While the U.S. Postal Service has taken some steps to improve its competitive position in the global market, the agency still takes a loss on inbound mail and small packages, which in turn puts small U.S. sellers at a competitive disadvantage.
Those are among the findings of a new report from the Postal Service’s Office of the Inspector General, which has concluded that the current system of setting global shipping rates is plagued by market distortions that “create winners and losers” and is calling for reforms to the way that the Universal Postal Union (UPU) sets terminal dues – the fees that one country’s post pays another for last-mile delivery.
“The Postal Service should champion reform to an increasingly anachronistic terminal dues system,” the USPS OIG wrote. “Otherwise, it risks becoming an international ecommerce provider of last resort for a residual product that does not reflect associated costs or provide the speed and quality consumers demand.”
The OIG’s report takes a close look at the heavily trafficked U.S.-China shipping corridor, which has been a particular source of contention for domestic Internet sellers. Amazon’s Paul Misener spoke for many in the ecommerce community in June, when he testified at a House hearing on the issue and made the case that U.S. sellers are at a competitive disadvantage to their Chinese counterparts because of a broken rate-setting system under which it can be cheaper to ship an item from China to the United States than from one point in this country to another.
The ecommerce community might take heart by the disclosure in the OIG report that the ePacket product – the result of bilateral agreements between the U.S. Postal Service and a handful of foreign posts – is now covering its costs, according to USPS calculations cited in the OIG’s report.
The OIG had documented a decline in the per-piece loss from the ePacket product in recent years, coinciding with a rise in ePacket volume, consisting of small, lightweight packages under 4.4 pounds.
The Postal Service recently renegotiated the ePacket rate with China Post, with the new agreement going into effect in October. However, the agency has acknowledged that its leverage in those talks is limited, as mailers in countries like China can always revert to the UPU rates that are less favorable for the U.S. Postal Service.
Rates and other specific terms of that agreement are redacted from the publicly available version, but one executive in the shipping industry described the renegotiated system as “a bit more realistic,” particularly in the provision setting rates based both on weight and number of packages, rather than the earlier system, which only considered weight. The new agreement, the executive said, “should provide some relief” for U.S. sellers.
But the OIG’s report cautions that bilateral agreements such as ePacket are “not a panacea” for the underlying unfairness of the international rate-setting system overseen by the UPU, a United Nations agency that will convene its quadrennial meeting next year in Istanbul.
Unlike the ePacket arrangement, the UPU terminal dues are the product of multilateral negotiations among the 192 member nations. Many observers have criticized that process as slow-moving, archaic and ill-suited to the changing shipping environment where letter mail is on the decline and package volumes are surging.
Add to that chorus the Postal Service’s OIG, which is urging reforms to the UPU process that would establish separate rate schedules for ecommerce packages and letter mail and move toward a more flexible, faster system for making changes to the rate system.
A spokeswoman for the Postal Service declined to comment on the report, but directed EcommerceBytes to the letter the agency submitted to the OIG on the issue of terminal dues, expressing support for many of the report’s reform proposals, including uncoupling small packages from the broader UPU rate system.
“In particular, regarding terminal dues proposals slated to go forward to the Istanbul Congress, the USPS has been an active proponent for the development of separate small packet rates, new caps and floors for these rates that take into consideration the commercial nature of this mail stream, increases to registered mail supplemental rates and the introduction of a tracked packet rate aimed to increase cost coverage on international letter mail,” Gisele Valera, managing director of global business and a vice president at the Postal Service, wrote to the OIG.
Ultimately, the OIG envisions a global ecommerce environment that is highly competitive and where rates for small packages are freed from the multilateral terminal dues regime and set by the individual carriers, with the presumption that the market forces will align rates with true costs in a way that the UPU system cannot.
“Only a system that reflects true costs and is subject to efficient market forces could conceivably fix the imbalances generated by an artificial, non-compensatory mechanism,” the OIG concluded. “While letters containing documents would still be subject to terminal dues, delivery charges for inbound packages containing merchandise up to 2 kilograms (4.4 pounds) should be freely set by each postal operator and accessible to all.”