Ryan Petersen on the history of global trade

Oh wow. Pablo Escobar is, to be clear, an evil, terrible human. One of the first entrepreneurs to get into politics, though. I think he ran for mayor. Did he win? I can't remember the story, but yeah, Pablo Escobar also was a logistics guy. That kind of, this term cartel is really about an alliance. A cartel is an alliance of different companies, different countries in the terms of, in the case of OPEC for example, but a cartel in the drug context was, he ran the logistics side of this alliance of companies. So you had producers, you had distributors downstream, but Pablo Escobar's job was logistics, shipping, and of course a much harder form of logistics than what we have to do because it all had to be underground and illegal and crossing borders is hard enough. Clearing customs is hard enough. Having to do this without being detected by the government and while they're trying to kill you actively.

Total nightmare. I was listening to the trial of El Chapo and there was this great audio recording that I guess the NSA or somebody tapped his phones. They had this audio recording that they played as evidence of him dealing drugs and they had him negotiating what are called, we call it in the industry, Incoterms. So Incoterms are like, I forget who created this standard, probably the World Trade Organization. It's the standard terms by which you negotiate where are the goods handed over in a trade transaction. So if I negotiate Incoterms, probably 90% of trade is done on FOB terms, free on board, meaning I sell to you at the port, I have cleared customs, it's the exporter's responsibility, export customs, you take it from there on the inbound, everything from the origin port onwards is your responsibility. The most famous Incoterm today is called DDP, delivery and duty paid. That means it's the supplier's job to deliver all the way to your warehouse. So, it's obviously a big deal because it's who pays the tariff, who pays the freight, who crosses the border. And so, there's this great audio recording of El Chapo haggling over a kilo of heroin. And like, is it DDP or is it FOB? I mean, it's a big deal because now who's responsible for getting this into the United States? It's probably like 80% of the cost of this thing is crossing the border illegally. But actually, Incoterms are back in the news because there's a huge amount of fraud happening right now. With tariffs, with Trump's tariffs, they've created this enormous incentive to cheat.

And, you know, the markets find a way. They're going to cheat. People will, especially entrepreneurs whose backs are against the wall and might lose everything will often cheat. And that's what we see, just an enormous amount of fraud happening. In fact, a lot of it is just Chinese merchants just selling on Amazon.

And the fraud looks like this: in the old day pre-tariffs, like it was a couple percent, you didn't bother and so you just import it. You pay the duties. You didn't cheat. I mean there was probably some cheating but it wasn't rampant. Now when tariffs have gone to 35, at peak they were like 150% for a few weeks but right now it's about 35% on most goods. That's a big incentive to lie about the value of the goods because it's 35% of whatever you tell the government the value of the goods is. And so people are just lying and they're saying, 'Hey, this thing is 100,000.' No, it's 10,000. And now instead of paying 35% tariff, if I pay 3.5% I'm back where I was before. And that is absolutely rampant right now. In fact, Amazon has become the number one freight forwarder in the, people don't know this actually. I haven't seen it reported, breaking news here. They're now the number one freight forwarding company on the trans-pacific Asia to the US and it's because of, my theory is, allegedly, I allege, it's allegedly just a huge amount of fraud that's happening where these merchants who sell on Amazon, all these companies with their brand name of like XYZ4750, you know like these crazy names, they're just lying and they're undercutting everybody on price because of it. Yeah, there's always incentive to cheat, whether you're Escobar or some Chinese merchant.

