Does U.S. Postal Service Subsidize China-based Merchants?

Cross-border ecommerce is booming, as is cross-border shipping. But the postage rates among countries for that shipping greatly vary. Merchants in certain countries, such as China, can ship very cheaply to U.S. consumers with rates that are unavailable to U.S. merchants.

To explain it all, I recently spoke with Paul Steidler, a senior fellow with the Lexington Institute, a public-policy think tank in Washington, D.C.

Practical Ecommerce: It’s sometimes cheaper for an international seller to ship into the U.S. than it is for a domestic U.S. merchant to ship across the country. Why?

Paul Steidler: I believe you’re referring to the ePacket program from China, which is a program that the U.S. Postal Service instituted in 2010. To understand programs like the ePacket and why it’s far less expensive to ship goods from foreign countries to the U.S. than to send goods within the U.S. itself, it’s important to understand “terminal dues.”

The Universal Postage Union sets common rates and common standards for 192 countries around the world. Within this system, the United States is classified as a group 1 country, meaning we’re going to pay the most for goods that are shipped to another country.

China has gotten itself designated as a group 3 country, which gives it a tremendous advantage in shipping goods from China to the United States. It costs less to send a package from Beijing to San Francisco than it does from Los Angeles to San Francisco. And this puts U.S. ecommerce merchants and others at a competitive disadvantage.

PEC: Is the ePacket program just between the U.S. and China?

Steidler: It applies primarily to the U.S. and China. It also applies to Hong Kong and some other countries. The U.S. Postal Service has been very secretive about how the program is performing. A U.S. Office of Inspector General report found that the USPS was losing $39 million from ePacket in 2014. It’s a program that mirrors the effect of the international terminal dues agreement.

I spoke recently with a U.S. company that sells mugs. It costs them $6.20 to mail the product to a different town in the United States. But a U.S. consumer can purchase the entire counterfeit product, with shipping, for less than $6.00 from China (with the shipping only being $1.00 of the component) through the ePacket program.

PEC: Supporters of the program say the public policy good of helping U.S. consumers obtain inexpensive products from China outweighs the narrow goal trying to protect merchants. Is that true?

Steidler: There’s some truth in that. But it’s fundamentally shortsighted. The USPS, as a result of the terminal dues system, loses about millions of dollars per year on international mail. And there’s really no way to fix that because it’s governed by an international treaty. So that money needs to be made up by domestic postal consumers. Also, consumers benefit when there is sustained, equitable long-term competition between companies and countries.

Additionally, the loss of U.S. ecommerce businesses also has very high costs in terms of lower tax revenue and fewer jobs. At the end of the day, folks want a system of fairness, so the shipping costs from Beijing to San Francisco (and from Los Angeles to San Francisco) reflect economic reality.

PEC: Can U.S. merchants can ship products to China in a similar inexpensive manner?

Steidler: No. It is dirt cheap to ship goods from China to the United States because China has gotten itself classified as a group 3 country under the International Universal Postal Union system. China is in a grouping with Botswana, Costa Rica, Kazakhstan, and similar underdeveloped countries.

PEC: The issue is not so much the policy of terminal dues, it’s the classification that China has within that policy. Is that what you’re saying?

Steidler: That’s a big part of it. The entire terminal dues system should be looked at. In fact, it’s something that began in 1969 — before ecommerce, before the age of international shipping.

PEC: Tell us about the Lexington Institute. You are a senior fellow there. Why is the Lexington Institute interested in international shipping?

Steidler: The Lexington Institute was established in 1998. Our mission is to inform, educate, and shape the public debate on issues that are of central importance to the future of democracy. We believe that logistics, and related to that, the expansion of ecommerce, which is fundamentally changing the way most business is done in the U.S. and the world, is a very important topic. So we issue studies and research reports. We have a number of forums on Capitol Hill and in other settings.

PEC: Anything else?

Steidler: International shipping and the ePacket program is an issue that folks should be on the lookout for. It affects the competitive position of American businesses. It’s now on the radar screen of policymakers in Washington. Stay tuned.