In October of 2018, the United States announced an intention to pull out from the Universal Postal Union (UPU) within one year. As a founding member of this 145-year old international organization, this development was significant. The UPU sets the terms and conditions for postal operators, so a US withdrawal would impact mailing and shipping relationships among postal entities, as well as commercial shipping carriers worldwide. The impetus behind the pullout announcement was a desire to revamp the terminal dues framework, which refers to the rates that foreign posts pay each other for delivering mail and packet shipments. The United States wanted to move to a self-declared rate system, or a system by which nations set their own prices for delivering inbound packets. The United States posited that inbound delivery costs into the US mirroring domestic shipping rates would then create parity between domestic and international businesses, specifically in e-commerce, and reduce some of the market distortions that the terminal dues system had created.
What Is the UPU?
The UPU is the global organization that sets the rules for global mail delivery, with the formation of a single territory by all signatory nations. The purpose of this single territory is uniformity of postal rates, weights, technology, security, and policies, while streamlining the global delivery of mail and parcels that travel in a postal environment. The UPU is a United Nations organization, and is headquartered in Geneva, Switzerland, with more than 170 member countries.
How Did We Get Here?
The terminal dues system was created about 40 years ago, when letters were the primary mail moving between countries. The rate structure was based on a classification system that took into account a country’s development so that developing countries paid less than developed countries. China, despite having the world’s second largest economy, was still considered a developing country in this classification system. With the explosive growth in e-commerce – much of it coming into the United States from China – this system created market distortions.
For many years, the terminal dues framework acted as a sort of subsidy for low-weight shipments into the US. A one-half-pound packet shipment from New York to Beijing, for example, might cost nearly $14 utilizing a postal method, while the same shipment from Beijing into the US might cost only around $4. For an e-commerce merchant who increasingly has to offer free shipping methods to stay competitive, this structure created a distorted cost structure for both the merchant/shipper and buyer. With posts accounting for nearly 70% of cross border deliveries, according to the International Post Corporation Cross-Border E-Commerce Shopper Survey 2018 (which was released in January 2019), this price distortion could potentially widen as cross-border e-commerce grows.
What Would Have Happened if the US Had Pulled Out?
It’s difficult to fully comprehend the gravity of a United States pullout. While changes to the remuneration system (as we call the payment system for cross-border delivery) only affects packets, a US withdrawal would have impacted all international mail and packages. Had the US no longer been part of treaties that underpin the UPU’s international postal services, international postal traffic to and from the US would then be considered cargo. Additionally, the US would have had to negotiate bilateral postal agreements with every country with which it wished to have a postal relationship. In simpler terms, this would have changed international mail and shipping as we know it, in terms of cost, clearance process, technology, and tracking visibility. Merchants would then need non-postal solutions to manage their international shipments, a position that could be untenable in an e-commerce world that demands low-cost and, increasingly, free shipment methods.
What Were the Proposals?
For only the third time in its history, the UPU called an emergency “Extraordinary Congress” in September 2019 to address the potential United States pullout and terminal dues framework. Three options were discussed as proposals:
● Option A would have allowed for an acceleration of a previously-approved terminal dues structure change, at a faster timetable.
● Option B would have directed countries to charge self-declared rates on inbound packets, with rates not higher than domestic rates.
● Option C would have adopted a self-declared rate structure but would have included a phase-in period at a maximum of 70% of domestic retail shipping rates.
The final proposal that passed is commonly referred to as “Option V.” In this proposal, elements of Option B and C were addressed, with the US moving to a self-declared rate model by July 2020. Other countries will transition to a self-declared model by 2025, with self-declared rates set at 70% of domestic (with annual increases of one percent allowed if rates don’t cover costs) and a cap of 80% for most countries. Some exemptions for small countries and developing countries were made in this proposal, allowing them to keep the current UPU rates.
What’s Next?
The phase-in for the self-declared rate model for the United States will occur in July 2020. Over the next few weeks and months, the actual rate structures in place to satisfy the phase in will be announced.
One of the key takeaways of this resolution is that international mail shipping rates, especially for inbound lightweight shipments, are going to increase in 2020, potentially twice. It will be important for shippers to analyze their international shipment methods to understand how to balance costs with transit time, shipment/tracking visibility, and technology.
Krish Iyer is Director, Strategic Partnerships at ShipStation. He is an industry leader in cross-border trade and logistics software with more than 17 years of Fortune 100/500 global product marketing/product development, sales, supply chain technology, and integrated marketing experience. He can be contacted at krish.iyer@shipstation.com.
This article originally appeared in the Fall, 2019 issue of PARCEL.
