Recently, the Trump administration announced its intention to withdraw from the Universal Postal Union (UPU). For 144 years, the multilateral treaty has been the governing force in setting international parcel shipping rates. One of the main facets of the UPU is a ranking structure that allows economically disadvantaged countries to pay discounted rates to ship packages internationally while more economically advanced countries wind up paying more. Many, including the Trump administration, claim the UPU is inherently unfair.
From the outset, the UPU’s intent was to help level the playing field for developing nations by lowering the cost of doing business. Reduced shipping costs could allow developing economies to distribute their goods at a lower transactional cost and thus allow them to compete in the global economy.
Fast forward to today. Despite the fact that China is one of the world’s largest economies, it is also one of the largest beneficiaries of the UPU parcel shipment discounts. According to the UPU, China is ranked as a “developing country” – a status the country uses to reap huge trade benefits.
“How is that possible?” you ask.
The UPU’s list of member countries’ contribution classes (the metrics used to set international shipping rates) hasn’t been updated since the 1960s – long before China’s rise as a global economic superpower. While countries like the United States, Japan, and France are at the maximum contribution class rating of 50 units, China has a significantly lower rating of 25 (which is a ranking shared by smaller economies like Italyand Spain).
As a result, the combination of China’s below-market international shipping costs and high volume of exports has cost the United States hundreds of millions of dollars per year. The American shipping companies (and ultimately the American taxpayers) have been left to foot the bill to make up for the difference between what China pays to export their goods and what it actually costs to deliver them stateside.
To compensate, the American retail and manufacturing sectors have spent years scrambling for ways to overcome China’s growing advantages in both production and delivery. While some have succeeded, the deck is clearly stacked in China’s favor.
That said, if the federal government succeeds in either renegotiating the terms of the UPU or pulling out of it altogether, the jig might finally be up. U.S. sellers may finally be in a position to out-muscle the abundance of inexpensive Chinese imports in the American marketplace.
Correcting the imbalance between domestic sales and Chinese exports
As it stands, it is cheaper to ship a small package from China to New York than it is to ship that same package across town. Combine that with the fact that many American retailers have to contend with already lower-priced, trademark-infringing Chinese products and you wind up with situations like the Mighty Mug.
This New Jersey company’s self-stabilizing mug faced a direct challenge from a Chinese competitor that (dubiously) produced a cheaper version of the product and was able to deliver it to customers in the United States at a lower overall cost than the original (which was shipped from within the United States).
Pulling out of an archaic postal treaty doesn’t seem like a big deal on the surface, but it is a potential game changer for America’s domestic retailers and manufacturers that have been increasingly undercut by Chinese competition – particularly in the e-commerce space. If China is forced to start paying their fair share of international shipping costs on their exports, Chinese retailers will have a harder time selling retail directly to American consumers.
For most American third-party sellers, this will be a win on multiple levels:
- In most cases, passing the increased shipping costs from China on to the American consumer will destroy their competitive price advantages over domestic goods.
- Increased shipping costs will force many Chinese retailers to choose slower shipping options that are less attractive to U.S. buyers.
- Expedited shipments from China will become prohibitively expensive for Chinese retailers already operating on paper-thin margins.
As an added bonus, withdrawal from the UPU may give American sellers the opportunity to become more competitive when selling abroad. Just as China enjoys favorable rates for shipping goods to the U.S., China can also export goods to other UPU nations like Britain and Germany at much cheaper rates than what American sellers pay. Stripping away China’s competitive edge in global retail will improve the potential profitability of American exports.
How the Chinese government will respond
Gauging Chinese response has been an ongoing challenge in Trump’s trade war maneuverings with China. So far, there has been a definite tit-for-tat approach employed by both sides with escalating tariffs and trade restrictions – but shipping is different.
China exports many more goods to the United States than they import. This is thanks in large part to the UPU; while it is inexpensive to ship from China to the United States, it is quite costly to ship from the United States to China. Hence, the main U.S. exports to China are high-priced luxury goods where the profit margins are large enough to offset the steep delivery costs.
