Is Our Postal Service Subsidizing China’s Producers?

Jayme Smaldone runs a small New Jersey-based company that invented the “Mighty Mug”. It’s a line of mugs that grips to a surface to prevent spills from knocked over drinks, saving many a laptop from distracted coffee reaches. (These American innovators got started through funding on Kickstarter.)

Jayme noticed that knockoffs of his Mighty Mug were selling on e-Bay for very cheap and included free shipping. But for Jayme’s company, the cost was about $6.30 to ship the same (original) mug from their New Jersey warehouse to a U.S. location, even one across the street. Outraged, Jayme complained to the U.S. Postal Service (USPS), the White House, as well as reporters from NPR’s Planet Money, who eventually did a story on the quirks of the international mailing system.

Planet Money’s reporters compared what the USPS would charge for a 0.75-pound package to be delivered within the United States versus the charge for the last leg of a journey from China. They discovered that the USPS will charge $4.76 for the domestic delivery but it will charge its counterpart, China Post, only $1.39 to deliver the same package that originated in China. Why?

The Universal Postal Union Tucked Away in Bern, Switzerland

The Universal Postal Union (UPU) dates back to 1874. Headquartered in Bern, Switzerland, international bureaucrats at the UPU create rules for international mail exchange among the national postal services of its 192 member states. Far from the original volume it governed, a century and a half later, the UPU finds itself at the center of the delivery of 350 billion domestic and international letter-post and 6 billion international parcels per year in 2012.

Not only does the UPU influence the operations of national postal services; it also sets international shipping rates. It’s for this system of international shipping rates, formally called the terminal-dues system, that the UPU has garnered unusual recent press attention.

Paying Too Much for the Final Mile in Mail Delivery

When a customer wants to send an item – a package for example – from one country to another, they go to their local post office and pay one shipping fee. The fee needs to cover the entire trip, including the most expensive part of the trip known as “the final mile” – the final leg of the journey in which the package arrives its final destination by the local post office in the foreign country.

The “final mile” is estimated to comprise 53 percent of the total cost of shipping. Historically, UPU members agreed to manage this issue through reciprocity, assuming that on average expenditure on “the final mile” will even out through global trade. But over time, and particularly with the growth of online purchasing, the U.S. Postal Service (USPS) has increasingly borne the cost burden of delivering packages coming from overseas, particularly from China. Meanwhile, mail activity originating in the United States has declined, causing a decline in USPS income from shipping fees.

The “Terminal Dues” Blues

In 1969, UPU created the terminal-dues system to set rates between countries for reimbursement of that “final mile”. In reports from 2015 and 2017 (query: why did they wait so long?), the U.S. Government found that the rates set at the UPU are below market rates and do not fully compensate the USPS for its expenses.

This “disparity” was originally intended to foster development in Asia and Africa, but the subsidized system ultimately benefited Chinese manufacturers, who today make up a disproportionate share – about 60 percent – of packages shipped into the United States.

The result? Foreign manufacturers can send their goods to the United States at cheaper rates than American manufacturers can send the same products to the same consumers – in the same country.

President Trump Went Postal on the UPU

Its turns out that, particularly for American small businesses, the UPU is the most important organization in the global supply chain that none of us had never heard of – at least, not until last week.
On October 17, the Trump Administration announced that the United States will withdraw from the UPU within one year, and will be pursuing bilateral and multilateral agreements to resolve the low fee problems. The announcement was positively received by U.S. businesses, while China criticized the decision.

It remains to be seen whether the U.S. will succeed in balancing its postal rates to ensure the USPS does not continue to lose money on international shipping. But for now, Jayme Smaldone is delighted he might be able to sell more Mighty Mugs to American customers.

Listen to this entertaining Planet Money Podcast #857: The Postal Illuminati