In fiscal year 2016, USPS handled over 1 billion pieces of international mail, which included over 976 million pieces of letter mail. According to USPS statistics, about 371 million pieces of letter mail (38 percent) was sent to other countries or “outbound” mail, while the majority of international letter mail, 605 million pieces (62 percent), was sent to the United States from other countries or “inbound” mail. UPU member nations agree to provide a “single postal territory” for international mail, meaning designated postal operators must deliver inbound international mail to the recipient in their own country (i.e., provide universal service). The UPU created the terminal dues system in 1969 to establish a means for paying destination countries’ designated postal operators for the cost of delivering the mail that originated in another UPU member country. UPU member countries vote every 4 years on the annual payment rates. The current terminal dues system was designed as a single rate structure for the delivery of letter mail, regardless of shape (i.e., letters, flats or packets). The system takes into account that this rate varies based on UPU’s estimation of each nation’s postal cost structure and economic development. As such, the UPU divides its member countries into country groups based on the UPU’s “postal development indicator,” which is largely based on gross national income per capita and attempts to factor in the cost to deliver a letter based on statistics from the United Nations, the World Bank, and the UPU. Designated postal operators from transitional (formerly called “developing”) countries generally pay a lower terminal dues rate for their mail to be delivered by designated postal operators in target (formerly called “industrialized”) countries (see app. II for a list of the countries in each UPU country group). UPU limits the rates through caps and floors to minimize year-over-year variability. In addition to USPS, numerous domestic stakeholders are affected by the terminal dues system, for example: ECOs, such as FedEx and UPS, that collect, transport, and deliver documents and packages sent to the United States from other countries. As they are not designated postal operators under the UPU, ECOs are not part of the terminal dues system and do not have access to terminal dues rates. Some U.S. businesses that compete with foreign companies for U.S. customers, including large e-commerce businesses, such as Amazon, and much smaller e-commerce related businesses, as well as U.S. businesses that obtain goods from other countries via international mail. U.S. businesses that send mail to other countries—such as business correspondence, advertisements, or e-commerce packages—and that have an interest in paying the lowest postage rate. U.S. consumers—mainly individuals who send or receive correspondence, gifts, or commercial goods through international mail. Government also plays a role in the terminal dues system. The Department of State (State) represents the United States to the UPU, and State officials participate in the negotiations at the UPU congress, held every 4 years, that determine terminal dues rates. State also solicits input on terminal dues and other international postal issues through a Federal Advisory Committee on international mail that consists of USPS and PRC officials, other federal agencies with jurisdiction over related issues (e.g., the U.S. Department of Commerce), and representatives from affected businesses. PRC also has a role in international mail issues including terminal dues, USPS bilateral agreements, and USPS international mail products. First, State is required by statute to request PRC’s views on terminal dues proposals before they are adopted by the UPU every 4 years to ensure that the U.S. positions on the relevant UPU proposals are consistent with PRC’s standards and criteria for regulating USPS rates (or if not consistent, provide a foreign policy or national security interest justification). State then is required to ensure that the terminal dues proposals for market-dominant mail are consistent with PRC’s views unless there is a foreign policy or national security concern. Second, PRC is required by statute to review USPS proposals for international mail products to ensure compliance with legal requirements, such as requirements relating to cost coverage. Third, PRC has also sponsored studies on terminal dues issues in recent years. USPS officials stated that designated postal operators send mail to USPS for delivery to U.S. addresses under the UPU’s Universal Postal Convention. Designated postal operators pay for the collection and transportation of mail to the United States and hand off mail to USPS at a USPS International Service Center (ISC) for sorting and final delivery (see fig. 1). USPS presents the inbound mail to U.S. Customs and Border Protection (CBP) for inspection at the ISC. Once the mail clears CBP inspection, the mail enters USPS’s domestic mail stream for delivery. The process is reversed for outbound international mail collected by USPS for delivery to foreign addresses. According to USPS analysis, USPS has generated positive net revenue from all terminal dues mail, which has increased from fiscal year 2012 to fiscal year 2016. This occurred even though losses from inbound mail more than doubled from $66 million to $135 million from fiscal year 2012 to fiscal year 2016 (see fig.2). Net revenue for outbound terminal dues mail increased during the same time period. To understand this trend of declining net revenue for inbound terminal dues mail, it is important to understand the differences in inbound versus outbound mail. As USPS is the designated postal operator for the United States responsible for ensuring universal service under UPU agreements, it is required to accept and deliver all mail tendered to it from other designated postal operators (inbound mail), including mail sent under the terminal dues rates adopted by the UPU. USPS’s recent losses on inbound terminal dues mail are due in part to the shift in this mail from primarily letters and flats to more packets (which are more costly