Universal disservice

They call the legislation to tax Internet sales the Marketplace Fairness Act. But if it is marketplace fairness Congress wants, it needs to look at the Universal Postal Union and what its anachronistic rate-setting system is doing to U.S. businesses.

Among other things, the Universal Postal Union sets the rates countries pay each other for handling each other’s international mail. For example, if you mail a letter or package to New Zealand from the United States, the U.S. Postal Service would collect your postage then send some of it to the New Zealand postal service to cover its costs of delivering the package.

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The Universal Postal Union sets the amounts each country can charge for delivering these pieces of mail, which are known as terminal fees. It negotiates the rates every four years and operates on the one-country, one-vote principle. Rich countries, such as the U.S., agree to charge less and pay more to poorer countries.

Thus, it is now cheaper to ship a package from China to the United States than to ship the same package from Ohio to Virginia, and the U.S. Postal Service can’t even recoup its costs of handling letters and packages from overseas.

This was not such a big problem when letters dominated the delivery streams and postal services moved virtually everything that traveled between countries. It was a way for the U.S. and other developed countries to help improve postal systems in the developing world at a reasonable cost and create a truly worldwide mail system.

But letter volume decreased by 27 percent from 2009 to 2014, and cross-border e-commerce is growing at the rate of 27 percent per year. E-commerce among Americans is expected to grow from $41 billion in sales in 2013 to more than $80 billion by 2018. That means the Postal Service, which already loses about $7 billion per year, stands to lose even more.

Also, only national postal services, such as USPS or Canada Post, are eligible to receive any money at all. Fed-Ex and UPS must pay their own way on both ends of the transaction, creating a market advantage for the postal services at the expense of quicker, more reliable delivery services.

The House Subcommittee on Government Operations got an earful on these problems and more during a hearing last June and asked the Postal Service’s Office of Inspector General to look into the problem.

The Inspector General’s report confirmed the problem. The Postal Service lost $75 million delivering international packages in 2014, the IG found, and the 13 percent “raise” it will receive through 2017 under the latest Universal Postal Union deal won’t be enough to erase the deficit. Also, it found the terminal fee system discourages efficiency and creates winners and losers, and the main area of disadvantage for the U.S. is in the small packages that make up so much of the e-commerce flow.

The report was careful not to overstate or understate the problem.

“Evolving innovation in cross-border logistics and the rise of alternatives to the terminal dues channel mean that the competitive impact of lower UPU terminal dues, paid by certain countries like China, is less significant than it may appear,” it said. “Nevertheless, terminal dues remain distortionary, and reform is a necessity.”

In fact, reform has not waited for the lengthy, balkanized Universal Postal Union process. Countries, including the U.S., have negotiated bilateral agreements; private shippers have worked out their own side deals, and others have succeeded by pressing advantages in speed and services, such as tracking.

China Post may have cost advantages over other providers because of lower terminal dues, but it takes 10-14 days to deliver packages others deliver in 2-3 days and offers only the most basic of tracking systems.

Reform, said the Postal Service’s Inspector General, should address terminal dues – moving toward a system where remuneration reflects costs. But it also should look at disparities in the services associated with delivering cross-border packages so they meet “customer demands for speed and reliability.”

To this end, it recommends the U.S. push to separate competitive small packages that contain merchandise from documents and letters. Documents and letters would continue to fall under the terminal dues regime, but packages would move under self-declared rates that reflect costs and are available to posts, competitors and shippers alike. This would strengthen shipping companies in the package sector and the Postal Service on the letters and documents side.

“The Postal Service should champion reform to an increasingly anachronistic terminal dues system,” the report concluded. “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.”

McNicoll is a conservative columnist and freelance writer based in Alexandria, Va. He is a former senior writer for The Heritage Foundation and former director of communications for the House Committee on Oversight and Government Reform.

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