Well, the United States is the only, actually there's two countries in the world that really allow anybody to import goods into their country almost unrestricted. It's the United States and the UK. And I don't know if we, it doesn't come from British common laws. These things evolve separately. We've, I don't know when it really started in the US. It's not codified into the statute. But it is, we allow it. So what does that mean? In every other country in the world besides those two, you need to go create a local entity whether it's an LLC, a C corp or a sole proprietor who's in the United States could import the goods in their name. And in the United States that's not required. You could just import stuff into the United States as a foreign company with no domestic presence whatsoever. And you can just register with CBP and just import the goods and you are the importer even though you're a foreign company. And therefore we have no ability to enforce what these people do. It's an honor system. Like most law depends on consequences if you're caught. I mean people will still cheat but at least there's consequences. It reduces the cheating quite a bit. But if you know like nothing can ever happen to me because the United States government does not have jurisdiction agents. We don't have trade compliance agents in other countries. So we cannot go after them. We can refer them to the Chinese government for prosecution. That's the best we can do if they cheat. So it's open season. And actually we pulled this data. The Chinese government publishes their export statistics to the United States and they show $112 billion higher export value than what those same goods show up as when they're declared to the US government upon import. That was for 2025, $112 billion. It's going to go up further until something's done about this. So, it's just an insane situation which could be very, very easily fixed. Now, it wouldn't never go away, but you simply say, 'Hey, you have to be a US entity. It could be a wholly owned foreign entity, but you got to set up an LLC, have a US bank account, go through some kind of KYC process, know your customer, who is this entity, and have consequences if you're caught cheating.' But, haven't been able to get anybody in Washington DC to pay any attention to this issue thus far. They're all very busy with other things. I think I spent a lot of time in DC lobbying on this issue. Lobbying is kind of a strong word, just talking to the administration trying to let people know that there's a problem.

And everybody kind of smile and nod. Yeah. Like you know I hear you, that definitely sounds bad and then nothing happens in between. I think I need to reframe my efforts a little bit. It's actually a good object lesson in persuasion for me. So, I'm used to like show people a problem and then you would think that would be enough for them to want to fix the problem.

Yeah. And there's something understanding what their incentives are. Like what are they trying to do? What do they care that American businesses are being hurt? Not really. Do they care that the US, $112 billion at a 35% duty rate? It's $35 billion for the government, but they don't care. They have a money printer, so why do they care about that? So what is it that they care about? I don't know. I'm trying to reframe it. It's probably about national security. I mean, it is absurd from a national security standpoint, too, because you can just import anything into the country. Anything. Fentanyl, bombs. I mean, yeah, sure. Like, if we catch you, we might come after you, but we're not going after the people importing fentanyl into the country. They let them go. So I think if you frame it that way, it might help a little bit being like, look, you can't let foreign companies just import stuff with no presence. I might be talking to the wrong people. I mean, the IRS also probably presumably cares more about collecting taxes. These companies pay no income tax either, right? Because all the profit is now made offshore. Whereas if they imported it and then sold it, there would be a profit recognized in the United States, they'd have to pay income tax. So, I don't know. This has been a frustration of mine. I've been to DC like once a month for the last half year or so trying to get people to pay attention to this issue.

Well, Dutch East India Company was the world's first joint stock company and it's quite an interesting thing because the Dutch were a province of the Spanish, the Hapsburg Spanish Empire was, the Netherlands was a province of Spain and you had the Protestant Reformation, revolution and there was a big war fought, Spanish Inquisition and they managed to get independence. One of the first things they did was they had these fleets and they started raiding the Spanish and actually it was more the Portuguese empire but for a period there Spain and Portugal had merged through marriage. And so it was one empire and trading both the Indies and the Americas for a brief period and the Dutch during this time started sailing there raiding, started as pirates. And it became very, very profitable and they ended up basically taking over and once they took over you had more of a commercial aspect to this and an emergence of many different companies that were trading and it became unprofitable. The competition sort of was bad, driven down the economics. And I forget the exact coordinating mechanism but a bunch of these merchants got together and they pooled their ships and said hey we're going to create this stock company and allocate shares to everybody and it'll have this monopoly on trade in the East Indies and then it got listed. It was the first listed public company where you could buy these shares that you put in became tradable. And yeah, it was a couple hundred years of domination. Of course, the British eventually came and took it over with the British East India Company took over the business. But yeah, that's kind of the origins of it was some kind of early form of getting together and creating a monopoly which now would be illegal under antitrust laws. I think it was a de facto government in effect. It was like a tradable government.

Oh, you start there. I mean, you go way further back in time. If you go all the way to, trade is as old as, it's older than art. There's evidence for long-distance trade going back like 40,000 years. And the first cave paintings I think are like 25,000 years old. So you can go way, way back and most empires are built on trade. They said Roman legions marched on Egyptian grain, right? And a big part of that was that trade of bringing grain from around the Mediterranean. I would say the Venetians trading throughout the Mediterranean were the dominant power from like call it 1100 till they conquered Constantinople in 1204. Right. And a lot of the, actually the Crusades were as much about trade as they were about religion. Being able to trade with the east and fighting for control over trade because the modern Israel is, before the Suez Canal was an incredibly important trade nexus to reach between Asia and the Mediterranean. So the Venetians and they had rivals the Genoese and even Florence which is not even on the water but became really active in banking and trading through all these like merchant fairs that they would have. So moving goods, moving money was in the old days hundreds of years ago was physical like you had to actually be a logistics company to be a bank.