for USPS to handle and deliver)—which outpaced the corresponding terminal dues revenue earned by USPS (see fig. 3). These losses are exacerbated by the rising volume of inbound terminal dues mail. According to USPS, there has been an 86 percent increase in all inbound terminal dues mail between fiscal year 2012 and 2016— including a 19 percent increase between fiscal year 2015 and 2016 alone—with much of the increase attributable to international e- commerce. E-commerce mail consists mainly of packets that are heavier and irregular (see fig. 4 for examples). Most inbound letter mail to the United States in fiscal year 2016 was “packets,” defined by the UPU as small packages that weigh no more than 2 kilograms (about 4.4 pounds), often generated by e-commerce. USPS officials stated that packets generate higher costs as USPS’s delivery and processing costs for packets are higher than they are for letters. The current terminal dues system does not distinguish mail based on shape, and there is no separate rate for packets. A recent report commissioned by PRC found that the current terminal dues system, by reducing the price of international packet mail below what it would be without the system, is responsible for increasing the demand (and hence volume) of packets sent through USPS. According to the report, this increase in terminal dues packets reduces the demand for other types of international mail and ECOs. As mentioned above, losses occur because USPS’s costs to deliver inbound terminal dues mail are higher than the terminal dues revenues for that mail. Specifically, PRC has recognized that terminal dues have not covered USPS’s costs to deliver inbound letter mail since fiscal year 1998 and has reiterated this recently. USPS recently stated that the failure to cover USPS’s costs for inbound mail was caused by the terminal dues system. For example, currently, USPS is paid between $1.13 and $1.87 in terminal dues to deliver a 10-ounce packet from a developing country, an amount that does not include any additional surcharges for tracking and other features. Conversely, USPS officials told us that the published domestic rates for a 10-ounce piece of mail range from $1.61 to the highest commercial rate of $3.46. However, comparing these products is complicated, because they offer different features. According to USPS officials, packets sent under the terminal dues system do not include any tracking and have a delivery time of up to 3 weeks from some countries, while all USPS domestic mail products include tracking and have delivery times from as short as one day to an average of 2 to 3 days. In addition, 85 percent of USPS domestic mail receives discounted rates for mail that is entered in bulk and prepared in a way that reduces USPS’s costs, including barcoding, presorting, and being entered into USPS’s system closer to its final destination. USPS reports show that net revenue for outbound terminal dues mail increased from fiscal year 2012 to fiscal year 2016. The increased net revenue allowed USPS to more than offset its losses from inbound terminal dues mail. The increase in net revenue came despite a decrease in outbound terminal dues mail volume over the same period. According to stakeholders we interviewed as well as our economic analysis, businesses that send outbound international mail and U.S. consumers also benefit from the current terminal dues system similar to USPS (see table 1). These stakeholders benefit for the following reasons: U.S. businesses that send outbound terminal dues mail, for example, e-commerce shippers or magazine publishers, may pay lower postal rates than what would be set by the destination country’s designated postal operator to deliver that mail. This is the case for mail sent to many developed countries, such as in Europe, where most U.S. outbound international mail is sent. In this case, the postage charged by USPS to the business reflects the relatively low terminal dues rate paid by USPS to those designated postal operators, rather than a higher rate that better reflects the designated postal operator’s delivery costs. U.S. consumers also benefit from the current terminal dues system. As described above, U.S. consumers have spurred a significant increase in inbound international mail, especially from Asia where terminal dues rates are lower than USPS’s costs, which contributes to low shipping prices for U.S. consumers. For example, the USPS’s Office of Inspector General (OIG) conducted a case study in 2015 that found that five low-cost items shipped from China cost about $1.60 per item in shipping charges, while equivalent published domestic postage for the same items cost between $2.04 and $2.22 per item, depending on their exact weight. Studies by the USPS OIG and WIK-Consult GmbH (WIK Consultants) have found similar benefits for consumers from the current terminal dues system. U.S. consumers may also see the same kind of benefit from lower mailing prices as do U.S. businesses that send terminal dues mail to certain outbound countries, such as in Europe, that have higher delivery costs than the terminal dues paid to them by USPS. Despite creating some benefits for some U.S. stakeholders, the current terminal dues system also creates competitive disadvantages for other U.S. stakeholders (see table 2). The terminal dues system puts ECOs at a disadvantage because according to representatives from ECOs we spoke with, their volume for international items that are similar to those currently shipped at terminal dues rates is low, and they cannot compete on price with designated postal operators. Instead, they compete using other features such as tracking and delivery speed. Businesses overseas, like e-commerce companies such as Alibaba, can use the terminal dues system as a low- cost alternative to ECO service for items which have much slower delivery standards than offered by ECOs. This disadvantage is especially pronounced when ECOs compete with designated postal operators for business from countries with relatively low terminal dues rates, such as many countries in Asia. U.S. businesses that compete with foreign companies that