Continuing efforts to fight what he says are unfair trade practices, the administration of President Donald Trump announced the U.S. will pull out of the Universal Postal Union (UPU) treaty. The treaty, agreed to in 1874, sets fees for international shipping of mail and small parcels (under 4.4 pounds) around the world. Since 1969, the treaty has assigned lower shipping rates to developing countries, including China, in an effort to boost their competitiveness globally.
According to the New York Times, more than 60% of packages shipped under the treaty to the U.S. come from Chinese companies today. Pulling out of the treaty could lead to companies like FedEx (NYSE: FDX) and UPS (NYSE: UPS) becoming more competitive for smaller, global packages coming to the U.S., many of which are e-commerce.
UPS spokesperson Kara Ross sent FreightWaves this statement on behalf of David Abney, chairman & CEO of UPS. “UPS believes the administration took the right step in addressing the inequities of the UPU system of terminal dues. Foreign postal operators should not be given government approved advantages in what is a competitive market. All parties should pay the same parcel delivery rates for the same services from the U.S. Postal Service, regardless of whether the country of origin is foreign or domestic.”
A spokesperson for FedEx declined to comment. Jeff Adams, spokesman for the United States Postal Service, echoed the Abney’s comments, though.
“The current system has led to the United States subsidizing the imports of small packages from other countries. As such, the Postal Service and its Governors fully support the Administration’s decision to move to self-declared rates, and will work closely with the State Department, the Postal Regulatory Commission, and other stakeholders to implement the Administration’s decision,” Adams told FreightWaves.
It also could be a boost for American manufacturers and retailers, including Amazon, explained Patrick Hedren, vice president for labor, legal and regulatory policy for the National Association of Manufacturers, in a statement to Bloomberg. “This is a big deal for manufacturers,” he said.
The U.S. formally notified the UPU yesterday. It takes one year before the withdrawal takes effect, and many, including those in Washington, hope they can work out a new deal before then.
“The president concurs with the Department of State’s recommendation to adopt self-declared rates for terminal dues as soon as practical, and no later than January 1, 2020,” read a statement from the White House. “The Department of State will also file notice that the United States will withdraw from the UPU. This will begin a one-year withdrawal process, as set forth in the UPU Constitution. During this period, the Department of State will seek to negotiate bilateral and multilateral agreements that resolve the problems discussed in the Presidential Memorandum. If negotiations are successful, the Administration is prepared to rescind the notice of withdrawal and remain in the UPU.”
In 2015, the U.S. Postal Service Inspector General (IG) issued a report on the treaty, which uses “terminal dues” to reimburse posts (individual country’s postal services) for the cost to deliver international packages across 192 countries that are party to the treaty. Rates are negotiated every four years by the Universal Postal Union. Each county has a single vote in the process, the IG explained in the report.
“Terminal dues originated at a time when postal traffic was primarily letter based and controlled almost exclusively by posts,” the report noted. “Today, however, international letter volume is in decline, and the postal channel is carrying more and more e-commerce package volume, including lightweight packets flowing through the terminal dues stream. This highly competitive market, where postal operators compete with a variety of private sector providers, intensifies existing distortions resulting from the current rate system that does not reflect actual domestic processing and delivery costs and ignores efficient market forces to which private carriers are subject.”
The report concluded that the terminal dues received by USPS “do not fully cover costs, leading to a loss on inbound mail and small packages.”
“Terminal dues create winners and losers,” the report noted. “In certain instances, low terminal dues benefit China Post and Chinese online retailers in the lightweight, low-value package segment at the expense of the U.S. Postal Service and American retailers.”
The report went on to say the U.S. should work with the UPU to separate small packages with merchandise from documents and letters. “While letters would continue to fall under terminal dues, small packages would be subject to self-declared rates that reflect cost and are available to all — posts, competitors, and shippers alike,” it said.
The IG quoted a PayPal estimate from 2013 that found American shoppers would make $80 billion worth of cross-border purchases in 2018. Given the rapid pace of e-commerce growth since then, that number may actually be low at this point.
The report went on to note that the USPS, as of 2014, may have been undercharging for delivery of both letters and small packages from industrialized and developing countries by as much as $2.1 billion per year.
The UPU rates generally do not apply to private sector companies such as UPS, FedEx and DHL, so any increase in the cost to international shipping could potentially create a more competitive scenario for those companies.
“Even with the price advantage afforded to the postal channel by terminal dues, competitors are currently competing successfully against the posts in many segments on service and value-added features,” the IG report noted. “If these competitors could access terminal dues or [USPS’] ePacket rates, they could potentially gain an even greater market share.”
To illustrate the unfair balance the treaty creates, an OIG employee purchased 5 items from China at a total cost of $8 in shipping and handling, or approximately $1.60 per item. They arrived in 10 to 15 days. Those same items, purchased from online U.S. retailers, cost between $2.04 and $2.22 per item to ship for delivery within 2 to 3 days as a First Class Package.
The UPU last adjusted rates in 2016, but Peter Navarro, assistant to Trump for trade and manufacturing policy, said that is not enough in an op-ed for the Financial Times that ran Sept. 2. Navarro said it costs more to ship a package from Los Angeles to New York through USPS than it does from Beijing to New York, putting small businesses and manufacturers at a disadvantage.
“The other gross inequity in the UPU system is that the world’s biggest economy does not have a voice commensurate with its trade involvement,” he wrote. “Although the U.S. handles roughly half of the world’s mail, it has one vote in 192 when it comes to setting rates. No wonder our businesses are placed at such a disadvantage.”
On Sept. 2, Navarro wrote that the U.S. would push to renegotiate the terminal dues at the UPU meeting that week. According to Navarro, the cost to ship a 1 pound package from LA to New York through USPS using Priority Mail retail rates is between $7 and $9. But, that same package coming from China and traveling the same route, would be reimbursed under UPU at just $2.50.
Navarro also argued that USPS loses about $1 for every small package that arrives from China, but American goods exported are charged above cost, making some of those products less cost-competitive in the global market. He went to say that if the U.S. did not see sufficient progress by UPU at its September meeting, Trump would consider all appropriate actions, including “self-declared rates” for shipping to the U.S.
USPS just recently announced price hikes for many of its products, including Priority Mail Express, which will increase 3.9% next year and Priority Mail, which is rising 5.9%. Those increases, which reflect “market conditions,” the USPS said, still need final approval by the Postal Regulatory Commission (PRC). They have been approved by the Governors of the Postal Service.