The Universal Postal Union: Why Its Upcoming Extraordinary Congress Is A Big Deal

The Universal Postal Union sets the rates and regulatory requirements governing the shipment of packages internationally. The Lexington Institute’s Paul Steidler spoke with postal expert Jim Campbell about the organization’s September 24-26 Extraordinary Congress at which the U.S. is pushing for major reforms and threatening to leave the organization if these reforms are not enacted. Mr. Campbell has been an observer at Universal Postal Union meetings for decades. The U.S. delegation to the upcoming Extraordinary Congress will be led by Peter Navarro, Assistant to the President and Director of Trade and Manufacturing Policy.

In short, what is the Universal Postal Union and why is the U.S. threatening to leave it?

The Universal Postal Union (UPU) is an intergovernmental organization founded in 1875 to govern the exchange of mail between countries. Among other things, the UPU Convention defines fees, called terminal dues, that post offices pay each other for delivery of inbound documents and small packets (merchandise) mail weighing up to two kilograms (4.4 pounds).

In industrialized countries like the U.S. terminal dues for delivery of small packets are far below domestic postage rates for similar services. As the volume of international e-commerce imports has risen this situation has become increasingly unfair to American merchants. On October 17, 2018, the U.S. Secretary of State announced to the UPU that we would withdraw in one year unless the UPU amends its Convention to permit countries to “self-declare” rates for delivery of inbound small packets that eliminate this preference for foreign merchants.

If the U.S. withdraws from the UPU, will that be the end of international postal services?

No. The United States Postal Service (USPS) has been negotiating contracts with foreign posts to ensure the continuation of international postal services. While USPS has provided little public information, there is no reason to believe that USPS will be unable to make satisfactory alternative arrangements. Long before the threat of withdrawal loomed, USPS had concluded more than five hundred such international contracts.

Will Americans still be able to exchange letters with foreign countries if the U.S. withdraws from the UPU? What about absentee ballots and other important documents?

Even if the U.S. leaves the UPU, there is no reason to expect significant changes in the exchange of international letters and other documents — including absentee ballots. There is no dispute about delivery rates or other arrangements for the exchange of documents.

What about the cost of small packages coming to the US?

Whether or not the U.S. leaves the UPU, the Administration has determined that USPS must raise delivery rates for inbound small packets, including e-commerce goods, to eliminate the preference for foreign mailers. While USPS has not announced new rates, a fair guess would be that terminal dues will be increased around $2.50 for a package under one pound and around $4.25 for a two-pound package. This represents increases of about 125% to 180% over the 2020 terminal dues prescribed in the UPU Convention. Delivery rates for inbound parcel post and EMS shipments are not in dispute and unlikely to change much.

Will higher costs for foreign shippers mean higher costs for American consumers?

The short answer is no. Terminal dues have no effect on the costs of providing postal services. The same employees use the same equipment to deliver the same packages no matter what USPS charges foreign post offices. Today USPS is undercharging for delivery of inbound small packets, which in turn puts upward pricing pressure on domestic First-Class mailers.

By aligning inbound delivery rates with domestic delivery rates, USPS will relieve domestic mailers of a burden amounting to between a $500 million and $1 billion annually and shift it to foreign mailers. So, while prices for some imported goods may increase, this will be offset by downward pressure on domestic postage rates. The overall effect on U.S. consumers will be positive because foreign mailers will be paying a larger, fairer share of the total U.S. postal bill.

Will U.S. e-commerce exports face higher delivery rates in other countries?

Yes, in industrialized countries but not in developing countries generally. In Western Europe, postal delivery rates for U.S. outbound small packets will likely see increases on the order of $2 to $3 per small packet, an increase of 50% to 150% over the 2020 terminal dues specified in the UPU Convention. This implies, for example, increases in outbound international First-Class Package Service and Priority Mail (commercial base) rates to Western Europe of about 4% to 15% on average. Rates to Canada could go up more, by 10% to 50%, because Canada has no domestic small packet rates, only parcel rates.

Importantly, U.S. exporters will then be paying their fair share of postage costs in other countries. The total increase in export costs could amount to around $200 million per year, far less than the increase in USPS revenue for delivery of inbound mail.

If the U.S. leaves the UPU, what effect will this have on customs clearance for small packets?

The UPU Convention effectively gives small packets the benefit of a simplified, less costly “postal customs” treatment. However, the postal customs regime is coming to an end. Industrialized countries — and other countries including China — are tightening customs controls for inbound postal packages for reasons of national security.

Under U.S. law, customs authorities will be required to apply customs and security controls to inbound small packets in the same manner as to similar non-postal goods. In the European Union (EU), postal customs privileges are scheduled to end in March 2021. As a legal matter, if the U.S. leaves the UPU, postal customs privileges for U.S. outbound small packets will end in some jurisdictions but not others. As a practical matter, for both inbound and outbound small packets, it is widely expected that customs authorities will need time to apply normal customs controls to the flood of small packets exchanged by mail.

The bottom line is that, in practice, a U.S. exit from the UPU may marginally accelerate the long-planned application of normal customs controls to inbound and outbound small packets.

What is the likelihood the UPU will adopt changes that satisfy the U.S. and keep us in the organization?

An amendment to the UPU Convention must be approved by a majority of the countries present and voting, each country having one vote. At the previous Extraordinary Congress held in Addis Ababa in September 2018, about 120 to 125 of the 192 UPU member countries participated in most sessions.

Three basic proposals have been submitted to the Extraordinary Congress. Option A provides minor increases in terminal dues in 2020. Option B allows each country to introduce self-declared rates in 2020 provided they do not exceed domestic rates for similar services.

Option C allows each country to introduce self-declared rates in 2021 provided they do not exceed 70% of domestic rates and do not exceed limits on annual increases that are imposed until 2025. For Option C, there are two important considerations to keep in mind. First, there is no evidence that 70% of domestic rates will eliminate the preference for foreign mailers in every country. Second, the limits on annual increases mean that even by 2025 around 14 of the 24 main industrialized countries (including the U.S.). appear unlikely to reach terminal dues that are 70% of domestic rates.

Since the submission of the three proposals in July, numerous amendments to Option C have been proposed.  The U.S. has submitted an “America First” proposal under which we could self-declare rates up to the full 70% ceiling for small packets received after July 1, 2020. Foreign posts would also be able to self-declare delivery rates for small packets received from the U.S. The U.S. proposal includes an “escalator” clause that would allow the 70% ceiling on terminal dues to rise by 1% annually, if necessary, to cover costs of delivery.

Brazil and Italy have submitted a “C Plus” amendment that would raise the annual increases in terminal dues permitted by Option C.  France, Germany, and China have submitted a “C Minus” amendment that would reduce the annual increases.

The Congress will consider Option B and any amendments first. If Option B is not adopted, it will consider Option C and amendments. If Option C is not adopted, it will consider Option A.

The outcome is unclear, due in large part to uncertainty about the intentions of developing countries which constitute a majority of the UPU members. The U.S. and about 30 other countries have announced support for Option B. If Option B is adopted, the U.S. will remain in the UPU.

At this point, approval of Option B is uncertain. It is also uncertain whether the various proposed amendments to Option C, or new amendments forged at the Extraordinary Congress, can be combined into a package that will satisfy the U.S. and receive majority approval. The U.S. will withdraw if either Option A or an unamended Option C is approved.