use inbound terminal dues mail are also disadvantaged by the current terminal dues system. Foreign businesses that send products from countries with low terminal dues to U.S. consumers through USPS may have a competitive advantage over domestic businesses, which may have to pay a higher domestic postage. Representatives from two small U.S. businesses we spoke with stated that the disparity between postage charges available to foreign mailers under the terminal dues system versus the domestic postage available to them was a significant factor in reduced sales in recent years, although the disparity between postage charges is not the only disadvantage they faced from foreign competition. We found this outcome may be less of a competitive disadvantage for larger businesses, such as Amazon, which may be able to obtain discounts on the domestic mailing prices from USPS based on volume, presorting, and other worksharing arrangements while smaller domestic mailers may not be able to secure such discounts. Even with discounting, the domestic- mailing price may still be higher than the foreign-mailing price charged by a designated postal operator a price that is based on, in part, a lower terminal dues rate. However, USPS officials cautioned that such comparisons are complicated because: 1. Terminal dues rates do not include other costs, such as the cost of collection, international transportation, and other costs that may be included in the price charged to the foreign mailer by the designated postal operator. 2. Significant amounts of international mail are sent in large quantities from foreign designated postal operators to USPS, making this mail not analogous to USPS’s single-piece mail rates. 3. U.S. commercial customers may pay non-published rates established in negotiated service agreements that may be lower than USPS’s single-piece published rates. While we described above how different stakeholders are affected by the terminal dues system, it is not possible to quantify the system’s impacts. For example, according to USPS officials, while the current system has a single rate for three shapes of terminal dues mail, USPS has over 3,000 rates for domestic mail, making rate comparisons of terminal dues mail products to domestic mail products imprecise. In addition, the terminal dues rate is a payment between designated postal operators, not the price paid by the foreign mailer. This price information may not be publicly available as designated postal operators in other countries might also have non-published prices. Based on our analysis of the changes to the terminal dues system recently adopted by the UPU and of USPS’s estimates of the financial impact of those changes, increased terminal dues rates should help reduce USPS’s losses for inbound mail. All terminal dues rates will increase for inbound mail starting on January 1, 2018—especially for certain countries, which will increase by 13 percent per year specifically for packets. By 2021, all but the least developed countries will have the same terminal dues rates for packets. As the majority of terminal dues mail handled by USPS is inbound, the increase in revenue resulting from higher terminal dues may likely more than offset the increase in USPS’s costs that will result from increases in terminal dues rates to the countries where most USPS outbound terminal dues mail is sent. The UPU also created a new rate category for packets, in addition to a new tracked-packet surcharge, which will increase USPS’s revenue. As described previously, the current terminal dues rates do not distinguish between letters, flats, or packets—even though packets are more expensive to handle and deliver due to their irregular size and heavier weight. This change should lead to higher terminal dues revenue for USPS. In addition, the UPU adopted the Integrated Product Plan (IPP) at the 2016 UPU congress; that, among other things, will require commercial goods to be sent under the terminal dues system as packets. According to USPS officials, this change could also increase terminal dues revenues, as all commercial items will be sent via packets, which will have higher terminal dues rates starting in 2018. However, decisions on other aspects of the IPP are expected to be made at a special UPU congress in 2018. According to USPS projections, USPS will start earning positive net revenues for inbound terminal dues mail as a result of these changes. As terminal dues rates increase, USPS projections show that USPS will cover costs for inbound terminal dues mail from the 15 countries that sent most of the inbound terminal dues mail to the United States in fiscal year 2015. The State Department official who coordinated the U.S. delegation to the 2016 UPU congress stated that these changes will achieve the government’s goal of dramatically improving USPS’s cost coverage for the delivery of inbound terminal dues mail, such as packets, from China and other developing countries, when the changes take effect in 2018. However, other stakeholders we spoke with disagree on the extent of improvement. While PRC staff officials stated that the UPU has made some progress in closing the gap between terminal dues rates and domestic rates for equivalent domestic mail, they also stated that there is still a way to go to make the rates equivalent to each other. Similarly, PRC’s Chairman stated that while the changes will improve USPS’s cost coverage, they will not eliminate the negative impacts of the current terminal dues system and may in fact exacerbate them over the 2018– 2021 period. In addition, he stated that while USPS projected that terminal dues proposals in 2008 and 2012 would increase USPS’s cost coverage for inbound terminal dues mail, the improvement was negligible, casting doubt on the accuracy of USPS’s projections for the planned changes for the 2018–2021 period. A consultant who has experience in international mail issues stated that, given some assumptions about changes in international mail volume, the terminal dues increases will still not be equal to the delivery costs for domestic postage for inbound terminal dues mail to countries such