published Oct 17, 2018 1:35:22 PM, by Brooke Sutherland
(Bloomberg Opinion) —

President Donald Trump is putting aside his tariff bazooka for the moment to instead target more surgical changes to trade relations. In an otherwise illogical trade war, this maneuver makes sense.

Trump plans to withdraw from a 144-year-old postal treaty that’s allowed Chinese companies to ship goods to America at significantly lower rates than what U.S. firms pay domestically. Putting aside the fact that Trump is reportedly more focused on the idea of tearing up trade treaties in general than the contents of this particular one, his administration is right to push back on this outdated system.

The treaty established what’s now called the Universal Postal Union as an arbiter of the rates national postal services from its 192 member-countries charge each other to deliver international mail and small packages. The idea is to help mail flow efficiently and cost-effectively across countries, so developing nations are charged lower rates as a means of supporting their postal systems. The problem is twofold: this system was built for letters, not the plethora of packages arriving on our doorsteps each week, and China was allowed to be treated as a developing country for far too long, giving it an outsize advantage amid the boom in e-commerce.

The treaty has enabled some Chinese online retailers to offer free shipping to the U.S., which is just absurd. It’s essentially a subsidy that tilts the playing field away from U.S.-based businesses, which pay much higher rates to ship to China, by the way. This is exactly the kind of structural disadvantage that’s at the heart of Trump’s trade war with China and this is one of the more effective policy moves he’s made to address the issue.

Donald J. Trump @realDonaldTrump …..China has been taking advantage of the United States on Trade for many years. They also know that I am the one… twitter.com/i/web/status/1…
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Critics of Trump’s tariff regime rarely dispute the fundamental problem: It’s not fair for the U.S. to allow Chinese goods to pour into its markets while U.S. companies jump through hoops to compete there, and America needs to do more to protect its intellectual property. Rather, they take issue with Trump’s methods. His message would have been stronger coming from a united front with Europe, Mexico and Canada, but instead he ratcheted up trade tensions with those countries as well. And it’s still unclear what exactly Trump’s demands are when it comes to China.

The postal treaty isn’t sexy, but challenging it gets to the root of the problem without all the extra noise. And unlike the Trump administration’s tariffs targeting $250 billion of imports from China and its steel and aluminum tariffs targeting just about everybody, there’s less risk of negative side effects for U.S. companies.

Amazon.com Inc. may lose some business from Chinese third-party sellers, but will likely make up for that with an increase in business from domestic retailers, particularly smaller ones, and its own nascent shipping efforts will benefit from a more balanced pricing system. Modernizing the international system would also give overseas shippers one less reason to favor the U.S. Postal Service over FedEx Corp. and United Parcel Service Inc., which aren’t subject to the same regulations. Any boost to postal rates is good for those companies as it increases their pricing power.

Withdrawing from the postal treaty is an aggressive move but one that looks useful in this case. Working within the Universal Postal Union is a slow process that hasn’t yielded great results. It’s governed by a congress that meets every four years, although it will on occasion hold extraordinary meetings as it did in September this year. The UPU Congress did revise some elements of the treaty in 2016 to more adequately compensate receiving countries for the higher cost of delivering e-commerce packages. China is also being reclassified into a rate category for more developed countries. But those changes are more technical than fundamental and don’t go far enough.

It takes a year for a country to withdraw from the UPU and during that time rates can be negotiated, mooting the point. What Trump is doing is lighting a fire under the union to enact real change. For once, his tendency to play with matches just might pay off.

Brooke Sutherland is a Bloomberg Opinion columnist covering deals and industrial companies. She previously wrote an M&A column for Bloomberg News.
To contact the author of this story: Brooke Sutherland at bsutherland7@bloomberg.net
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