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U.S. Withdrawal from Postal Treaty Could Have Implications for Canadian e-Commerce Businesses

Jacob Serebrin
Special to The Globe and Mail
Published September 16, 2019 Updated September 16, 2019

Canadian businesses that ship directly to customers in the United States from countries such as China could face higher costs if the U.S. withdraws from an international postal treaty this fall. Even if the U.S. doesn't withdraw, it could succeed in obtaining concessions that could lead to a rise in shipping costs from foreign postal services to American destinations.

The Swiss-based Universal Postal Union (UPU), established in 1874, acts a co-ordinator for 192 international postal services. It's why you can send a postcard home from vacation and expect Canada Post to deliver it.

Postal services pay one another to complete deliveries. Those payments, called terminal dues, are set by the UPU. Under this system, postal services in developing countries pay less than those in wealthier countries.

But the United States says this system – which classifies China as a developing country – means it's paying to give manufacturers in foreign countries an unfair advantage. It's currently cheaper to send a small package from China to the U.S. – or Canada – than it is to send an equivalent package from one U.S. state to another.

Last fall, the United States gave notice that it will withdraw from the UPU. That withdrawal is set to go into effect next month. The U.S. has said it will suspend its withdrawal if the UPU's other members agree to let it set its own terminal dues. That proposal will be discussed at a special UPU meeting on Sept. 24 and Sept. 25 in Geneva.

Jordon Sansom, the director of marketing at Toronto-based Shape Products Inc., said his company and its clients will be hurt if the U.S. leaves the UPU or gets the concessions it wants. Shape Products helps its North American customers design products and begin manufacturing, usually in Asia.

Mr. Sansom said his company's smallest customers, who are developing their first products, will be "hit the hardest" if postal rates increase.

Many of those customers start out as "drop-shippers," Mr. Sansom said. Drop-shippers are typically online sellers who ship products, usually from Chinese manufacturers or wholesalers, directly to customers without ever holding them in inventory.

"We find that these customers normally come to us about a year or two into their lifespan, where they've been bringing products in from Chinese factories, selling them in the U.S. or in Canada, and then they decided, hey, we want to launch something that differentiates us from the competition and that's when they start investing in design," he said.

If the cost of shipping to the United States rises, many of these businesses won't get to that stage, Mr. Sansom said.

"If these smaller clients start to get wiped out, or their numbers get reduced, then we focus more on our larger client acquisition, or focusing on clients who are already in that middle stage, who have already launched their product," he said.

One of the biggest enablers of drop-shipping is Canadian e-commerce company Shopify Inc. The company, which acquired drop-shipping marketplace Oberlo in 2017, has tutorials and trips for aspiring drop-shippers as well as testimonials from Shopify customers who built successful drop-shipping businesses on the platform.

While those Shopify customers are likely to be affected by higher shipping rates to the U.S., Todd Coupland, a managing director at CIBC World Markets, said drop-shippers aren't a big enough part of Shopify's customer base for the company itself to see a major impact.

"Drop-shipping is a small percentage of its total customer base," said Mr. Coupland, who covers Shopify as an analyst.

Shopify did not respond to multiple requests for comment.

Businesses sending goods from Canada to the United States are unlikely to see price changes, because of an existing agreement between Canada Post and the United States Postal Service (USPS). However, some businesses and business groups say they're worried about uncertainties around how packages will clear the border if the United States leaves the UPU.

For its part, Canada Post said it doesn't expect any "major issues" if the United States leaves the UPU. Jon Hamilton, a spokesperson for Canada Post, said it has had bilateral agreements in place with the USPS for 40 years. However, Canada Post won't say how it plans to approach the issue of terminal dues at the upcoming UPU meeting.

It's not clear whether the Canadian government shares the U.S. position on terminal dues. A spokesperson for Jim Carr, Minister of International Trade Diversification, directed questions on the subject to Canada Post.

Andrea Stairs, general manager of eBay Canada and Latin America, said she's optimistic Canada Post and the USPS will be able to ensure a smooth transition. "I think the one area of uncertainty is parcel clearance across the border," she said, "It's governed in part by these UPU relationships."

Corinne Pohlmann, senior vice-president of national affairs at the Canadian Federation of Independent Business, said she thinks the United States is raising a valid point about unfairness in international trade. Businesses in China have an unfair advantage when they can ship to a customer in the U.S. or Canada for less than it would cost a Canadian business to ship to that same customer, she said.

However, she's still concerned about the impact of a U.S. withdrawal from the UPU on Canadian businesses and global shipping rates. "We've been living with a lot of uncertainty over the last few years, given various tariffs that have been put on and taken off," Ms. Pohlmann said. "This just adds another piece to that."