Why it's cheaper to buy from China – the problem with UPU terminal dues

Taken from the Report of an Investigation by the United States Postal Service Office of Inspector-General.

Note: The report by the USPSOIG necessarily focuses on the US perspective but clearly the issues highlighted affect mail between all postal administrations and it is therefore relevant at least in part to the UK and other developed countries. Note that reference to 'shipping companies' is not exclusively maritime, it also refers to courier companies. We do not know Royal Mail's views on terminal dues.

Terminal dues is the system that postal authorities (posts) use to pay one another for international deliveries of letters and small packages. The global terminal dues system, updated every four years by the Universal Postal Union (UPU), does not fully reflect actual domestic processing and delivery costs.

As a result the U.S. Postal Service and other operators have lost money on international postal letters and small packages received from abroad, especially from emerging countries like China. The explosive growth in cross-border ecommerce traffic has greatly elevated concerns about the economic distortions created by the system.

Posts pay terminal dues to compensate one another for international deliveries. When someone mails a letter or small package to another country, the postal administration in the sender’s country receives the postage and pays terminal dues to the destination post for its share of processing and delivery. Terminal dues rates are painstakingly negotiated at the Universal Postal Union (UPU) among its 192 member countries every 4 years — and implemented about 18 months after that — using the principle of one country, one vote. Because of the complexity and length of the UPU decision-making process, significant changes to the terminal dues system may take many years to unfold.

Until 1969, terminal dues did not exist; the receiving post bore the entire cost of sorting, processing, and delivering the foreign customer’s item. The terminal dues system’s goals were to provide posts with some compensation for their delivery of inbound international mail and to support a single worldwide postal network. As a result, it funded improvements to the postal infrastructure in developing countries. Terminal dues, therefore, by design, were based upon setting rates by majority agreement rather than reflecting true economic costs.

The explosive growth in ecommerce traffic, especially from China, has greatly elevated concerns about the system’s unfairness. As international ecommerce packages experience rapid growth, destination posts with higher postal rates are protesting that terminal dues do not cover their costs. U.S. online retailers have argued that competitors in China can send packages to the United States through China Post at lower rates than American businesses are required to pay in their own country. In segments other than lightweight packets, such as heavier, higher-value packages requiring additional services, the rate advantage of low terminal dues posts like China Post decreases. Additionally, private sector shipping companies maintain that terminal dues are only available to postal operators, providing an unfair competitive advantage.

Governments and some posts started to discuss UPU remuneration reform to improve the cost coverage for inbound delivery of international mail. In 1999, aligning terminal dues with delivery costs officially became the UPU’s long-term goal. To allow a smooth transition, a two-tier structure consisting of developing and industrialized countries (now called “transition” and “target” countries, respectively) emerged. Posts located in lower-income countries such as India or Morocco generally would pay lower terminal dues than posts in industrialized countries such as the United States or France. In other words, industrialized countries would continue to subsidize developing countries. Although the goal was to improve fairness, the unintended outcome was distortions caused by an artificial compensation system

As of 2015, the lower terminal dues transition country category, established to help developing economies, still includes 140 countries, including the so-called BRICS (Brazil, Russia, India, China, and South Africa). In this way, the Postal Service will have subsidized posts for many years that, in some cases, have not necessarily needed such support. Forty of these countries, including all of the BRICS except for India, will join the target tier next year. However, moving these countries to the target category may not immediately lead to significant terminal dues payment increases. The UPU Congress will approve new rates, for the period from 2018 to 2021, next year — meaning implementation is 2 to 6 years after a decision. The new target countries may continue to have an advantage during this period.

In the long term, the terminal dues system should reflect the true cost of inbound delivery. In the interim, the United States should continue to work with the UPU to support the separation of competitive small packages containing merchandise from documents and letters. While letters would continue to fall under terminal dues, small packages would be subject to self-declared rates that reflect cost and are available to all — posts, competitors, and shippers alike.

The bigger issue is the increasing irrelevancy of the international terminal dues channel in an age of ecommerce because it fails to meet customer demands for speed and reliability. Efforts to ensure this channel’s responsiveness should not only include fixes to terminal dues remuneration but also, in parallel, measures to improve the service quality of cross-border packages. The Postal Service should champion reform to an increasingly anachronistic terminal dues system. 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 full report of the USPSOIG can be read here: www.uspsoig.gov/document/terminal-dues-age-ecommerce

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