What Should the Policy Be?

Here’s an interesting case study. If this op-ed at the Wall Street Journal is accurate, China, the United Nations, and the United States are all subsidizing Chinese exports:

President Trump tweeted in December that the U.S. Postal Service isn’t charging Amazon enough to deliver merchandise. But it’s not Jeff Bezos who is getting the lowest rates. In fact, it’s a major economic competitor of the United States—China—that is getting a sweetheart deal from the USPS.

I learned of this because it undercuts my company, Mighty Mug. We sell a patented travel mug that we mail customers from our warehouse in New Jersey. Over the past two years, China-based competitors have flooded the market with knockoffs of our product.

We pay the USPS $6.30 to ship a Mighty Mug within the U.S. In a web search for infringing items, we came across a fake Mighty Mug for $5.69, with free shipping all the way from China. How is a Chinese retailer able to sell a product and send it 8,100 miles for less than our shipping costs alone?

The answer has to do with an international agency I’d never heard of—the Universal Postal Union, founded in 1874 and now a United Nations agency. It sets intercountry rates for mail delivery.

The UPU has 192 members divided into groups based on the strength of their economies. This classification dictates the amount each country pays in terminal dues—that is, the fee to a foreign postal service for delivering inbound mail. Less-developed countries get significant discounts on shipments to more-developed ones. The UPU classifies China a “Group 3” country, along with countries like Cuba and Gabon—even though China has the world’s largest e-commerce market.

Many developing countries can take advantage of this system, but China has done so like no other, partly because of the volume of its exports to the developed world and partly because its government aggressively subsidizes the trans-Pacific leg of the journey.

While it costs my company $6.30 to deliver a one-pound package within the U.S., the USPS delivers the same package from a Chinese shipper for just $1.40—less than a quarter of our cost. And the Chinese advantage increases with the weight of the package.

This low-cost shipping arrangement is not a two-way street. While a Chinese company can ship a mug here for a little more than $1, the USPS would charge my company $22 to ship a mug to China.

Adding insult to industry, the USPS loses money on these inbound China shipments. And American citizens are paying for it. As the Government Accountability Office stated in a 2017 report, “inbound international terminal dues mail does not cover its costs for delivering that mail in the United States. As a result, USPS’s net losses on this type of mail more than doubled from 2012 to 2016.” Meanwhile, “rates for outbound international terminal dues mail has resulted in net positive revenues for USPS.” In other words, American businesses are hurt by low-priced Chinese imports, and above-market shipping rates for exports.

What should the policy be? First, the United Nations needs to recalibrate the formula it uses for calculating shipping rates or, better yet, it shouldn’t be setting international shipping rates at all. The United States should be putting pressure on the United Nations to that end.

The United States should impose a tariff on Chinese goods in the amount of China’s export subsidies. And another tariff in the amount of the cost to American intellectual property owners of China’s failure to enforce protections on intellectual property in international accords to which China is a signatory. That would, at least, be a start.

Here’s a question. How much of the competitive advantage of China’s goods would vanish without their various subsidies? Note that I’ve barely scratched the surface of the ways in which we’re subsidizing China’s exports not merely to the United States but to the world.

Why don’t we take those commonsense steps? IMO it’s a combination of inertia, nostalgia, romanticism, political guile, and ideology. Inertia and nostalgia because many of our policies were formulated when the U. S. had the unquestioned largest economy in the world. Romanticism because we must help the poor Chinese, mustn’t we? Political guile because consumers (read: voters) like cheap consumer goods. And ideology because there is a consensus among American politicians that trade is always good and it’s not possible for any country to jigger its trade to be a weapon of economic warfare.

The effect of our “dumb as a post” polices is to penalize American manufacturing and intellectual property creators to the benefit of service industries (which we also subsidize). That has had the effects of refactoring our economy away from manufacturing and towards service industries, increasing income inequality, and subsidizing the parts of the country that are better able to attract service industry workers.

We really are our own worst enemy.