Should China choose to strike back against American withdrawal from the UPU with shipping increases of their own, it probably won’t matter much. Big spenders in China are unlikely to flinch at modest increases to the price of their already expensive, high-end imports. The demand will remain. As a result, existing American luxury good industries that currently rely on Chinese buyers are unlikely to see any appreciable dip in their exports.
How Chinese sellers will respond
An end to American involvement in the UPU won’t mark the end of Chinese retail presence in the United States, but it will certainly alter it.
While it has become increasingly popular for Chinese retailers to sell directly to international customers through popular marketplaces like eBay or AliExpress, sellers opting to remain in these channels will feel the sting of increased shipping rates and lengthy shipping times.
It is likely that Chinese retailers will increasingly opt to ship products in bulk to U.S. fulfillment centers and take advantage of services like Fulfillment by Amazon (FBA) or Shipped by Newegg. Utilizing these states-side fulfillment centers for popular items means that the goods can be delivered to customers quickly using Amazon Prime or Newegg Premier.
Some Chinese retailers are already taking advantage of this practice – especially since Chinese container shipments can take over a month to arrive in the United States by boat. Regardless of the UPU, getting inventory into the country prior to a retail sale to an American customer allows for faster turnaround time from purchase to delivery. Expect even more Chinese retailers to rely upon fulfillment center sales if shipping rates increase.
American third-party sellers that rely on Chinese imports can take advantage of this approach as well. The SellerCloud inventory management system provides users with the tools to manage these types of inbound shipments to fulfillment centers like Amazon’s and Newegg’s. From there, inventory is adjusted and the cost of goods sold can be efficiently tracked and analyzed.
All that said, relying on bulk exports and fulfillment centers is not without its challenges. Products sitting in warehouses are very different from those produced on demand. Fulfillment center inventory must be pre-configured and lie in wait for a potential sale. Sellers lose physical contact with their goods once they are in the hands of the fulfillment center (especially if the seller is halfway around the world). Thus, as more and more companies begin selling their inventory using fulfillment center models, the less potential there is for customization and product variety.
Amazon has taken steps to address this issue with their Seller Fulfilled Prime program. In the program’s first few years, SellerCloud has already seen trends showing that many existing FBA merchants have taken advantage of Seller Fulfilled Prime as a way to add additional varieties of products to their marketplace offerings. This approach has allowed sellers to move beyond limitations of FBA while still taking advantage of the valuable Prime badge on their listings. What’s more, since Seller Fulfilled Prime relies upon sellers’ warehouses rather than Amazon’s, you enjoy more control over the entire fulfillment process than overseas competitors do.
Chinese e-commerce retailers are going to have to make some significant adjustments if they wind up losing their competitive shipping advantages. Making matters worse for them, many of their remaining options for reducing shipping costs and streamlining distribution will finally be able to be matched or bested by American sellers.
It is important to note that withdrawal from the UPU is a yearlong process. The White House has stated that they will seek to renegotiate the terms of American involvement in the UPU during that time.
The UPU’s current list of developing nations is nearly fifty years old – that predates not only China’s rise as an economic juggernaut, but also modern economic cornerstones like FedEx and the internet. Regardless of whether America actually withdraws from the UPU or simply renegotiates, China’s shipping rates to the United States are poised to change dramatically in the coming year.
In the meantime, there are things you can do to improve your business’s competitiveness regardless of what international shipping changes may come. With the SellerCloud inventory management system, American third-party e-commerce sellers have already begun to position their businesses to compete both domestically and internationally by utilizing our tools to transition third-party e-commerce into more lucrative business models like first-party dropship sales, invoiced business-to-business sales, and private label retail.
Whatever model you choose for your company’s online retail presence, SellerCloud has the tools to manage everything including inventory, invoices, shipping, and tracking every component of your cost of goods sold.
Contact us directly to learn more about how SellerCloud can help make your business stronger today and better prepared for whatever changes may come in the future.