Until not that long ago. I mean, Wells Fargo and American Express both started as freight forwarding companies because you had to move the gold here in the American West. You had to get the gold on stage. That's why Wells Fargo has a stage coach on their logo, right? So you had Venice trading with the Muslims and I think the discovery by the Portuguese, the invention of the caravel, a lot of other early technologies, trade has largely been driven by these development of new technology. The quadrant, the sextant, some of these, the clock, the clock is incredibly important for positioning yourself. You can't do longitude without a clock. You need to know where you are in the world. You need to know what time it is, that's how you determine where you are in the world. And so these technologies, especially Henry the Navigator and the Portuguese, it's sort of like the original venture capital was funding this exploration down the coast of Africa. They didn't know where they were going to go. I don't know that they actually expected in the early days of Henry the Navigator to make it around Africa. They just realized that it was quite profitable. Trading in slaves, discovering new lands. They discovered Madeira. Madeira is an island. Now it's most famously known as Cristiano Ronaldo's birthplace. But Madeira was this uninhabited island that Madeira means wood. It was heavily forested. Now there's no trees there. They chopped them all down. Became very, very profitable. They set up vineyards there. I mean free land was like unheard of at that time. They hadn't discovered the Americas yet. So they realized it was profitable. They kept reinvesting those profits and eventually Vasco da Gama rounded the Cape a few years after Columbus discovered the Americas actually around 1498. 1498 is when they made it around the Cape of Good Hope and made it to India and the Islamic world had put down this kind of iron curtain. You could trade and they were very open to trade with the Venetians were essentially allied with the Muslim caliphate and the Ottomans but they couldn't, they could trade but they couldn't go beyond and the main things they wanted from the east were spices. Spices are really good for long-distance trade in that time because they're very small and very, very valuable.

Yeah. They weren't that perishable and just the value to weight density, you know, ratio is just so high. And so the markup I think it was at least a thousand x. It might have been 10,000 x from if you bought the spices in India.

No, the spices really originate in Indonesia in these spice islands called the Moluccas. If by the time they got to India, they probably already marked up like 20x or something and then another 20x, you know, you pretty quickly get to a thousand x or more once you reach Venice. And so there was this huge, people didn't know that but they knew for sure you want to get to the source of these things and you didn't even know where they were from. Really had no, it was like a lot of mythology you didn't know. So the people in, you know, England might have been buying cayenne pepper or something and they were like, 'We don't know. It just appears on the magical mythical east, full of wealth and Aladdin genies or whatever.' But so that was driving a lot of the early exploration was to try to get to this source of these spices and other goods. So Vasco da Gama kind of makes this end around the iron curtain of Islam and being able to go and that really opens up the Portuguese Empire. And then as I said earlier, the Dutch eventually take over and then the British and Venice goes into decline. It took about a hundred years. Actually, it's one of the things that people miss with these new technologies, new trade routes. There's a relatively gradual, it's not instant. You know people think oh we invented AI and now tomorrow the whole world changes like actually it takes a huge amount of inertia.

I mean Venice continued to prosper, the golden age of Venice. I mean that lasted well another hundred years after that. It took a while because in the beginning you're like, 'Okay, I sent one ship over there, came back with a bunch of spices, but like it's 0.1% of the market or something.' Like it takes time even with an exponential curve for it to have that kind of an impact.