as the United States. He estimated that the difference between the new terminal dues rates and equivalent domestic postage for packets will be reduced from about 57 to 73 percent (depending on the sending country) in 2016 to about 50 percent by 2021. According to stakeholders we interviewed as well as our analysis of UPU’s terminal dues rates, the projected increase in terminal dues rates caused by the planned changes to the terminal dues system may negatively affect U.S. businesses that send outbound terminal dues mail and U.S. consumers (see table 3). U.S. businesses and U.S. consumers that send mail to other countries will pay higher postage rates for terminal dues mail, to the extent that USPS increases its prices to reflect the higher terminal dues USPS must pay to designated postal operators. However, increased terminal dues rates may still be less than the cost to deliver that mail for designated postal operators in relatively high cost countries, such as Norway and Germany. U.S. businesses and consumers benefit from this disparity as the postage they pay USPS to send mail to those countries is based on the terminal dues rates to those countries, not the delivery costs, which may be higher. U.S. consumers may also see shipping prices increase for inbound terminal dues mail, for example e-commerce packets, to the extent that any increases in postage charged to foreign mailers resulting from increased terminal dues rates are passed along to U.S. consumers. ECOs and U.S. businesses affected by inbound terminal dues mail should become more cost-competitive due to the planned increased terminal dues rates, although the planned changes may not eliminate all of the existing competitive disadvantages (see table 4). A State Department official stated that these new rates may still not fully cover the cost of delivery in some countries with very high postal delivery costs, potentially impacting ECOs’ competitiveness in those countries. A representative from a small business that competes with overseas e- commerce businesses for U.S. consumers stated that any increase in terminal dues would make his business more price-competitive with foreign competitors. However, a representative from one small business affected by inbound terminal dues mail we spoke with stated that his business had already suffered due to the terminal dues system. He added that other factors also make it harder to compete and therefore it would be harder to recover even with higher terminal dues rates. While these changes may have different effects on U.S. stakeholders, it is difficult to quantify the future effects because of limited information and forecasting variability. As a result, it remains to be seen what the effects of these changes to this system will be on domestic stakeholders. USPS, USPS OIG, PRC, and others have developed or adapted models and analyses that try to show the economic impacts of the terminal dues system on different stakeholders and estimate the impact of any changes to that system. We analyzed six recent models and analyses—including the USPS’s, USPS OIG’s, and PRC’s models—that describe either different effects of the terminal dues system on USPS, all designated postal operators, or other stakeholders. Some of these studies also try to measure how terminal dues rate increases may affect these stakeholders. Our review determined that these models and analyses can help inform stakeholders about the different overall effects of terminal dues. However, we also found that the analyses are limited in how they can predict or describe the effect of the terminal dues system, in part due to a lack of complete information on the following issues: the volume of mail, including its type and weight, that flows between each UPU member country; equivalent domestic postage rates that would be charged to domestic mailers for service equivalent to inbound terminal dues mail; the presence of alternative international mail agreements, such as bilateral and multilateral agreements; the number of U.S. businesses and consumers that receive or send international mail covered by terminal dues rates; the number and market characteristics of U.S. businesses that currently compete with imported products that are sent under terminal dues; how terminal dues rates and changes in those rates would affect supply chains between businesses in the U.S. and other countries; and, the share of postage costs of U.S. businesses for outbound mail that is covered by the terminal dues system and the proportion of total business costs; how important postage and shipping costs are to total costs of doing business, domestically and globally. Our analysis also found that some of the models and analyses we reviewed did not make adjustments to factor in some or all of these potential mail-related changes, such as changes in: volume of international mail reimbursed by terminal dues changes in response to increases in terminal dues rates or changes in other international mail products offered by USPS or express consignment operators; monetary exchange rates, as all terminal dues are denominated in Special Drawing Rights, a combination of five major currencies, which all vary over time, introducing uncertainty to any projection of terminal dues rates; and, other international trade issues, such as customs duties, tariffs, labor costs, other shipping costs, and regulatory costs. In the absence of models or analyses that take these factors into account, it is difficult to quantify the impact of terminal dues rate increases on other domestic stakeholders. Not all international mail is sent through the terminal dues system. USPS officials and mail stakeholders told us and USPS data indicate that mailers send a significant portion of U.S. inbound and outbound international mail using the following alternatives: bilateral and multilateral agreements, parcels, express mail service, and direct entry. USPS data show that that while terminal dues as a percentage of inbound international mail volume increased from about 50 percent in fiscal year 2012 to about 60 percent in fiscal year 2016, a significant portion of international