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Postal Rate Controversy and Economics

postal rate controversy

Figuring out the postal rate controversy is tough. You need to consider a complex cost structure and the politics of mail delivery.

Most of us in Canada pick up our mail from local post boxes, shown above. I find it very convenient. A short walk to pick up my electronic packets from China, a few bills and lots of flyers. Like many families, we do not get much “snail mail” anymore.

This fall, we will hear lots of postal rate controversy, specifically about how national post offices in Canada and U.S. are subsidizing e-commerce merchants in China. The odds are good that rates will increase, agreements will be changed and possibly the seamless flow of e-commerce through customs will be disrupted.

I have been digging into the “facts” behind this postal rate controversy and here is what I discovered. Two items of note.

First, we are having a controversy about a problem that was already solving itself. In the latest Universal Postal Union terminal dues agreement (2018-2021), the lower charges to Chinese merchants were already going away. The Chinese rates have been increasing 11% a year. By 2021, you will see that 20 ounce packets from China face the same terminal rate as packages from “developed countries”, e.g. Europe. You can already see the effects of these changes on E-bay if you have been paying attention.

Second, the real problem for the United States Post Office (USPS) is that fewer people are sourcing goods from the United States anymore. USPS used to make a profit on international mail. It did this by charging more for packets mailed to other countries. In short, the outbound mail subsidized the inbound mail. Partly due to higher USPS outbound mailing costs, many consumers around the world stopped buying from USA and shifted to China.

Postal Rate Controversy – Reality Difficulties

It’s very difficult to figure out the actual cost of delivering a letter or small packages. You will discover this challenge when you consider the cost structure or economics of a postal service.

The problem is that around half of the costs of running a postal service are fixed costs. Economists will tell you that these costs cannot easily be assigned to any particular piece of mail. Fixed costs do not vary with volume. Fixed costs include mail delivery and retail networks which are staffed regardless of the volume of mail, plus institutional and administrative costs.

In highly developed countries, fixed costs run at just under half of the total costs. USPS 44%, Canada Post 42%, Royal Mail 47%. You get the idea. In lower volume postal services, fixed costs are even higher.

So part of the postal rate controversy is that assignment of costs to any particular piece of mail is quite arbitrary. Add to this political interference, and the whole thing is quite messy.

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