Why does it cost less to send a small package from Beijing to New York than to send that same package a short distance within the U.S.? The short answer is because the U.S. has allowed this to happen for decades.
In doing so, we have placed many businesses, especially e-commerce and light manufacturers, at a significant disadvantage to their Chinese competitors. Fortunately, the Trump administration is taking action.
At issue is an arcane and opaque matter pertaining to international mail: terminal dues. This is the mechanism by which post offices in different countries divide up the revenues from international mail, defined as all items under 2 kilograms or 4.4 pounds.
The organization which sets the rules is the Universal Postal Union (UPU), a specialized agency of the United Nations based in Bern, Switzerland. Comprised of 192-member countries, each UPU country gets one vote on various rate proposals for mail prices and standards.
The UPU has long operated on a general principle that to promote mail and commerce, poorer countries should get a break on rates. As such, it has established four groups of countries, with the United States and most of the developed world in Group I. China, the world’s second largest economy, is in Group III, along with countries like Botswana, Costa Rica and Cuba. China has lobbied and pushed hard to stay a Group III country and, as such, gets a huge break on international shipping rates, particularly as e-commerce continues to boom.
In a recent Financial Times op-ed, Dr. Peter Navarro, Assistant to the President for Trade and Manufacturing Policy, noted that the cost for a Chinese business to send a 4.4-pound package to the United States is $5. An American business, however, will pay between $19-$23 to ship the same package within the U.S.
Jayme Smaldone, founder and Chief Executive Officer of Mighty Mug, discovered that Chinese counterfeit producers of his spill-proof drinking mug could send the product from China to the U.S. for under $6. Yet, Mighty Mug pays $6.30 just for shipping within the United States. And while the cost to ship a typical mug from China to the U.S. is $1.50, to send a mug from the U.S. to China is $22.
On August 23, President Trump issued a memorandum that says in clear and direct language that this must stop. The memo found, “The current system of terminal dues distorts the flow of small packages around the world by incentivizing the shipping of goods from foreign countries that benefit from artificially low reimbursement rates.” The president asked that the Secretary of State provide recommendations to fix this by November 1.
There is a broad cross section of support for the President’s proposal and tough approach on terminal dues. Following the memorandum, Robert Taub, Chairman of the Postal Regulatory Commission said, “The anticompetitive nature of the UPU has concerned the United States Government since the Reagan Administration.”
Chairman Taub added, “President Trump’s memorandum represents an enormous leap forward to finally addressing these problems on behalf of our fellow Americans, particularly U.S. merchants, U.S. mailers and U.S. private-sector carriers who are trying to compete fairly in these global markets.”
The National Association of Manufacturers has also been blunt, saying, “Stopping the subsidization of Chinese packages should be part of a broader strategy to effectively tackle the many challenges manufacturers face in China.”
The UPU did have an opportunity to address the disparity in terminal dues rates at a recent September 3-7 meeting in Ethiopia. Postal consultant Jim Campbell, who attended the Ethiopia meeting and is a long-time UPU expert, said, “We didn’t make any progress there.”
Campbell also points out there are several next steps that the United States can undertake, particularly as most European and developed countries face the same challenges as the U.S. does with China. The U.S. can form a coalition of 25 or so countries within the UPU and push for change there. Or, it can say that foreign shippers will have to pay the same rates to ship products in the United States as American companies pay.
Congress is also taking notice. An August 31 letter to Secretary of State Mike Pompeo from Senator Bill Cassidy, Representative Kenny Marchant and others urged the administration to dig in. “In a global economy with razor-thin margins, a flawed UPU agreement can mean the difference between success and failure for an American employer. These terminal dues rates must not place American businesses at a disadvantage in the global marketplace,” said the letter.
Given the November 1 deadline for a terminal dues action plan and the blatant unfairness inherent with terminal dues, how China responds to terminal dues proposals has many ramifications. This not only directly impacts U.S. manufacturers and e-commerce countries, but it is a likely bellwether on how U.S. trade talks are likely to proceed.
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