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 withdrawal was planned for a year after the announcement. If a deal could be worked out before then, the US would stay in the treaty. In September 2019, the Universal Postal Union convened a meeting to try and hammer out a deal. Officials described the alternative as “chaos.”
Changes in this international parcel shipping agreement will affect many eCommerce companies. This could change the cost-benefit analysis for some e-commerce businesses that import their products. It could also impact US companies that ship internationally.
Fortunately, the member countries were able to reach a deal. The new Universal Postal Union treaty satisfied US negotiators. If you order products from small eCommerce sellers in China, you may see higher shipping charges next year. In addition, after 2021, the cost to mail parcels from the US to other countries could also change.
When the new agreement goes into effect in July of 2020, you should have a plan in place. Understanding eCommerce shipping changes is crucial to your business’s health. Here’s what you need to know to prepare your eCommerce company for the changes to international shipping costs.
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 even have needed to apply 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.
This price discrepancy is partly offset by terminal fees the USPS charges. 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.
Uncertainty Remains About Universal Postal Union Rates
The new treaty was announced on September 25, 2019. It will allow changes to US terminal fees starting in July 2020. At that time, the US will have the freedom to increase the terminal fees it charges for inbound parcels from China and other countries. This could cause countries like China to raise mailing costs to cover the higher fees.
In January of 2021, other UPU member countries can begin phasing in their own increases. Higher fees will be allowed for countries that ship at least 75,000 metric tons of inbound mail per year.
International mail rates from the United States probably won’t go down. But the rates for other countries may rise. This could make your products more competitive to ship across borders.
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.
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 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 gives 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.
Once the new Universal Postal Union treaty goes into effect in 2020, this equation may change. It’s too early to tell what the new rates for shipments from China to the US will be. But it’s a safe bet that China to United States small parcel charges will rise significantly.
5 Ways Withdrawal from 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 won’t have the benefit of bargain-basement shipping prices to the US once the new terms take effect. Consumers may get used to higher prices (and especially higher shipping costs) in online stores. This could make small US eCommerce businesses more competitive in international marketplaces.
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 may 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. They may use 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 coming changes to the UPU treaty could increase your costs of goods sold. However, your supplies will only be more expensive if you order very small packages from China that are covered by the terms of the treaty.
Outbound international shipping rates may change in 2021
The Universal Postal Union has 191 member countries, in addition to the US. Starting in January 2021, international shipping prices from the US to other countries could rise. The new UPU terms allow some flexibility in setting rates. If you are an international eCommerce seller, you’ll need to 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 equal, 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 that is by placing stock in centrally-located order fulfillment centers. If you sell internationally, you may want to use warehouses 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. This includes major disruptions to the global economy. Changing 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 eCommerce market shifts.