The United Nations is helping subsidize Chinese shipping. Here’s how.

March 11, 2015, 3:57 PM UTC
Container ships Oakland port
Containers sit on a ship that is docked in a berth at the Port of Oakland in February 2015 in Oakland, California.
Photograph by Justin Sullivan — Getty Images

If you’re an electronics hobbyist, you should get to know 3dayandnight. The Shenzhen, China-based eBay seller is a retail jack of all trades, but offers some particularly great deals on microchips for applications like infrared sensing ($1.20) and voice recording ($1.96).

Just how great a deal is this, you ask? On RadioShack’s website, a very similar voice recording component sells for $9.99—plus another $6.99 charge to ship the item from a U.S. warehouse. Total cost: $18.17.

The shipping cost to get that item to a U.S. doorstep all the way from Shenzhen, China? Zero dollars.

Total cost? $1.96.

There are millions of cases like this across the Internet. Platforms for digital commerce like eBay have made it easy for Chinese producers to connect directly with purchasers from Oklahoma City to Oslo. But how could it be free to ship a microchip to Norway’s capital? With such low prices, there’s no way the cost of shipping is built in.

How is it possible to manufacture and ship an item across an ocean for two bucks?

A big part of the explanation is a United Nations body called the Universal Postal Union. The UPU helps coordinate rates and standards between nearly every national postal system, and has been a crucial piece of global infrastructure since its founding in 1874 (it was absorbed into the United Nations only in the 20th century). But critics argue that the system now amounts to a subsidy for international shipping from developing countries and net exporters.

At the heart of the matter is a mixed system of barter and compensation. Postal services within the UPU agree to carry one another’s international letters and small parcels from their point of arrival—say, a port—to their final destinations. They then compensate each other for this service at rates set by the UPU. These are known as terminal dues, and are amended at a UPU congress every four to five years.

The UPU system is extremely complex, with countries slotted into at least nine different categories, which are based on their level of development and effect the terminal dues rates they pay to each other. These rates are generally far below rates paid by domestic shippers. For example, as of 2012, the terminal dues on items from China to the U.S. were about one U.S. dollar per kilogram. This means that in many if not most cases, the U.S. Postal Service received less compensation for a China Post package moved from a Los Angeles port to its final destination inland, than it would have from someone in Los Angeles who sent an identical package within the United States. The last half of that voice chip’s journey would have cost China Post less than the price of a U.S. stamp.

In some cases, terminal dues are below, not just the domestic customer price, but the real underlying cost of shipping. Many developed countries, with higher postal costs in wages, services, or infrastructure, actually lose money on each piece of mail sent to them internationally. Norway Post has stated that its losses under the UPU must be compensated for by higher costs elsewhere in its postal system—meaning that Norwegians sending mail to one another, or out of the country, are subsidizing the price of shipping into Norway from abroad.

It’s little surprise, then, that Norway Post officials are critical of the UPU’s current structure. Kristen Bergum, Norway Post’s Vice President for Governmental and International Affairs, claimed in a 2011 conference presentation that postal services with low shipping costs and those who are net exporters have allied with developing nations to keep terminal dues low.

The impact of this imbalance has grown over the past five years with the rise of international e-commerce through platforms like eBay (EBAY) and Aliexpress, a consumer-oriented sister site of Alibaba (BABA). The volume of small packages from developing countries into developed nations has exploded as an ever-greater portion of international trade moves through national posts, rather than through commercial shipping routes to wholesalers.

The UPU has taken some steps towards reform. Beginning in 2004, countries have been progressively transitioned into a target system intended to more closely match compensation rates with real costs. As part of this reform process, China will be transitioned in 2016 into a category for more developed nations, who generally pay higher terminal dues.

However, critics are skeptical of the substance of these changes. “[China will have] the same rates as before, they’re just going to nominally be in the target system,” says Jim Campbell, a former DHL executive and policy consultant who is critical of the UPU. One reason for this is that the current UPU system includes caps on terminal dues paid to the most developed countries.

The next UPU congress is scheduled for 2016, but observers see little sign of big changes coming. National governments haven’t paid much attention to the UPU, and representation is largely left to loosely supervised postal service heads. This means high-cost postal systems like Norway’s will continue to lose money on inbound mail, while businesses in developed countries continue to face the pressure of artificially cheap international shipping.

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