REPORT FUELS CALLS FOR CHANGES IN TERMINAL DUES
A recent study commissioned by the U.S. Postal Regulatory Commission concluded that the current system for assigning fees between countries for mail and small packages sent internationally produces market distortions and disruptions in global mail and trade flows.
This system, known as terminal dues, is governed by the Universal Postal Union (UPU), a United Nations body whose 192 member countries include the United States. The UPU’s terminal dues system establishes rates each country is paid for delivering mail that originates outside its borders, with varying rates for outgoing mail.
The U.S. Postal Service earned more than $3 billion in revenue from inbound international mail in 2013. But inbound mail to the United States does not cover its handling and delivery costs, and the Postal Service lost $79 million in 2013 for single-piece letters alone. The world’s largest postal operator, it receives the system’s lowest fees per piece of mail under this system among industrialized countries. Its rates are set to increase by 13 percent each year between 2014 and 2017. Charges paid for outbound mail will increase as well, but by smaller rates. Because of a culture of opacity the Postal Service uses to shroud financial details it considers sensitive, there has been no public analysis indicating the extent to which the planned increase will impact its bottom line.
The Postal Regulatory Commission’s terminal dues paper, written by the firm Copenhagen Economics, is only the latest to point to problems for the United States and some other industrialized nations under the international terminal dues system. An audit report by the Postal Service’s Inspector General in March 2014 highlighted numerous concerns. As early as 2002, the European Commission noted that this system, “is not costs based, leading to significant distortions between remuneration and actual delivery costs incurred.”
The presence of market distortions between designated postal operators and commercial carriers remains an area of concern. The terminal dues system only sets rates for government-designated first-mile operators, producing distortions in the highly-competitive international delivery marketplace.
Providing preferential treatment to state-owned postal operators over private-sector providers seems in direct conflict with several direct provisions in U.S. law and trade policy. The 2006 Postal Accountability and Enhancement Act prohibits entering into any international agreement regulating postal services across borders that “grant an undue and unreasonable preference to the Postal Service” or any other provider in competitive markets [section 407].
Federal trade in services laws stipulate that a primary objective of U.S. trade policy is “to reduce or eliminate barriers to, or other distortions of, international trade in service.” While the U.S. Justice Department has not issued a public analysis of antitrust concerns relating to international postal and delivery arrangements, such a determination would be of value as the United States establishes its positions for the next Universal Postal Union Congress in 2016, a process which is already underway.
Even as international letter mail volumes decline, small package shipments are growing. International mail declined 2.9 percent in 2013, while package volumes grew 3.7 percent. National postal providers, including the U.S. Postal Service, see this growing share of their revenues as an important opportunity for growth, and have aggressively courted e-commerce business.
Signing international, bilateral agreements with other designated postal operators at rates below terminal dues designations has become a significant component of such strategies to increase business. But in its eagerness to boost its small package volume, U.S. Postal Service management has sometimes agreed to money-losing deals. A 2010 agreement with China’s state carrier China Post resulted in an increase in small packages sent under special “ePacket” rates from 9.5 million to 26.8 million in 2012. An audit by its Inspector General determined that the Postal Service lost at least $39 million in 2011 and 2012 on its ePacket business with China.
Harmful implications of underpricing deals extend beyond the delivery industry. Online merchants in the United States have complained of losing business to competing Chinese sellers, who take advantage of exclusive international shipping rates to offer steep discounts to U.S. consumers.
The 2006 postal reform act charges the Postal Regulatory Commission with preventing the Postal Service from subsidizing its competitive product offerings with proceeds from its statutory mail monopoly. But consistent, sharp contrasts in cost coverage data suggest the presence of cross subsidies between product categories. Recent patterns in price increases for its market-dominant products, like first-class mail, have increased at substantially higher rates than competitive products, particularly its small package business.
Find Archived Articles: