When I first started shopping online, I used to wonder how something from China could be shipped to my home in Sydney much cheaper than something from Melbourne. After some digging, I came across the Universal Postal Union (UPU) one of the world’s oldest international organisations.
This somewhat obscure, Swiss-based organisation coordinates rates and standards between 192 national postal systems in the world. From mailing a letter to receiving an online shopping parcel, the postal rates paid are determined every four years by the UPU for its membership.
The UPU system divides countries into categories, based on their level of development, which determines the rates or terminal dues paid to each other.
The US is classified as a “target” country and China as a “transitional” country. Since China is still considered a “transitional” country by the UPU, this means it enjoys a lower rate for sending mail to a developed nation like Australia or the US. As a result, mail services from China to countries like Australia and the US costs less than what their own postal services charge for a comparable domestic delivery.
The UPU’s system of determining terminal dues is at the core of US President Donald Trump’s latest trade move—to withdraw the United States from the UPU system entirely.
This action will, Trump says, particularly target China whom he notes has benefited from this arrangement—as developing countries pay lower rates than wealthier countries.
All postal operators pay terminal dues to compensate foreign postal services for delivering their overseas mail. When a letter or parcel is mailed overseas, the postal service of the sender’s country, which has received payment for postage, usually in the form of a stamp, pays terminal dues to the destination’s postal service for its share of the delivery process.
Trump correctly notes that China is paying discounted rates for international delivery under the system.
This, he says, is now hurting the US Postal Service. Withdrawal of the US from the UPU system is the latest of Trump’s protectionist measures to reign in China’s competitive edge vis-a-vis the United States.
Trump’s administration has said the UPU system hurts US businesses because American customers can purchase knock-off products at a lower price, even when factoring in the cost of shipping from China. The US Postal Service said it lost more than US$135 million handling imports from across the world in 2016.
China’s developing-country status has also become part of the argument in US-lodged complaints with the World Trade Organization, with the US joining with Japan and the EU to initiate changes to the trading body’s rule book, aimed at forcing China to alter its trading practices.
The US campaign for WTO changes has simmered in the background while the Trump administration continues to target Chinese imports with tariffs, which has seen Beijing retaliating with tariffs of their own.
Trump has displayed a particular disregard for anything that implies international co-operation. By going head to head with China, the WTO or when negotiating trade agreements like NAFTA, CPTPP or KORUS - or with anyone else whom he feels is acting against what he considers to be acting against the interests of the US --Trump continues to challenge the status quo.
This is not always a bad thing as many of these institutions have been mired in bureaucracy and an inability to act. The WTO, for example, has only concluded one negotiation since it was created in 1995.
Who are the losers in this latest move?
In an age of e-commerce and globalization, a move to pull out of the UPU could directly impact the daily lives of consumers. The Trump administration has said it intends to withdraw and set its own rates but what’s to stop other countries, including China, from trying to do the same? A petulant, tit-for-tat approach is not the best way for trade to be conducted moving forward.
All Trump does with these antics is cede American leadership and clout to Beijing on the world stage. China now gets to be seen as the good global actor, stepping in as the US retreats from the international order.
While it is true that expanding Chinese e-commerce platforms like Alibaba or JD.com that ship overseas could risk losing trade when postage rates are increased, the real losers will be American consumers who are likely to see higher prices reflecting new shipping rates.
American consumers are also at risk in other ways. As the case of Australia showed earlier this year, if government policy increases costs or makes compliance too difficult for firms, marketplaces can simply shut off markets.
When Australia lowered the de minimus threshold for goods to zero and started applying large taxes to imported all e-commerce shipments with new compliance paperwork, Amazon stopped sending goods from overseas entirely (as noted in our Talking Trade post here).
The United States, of course, is not Australia and has a customer base that is hard to ignore. Marketplaces will likely continue to deliver, despite higher costs, but will pass along these higher postal rates to customers who will pay more.
In the meantime, firms will search for alternative markets outside the US to continue to grow their businesses.
Governments outside the United States may follow suit and withdraw from the UPU as well, leaving US exporters, including many of the most vibrant global e-commerce vendors, at risk of failing to reach their own customers in fast-growing overseas markets where last mile delivery is always the most challenging part of e-commerce for firms.
Withdrawing the United States from the UPU may seem like a small victory for Trump, but the implications and collateral damage it could cause to American consumers and companies alike may be significantly more than the relatively minor amount Trump claims the US Postal service is currently forgoing.
***This Talking Trade blog was written by Dr. Raymon Krishnan, Director, Corporate Advisory Services, Asian Trade Centre, Singapore***