Should the United States be subsidizing Chinese companies that are in heated competition with American merchants and small manufacturers?
We are not only doing so, at the cost of well over $135 million annually, but lacking a change in policy, this will continue through at least 2021.
At issue is an arcane and opaque issue 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 up to 2 kilograms or 4.4 pounds. As with U.S. mail, international letter correspondence has been significantly declining in recent years while the volume of packages has shot up, especially given the growth in e-commerce.
Terminal dues are not determined by market prices. Nor are they the product of bilateral negotiations between countries. Rather the rates and other specifications are developed by the Universal Postal Union (UPU), a specialized agency of the United Nations based in Bern, Switzerland.
The U.S. Postal Service (USPS) does have a customized and largely confidential, Negotiated Service Agreement in place with its Chinese counterpart, China Post. Many believe the Chinese would not have entered into such an agreement if its provisions were not at least as good as UPU determined terminal dues.
A 2014 Postal Inspector General report that USPS had lost $39 million with China Post on a then newly-designed product called ePacket for small packages has added to these concerns.
Each UPU member country, and there are 192 of them, has one vote. So perhaps not surprisingly, pricing policies are adopted that favor less developed countries. What should raise eyebrows though is that China, the world’s second largest economy, has been able to get itself designated as an underdeveloped country, and is therefore able to reap substantial postal subsidies.
The UPU has four groups of countries, with the United States and most of the developed world in Group I. China is in Group III, along with countries like Botswana, Costa Rica, Cuba and Kazakhstan.
Impact to American Businesses
As a practical matter, with terminal dues it costs less for someone in China to send a small package to the U.S. than it does for a U.S. resident to send a package to a different state. Many Chinese shippers thus offer free shipping on products sent by international mail to the U.S.
The USPS Inspector General acknowledged these problems in a December 2015 report saying, “As terminal dues rates do not reflect costs and differ for industrialized countries and developing countries, the terminal dues system inherently generates a number of market distortions.”
As e-commerce volumes from China climb, the retail industry is taking notice and speaking out.
Skip McGrath, whose e-commerce business has been impacted by low-cost shipments from China told The Washington Post, “I can’t believe our government would do this to undercut American sellers to help the Chinese sell more in America.”
In a letter to the U.S. Postal Regulatory Commission, Ina Steiner, Editor and Publisher of EcommerceBytes.com says, “Knowing that domestic mailers are subsidizing foreign mailers who use the same (U.S.) postal infrastructure, but who do not contribute to the Postal Service’s institutional costs, is not only unsettling in principle; it harms many US merchants, particularly small online sellers.”
In March, the Postal Regulatory Commission (PRC), which oversees the USPS reported that USPS had lost $134.5 million on international letter post in Fiscal Year 2016. As a practical matter, these costs will eventually have to be borne by U.S. postal customers paying higher rates, seeing reduced services, or even a potential federal bailout of the Postal Service.
The costs to the U.S. economy, though, in terms of lost jobs and lost tax revenues are significantly higher. China has not only vaulted in recent years to become the world’s largest e-commerce market, but, according to eMarketer, its worldwide ecommerce sales are projected to grow from $900 billion in 2016 to $2.4 trillion in 2020. Many of these increased sales are targeted toward the U.S. and will continue to come at the expense of U.S. retailers and small manufacturers.
The Financial Outlook
Supporters of the UPU’s terminal dues system point out that a new four-year agreement, signed in Istanbul in Turkey, will increase terminal dues 13% a year from China to the U.S. starting in 2018, as well as each year from 2019-21.
The PRC, though, also reports that the USPS only receives 66.4% of the cost coverage for international letter post, compared with 226.7% for domestic first-class mail. Thus, with the UPU terminal dues increases fully in effect it is likely the U.S. Postal Service will continue to have significant losses. While the percentage of these losses per package may be decreased, the added volume from China could drive overall losses higher.
Furthermore, sizable increases in terminal dues from 2012-16 were once touted as a harbinger of addressing the problem. The $134.5 million USPS loss in 2016 shows those assurances were incorrect.
Potential Public Policy Developments
Terminal dues clearly impacts the U.S.-China business and strategic relationship. It should be a top agenda item for discussions among policy makers between both countries.
Complaints by those harmed by terminal dues are also likely to be filed before the PRC, contending that the terminal dues agreement is at odds with U.S. laws, such as a provision against providing undue favors to any mailers, in this case the Chinese companies. U.S. law also requires the Postal Service to apportion operational costs to all users on a fair and equitable basis with terminal dues, something that clearly is not currently happening.
Some experts believe that the UPU’s terminal dues amount to an unratified treaty, and that the failure to explicitly ratify that treaty makes the provisions null and void.
For U.S. businesses, especially Mom and Pop operators who are trying to make entrepreneurial livings through e-commerce and light manufacturing, terminal dues are a clear and present danger. And the problem could get even worse in the coming years. Policy makers should prioritize this arcane and opaque, yet very important issue.
Paul F. Steidler is a Senior Fellow with the Lexington Institute, a public policy think tank based in Arlington, Virginia.
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