- What is the UPU (Universal Postal Union)?
- Why did the US pull out of the UPU?
- Impact on the Chinese retailers, currently the major beneficiary of the UPU
President Donald Trump recently attempted to reduce the US-China trade deficit by exiting the multi-lateral agreements (similar to exits from the Paris Climate Agreement and Trans-Pacific Partnerships) that are seemingly unfavourable for the nation. On similar lines, the US government recently announced its plan to pull out of the UPU (Universal Postal Union). This is a 144-year-old global postal treaty that sets the terms and conditions for global mail exchanges. The US withdrew from the UPU on October 17, 2018 and thereafter, the US State Department has communicated that it will work over the one-year notice period in order to draw up/negotiate better rates for the US, otherwise it will walk away from the international shipping treaty in the year 2020 and will set its own ‘self-declared’ rates.
The UPU agreement mandates postal authorities in 192-member countries to offer equal treatment, in terms of charges for both the domestic and the foreign mails by establishing a uniform flat rate (based on the size and the weight) anywhere around the globe. The UPU sets forth the amount of postage to be charged for international mails along with an amount on each postal service that should be reimbursed to other nations (known as terminal dues) for this service. The international postage treaty was deemed revolutionary as UPU eliminated the need for shippers to calculate the postage cost based on each leg of a journey as parcels move from country to country. This was done with an intent to foster development in economically weaker countries, the treaty sets out lower rates for African and Asian nations as compared to the charges levied on the developed countries. The UPU offers discounts on the shipment of items weighing up to 4.4 pounds or measuring less than 36 inches with a major chunk of the discounts being offered to the developing nations.
The US pulled out of the treaty due to the Chinese retailers’ unfair shipment of products worldwide, including to the US, that too at a subsidised rate. This is because China is still treated like a developing nation according to the treaty, in spite of being the world’s second-largest economy clocking close to US$350 Bn+ in sales annually from e-commerce. Moreover, approx. 60% of the packages shipped to the US originates from China, a country known to attract price-sensitive customers. The US government officials estimate that handling foreign mail due to the UPU treaty costs the US Postal Service approx. US$170-300 Mn every year and is, therefore, a cause of concern.
As is common knowledge, the postal system has become pertinent for the e-commerce industry, with a majority of the people now preferring to shop online instead of their local retail establishments. While consumers almost inevitably expect free shipping on their orders, sadly retailers face a hefty cost, especially in the US. Although a Chinese retailer can typically ship a product weighing 1 pound (0.45 kg) from Beijing to New York at a meagre cost of as low as US$3.6, the same package would cost US$6 from South Carolina to New York. Furthermore, a similar package would cost c. US$50 to ship from New York to Beijing. It is due to these rock bottom shipping rates that Chinese retailers are at a huge advantage over their competitors when competing on the same e-commerce platforms. This more often than not renders their US counterparts obsolete on their own domestic turf.
Hence, due to these subsidised shipping rates, a Chinese retailer can quite conveniently ship lightweight items (like electronics, apparel and other gadgets) and offer free shipping to the US buyers purchasing certain items from cross-border platforms like Light in the Box, AliExpress, DHGate, etc. The US government claims that in essence it is (somewhat unfair) awarding a massive subsidy, which is funded by its citizens/ratepayers as they incur higher shipping charges. The low shipping charges for Chinese retailers are said to have boosted the prevalence of cheap knockoffs online as well as narcotics and fentanyl trade (drug), China local manufacturers are also at a disadvantage, in spite of their higher quality goods due to the low price point and free shipping offered by the Chinese retailers.
Apart from this, how it can be disadvantageous for the online retailers (B2C) as it can also potentially result in a loss of retail and distribution opportunities (B2B), with distributors being discouraged to stock up and sell products manufactured in the US vis-à-vis the cheap Chinese counterfeits available online.
While a few have criticized this move, many such as the USPS (United States Postal Service) and UPS (United Parcel Service) have praised President Trump for pulling out of the treaty that according to them allowed for unfair trade practices. The move is likely to benefit delivery companies such as UPS, DHL and FedEx and will make them more competitive for small and global parcels coming to the US, a majority of which are attributable to the e-commerce sector. These companies would probably drop their charges in an attempt to capture a major chunk of the market. Additionally, the move will help manufacturers and e-commerce giants (such as Amazon) alike to fend off the prevalence of cheap knockoffs of foreign competitors. On the other hand, the US customers will likely have to absorb/bear high shipping charge as retailers would pass on the shipping cost to customers. This would probably be over and above the high costs which customers will have to bear due to the imposition of tariffs on almost half of the Chinese imported goods.
The US pulling out of the UPU is undoubtedly bound to create some level of disruption in the e-commerce sector, small Chinese retailers would be hit by this move as switching to another form of logistic services such as private courier and shipping companies would undoubtedly lead to a rise in the shipping/delivery costs. One way for the big and the more established Chinese companies to take this hit from the potential increase in the postal fees would be to quickly ramp up building overseas warehouses in their main shipping destinations. While the move will decrease the dependency on the UPU, it will likely benefit enterprises that set up their own logistics systems.