mail comes into the United States via these alternatives. Each of these alternatives is described in greater detail below. USPS negotiates bilateral and multilateral agreements for a number of countries, wherein USPS and other designated postal operators both pay higher rates for different mail products (inbound and outbound) with desirable features not available for terminal dues mail, such as tracking and faster delivery. For example, USPS is party to the multilateral PRIME agreement, which gives priority delivery and performance bonuses (paid in addition to terminal dues) to mail from 31 countries. According to USPS officials, bilateral and multilateral agreements have improved USPS’s financial position. In reviewing these agreements, PRC has found that they improve USPS’s financial position relative to what it would have been in the absence of these agreements. USPS offers products that provide UPU parcel service for both inbound and outbound mail, which includes tracking, liability insurance, and signature confirmation at delivery. Parcels are sent under UPU parcel rates, which are higher than what USPS would receive under the terminal dues system for comparable letter mail. USPS also offers “e-Commerce Parcel,” a new parcel service established by the UPU in 2016. The e-Commerce Parcel product is aimed at the e-commerce marketplace and provides tracking, but no liability or signature confirmation. Under e-Commerce Parcel, designated postal operators determine the inbound delivery rates, which are expected to be lower than parcel service due to the service limitations. USPS officials stated that they are implementing the e- Commerce parcel service and reviewing its pricing strategy. USPS also provides Express Mail Service (also referred to as EMS) for both inbound and outbound international mail. Express Mail Service products provide express delivery of documents and merchandise, which take priority over other postal services and include signature confirmation and liability insurance for damaged or lost mail. Express Mail Service rates for inbound products can be set by bilateral agreements or determined by the receiving designated postal operator. During fiscal year 2016, inbound Express Mail Service products included shipments from 149 countries, including China, Japan, Korea, Canada, and France. Express Mail Service products for outbound U.S. mail include Priority Mail Express International service, a high-speed USPS mail service available to certain countries and available at designated USPS facilities, and Global Express Guaranteed service, a USPS international expedited delivery service provided through an alliance with FedEx. Mailers use direct entry as a way of accessing USPS domestic mail services from foreign countries without sending the item through a foreign designated postal operator. Under USPS’s Global Direct Entry Wholesaler Program, third party companies, such as foreign e- commerce businesses selling products in the United States, send the items to the United States as cargo that bypasses designated postal operators, circumventing the terminal dues system entirely. Once the items clear customs, they are entered to USPS’s system at domestic postage rates. Some of these items are entered into USPS’s system outside of USPS’s Global Direct Entry Wholesaler Program. For example, we spoke with a representative of a U.S. company that provides direct entry services for foreign mailers, preparing items for easier entry through customs, for example by labeling items with barcodes that describe the product, and for USPS by applying U.S. domestic postage. The company representative stated that once the items clear customs, the company transports the items to one of 140 USPS distribution points (i.e. USPS’s domestic mail processing facilities) to facilitate timely and efficient delivery. As we discuss in more detail later, these alternatives may offer various benefits and disadvantages to customers that may choose them based on a combination of price, available features, and speed of delivery. USPS officials stated that alternatives to the terminal dues system earn increased net revenue for USPS, for example, Rates negotiated as part of bilateral and multilateral agreements, UPU parcel rates, and Express Mail Service product rates set by USPS are higher than terminal dues rates; this difference means negotiated rates provide better cost coverage and generate higher net revenues than terminal dues rates. Direct entry mail generates greater net revenue for USPS, because shippers enter the mail directly into USPS’s domestic mail stream at domestic postal rates. USPS also realizes operational efficiencies from these alternatives due to mail entry and preparation requirements, leading to lower USPS costs. Direct entry mail is subject to the same preparation requirements as domestic mail entered in bulk quantities, such as being presorted and entered close to its final destination. Although alternatives to the terminal dues system account for a significant portion of international mail handled by USPS, terminal dues mail continues to grow at a higher rate. From fiscal year 2012 to fiscal year 2016, the volumes of (1) USPS terminal dues mail, (2) mail covered by bilateral and multilateral agreements, and (3) parcels increased, while Express Mail Service volume decreased. U.S. consumers may also benefit from all four alternatives due to faster delivery than under the terminal dues system and from special features such as tracking, especially for higher-value items. However, U.S. consumers may pay more to use these alternatives given the special features they offer. The effects of the alternatives on ECOs are unclear. Representatives from ECOs told us that USPS bilateral and multilateral agreement mail products and Express Mail Service products enjoy certain advantages, such as easier customs clearance, that make USPS’s products more attractive to customers. However, the representatives added that the effects of USPS bilateral agreements on their business are unclear, because USPS considers the rates to be proprietary information that is not publicly