Like most people with a life, up until a few years ago, Jayme Smaldone had never given much thought to international postal policy.

But eventually he could no longer ignore the flood of knockoffs from China that was hurting demand for Mighty Mugs, his line of spill-resistant coffee cups and drinking glasses. "Retailers were saying, 'Why should I buy product from you for fifteen bucks and retail it for thirty bucks when my customers can go online and buy the exact same product, in their opinion, for six or eight bucks?" Smaldone recalls.

Seeking to understand how the knockoff makers were able to undercut his prices so dramatically, Smaldone ordered 30 different versions, mostly from eBay. One of them, shipped directly from China, arrived eight days later. The cost: $5.69 -- with shipping included.

"That blew my mind," he says. At that price, he had assumed it would be shipped by sea and take weeks to arrive. "How the hell are they getting transpacific air freight for $1.50 or $2?" he wondered.

The answer to that mystery goes a long way toward explaining why e-commerce works the way it does in 2019. The abundance of counterfeit and knockoff merchandise, some of it dangerous to children, available for sale on Amazon, eBay, and other online retail platforms stems largely from the low cost of labor and weak intellectual property rights enforcement in China. But it's also a consequence of international agreements that make it absurdly cheap to mail small packages from China to the States -- cheaper, typically, than sending the same package domestically within the U.S. Entrepreneurs like Smaldone say those agreements, a legacy from long-ago eras of international trade, amount to a subsidy for Chinese manufacturers, one that's underwritten by customers of the U.S. Postal Service.

The shipping cost disparity has its roots in a treaty from 1874 that created an intergovernmental body called the Universal Postal Union. The purpose of that treaty was to facilitate international mail by establishing the fees various postal services would pay one another for transporting parcels that originated abroad to their final destinations. It was a useful innovation, back then. Among other things, it helped early catalog retailers access foreign markets.

Built into the UPU framework was the principle that rich countries should bear more of the cost of moving mail around the globe, and developing countries should get discounts. And, even as it has become the world's second-biggest economy and biggest manufacturer, China has remained on the UPU's list of developing nations, which allows it to pass off much of its postal burden to the U.S. and the European Union. The Trump administration, which has moved to withdraw from the treaty, has estimated the U.S. spends $300 million per year to subsidize shipments from China.

Cheap mail alone wouldn't be enough to supercharge China-to-America e-commerce. Customers of Amazon and eBay also expect their orders to arrive quickly and to be trackable. The conditions for that didn't arise until 2011, when the USPS entered into agreements with the postal services of Hong Kong and China to create a new category of first-class mail for parcels up to 4.4 pounds. The new service, called ePacket, was specifically "structured to foster growth in e-commerce," according to USPS. That language implicitly defined "e-commerce" as China-to-U.S. sales, since the equivalent shipments in the other direction remained several times costlier.

If you buy a small item from a Chinese seller on eBay, or from one on Amazon's third-party marketplace that doesn't use Amazon's fulfillment service, chances are it's an ePacket shipment. "That's what really made the direct-shipping thing explode," says Smaldone. While USPS doesn't break out the P&L of ePackets as a line item, in a 2018 audit report, it said the service generated an additional $493 million in revenue for fiscal years 2014 through 2016.

After he pieced together the puzzle of how the knockoff makers were able to ship their ersatz Mighty Mugs here so cheaply, Smaldone made it his mission to level the playing field. In November 2017, he sent a letter to the chairman of the Postal Regulatory Commission and copied President Donald Trump and several members of his cabinet. Within a few weeks, he heard back from a White House official letting him know that Peter Navarro, the president's director of trade and policy and the administration's leading hawk on China, had taken an interest in the matter.

The following October, President Trump, reportedly at the urging of Navarro, announced the U.S. would withdraw from the UPU treaty by the end of 2019. Even though the ePacket service agreements were negotiated bilaterally, those rates are pegged to the UPU treaty, so a withdrawal could affect them as well.

That would be boon to entrepreneurs like Kevin Williams, who has seen e-commerce sales of his popular car-washing device, the Brush Hero, suffer in response to Chinese imitators. "For me, it should pretty much do away with my direct-from-China counterfeiting problem," he says. "They can still undercut me on price, but the undercutting will be a lot less, and it will make them less competitive."

In theory, anyway. For all the tough talk from the Trump administration, it's entirely possible more equitable postal policies will be traded away as a bargaining chip in the ongoing U.S.-China trade talks. Even Smaldone thinks the best outcome would be if the threat of a U.S. pullout leads to a meaningful renegotiation of the UPU treaty rather than a confusing new regime of bilateral agreements, which could introduce new asymmetries and absurdities.

"Whatever needs to be done to create a fair system should be done," he says. "I don't ask for an advantage in anything, but I don't want to be disadvantaged, either."  

Published on: Apr 18, 2019