USPS, Facing Fiscal Calamity, Confronts New Challenges To International Parcel Competitiveness

The U.S. Postal Service (USPS) is fighting to keep its head above water amid staggering financial losses related to the coronavirus pandemic and the Trump administration's refusal to grant the relief the agency says it needs to avoid going broke by Sept. 30. At the same time, USPS faces competitive headwinds on the international parcel shipping front starting July 1.

On that date, a new pricing structure for the movement of low-value small parcels goes into effect that raises rates on shipments connecting a number of origin and destination postal systems. The structure, agreed to last fall by 192 members of the Universal Postal Union (UPU), the group that oversees the world's postal systems, allows countries to "self-declare" their rates, either immediately or over a five-year phase-in period, for processing and delivering inbound parcels from foreign postal systems. It replaced a 50-year-old "terminal dues" program in which UPU set multilateral rates and required established posts to subsidize the processing and handling of shipping of items from countries that it deemed less advanced. 

The new agreement permits the U.S. and any country it does business with to hike rates up to but not exceeding 70% of what would be charged to deliver a domestic mail and parcel shipment. In many cases, this roughly doubles the rates that USPS could charge countries like China, which under the old system was still classified as a "developing" country and thus eligible for subsidies. The United States, which handles about half the world's mail, threatened to leave the UPU last fall unless terminal dues were scrapped and a self-declare regime put in its place.

However, the agreement now allows foreign destination posts to hike their rates on U.S.-originating traffic as well. This puts pricing pressure on USPS and, by extension, on U.S.-based merchants that ship goods with thin profit margins to start with. In some cases, USPS' U.S. outbound rates may rise above the prices charged by private express carriers like DHL and United Parcel Service, Inc. UPS, which have the reputation of providing a better service

The changes may prompt U.S shippers to switch to carrier upstarts like Passport Shipping that focus on e-commerce, or incumbents like DHL eCommerce and UPS Economy, a UPS unit that specializes in handling and shipping high-volume, low-value goods, to ship their goods from the U.S. to foreign destinations, according to executives interviewed for this story. Private carriers are "awaiting to serve USPS customers who are in need," said Mark S. Schoeman, president of The Colography Group, Inc., a consultancy. 

One way for U.S.-based merchants to get around the pricing program would be to "stage" merchandise in or near destination countries and fulfill orders as needed, Schoeman said. This could create beneficial shipment consolidations and improve transit times and costs, he said.

Though it was never formally stated, the U.S. pushed last year's changes to hit back at China, which originates much of the business-to-consumer (B2C) traffic entering the U.S. For decades, China Post, the country's postal entity, paid USPS about 35% of what it cost it to process and deliver parcels once they arrived in the U.S., according to Alex Yancher, co-founder and CEO of Passport Shipping, an e-commerce parcel provider. USPS has lost about $1 on every Chinese shipment it handles, according to critics of the terminal dues program. Because of the pricing distortions, it costs less to ship a parcel from Beijing to Boston than from Detroit to Boston, U.S. officials said last year as they were pushing its reform agenda.

The repricing scheme taking effect next month will allow USPS to generate more revenue on Chinese shipments. However, it may hurt the USPS on outbound international traffic as foreign posts self-declare at higher rates. The positive news for USPS is that it handles far more low-value imports than exports, a reflection of U.S. consumers' seemingly insatiable desire for inexpensive products regardless of where they are made. USPS officials declined to comment on the ramifications of the new pricing regime.

Other issues

The new U.S-Mexico-Canada trade agreement, which also takes effect July 1, contains another headwind for USPS. The agreement doubles to CAD$40 (USD $30) the value of Canadian imports exempted from taxes at the border. It also raises the duty-free threshold to CAD$150 from CAD$20 under a protocol more commonly known as de minimis, where goods below a certain value threshold are exempted from duties and taxes. However, USPS shipments are excluded from Ottawa's new de minimis regime. While the higher de minimis threshold benefits shippers and consignees, it places USPS at a pricing disadvantage vis-a-vis private carriers, experts said. The de minimis threshold on U.S. parcel imports is set at $800 per shipment.

A potentially larger issue for USPS is the manner in which it collects duties and taxes on international shipments. Increasingly, e-commerce merchants are migrating to what is known as a Delivery Duty Paid (DDP) program in which such charges are collected at the front end of the transaction. DDP improves transparency, avoids any surprise fees upon delivery, and spares the consignee the hassle of dealing with the destination postal system, advocates said. However, USPS is not set up to collect fees such as value-added taxes (VAT) ahead of the shipment. This can translate into a "poor experience" for customers, said Yancher. This problem may crop up for USPS next July when the U.K. and the European Union eliminate their respective de minimis charges on parcel imports, potentially subjecting every shipment to VAT, Yancher said.

Yancher was not overly concerned about the impact on USPS of the new UPU rate structure. The new rates will vary depending on package weight and the destination country, he said. In some circumstances, rates may actually decline, he added. Rate changes and other challenges aside, USPS remains a key part of the "optimal mix" of shipping services that Passport recommends to clients, Yancher said.

The last thing USPS needs are drawdowns of any service lines. The agency is losing billions of dollars due to drastic declines in first-class and marketing mail traffic. Postal officials have said that unless the agency gets a $75 billion capital infusion in the next coronavirus relief bill, it will run out of cash by Sept. 30, the end of its current fiscal year. However, President Donald Trump has warned that USPS will get nothing unless it quadruples its parcel rates. Such a move would result in Amazon.com Inc. AMZN, USPS' largest shipper, moving much of its business in-house, analysts have said. It would also hurt small to midsize merchants that rely on USPS' inexpensive delivery rates to offer low-cost or free shipping to its customers, analysts have said.

Internationally, USPS is a heavy user of the lower decks, or bellies, of passenger airlines to transport parcels and mail. However, most international passenger flights have been indefinitely shut down due to the pandemic and subsequent border closures. USPS has resorted to chartering aircraft at very high cost, or in serving markets like Europe and Brazil, putting mail and parcels on oceangoing vessels.