It might be a year more. I mean, it just, I think just to India was about a year and probably another six months from there. And you could only go once a year because of the monsoon winds crossing the Indian Ocean. So it's sort of an annual out and back maybe three years journey or something like this. It wasn't, the Suez Canal was hugely important for this. It cut off, and that was already in the age of steam. It cut off massive amounts of travel time. Now when corporations start to take over from governments, I mean it's gone back and forth, right? You had the Dutch East India Company, the English East India Company came in effectively. I think they were sort of reluctant. I'm probably going to get in trouble in India for this. It's one way to make our podcast go viral, by the way, is to say something that offends Indians and they'll go totally crazy. I don't mean to offend. I maybe learned my history differently or might be wrong. But I think the East India Company was somewhat, the British East India Company were somewhat reluctant conquerors. They came to trade. They were doing a lot of trade. And in some of what they did really kind of created a lot of breakdowns in India and society. Some of that was through power, force projection, through taking sides in local armies. Some of it was trade networks that were developed displaced current economic powers and political dynamics. But India largely devolved into chaos during this time and I don't think they're unrelated. I think it was probably caused by the English East India Company. And then they realized hey this chaos is bad for business.

And they ended up feeling that they had, they felt compelled to one way or the other conquer India and become the government of India which they were for a long time before the British government effectively took it over and made it truly a colony. For a long time, it was just run by a corporation, which is one of the more screwed up forms of government you could ever have is an actual corporation running it for profit of people who don't even live there back in England. Actually, one of the interesting things is how do these corporations become monopolies in the first place? How did they get the government to agree to that? It was largely through bribery.

Yeah. They gave the politicians big shares in the company and created these monopolies so that only the British East India Company was allowed to sail on behalf of Britain and then the British Navy made sure that the French and others couldn't trade. The French were there in a big way, in fact it was only with the Napoleonic wars, some of the Napoleonic wars were fought in India. It was a very global war. But the French had a big settlement in what's now Chennai, Madras. It was Pondicherry was it was called at the time but it was eastern side of India that there was a French colony there that the British took over during the Napoleonic war. So it was, but the British Navy did their best to box out other competitors and made sure it was only the East India Company or later the Raj that could trade. But over time the networks changed. So the British had a really hard time finding anything. This was especially true in China but also in India. It was a hard time to find things that these people wanted to buy from Britain.

It was a bit like that except that they weren't accepting the British pound in money printing like we have now.

With the lack of, they had to use hard metal. It wasn't, there wasn't fiat. It was traded with silver and bullion. And it became a huge drain. Especially China, the Chinese produced lots of things that the British wanted. Tea, silk, porcelain, probably some other stuff. And but those are the big ones. And the British didn't have anything at scale that they wanted. Like they had like mechanical clocks that people thought were interesting and stuff, but like basically the Chinese were pretty self-sufficient and these guys would show up with like British textiles that weren't very quality compared to the local stuff and there was nothing to trade. And so what they did want was silver. So it was really draining the silver reserves of the Europeans doing this trade. And where you get silver from? Of course mostly from the Americas, from Peru, from Potosi, the mine in Peru, in Bolivia, excuse me. And actually about 25% of all the silver mined in the Americas went across the Pacific, not across the Atlantic, was sailed via this Manila galleon, sailed to Manila. And Manila, the Philippines became a trading hub because the Chinese were banned from trade externally and so they had to sneak out to the Philippines and do their trade with the Europeans there.

The Ming dynasty had banned trade. That's considered a huge tactical blunder. They stopped allowing overseas trade.

I think it was mostly government-run operation up until then. Naval going and it was really draining their funds. They weren't seeing a return from it. They weren't looking at overseas commerce as a commercial venture. It was largely diplomatic. It was power projection. It was symbolic. They would build these treasure fleets and go sail the world to show how great China was and get people to kind of bend the knee and do some diplomacy. But it wasn't profitable at all. And there was a new emperor and he said enough of this. We got our own problems here domestically. We're going to stop that. Stop funding it. They actually banned overseas trade during the Ming dynasty about 60 years or something, 50 years before Vasco da Gama rounded the Cape. I mean it's a great alternative history of what would have happened if the Chinese had been there in force with their much larger more powerful ships than what the Europeans had. So anyways the Chinese were banned. So they would have to come down to Manila to do trade. And so the Spanish sent this galleon every year, actually would come by here in California, would sail up the coast and then cross over. I forget where they would head out to sea, but in California somewhere and head out to sea, trade the silver in Manila, but it's not good for the, you don't want to just give up all your silver. And so eventually the British figured out that the Chinese did want opium which came from India, from Afghanistan, and that became the main business of the British East India Company that most of the profits, I don't think the other stuff they were doing was that profitable.