Boxed In

U.S. Housewares Fights China’s Direct Postal Edge

NEW YORK— Hard as it is to believe, a factory in China can ship a small package containing a housewares item using the United States Postal Service to a U.S. consumer at a significant discount to the rate an American business is charged to ship a comparable item domestically. That has some people
up in arms.

“Some” is the correct term because few people, even in the housewares industry, understand what’s going on with the shipping of those small, up-to-2 kilograms, or 4.4-pound, packages from China. Those who have spent the considerable time necessary to grasp the situation want their colleagues to help pressure the powers that be into making the costs associated with delivering these small packages from China fairer.

The powers that be include the U.S. State Department and Postal Service who, respectively, negotiate and administer a set of accords that establish American involvement with the Universal Postal Union (UPU), which the country entered at the time of the Lincoln administration. The purpose was to keep documents flowing around the globe. Today, the postal service, under the accords, treats small packages as something like letters for purposes of rates, which creates a set of challenges for U.S. business in the e-commerce era.

Jayme Smaldone, CEO of Mighty Mug, has taken an active role in drawing attention to the present system and fostering change. Still, even he only learned about the situation coincidentally.

Smaldone’s experience with the UPU and what are known as terminal dues, payments between postal services covering delivery of international letter mail and small packages, began two years ago. Then, he was responding to copycat versions of his Mighty Mug product line that he said violated intellectual property rights. His lawyers advised him to purchase the copycats to strengthen the company’s case.

“One of the items I bought stuck out,” he recalled. “It was $5.69 with free shipping from China and arrived in eight days. The only way that can happen is by air and that’s the most expensive way. That raised a red flag for me. I asked our director of e-commerce how much it would cost to ship a Mighty Mug there, and pointed across the street. He said $6.30.”

Smaldone said that, to ship a one-pound package to a customer within the U.S., Mighty Mug pays $6.30 but a shipper in China, under the UPU regime as it has stood, can reach that same address for $1.40. For a four-pound package, he added, Mighty Mug pays $17.61 while the Chinese shipper pays $3.67.

After deciding he needed to understand how the international postal system had come to place his and other U.S. businesses at such a competitive disadvantage, Smaldone was on the case, learning, in the course of his investigations, how the UPU determines rules for international mails, and terminal dues. As an ideal, terminal dues are pegged at 70% of the normal cost of a delivery, based on the premise that the country sending the package uses only the delivery function of the receiving country’s postal service, and, so, should only pay a percentage of the full rate. In practice, however, countries pay much less than that 70% rate, and the cost equation may not cover actual cost of delivery, particularly when it comes to small packages. In fact, the complex and often arcane practices regarding small package delivery have helped keep international postal practices under the radar of most Americans including the housewares industry.

The situation needs to change, Smaldone said, not only because it provides a competitive advantage to Chinese businesses manufacturing and distributing small package goods that can be shipped to the U.S., but also because relaxed customs regulations for international postal shipments can facilitate the proliferation of knockoff and counterfeit products.

Enabling Counterfeit Products

Indeed, among the trade organizations acting on terminal dues and small packages shipping issues, which includes the International Housewares Association, the National Association of Manufacturers is taking particular interest in how the current system makes it easy for knockoff and counterfeit products to enter the U.S. market, said Patrick Hedren, NAM vp/labor, legal and regulatory policy. NAM is exploring means— as trade and business organizations review legal, legislative and regulatory methods that might give their members relief from the negative effects of the current international small package shipping system— to turn off the flow of counterfeit goods at the tap.

Part of the problem is customs. Under international conventions, countries subject mail and small packages that cross national borders to much less customs scrutiny than shipments from private firms, Hedren noted, making detection of bogus products, and even drugs, arms and munitions, extremely difficult. The issue of contraband is one, along with terminal dues, that has begun stirring action in the U.S. Congress.

“We are focused on counterfeit problems,” Hedren said. “The opportunities for counterfeit goods
are greater than ever.”

As regards terminal dues charges, actual payments are a function of a schedule with four designations, each including its own rates.

Jim Campbell, a consultant and attorney who has worked for and with companies such as DHL International and Federal Express, has written extensively on the issue of the UPU and terminal dues. He points out that terminal dues are organized under four designations: Group 1 includes 24 industrialized countries such as Israel, the U.S., Canada, Japan, Australia and New Zealand as well as nations within Western Europe. Group 2 includes relatively advanced developing polities such as Hong Kong, treated as separate from China by the UPU, Singapore, Korea and Poland. Group 3 includes less advanced developing countries including China, Thailand, Malaysia, Mexico, Brazil and Russia. Group 4 includes the least advanced developing countries, including potentially important commercial countries such as India, Egypt and Vietnam.

