By Ethan Wilson
Just off the holiday season, you’ve probably been a beneficiary of insanely cheap shipping. Perhaps you ordered an item that arrived with foreign postmarks. If so, you likely paid shipping rates far lower than you would ever see at your local post office.
The astronomical rise in e-commerce has brought a lot of attention to shipping rates, specifically, rates for shipping items into the U.S. from countries like China. Just last week, President Donald Trump tweeted about the massive financial losses facing the U.S. Postal Service. So what’s really at issue here? What are the mechanisms involved? Are Americans truly subsidizing shipping costs for foreign online retailers?
It all starts with the Universal Postal Union (UPU) an international organization established by the Treaty of Bern (1874) and now a special agency of the United Nations. Tasked with creating “cooperation between postal sector players,” the UPU claims to “ensure a truly universal network of up-to-date products and services.”
One of these products is the “terminal dues system.” Terminal dues are fees paid by the post in the country of origin to the post in the destination country to process and deliver the item(s) being shipped. According to a report by the U.S. Postal Service’s Office of Inspector General, terminal dues are “based upon setting rates by majority agreement rather than reflecting the true economic cost of inbound international mail delivery.” The report notes that the goal of terminal dues is to “provide posts with some compensation for international mail while also supporting a single worldwide postal network by subsidizing developing country participation in international universal service.”
The terminal dues system is designed to promote international postal activity by subsidizing such activity in countries the UPU determines to be developing. On its website, the UPU states that “not all countries are at the same stage of development and there are significant variations in their mail volumes, postal tariffs and cost absorption. The aim is to progressively incorporate the developing and least developed countries into a target system that already applies to industrialized countries.” (Read more on UPU country classification methodology.)
We know that different countries pay different fees for international shipping activity. But what does this mean for the U.S. and businesses located here? The reality is that, yes, in general, it does cost more, sometimes a lot more, to ship both domestically within the U.S. and internationally from the U.S. to most countries compared with shipping from foreign countries into the U.S.
A sharp rise in e-commerce has resulted in a massive increase in the number of small, lightweight packages being shipped into the U.S., predominately from China. And yes, China is designated as a developing country by the UPU. In fact, China’s UPU postal development index (PDI) is about the same as Argentina, Botswana, Jamaica, and Lebanon (just to name a few). See the whole UPU classification list.
The process goes something like this: A Chinese manufacturer/retailer/wholesaler sells small, lightweight electronics through an online marketplace. Its final price likely includes the cost of shipping and shipping is noted as “free.” When an order is placed by someone in the U.S., the Chinese business ships the item through China Post airmail, paying the comparably lower shipping costs afforded to it by the set prices of the UPU terminal dues system. China Post then remits the exact cost required by the UPU to the USPS. Somewhere along the logistics line, the item is transferred to USPS possession where it is sorted and shipped out to its final U.S. destination.
U.S. based business face two problems.First, artificially low shipping costs persuade many shoppers to buy goods online and forego shopping at brick-and-mortar locations. Second, for those U.S. businesses that offer online shopping, it is very hard, if not impossible, to offer the same shipping costs as retailers located in China. Many U.S. based retailers must eat the cost of shipping to level the cost “playing field” on the consumer end.
What can be done? Well, it’s tough to say. In June 2015, the House Subcommittee on Government Operations issued a report titled Fair Competition in International Shipping. The U.S. State Department outlines its strategy in the U.S. Strategic Plan for the UPU. A starting point is for the UPU to change postal development indices to more accurately identify countries, like China, that are designated as “transitioning” but have the retail and manufacturing capacity of a developed nation.
The UPU sets terminal dues and other fixed postal costs every four years. Developing countries’ postal development indices also change during these meetings. The current cycle is Jan. 1, 2018 -Dec. 31, 2021. The next UPU Congress will be held in 2020 in Abidjan, Côte d’Ivoire (Ivory Coast).
This issue was recently explored at NCSL’s Capitol Forum during a session titled “Buyer Beware - Counterfeit and Hazardous Goods Bought and Sold Online.” The session, focusing on consumer awareness and protection, touched on the recent influx of dangerous items entering our country, primarily via shipments originating outside of the country. This session hosted shipping, manufacturing and law enforcement experts who discussed how these items get through customs and into our country.
Ethan Wilson is NCSL’s policy director for Commerce and Financial Services in Washington, D.C.