available. The representatives also noted that they did not believe their products are able to compete directly with USPS bilateral and multilateral mail products because the rates for these products are based on comparatively low terminal dues rates. A 2015 USPS OIG study found that ECOs’ rates are generally much higher than rates for USPS bilateral agreement and direct entry products, therefore ECOs’ products are not price competitive with USPS’s products. Express Mail Service and parcel products are priced higher than terminal dues rates and offer special features similar to those offered by ECOs, such as priority shipping and tracking, making those products more attractive for higher value and time sensitive items, and thus may compete with ECOs’ products. The effects of the alternatives on other international mail stakeholders, such as U.S. businesses that are affected by inbound or outbound international mail, are also unclear. For example, USPS bilateral agreements may increase mailer options by providing faster service and more product features, all at a lower price that discourages competition from ECOs. However, the full effects of bilateral agreements are unclear, in part because these rates are not public. The extent that U.S. businesses related to outbound mail have access to and use direct entry options into other countries is also unclear. In addition, other non-postal related factors such as monetary exchange rates and product prices affect the competitiveness of U.S. businesses that are affected by inbound or outbound mail could be more important than mailing prices to their international competitiveness. It is also difficult to quantify the effects of alternatives to the terminal dues system because of limited information. The information needed to determine the effects on domestic stakeholders from Express Mail Service products and bilateral agreements are not publicly available, as USPS regards this information as business proprietary. Effects on stakeholders from direct entry mail are also unclear, in part because this type of inbound mail may be difficult to distinguish from other domestic USPS mail, and information on direct entry mail is not collected by USPS. Use of alternatives also depends on terminal dues rates and other factors, such as overall mail volume trends, and the models and analyses we reviewed do not take these alternatives into account when modeling international mail trends. For example, none of the models and analyses we reviewed took into account bilateral agreements due to the lack of publicly available information. We provided a draft of this product to USPS, PRC, and the Department of State for their review and comment. In USPS’s comments, reproduced in appendix IV, USPS generally agreed with our findings, described the impact of upcoming terminal dues changes, and emphasized that USPS has been taking efforts to improve its cost coverage and collect more revenue for international mail. In PRC’s comments, reproduced in appendix V, PRC generally agreed with our findings. State did not provide any formal comments. USPS also provided technical comments, which we incorporated as appropriate. PRC and State did not provide any technical comments. If you or your staff have any questions about this report, please contact me at (202) 512-2834 or rectanusl@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix VI. This report describes the financial effects on domestic stakeholders of the following: (1) the rates under the current UPU terminal dues system, (2) planned changes to those rates, and (3) alternatives to the terminal dues system. For all of our objectives, we interviewed officials at the U.S. Postal Service (USPS), the Department of State (State), U.S. Customs and Border Protection (CBP), and the Postal Regulatory Commission (PRC); industry consultants; and selected mail stakeholders affected by terminal dues. We selected stakeholders affected by terminal dues based on our reviews of comments submitted to PRC on proposals related to terminal dues for the 2016 UPU congress, as well as interviews with USPS, PRC, State officials, and industry consultants. To obtain background information and provide context for this report, we reviewed relevant federal statutes and U.S. policies; documentation from the UPU, State, USPS, USPS Office of Inspector General (USPS OIG); and knowledgeable consultants. Relevant legal sources that we reviewed include Title 39 of the U.S. Code and the 2006 Postal Accountability and Enhancement Act. In addition, we reviewed the UPU constitution, UPU general regulations, and UPU agreements reached at the 2016 UPU congress, which define the terminal dues system. We reviewed documents of State’s Advisory Committee on International Postal and Delivery Services under the Federal Advisory Committee Act, including minutes and proposals, and USPS and USPS OIG reports on terminal dues and international mail flows. We also reviewed related studies by third parties, including PRC-sponsored reports by Copenhagen Economics on the economic impacts of terminal dues and other terminal dues related reports. In addition, we reviewed GAO reports on related postal issues, as well as relevant academic literature, industry journals, books, and other publications, including news articles. We analyzed available USPS information for fiscal years 2015 and 2016 on international mail to and from the United States and to and from UPU- designated target and transitional countries to determine the most significant mail flows. USPS information for inbound and outbound international mail by country was only available beginning in fiscal year 2015. To determine the current rates under the UPU terminal dues system and the effects of these rates on selected stakeholders, we reviewed and analyzed UPU documentation on terminal dues rates, and we identified and interviewed affected domestic mail stakeholders to obtain their views on the potential impacts of the current terminal dues system. We judgmentally selected stakeholders through interviews with USPS, State, PRC, and industry group officials and consultants and our review of mail