Yet, the reality of terminal dues payments is more complex than the four-tier schedule suggests. The assumption that industrialized countries pay a proportion of cost much closer to the 70% number would be incorrect, Campbell maintained, as some, such as Germany, still receive significant discounts on U.S.-bound small packages. However, it should be noted, the same is true in reverse: Small packages outbound from the U.S. to Germany have a proportionate discount. Indeed, all outbound packages from the U.S. to other countries under the UPU get discounted delivery rates given the terminal dues structure, with volume being a factor in deciding the financial impact of postal traffic.

In addition, a separate group of small packages, ePackets, move based on special agreements with postal services outside the U.S., accords that set higher charges but provide enhanced delivery services. Non-UPU delivery rates established as part of those
deals are not public.

The State Department’s Role

In fact, much of what the U.S. Postal Service charges in the course of international shipping can’t be valued easily. Yet, it doesn’t negotiate agreements under UPU auspices. That’s up to the U.S. State Department. According to it, negotiations conducted must be based on numbers provided by the post office, which reflect its method of assessing costs, itself a subject of controversy.

In clarifying the role State plays in UPU negotiations, Joe Murphy, chief of the international postal policy unit with the department’s Bureau of International Organization Affairs, said, “The agreement is actually a series of instruments called the acts of the union of the UPU. There are several of them. They work together. They’re hierarchal. The highest is the constitution, an overarching framework that includes shared objectives and government structure. Under that are the general regulations of the union implementing the constitution.”

The constitution is a permanent arrangement. However, the general regulations that implement the constitution are different and determined at a regular convention.

“The convention is not permanent and has a life of four years,” Murphy said.

The last was held in 2016. Changes made at the quadrennial conventions come into effect two years after a convention year. The most recent set of regulations became operative on January 1.

In looking at circumstances, the State Department recognized that the gradual then dramatic growth in small packages crossing from China to the U.S. was a critical issue, deciding, said Murphy, “Absolutely, it is the case that this needs to be fixed.”

In the recent conventions, the State Department initiated mechanisms to deal with the changing reality of letter and small package shipping. In the round previous to the last, it created a second designation for mail, which covers flat and small package shipping, to help close a $40 million deficit on inbound volume. However, the State Department didn’t anticipate the explosion of global e-commerce that occurred in the middle of this decade and the concurrent expansion of small package shipments to the U.S. from China, which was predominantly responsible for an approximately $170 million 2017 deficit on inbounds that the U.S. postal service suffered. Indeed, the U.S. General Accounting Office, in a report on terminal dues and their effects, related that USPS losses from inbound mail more than doubled from $66 million to $135 million from fiscal year 2012 to fiscal year 2016.

The solution the State Department put into place revolved around caps. The UPU general regulations include caps that keep terminal dues from rising to their predetermined levels for each of the four established rate schedule tiers. The idea of the caps, as the State Department describes it, is to keep sudden changes in postal rates as initiated by individual or groups of countries from shocking the international order. Recent agreements, the State Department noted, moved China from tier 4 to a tier 3 in the rates schedule, and, so, from the developing countries that are targeted for the greatest cross border terminal dues breaks to a somewhat lesser discount. The last set of general regulations, emerging from the most recent, 2016, convention, included a provision regarding China. Under it, China’s payments will increase based on a 13% figure per year, reaching a compounded 63% over the life of the current convention provisions.

The State Department believes that provisions emerging from the 2016 convention provisions will bring the terminal dues issue with China into line, substantially closing the deficit on payments the U.S. Postal Service has borne and creating a more equitable competitive shipment situation.

Observers are more dubious about the effect on terminal dues and the competitive disadvantages on shipping U.S. businesses face as compared to China-based small package shippers. After all, the 70% ideal rate still constitutes a significant discount and observers aren’t sure that the current proposed solution would actually bring payments to that level. The State Department indicated that any continuing inequities could be addressed at the next UPU convention, scheduled for 2020, although implementation of new provisions would wait until 2022.

In addition to uncertainty about how actual terminal dues payments will change, observers also note that the real Postal Service deficit may not be adequately addressed. Campbell asserted that the way the U.S. Postal Service accounts for costs only covers a proportion of its overall delivery expenses.

“The post office directly attributes only about 57% of its costs to specific products,” he said, noting that, although it directly accounts for the expense of putting mail in your mailbox, the cost of the truck that conveys it is considered separately. As such, the costs that the Post Office uses in analysis of terminal dues do not equate to the costs that the postal service has to cover.

