Earlier this week, several media outlets including The Guardian reported that the Trump administration will begin to withdraw from the United Nations-affiliated Universal Postal Union (UPU), leaving the nation free to determine its own fees for postal services.
The institution was founded in 1874 and currently counts 192 nations as members. Primarily, it sets fees that postal services in any country can charge for shipping deliveries from other countries.
According to the rules set by the postal alliance, developing countries can ship goods for a cheaper price. US President Donald Trump has repeatedly described this as favouring for countries such as China and India and has criticised it as “a flawed system”.
“They call themselves developing nations, and under that category they get subsidies”, he complained last month during a rally.
Jay Timmons, the president of the National Association of Manufacturers, said in a statement: “This outdated arrangement contributes significantly to the flood of counterfeit goods and dangerous drugs that enter the country from China.”
According to the group, the discounts for Chinese shippers cost the US Postal Service USD 170 million in 2017 alone.
In the last few years, the world has seen an explosion of e-commerce. According to the government agency Institute of China International Electronic Commerce Center, total value of global e-commerce transactions doubled between 2013 and 2017.
According to UPU’s own data, letter shipments accounted for 48% of global postal revenue in 2006 but ten years later it shrunk to 39%. In 2006, only 14% of revenue came from package delivery. In 2016, it was 23%. The very nature of postal services has experienced a transformation in the last few years due to e-commerce.
According to eMarketer, a NY-based market research company, the value of cross-border B2C transactions will reach USD 1 trillion by 2020. In 2017, 30%, 24% and 17% of e-commerce transactions happened in China, US and India respectively. China and the US are the main global actors of e-commerce, so their cross-border e-commerce transactions are a very sensitive issue.
Currently, the UPU classifies countries according to the development of their postal services. This ranking takes into account the executive ability, composition, manpower and efficiency of each country’s postal service. The UPU gives countries a Postal Development Index. Norway ranks first in the ranking with a PDI of 0.927 while the US and China have a PDI of 0.575 and 0.073. China’s PDI is similar to countries such as Mexico, Thailand or Turkey. Since the US ranks higher than China, the UPU rules mandate that deliveries from China to the US have to be cheaper than dispatches made in the opposite direction.
For example, in order to deliver a 1-kilo package from China to the US, a fee of USD 2.45 has to be paid to the US Postal Service. Sending the same package from the US to China however would require paying USD 3.24 to China Posts. This, the Trump Administration argues, allows China to flood the US with goods, putting American companies at a disadvantage.
The news of the proposed US exit from the UPU caused a flutter in China.
Zhao Xiaomin, an expert on e-commerce and package delivery told local National Business Daily: “This will have a great impact on China’s cross-border e-commerce transactions.”
On WeChat Moments, China’s main social network, many expressed fears that other countries could follow the footsteps of the US.
According to Zhao, this will affect the capital market’s attitude towards companies engaged in cross-border business.
“Capital will rapidly lose their confidence on these companies, their stock price and valuation will fall sharply.”
On October 18, just hours after the White House’ announcement, its effect could already be felt in the stock markets of Mainland China. Alibaba’s stocks fell by 0.98%, ZTO Express (中通), one of the main logistics companies, fell by 4.20% and e-commerce giant JD fell by 3.86%.
Zhao Xiaomin however said there are ways in which Chinese companies could cushion the impact.
“They (the Chinese companies) should increase international cooperation with other countries, reducing cultural barriers.”
Sun Jianwei, CEO of Global Link Logistics (汇通天下), was also blunt in estimating the impact of the development.
“It will have a huge impact on costs”, he declared to e-commerce portal Ebrun (亿邦).
According to Sun, “The move will put a huge pressure on Chinese sellers who will be forced to re-evaluate their choices and priorities”.
Other voices within China appeared more relaxed.
Sources from within ZTO Express told tech portal Huxiu: “At the end of the day, 98% of our business happens within the borders of China, it will not affect us much.”
Although cross-border deliveries to the US are only a tiny fraction of the business of Chinese logistics giants, this decision by the Trump Administration has raised the alarm in the sector. If the trend extends among other countries and they too set their own tariffs, it will mean a serious obstacle to the internationalization of Chinese e-commerce.
In the last months, Chinese tech companies have reacted to a slowing trend of the once fast-growing e-commerce. In 2014, e-commerce sales volume grew by 49.7%. In 2015, the growth declined to 33.3% and in 2016 it further fell to 26.2%, according to the Chinese government and analyst firm Founder Securities. Alibaba reacted to this trend by coining the “New Retail” and resorting to B2B business in order to minimize the effect of a slowing e-commerce. But those who were looking abroad for growth will now have to reconsider their strategy.
Xi Daming, associate professor at Renmin University, has a different approach. Inquired by the Global Times, one of the Communist Party’s mouthpieces, he said: “This decision by the U.S will not significantly change the cheap price of Chinese goods. The real victims of this decision will be American consumers.”
However, the American decision to withdraw from the institution will take a year to come into effect. Sun Jianwei is confident that the US would use this year to re-negotiate prices and finally stay in the Union.