On October 17, 2018, the Trump Administration announced plans to withdraw from the Universal Postal Union treaty due to a dispute over the discounted postal rates charged on Chinese packages shipped to the United States. The move is part of the administration’s ongoing efforts to level the playing field between Chinese and US businesses.
The withdrawal won’t go into effect for a year. Negotiations will be ongoing during that time, and there is hope that the parties could reach a satisfactory agreement to maintain US participation in the Universal Postal Union (UPU).
As eCommerce becomes ever more global, changes in this international postage agreement will have a profound effect on eCommerce companies, both in how e-commerce businesses import their products to fulfillment warehouses in the US, as well as the ecommerce fulfillment services from these warehouses to final customers.
Here’s what you need to know to prepare your eCommerce company to weather this latest change in international shipping.
What is the Universal Postal Union Treaty?
The UPU, now an arm of the United Nations, was established in 1874 by the Treaty of Bern. Before this international agreement, cross-border post was complicated and often very expensive. Some countries had bilateral postal agreements, and some didn’t. If you wanted to mail a letter to someone in a country that didn’t have a reciprocal agreement with the country you mailed from, you would have to rely on a forwarding service and you might have to apply stamps from each country your letter passed through.
To facilitate international postal delivery, the 192 member countries of the UPU agree to honor each other’s postage in exchange for terminal fees to cover the cost of delivery in the destination country. The UPU also sets standards for international delivery and generally takes the chaos out of sending letters and small packages across national borders.
Changes in International Shipping
The UPU only governs the mailing of letters and small packages up to 4.4 pounds (2 kg). At the time the agreement was first implemented, most international mail was letters. Now that email and apps like Snapchat and WhatsApp connect people around the world in real time, the volume of letters has shrunk. At the same time, the number of small parcels shipped internationally is on the rise due to eCommerce.
The UPU reported that international letter delivery declined 9% in 2015, compared to a 3.2% decrease in domestic post. During that same period, international mail parcels went up 12.1% while domestic package delivery only rose 6.4%.
The UPU meets every few years to renegotiate the treaty. To ensure that it is economically feasible for someone in a developing country to send international mail, the treaty groups countries by their development status and charges lower terminal fees for economically disadvantaged nations.
The most recent agreement took effect at the beginning of 2018 and raised terminal fees for some developing countries with maturing economies, including China. The higher fees still don’t cover the full cost to the US Postal Service to make the deliveries. The rates are often lower than the price you would pay to send domestic mail to the same address.
This price discrepancy is partly offset by the high fees the USPS charges for outbound packages from the US to other countries. A 2015 report by the inspector general of the US Postal Service showed that the post office made a net profit on international shipments, with the inbound losses more than covered by outbound fees. However, the trend from 2010 to 2014 analyzed in the report showed inbound losses grew while outbound profits shrank, as international eCommerce shipments began to flood the US. This data points to a day in the near future when the post office will have a net loss due to the terms of the UPU.
Cheap Chinese Shipping Fueled a Micro-ECommerce Boom
The low cost to ship small packages from China to the United States has made it easy for small Chinese sellers to reach US consumers. Direct sales through eBay and the Amazon marketplace have boomed, as inexpensive postage allowed Chinese merchants to offer free shipping to American customers. It isn’t fast – international mail from China can take two weeks or more – but the low price is attractive to both buyers and sellers.
The cost to ship a 4.4-pound package from China to the US tops out at $5.41 – less than it would cost a US eCommerce seller to ship the same item to a US address. (Note: international postal rates from China to the US rise steeply above 4.4 pounds.)
For example, a Chinese manufacturer could sell a t-shirt that weights 1 pound (about 453 grams) to someone in Cincinnati. The cost to send this small parcel from China to the US would be less than $2. To ship that same t-shirt from Miami to Cincinnati, you’d have to pay $6.70 for Priority Mail, since most domestic packages over 13 ounces must be shipped by Priority.
In the example, although the US t-shirt would arrive much more quickly, there’s almost a $5 difference in shipping costs, giving a competitive edge to a Chinese eCommerce seller, who might also be able to offer his products at lower prices.
6 Ways Withdrawal from the UPU Could Affect US ECommerce Companies
Even the threat of US withdrawal from the UPU has sent ripples through the eCommerce industry worldwide. A change in the structure of international postal pricing could affect carriers like FedEx and DHL, eCommerce retailers, and simply individuals who want to ship a package overseas.
Here are six possible effects of a disruption in international shipping.
Less competition from small Chinese sellers
The stated point of the Trump administration’s withdrawal from the UPU is to level the playing field. If consumers get used to higher prices (and especially higher shipping costs) in online stores, as some have predicted, this could make small US eCommerce shops more competitive in online marketplaces.
The Universal Postal Union treaty has little effect on large Chinese eCommerce businesses
The South China Morning Post reported that, while small Chinese eCommerce firms will suffer, larger Chinese retailers aren’t as likely to be affected. The article noted that these companies often employ sophisticated logistics operations with multiple warehouses around the world, rather than shipping small individual packages to US customers from China.
For US eCommerce sellers who buy raw materials or products for resale from Chinese manufacturers, changes in the UPU could increase your costs of goods sold, but only if you order very small packages from China that would be covered by the terms of the treaty.
Outbound international shipping rates could go up or down
If the US completely withdraws from the UPU, it will have to negotiate new agreements with all of the other 191 member countries, not just China. The only thing certain about that prospect is that it would lead to uncertainty, as international shipping prices to individual countries could go up or down.
ECommerce companies could have new international shipping options
Because they aren’t eligible for the profit-sharing terminal fees that the post office gets, private shipping companies like UPS and FedEx have been shut out of the international last-mile shipping market governed under the UPU. FedEx already partners with the US Postal Service domestically; changes in the agreement could be an opening for freight companies to play a bigger role in international deliveries to US consumers.
The value of fulfillment centers closer to customers will increase
Free shipping is more important to consumers than fast shipping. If a new UPU treaty or exit from the agreement eliminates inequities from shipping costs, the competition for eCommerce customers may shift from fulfillment costs to shipping time.
The fight to have the fastest delivery is already underway, led by Amazon, as usual. As eCommerce businesses scramble to provide one- and two-day shipping for their customers, placing stock in centrally-located order fulfillment centers, both in the US and internationally, is more important than ever. This strategy can also help keep a lid on shipping costs.
Uncertainty in the delivery of small international parcels may rock the eCommerce industry
In a worst-case scenario, the US could leave the UPU with no replacement in place, leading to a complete breakdown of international shipping through the post office. (If you think that can’t happen, one word: Brexit.) In that event, US eCommerce stores with an international clientele would likely turn to alternate shippers, even for small packages.
Changes to international postal agreements could ultimately spur the US eCommerce industry to find better ways to reach an international market, but the chaos that could happen in the interim may make business planning difficult.
Prepare Your Business for Changes in International Shipping
Business owners must always prepare for changes that can affect their business models, including major disruptions to the global economy, such as withdrawal from treaties. To stay one step ahead, make sure you stay informed of the latest developments in what is sure to be an interesting year of UPU negotiations. Work with your fulfillment provider to prepare to take advantage of opportunities presented by this shipping change – and to mitigate any problems it may cause.