Hidden tariffs coming up? The US is set to leave the Universal Postal Union (UPU) next month which may cause USPS shipping rates from countries like China to possibly rise 300% or more.

via freightwaves:

Barring an eleventh-hour agreement, the U.S. Postal Service (USPS) will leave the Universal Postal Union (UPU) on October 17, ending 144 years of U.S. involvement in the international body that governs the exchange of mail and postal parcels between countries, and perhaps fundamentally changing the landscape of global air shipping.

Members of the 192-member United Nations body will gather on September 25 and 26 in Geneva, Switzerland in only the third “extraordinary Congress” in UPU history. The key agenda item will be to vote on what UPU is calling the “possible revision of small packet remuneration rates,” which is the core issue to determine the future of U.S. involvement.

The U.S. State Department, which is the lead negotiator for the U.S. in UPU, has submitted a proposal that would allow the U.S. to “self-declare” international postage pricing and to decide on subsidy levels, if any. Unless the UPU agrees to the proposal by a September 30 deadline, the U.S. will leave the Union 17 days later and, over time, begin a framework of bilateral negotiations with individual postal authorities. The self-declare regime would begin in 2020.

The practical effect of the exit of the U.S. would be a rate increase of at least 300 percent on postal parcel traffic to the U.S. from heavy net exporting countries as rates kept artificially low for decades begin to normalize, according to Matthew White, a strategist for iDrive Logistics, a consultancy working with customers to prepare contingency plans for the possible U.S. exit. U.S.-based international shippers will also pay more, at least over the short-term, because USPS will cancel negotiated service agreements (NSA) covering international shipments if the withdrawal takes place, White said.

Private sector parcel carriers may see a huge bump in business due to new-found pricing competitiveness, while high-volume traffic may migrate to cheaper ocean shipping services because of the large price increases, White predicted. The future of the UPU, which was founded in 1876, might be at risk if the U.S. leaves the multilateral regime and migrates to a self-declare structure and bilateral relationships, according to White.

President Trump telegraphed the departure in an August 2018 memorandum, saying that certain “current international postal practices in the UPU do not align with United States economic and national security interests.” President Trump’s memorandum raised concerns with two practices. One is the inability of foreign postal services to furnish advance electronic shipment data, which U.S. Customs and Border Protection (CBP) needs to improve its ability to flag and detect high-risk shipments, as well as facilitate import flows.

The other, and more politically charged, issue is with the UPU’s 50-year-old “terminal dues” structure, which are the funds paid to the postal authority of the destination country by the authority of the origin country. The 1969 UPU Congress adopted the current terminal dues system, which governs cross-border delivery of packages and letters weighing less than 4.85 pounds. Instead of basing terminal dues on the actual handling costs incurred by the destination country’s operator, the UPU established a “country classification” system factoring in different stages of member states’ economic development and the many variations in their mail volumes, tariffs and cost levels. As a result, developing countries enjoyed relatively low shipping rates into the U.S. Meanwhile, the U.S., with its highly advanced market, would typically pay more.

The Trump Administration has argued that the terminal dues regime has led to significant price distortions that have left the U.S. at a competitive disadvantage for decades. For example, a 4.4-pound parcel shipped from China to the U.S. could cost less than a domestic shipment shipped between, say, New York and Detroit, according to those who have followed the issue.

What’s more, the terminal dues system was formed when China was very much a developing country with little, if any, economic influence on the world stage. Over the decades, China has grown into the world’s second-largest economy but continues to pay postal rates associated with that of a developing country, the Administration has argued.

The Administration has not singled out China as a factor behind its threat to exit the UPU. However, it can be deduced that, in light of the escalating trade turmoil between the two countries, its actions were meant to send another in a series of messages about China’s alleged gaming of the global trade system. Changing the status quo by adopting a self-declare approach, or leaving the UPU entirely and negotiating on a bilateral level, would level the playing field between the two countries, according to supporters of the Administration’s efforts.

In a 2015 report, the USPS’ Inspector General found that the low terminal dues for China “benefit China Post and Chinese online retailers in the lightweight, low-value package segment at the expense of [USPS] and American retailers.” This report estimated that the terminal dues structure cost USPS approximately $300 million from 2010 to 2014. According to the Postal Regulatory Commission, the independent agency that rules on postal rate proposals, the loss to USPS attributable to terminal dues reached $134.5 million in fiscal year 2016 and $170 million in fiscal year 2017.

Chinese companies ship many low-cost, low-value shipments to the U.S. via the postal infrastructure. Beijing may retaliate if it views the U.S. action as another step in ratcheting up the broad trade dispute, White said.

The USPS did not respond to a request for comment. In a June 19 memorandum announcing the possible departure, Giselle Valera, USPS’ executive director of continuity of global operations, said the quasi-governmental agency “fully supports the objectives of the Administration to secure a more balanced and fair remuneration system for small packets containing goods.”

USPS wants to establish agreements with foreign posts to continue exchanging mail if the U.S. exits, Valera wrote, adding that “it intends to use commercial logistics partners for deliveries abroad.”

The Administration is within its rights to withdraw from the UPU, according to Eliot Kim a Juris Doctorate candidate at Harvard Law School. Writing in October 2018 in “Lawfare,” Kim said Article 12 of the UPU Constitution explicitly allows any member state to withdraw from the organization with one year’s notice. In addition, the administration can act without Congressional approval, Kim said, citing language in the landmark 2006 Postal Accountability and Enhancement Act that gives the Secretary of State “power to conclude treaties, conventions and amendments related to postal services and other international delivery services,” Kim wrote.

 

 

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