December 14, 2015 (RARC-WP-16-003)
- Terminal dues, which posts use to pay one another for international deliveries of letters and small packages, have generally been set below domestic postage rates.
- As a result, the terminal dues system fails to cover many postal operators’ processing and delivery costs for international inbound mail and thus hinders competition.
- Our research shows the terminal dues system creates definite winners and losers among posts and retailers, and comprehensive reform of the system is needed.
Terminal dues is the system that posts use to pay one another for international deliveries of letters and small packages. The global terminal dues system, updated every four years by the Universal Postal Union (UPU), does not fully reflect actual domestic processing and delivery costs.
As a result the U.S. Postal Service and other operators have lost money on international postal letters and small packages received from abroad, especially from emerging countries like China. The explosive growth in cross-border ecommerce traffic has greatly elevated stakeholders' concerns about the economic distortions created by the system.
In our report, we assess the impact of these distortions in the international small package market, with a focus on the U.S.-to-China corridor. Our research shows that terminal dues create winners and losers among posts and retailers:
- In the lightweight, low-value package segment low terminal dues benefit China Post and Chinese online retailers at the expense of the Postal Service, other international carriers operating from China, and American retailers.
- In other segments, such as heavier, higher-value packages requiring additional services, the rate advantage decreases. In addition, other carriers effectively compete by providing better service or through direct entry into the U.S. mail processing system.
We also note that the emergence of alternative remuneration methods (such as bilateral agreements) that circumvent the terminal dues system, and innovative, non-postal logistics value-chains reduce the competitive harm that lower UPU terminal dues may cause. At the same time, however, they threaten the relevance of terminal dues.
Finally, the paper addresses the need for comprehensive terminal dues reform and discusses possible fixes to the system, such as moving all small packages from terminal dues toward self-declared, cost-reflective rates.