stakeholder comments submitted to PRC pursuant to PRC proceedings on terminal dues and international mail related proposals and agreements. In addition, to select business and consultant stakeholders, we also reviewed published reports documenting their knowledge of international mail and terminal dues issues. We interviewed USPS and CBP officials and observed international mail processing by USPS and CBP at two USPS International Service Centers (ISC). We applied standard economic principles to describe effects of the current terminal dues system on domestic stakeholders. To describe the effects of the current terminal dues system on USPS specifically, we reviewed USPS position papers, analyses, and reviewed and analyzed terminal dues models and analyses showing the effects of terminal dues, and reviewed UPU documents describing the terminal dues system, relevant USPS OIG reports, and PRC proceedings and Annual Compliance Determination Reports. We analyzed USPS information and reports on inbound and outbound international mail, including volume, costs, and revenue from fiscal years 2012 to 2016 and UPU information describing the terminal dues system and rates from 2014 to 2017. We assessed the reliability of USPS’s information on the volume, costs, and revenue for international mail by reviewing documentation related to how the data are collected and processed. We found this information to be sufficiently reliable for the limited purpose of presenting this descriptive information. We also visited the Chicago O’Hare International Airport and the New York John F. Kennedy International Airport International Service Centers to observe how USPS processes inbound and outbound international mail and how USPS interacts with CBP to clear international mail for delivery to U.S. addressees. We selected the Chicago O’Hare International Airport and the New York John F. Kennedy International Airport International Service Centers because they process most inbound international mail volume, as well as their location and interviews with USPS and CBP officials. To determine planned changes to UPU terminal dues rates, we reviewed UPU documents that described the changes to the terminal dues system resulting from the 2016 UPU congress, including the 2018 through 2021 terminal dues rate structure. We also reviewed USPS and State proposals to the 2016 UPU congress and stakeholder comments submitted to PRC on proposals to the 2016 UPU congress. We applied standard economic principles to describe effects of the planned changes on domestic stakeholders. We reviewed six economic models and analyses estimating different effects of the current and future terminal dues system on global postal flows and on various stakeholders. We selected the six models and analyses for analysis based on how current they were and whether they produced empirical findings related to the effects of terminal dues or changes in terminal dues. These models and analyses were taken from the published academic literature, economic papers, government reports, and government analyses. The studies used a range of methodologies from simulation modeling to experimental methods, in part due to the paucity of data on a number of variables such as trade flows or how terminal dues affect certain stakeholders, such as consumers and businesses. Our overall review of the studies was based on economic criteria and GAO guidance which included: the purpose of the model, the assumptions used, the data or lack of data, model validation methods, transparency of the model and data, sensitivity analysis, and peer review. Where appropriate, we also compared the results of the models or analyses to other similar modeling results. The analyses we assessed address different questions relating to various mail stakeholders. We determined that these analyses appropriately include, though with certain limitations, the key elements of an economic analysis. Our overall assessment is that while these models and analyses include limitations and caveats, they still inform decision-makers and stakeholders about the different economic effects of terminal dues. To determine the alternatives to the terminal dues system used by U.S. mail stakeholders and the implications of those alternatives for stakeholders, we interviewed USPS, PRC, and State officials, representatives from mailing industry companies, express consignment operators and other selected stakeholders affected by the terminal dues system, international mail consultants, and freight shipping and forwarding firms. We analyzed USPS information and reports on inbound and outbound international mail from fiscal year 2012 through fiscal year 2016, including volume, cost, and revenue data. We assessed the reliability of USPS’s information on the volume, costs, and revenue for international mail by reviewing documentation related to how the data are collected and processed. We found this information to be sufficiently reliable for the limited purpose of presenting this descriptive information. We selected the four alternatives offered by USPS to the terminal dues system, including USPS bilateral and multilateral agreements with other designated postal operators, Express Mail Service products, parcels, and direct entry mail. To describe these alternatives and determine their implications for mail stakeholders, we reviewed and analyzed USPS bilateral agreements with other designated postal operators, stakeholder comments on proposed bilateral agreements, PRC decisions on the proposed agreements, and USPS and USPS OIG documents and reports describing our selected alternatives. We reviewed USPS’s bilateral agreements with China Post, Canada Post, Hong Kong Post, Korea Post, and Royal PostNL in the Netherlands, which were in force during the course of our work. We applied standard economic principles to describe effects of these alternatives on domestic stakeholders. The performance audit on which this report is based was conducted from May 2016 to August 2017 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate, evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. We subsequently worked with USPS