By The Numbers?

The difficulty of figuring out post office finances is an ongoing issue. Even the Postal Regulatory Commission has had difficulty getting the Post Office to reveal data relevant to the terminal dues question. USPS cites concerns about commercially sensitive information as the reason for reluctance to be more forthcoming.

In January, the PRC, followed up on a request by the U.S. Chamber of Commerce to reveal aggregated inbound letter post revenues, which would include small packages, by country group, one the Postal Service had denied. In reviewing that denial, the PRC determined that the information should be unsealed, but the process is ongoing.

Yet, all that may only be one part of a much larger problem for U.S. companies. Evidence suggests that the government in China is making it so inexpensive for companies there to ship small packages to U.S. consumers, any move to change terminal dues fees may have little or no effect on Chinese small-package shippers. If changing terminals dues forces China Post to absorb new costs, the effort might result in its charging more for small-package shipping. Or it may not if the Chinese government determines it is in the country’s interest to expand that trade.

Smaldone and others suspect that China already is willing to absorb substantial losses in shipping small packages to the United States by airfreight. Smaldone said the $5.69 mug he received in eight days, which time would necessitate airfreight delivery, would have cost him $30 going the other way. The quick-delivery mindset of U.S. consumers certainly has limited tolerance for shipping periods of more than a few days, so, without the kind of turnaround time from order to delivery that airfreight provides, direct small package delivery from China would likely become unattractive to many if not most Americans.

The United Parcel Service, in a draft memo obtained by HomeWorld Business, created to rally opposition to the terminal dues structure, one it regards as providing postal services with an unfair competitive advantage versus private shippers, stated frankly that China is heavily subsidizing the shipping costs. According to the memo, Chinese company shipping small packages to the U.S. pay little or nothing for air freight to the U.S. point of entry, typically John F. Kennedy International Airport in New York.

The effort to eliminate advantages enjoyed by overseas small package shippers versus their U.S. competitors may wind up being a complex struggle, but parties involved in the situation agree you have to start somewhere. As such, making the case for terminal dues fairness to the American public and government could begin generating momentum on an issue that contains what a Congressional source called “built in outrage” ready to ignite when people learn about the situation.

Congress is becoming more aware of the issue, in part thanks to efforts by Texas Congressman Kenny Marchant. In January, the congressman sent the chairman of the Postal Regulatory Commission a letter, provided to HomeWorld Business, supporting PRC’s request for information on terminal dues and postal service finances. In the letter, Marchant expressed frustration with the UPU and terminal dues as they are constituted today.

In it, he stated a concern about “the lack of transparency that surrounds this program,” which he said seems to underlie the ability of terminal dues inequities ability to continue unaddressed.

Marchant commended the chairman’s request for information from the post office on the issue, adding, “Such a disclosure of information by the USPS would unmask the full extent of the growth of inbound international parcels under terminal dues and reveal the full extent to which the USPS has been helping foreign merchants, all the while the USPS is losing money on these deliveries in the process.”

Marchant is among those members of Congress who is working to address concerns related to the post office and how it deals with various financial issues, including those related to terminal dues.

Changing The System

IHA lobbyist Pam Sederholm, president and CEO Sederholm Public Affairs, told HomeWorld Business that turning a spotlight on terminal dues and rallying support to change the system is a critical first step to addressing the larger issue.

“I think first and foremost, we have to raise awareness with our membership,” she said. “The IHA membership can bring its weight to bear on its representatives and others in government.”

In the meantime, Sederholm said, the IHA is discussing action with other parties concerned about terminal dues and related postal issues even while engaging the PRC in its efforts to sort out the facts on charges and costs. Costs and competitive disadvantages suffered by U.S. businesses on shipping costs are important issues but so is how easy the international postal system makes it for counterfeit items produced in China to reach the U.S. market. And not a few in Washington are worried about the use of the lightly inspected small-package postal delivery system as a conduit for illegal drug distribution or as a vehicle for terrorist actions.

“Unchecked, you have some real safety issues,” Sederholm said.

“IHA through her activities and those of its government affairs committee will push to make the system more transparent,” she said

Still, any effort to effect real change will take time and sustained effort.

“There isn’t a single answer,” Sederholm said, “It’s about finding who is sympathetic and who understands in all the quarters of government, regulatory, legislative, executive. Everyone is trying to get a handle on the issue. But I would make a plea to your readers: Ask them to check what their costs are and to see what the discrepancies are when it comes to shipping and where the unfairness is. We need their help.”