On October 17, 2018, the Trump Administration announced plans to withdraw from the Universal Postal Union (UPU) treaty. The dispute was about discounted postal rates charged on Chinese packages shipped to the US. The move was part of the administration’s efforts to level the playing field between Chinese and US businesses.
The US planned to pull out of the treaty a year after the initial announcement unless UPU members agreed to revisions. In September 2019, the Universal Postal Union convened a meeting and hammered out a deal. The organization’s members agreed to rate changes. In return, the United States agreed to remain in the UPU. International shippers breathed a sigh of relief.
Understanding eCommerce shipping changes is crucial to your business’s health. Here’s what you need to know about the Universal Postal Union and changes to the treaty that may affect your eCommerce company.
Universal Postal Union Changes Lead to Higher International Shipping Costs
The first phase of changes in the new UPU treaty started on July 1, 2020. As a result, US-based eCommerce companies that ship to other countries through USPS saw an increase in international shipping rates. This is because many UPU member countries have increased their charges for receiving and delivering packages shipped from the United States. In addition, consumers who order products from small eCommerce sellers in China face higher shipping charges.
The price hikes affect bulk shippers, not over-the-counter international mail. The amount of the increase will vary from country to country. US eCommerce companies could see a 50% increase in mailing costs to Canada. About 30 countries increased their rates for US parcels on July 1, 2020. The other 160 UPU members still have the right to increase the rates they charge to receive US packages. So, the future may bring more cost jumps on international package delivery.
In January of 2021, other UPU member countries can charge higher rates for packages from countries other than the US. Higher fees will be allowed for countries that ship at least 75,000 metric tons of inbound mail per year.
The revisions to the Universal Postal Union treaty will affect many eCommerce companies. This may change the cost-benefit analysis for some e-commerce businesses that import their products. It will also impact US companies that ship internationally.
Impact on small eCommerce packages from China
On July 1, 2020, USPS raised the fees it charges for incoming parcels. International shippers, including from China, now have to pay $2.87 per package and $3.95 per kilogram (about 2.2 pounds). This is a huge increase in shipping costs on small parcels from China to the US. In the past, the cost to mail packages under 4.4 pounds (2 kilos) from China was less than the cost to ship the same package within the US. See below for more on the cheap postage that fueled China’s micro-eCommerce boom.
The bottom line is that the cost for shipping small packages from China to the US will be able double what it was in the past.
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 agreement, mailing letters across borders was complicated and often expensive. Some countries had bilateral postal agreements, and some didn’t. It was hard to mail a letter to someone in a country that didn’t have a reciprocal agreement with your country. You would have to rely on a forwarding service. You might have even needed to add stamps from each country your letter passed through.
To facilitate international delivery, the 192 member countries of the UPU agree to honor each other’s postage. In exchange, receiving countries get terminal fees to cover their cost of delivery. The UPU also sets standards for international delivery. The group brings order to the process 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 parcel volume went up 12.1% while domestic package delivery only rose 6.4%.
Universal Postal Union treaty negotiations
The UPU meets every few years to renegotiate its treaty. They try to ensure that it is economically feasible for someone in a developing country to send international mail. To do this, the UPU countries by economic development status. It charges lower terminal fees to economically disadvantaged nations.
The agreement that took effect in 2018 raised terminal fees for some developing countries with strong economies, including China. However, the higher fees still don’t cover the full cost for the US Postal Service to deliver these parcels.
The terminal fees the USPS charges have partly offset this price discrepancy. A 2015 report by the inspector general of the US Postal Service compared these costs. The report showed that the post office made a net profit on international shipments. Inbound losses from international parcels were more than covered by outbound fees. However, the report found that, from 2010 to 2014, inbound losses grew while outbound profits shrank. This is the period when international eCommerce shipments began to flood the US. The new UPU agreement gives the US tools to keep the USPS in the black on international shipping.
Cheap Chinese Shipping Fueled a Micro-ECommerce Boom
The low cost of shipping 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. Inexpensive postage allows Chinese merchants to offer free shipping to American customers. It isn’t fast – international mail from China can take two weeks or more. However, the low price is attractive to both buyers and sellers.
In the past, the cost to ship a 4.4-pound package from China to the US topped 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 ship a t-shirt that weighs 1 pound (about 453 grams) to 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.
Although the US t-shirt in this example would arrive much more quickly, there’s almost a $5 difference in shipping costs. This gave the Chinese eCommerce seller a competitive edge on shipping costs. If he can offer his products at lower prices, that’s hard for a US-based seller to beat.
Now that the new Universal Postal Union treaty has gone into effect, this equation may change. Small parcel charges from China to the US have risen significantly. It’s too early to tell what effect this will have on Chinese eCommerce sales to the US and other countries. However, it puts US eCommerce companies on a more equal footing with their Chinese competitors, at least in terms of shipping costs.
5 Ways Changes in the UPU Could Affect US ECommerce Companies
The threat of changes in the Universal Postal Union treaty has sent ripples through the eCommerce industry worldwide. The changes in international postal pricing could affect carriers like FedEx and DHL. ECommerce retailers and consumers will also notice the changes starting in July 2020.
Here are five possible effects of higher rates for international shipping under the UPU treaty.
US retailers may have less competition from small Chinese sellers
Chinese sellers don’t have the benefit of bargain-basement shipping prices to the US now that the new terms have taken effect. This could help overcome some of the price advantages that many Chinese sellers have over US-based businesses. That might make small US eCommerce businesses more competitive.
The Universal Postal Union treaty change will have little effect on large Chinese eCommerce businesses
The South China Morning Post reported that small Chinese eCommerce firms will suffer from higher mail costs. However, larger Chinese retailers aren’t likely to be affected by the treaty change. Large companies often have sophisticated logistics operations with multiple warehouses around the world. Most of them don’t ship small individual packages to US customers from China. So, the postal changes won’t upend their business models.
It’s a different story for US eCommerce sellers who buy raw materials or products for resale from Chinese manufacturers. The changes to the UPU treaty could increase your costs of goods sold. However, the shipping costs for your supplies will only go up if you order very small packages from China. Those are the only international parcels that are covered by the treaty.
Outbound international shipping rates have gone up
The Universal Postal Union has 191 member countries, in addition to the US. Starting in July 2020, countries were free to raise the rates they charge for incoming parcels shipped from the United States. As of this writing, international shipping prices from the US to more than 30 other countries has gone up. More increases may follow.
The new treaty gives members more flexibility to set their own rates. If you are an international eCommerce seller, keep an eye on fluctuating rates in the future.
ECommerce companies could have new international shipping options
Private shipping companies like UPS and FedEx aren’t eligible for the terminal fees that the post office gets. They have largely been shut out of the international last-mile delivery market governed by the UPU. The new Universal Postal Union treaty could provide a chance for freight companies to play a bigger role in international deliveries to US consumers.
Fulfillment centers closer to customers will become more important
The new UPU treaty will reduce inequities in shipping costs. Today, free shipping is more valuable to consumers than fast shipping. As fulfillment costs become more equalized, the competition may move to who can ship the fastest.
The fight to have the fastest delivery is already underway, led by Amazon. Many eCommerce businesses are scrambling to provide one- and two-day shipping. The best way to do this is by placing stock in centrally-located order fulfillment centers. If you sell internationally, you may want to choose fulfillment warehouse locations both in the US and other countries. This strategy can also reduce your shipping costs.
Prepare Your Business for Changes in International Shipping
Business owners must always prepare for changes that can affect their business models. The change in international postal rates is just one of many factors that can impact your eCommerce business. Work with your 3PL services company to be prepared to weather the ever-changing eCommerce marketplace.