from June to October 2017 to prepare this public version of the original sensitive report. This public version was also prepared in accordance with these standards. This is a public version of GAO-17-571SU that we issued in August 2017. This report excludes information that was deemed to be proprietary by USPS and that must be protected from public disclosure. Therefore, this report omits proprietary information and certain data related to USPS’s revenues, costs and volumes for international mail. Although the information provided in this report is more limited in scope, it addresses the same objectives as the sensitive report and the methodology used for both reports is the same. The UPU divides its member countries into country groups based on the UPU’s “postal development indicator,” which is largely based on gross national income per capita and attempts to factor in the cost to deliver a letter based on statistics from the United Nations, the World Bank, and the UPU. The UPU uses the country groups to, among other things, apply terminal dues rates to international letter mail sent between member countries. The UPU consolidated its five country groups for the 2014– 2017 period into four country groups for the 2018–2021 period: Group I includes the most developed countries, Groups II and III include developing countries, and Group IV includes the least developed countries. In addition to the contact named above, Derrick Collins (Assistant Director); Greg Hanna (Analyst-in-Charge); Barbara El Osta; Camilo Flores; Kenneth John; Mike Mgebroff; Malika Rice; and Amy Rosewarne made key contributions to this report.
In 2016, USPS handled over 1 billion pieces of international mail—both inbound (received from other countries) and outbound (sent to other countries). International mail is governed by the UPU, which is comprised of over 190 member countries, including the United States. The UPU establishes remuneration rates, called terminal dues, for certain types of international mail exchanged between member countries. Questions have been raised about how current and future planned rates for terminal dues affect USPS and other stakeholders that are involved in international mail. GAO was asked to review the terminal dues system. Among other issues, this report examines the financial effects of: (1) the current UPU rates for terminal dues and (2) the planned changes to those rates on USPS and mail stakeholders. GAO analyzed USPS's mail data for fiscal years 2012–2016; USPS's, the Postal Regulatory Commission's (PRC), and UPU's policies and documents; and applicable U.S. statutes. GAO interviewed USPS, PRC, and Department of State officials, and mail stakeholders, including U.S. companies, such as FedEx and UPS, and consultants. These stakeholders were identified through public comments made to PRC on proposals related to terminal dues. While not generalizable, the views provide illustrative examples. This is a public version of a sensitive but unclassified report issued in August 2017. Information related to USPS's revenues, costs, and volumes for international mail that USPS has deemed proprietary has been omitted from this report. The Universal Postal Union (UPU), a specialized agency of the United Nations, created the terminal dues system so that designated postal operators in member countries could compensate designated postal operators in other countries for delivering mail in those countries. GAO found that it is not possible to quantify the financial effects of the terminal dues system on various U.S. mail stakeholders because the data needed to conduct such an analysis are not readily available. However, stakeholders GAO spoke with and literature GAO reviewed described differing impacts of the terminal dues system on U.S. stakeholders. For example, Analysis by the United States Postal Service (USPS)—the U.S. designated postal operator—found that the rates for 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 between 2012 and 2016. In contrast, USPS analysis indicates that the rates for outbound international terminal dues mail has resulted in net positive revenues for USPS, which offset the losses from inbound terminal dues mail. U.S. businesses that send outbound terminal dues mail may benefit to the extent that their costs to mail items to certain countries through USPS may be lower than the actual mail delivery costs in those countries. U.S. consumers who receive imported products may pay lower mailing costs for products originating from low terminal dues rate countries. Express consignment operators such as FedEx and the United Parcel Service said the terminal dues system creates a competitive disadvantage for them. Representatives from these companies said that they have difficulty competing for some international mail business because they cannot offer pricing as low as the postage based on the terminal dues rates offered by designated postal operators. The UPU adopted increased terminal dues rates for member countries starting in 2018. GAO found that these planned changes could affect U.S. stakeholders differently, but the effects are also difficult to quantify because of limited information and forecasting variability. Nevertheless, stakeholders identified examples of the potential effects that the planned changes could have on them. For example: For USPS, an increase in inbound terminal dues rates should reduce related losses for delivering this mail; although USPS's costs may increase from paying higher terminal dues rates to countries where USPS sends most of its outbound terminal dues mail. U.S. businesses that send outbound terminal dues mail may have to pay higher postage to USPS to cover the increase in terminal dues rates to send mail to other countries, thus increasing costs to them. U.S. consumers who receive lower-priced imported products may experience a reduced benefit because of the higher terminal dues rates for inbound mail. The increased rates for inbound terminal dues mail may allow rates offered by express consignment operators to become more competitive as they may be able to offer their mail products at more comparable costs.