Postal Regulatory Commission Report Confirms Market Distortions in International Mail System

The complex system governing payments for international mail is responsible for widespread distortions in the marketplace for mail and delivery services, according to a new paper published by the Postal Regulatory Commission.

The paper, prepared by the firm Copenhagen Economics, is the latest to document market distortions produced by the system, known as terminal dues, that sets the rates postal operators charge each other for transporting, sorting and delivering mail across borders.  The system is governed by the Universal Postal Union, an international agency based in Switzerland, whose 192 member countries each possess one vote.

Generally speaking, this system is designed so that the designated postal operators of developing nations collect subsidies from developed nations.  It is only partially based on the actual costs incurred in delivery, or by countries’ domestic postal rates.  Instead, the system assigns countries to six different groups, which largely determine subsidy levels as well as discounts according to schedules.  Terminal dues for countries within each group can also vary widely, weighted based on different factors.

As a result, even among the most industrialized countries, some benefit from being at the receiving end of such subsidies, while others must pay.

An effect of these distortions is to permit some counties to, “export large and rapidly increasing quantities of e-commerce parcels,” to others, as observed by international postal and delivery expert Jim Campbell.

The regulator’s report also documents stark differences between terminal dues received by the United States and domestic postal rates for comparable deliveries, which are consistently higher.  It notes that as small e-commerce packages account for an increasingly large share of the mail mix, the size of payments, and of the subsequent market distortions, are expected to also grow.

In the highly-competitive international marketplace for express delivery services, such distortions are also prevalent and produce anti-competitive effects at the expense of private-sector delivery companies, which are excluded from the terminal dues system.

As evidence of market distortions in the system of payments for international mail mounts, this raises legal questions as well.  Postal laws in the United States explicitly prohibit the Postal Service from entering into any international agreements which, “grant an undue or unreasonable preference to the Postal Service,” or any other provider.  The U.S. Department of State is the lead agency responsible for establishing international postal agreements, including terminal dues.

Additionally, under U.S. trade-in-services laws, a primary goal of trade policy is to, “reduce or eliminate barriers to, or other distortions of, international trade.”

A prior paper published by the U.S. postal regulator had also observed that the terminal dues system produces market distortions in international mail and shipping markets.  Inbound international letters lost $74.8 million below attributed costs in 2014, according to the commission, which noted that domestic mailers must then subsidize the losses.

Acting Chairman of the Postal Regulatory Commission Robert Taub testified on the report’s recommendations to a hearing of the U.S. House Government Oversight Committee six months ago.  “Its key solution,” Taub observed then, “similar prices for similar services regardless of country of origin or status as private or public operator — shows that terminal dues do not have to remain an intractable problem.”

At the hearing, chairman Mark Meadows (R-NC) described a goal of his subcommittee as being, “to eliminate anti-competitive trade distortions as quickly as possible.”

Because of the way international mail is priced, all countries studied by the commission under this system received a net gain on outbound mail flows.  But its authors also note countries that are net exporters of mail experience heavier net losses than countries that are net importers of mail.

Additionally, the U.S. Postal Service maintained bilateral agreements with seven foreign postal operators, allowing those countries to pay negotiated rates below those prescribed by the terminal dues system.

A 2014 report by the Postal Inspector General concluded that one of these agreements, with China Post, lost at least $39 million during 2011 and 2012 on a newly-designed product it called the ePacket.  These small packages, with tracking and delivery confirmation options, are a special product created by the U.S. Postal Service to increase its market share in international shipping generated by e-commerce.  The Inspector General recommended that the product be reclassified as a competitive product, and thus required to cover its full attributable costs.

Scheduled changes in terminal dues rates and classifications, occurring gradually between 2014 and 2017, are expected to reduce many of these subsidies, but limited public transparency surrounds the precise details, and it is unclear what the overall impact on market distortions will be.