Late compromise ensures U.S. will remain in the Universal Postal Union

While the clock was ticking on a deadline for the United States to exit the Universal Postal Union (UPU), which, as previously reported, had the potential to impact global parcel rates heading into Peak Season, it appears that the crisis has been averted.

Established in 1874, the UPU is comprised of 192 member countries and serves as the primary forum for cooperation between postal service players, helping to ensure a universal network of up-to-date products and services, according to its website. The UPU sets the rules for international mail exchanges and makes recommendations to stimulate growth in mail, parcel and financial services volumes and improve quality of service for customers.

As previously reported, in October 2018, the White House said that a report President Trump received on August 23, 2018 ahead of the Presidential Memorandum on “Modernizing the Monetary Reimbursement Model for the Delivery of Goods Through the International Postal System and Enhancing the Security and Safety of International Mail,” explained that sufficient progress has not been made on reforming terms of the Acts of the Universal Postal Union (UPU) in line with the policies of the United States outlined in the Memorandum.    

The statement went on to say that President Trump signed off on the Department of State’s recommendation to adopt self-declared rates for terminal dues by January 1, 2020, adding that the Department of State would also file notice that the U.S. will withdraw from the UPU and begin a one-year withdrawal process at that time. Over this one-year period, the Department of State would seek to negotiate bilateral and multilateral agreements that resolve the problems discussed in the Presidential Memorandum, and if negotiations are successful, the Administration is prepared to rescind the notice of withdrawal and remain in the UPU, the statement noted.

With that one-year period nearly complete, it appears that the U.S. will remain a member nation in the UPU, with a compromise reached this week at the UPU’s Extraordinary Congress meeting in Geneva, Switzerland.

In short, this agreement enables countries importing more than 75,000 metric tons of parcels and mail will to be able to set their own rates beginning July 2020. And a second tier of importing countries may set “self-declared” rates in January 2021.

“Let me assure you that if indeed this proposal as presented passes in its entirety today, the United States will be able to remain a member of the Universal Postal Union,” said White House trade adviser Peter Navarro said in a Reuters report. “It bridges the different views held by net postal exporters and net postal importers here in the room.”

John Haber, founder and CEO of Atlanta-based Spend Management Experts (SME) said the winners in this development are the White House, UPS, and FedEx.

“The mail and postage rates are going to go up, there is no doubt,” said Haber. “It will be the same for the USPS and the integrators. The cost differential between UPS and FedEx is going to be less now that the USPS can set its own rates.”

But that comes with a caveat, Haber explained, in that the USPS can set its own rates and not have it be a financial drain, as it has been subsidized by the government with its rates fixed for items coming into the U.S. The question now is how much volume gets removed.

“It is unclear how it will impact them from a volume perspective, how much rates will be raised, and how much it is going to impact integrators, but there is no doubt international rates are going up,” he said. “How much? We are not sure, but there is no doubt it is going to be more expensive. And if the U.S. had left the UPU there would have been all kinds of side agreements. The people managing this process for the White House had been saying there was going to be a seamless transition and people would not notice anything, but I find that very hard to believe. It would have been a nightmare. This is likely a good result.”

An analysis from iDrive Logistics said that if the U.S. had exited the UPS, it would have been ridding themselves of scores of negotiated service agreements with PC postage providers on 9/30/19, affecting negotiated international rates. 

“This [was] due to the United States government’s plan to withdraw from the Universal Postal Union,” said iDrive Logistics. “This has significant implications for postage providers, international shippers, importers, and domestic small businesses who compete with (particularly) Chinese manufacturers.  This is due to the UPU setting variable rate structures between countries way back in 1969 and pegging them (in essence) to trade imbalance.” 

In an example, iDrive Logistics said that shipping a package under 4.4 pounds from China to the United States costs less than shipping the same package domestically from New York to, say, Detroit.  It said that this is solely due to this 1969 agreement, and if it ends for the United States and others (192 member countries, this will significantly disrupt international e-commerce.

Jerry Hempstead, president of Hempstead Consulting, told LM that the variable rate structure agreement was made when China was still a developing nation, with those deals making sense at that time, in order to assist them as they were unable to afford the same terminal dues as other nations like the U.S., Germany or England, among others.  

“Back when China was a developing nation, that made a lot of sense,” he said. “It was a system based on your ability to pay, but the Chinese economy is no longer a developing nation. This problem existed that they could crush sellers in the U.S. For example, there was no way for the e-bay sellers to compete with the Chinese sellers, because they got crushed on transport costs. In this case, China is going to pay more for packet mail coming into the U.S. than they were paying in the past. It means considerably more revenue for the USPS on the rate coming in. China could turn around and raise rates on items from the U.S. to China, but it is a night and day difference, with the amount of items coming from China to the U.S. is huge compared to the U.S. to China.”

Depending on much China to U.S. rates head up, there may be an opportunity for the parcel integrators to raise prices for U.S.-bound small parcels, Hempstead observed. On the other side, there is what he called zone-skipping, with packages prepared and bundled in China for entry into the USPS and put into a container as a U.S.-bound freight shipment at “pennies per pound,” at which point they become FedEx SmartPost, UPS SurePost, DHL e-commerce, and Newgistics.

“The USPS will still end up with revenue, but it will help UPS, FedEx, DHL and others if they can make these shipments domestic shipments once they enter the U.S….and are zone-skipped from China,” he said. It is a good thing for the integrators either way.”