FACT CHECK: Ama­zon's Postal Ship­ping Rates

Trillions - - Contents -

In re­cent months, Don­ald Trump has been on a roll com­plain­ing about how Ama­zon.com is un­der­pay­ing ship­ping charges on pack­ages shipped through the U.S. Postal Ser­vice. We do not sup­port Ama­zon’s preda­tory busi­ness prac­tices, but the truth is that Ama­zon is prob­a­bly pay­ing what it should in the cur­rent cir­cum­stances. The is­sue is con­sid­er­ably more com­pli­cated than ei­ther side of this ar­gu­ment is ex­plain­ing.

Small busi­nesses and in­vi­did­u­als who ship a pack­age by any means might no­tice that costs have risen dra­mat­i­cally while some very large com­pa­nies, such as Ama­zon pay a frac­tion of what ev­ery­one else pays. This seems un­fair and on some lev­els it cer­tainly is.

But it is prob­a­bly also true that some of Trump’s ire against Ama­zon is driven by his frus­tra­tion with the tough news cov­er­age by The Wash­ing­ton Post. The Post is per­son­ally owned by Jeff Be­zos, who also hap­pens to be the CEO of Ama­zon. Ama­zon has no le­gal con­nec­tion to the Post. But when Trump ex­presses that anger by say­ing on April 3, 2018, that “the post of­fice is los­ing bil­lions of dol­lars … be­cause it de­liv­ers pack­ages for Ama­zon at a very be­low cost … And that’s not fair to the United States. It’s not fair to our tax­pay­ers,” he’s wrong on sev­eral grounds. He has also scram­bled the facts of what could have been an im­por­tant con­ver­sa­tion to have about the postal ser­vice.

A first point to clar­ify is that the U.S. Postal Ser­vice (USPS) is not legally al­lowed to sell its ship­ping ser­vices at be­low cost. Ac­cord­ing to the Postal Ac­count­abil­ity and En­hance­ment Act (PAEA) of 2006, it is re­quired to pro­vide “com­pet­i­tive prod­ucts,” such as Ama­zon’s bulk ship­ping, at prices that “cover at­trib­ut­able costs and con­trib­ute to in­sti­tu­tional costs.” For the pur­poses of the law, the USPS has two cat­e­gories of prod­ucts: (1) mar­ket-dom­i­nant prod­ucts that in­clude items such as reg­u­lar mail ser­vice (in­clud­ing first-class mail), some­thing the com­pany pro­vides ex­clu­sively, and (2) com­pet­i­tive prod­ucts that in­clude the pack­ages the USPS ships in di­rect com­pe­ti­tion with UPS, Fedex and other bulk ship­pers. The law makes it clear that the USPS is not legally al­lowed to sell com­pet­i­tive prod­uct ser­vices at be­low cost.

This con­trasts with other pri­vate com­pa­nies (like UPS and FEDEX) that very well might de­cide when en­ter­ing

a mar­ket to price at be­low cost. The USPS is sim­ply and firmly not al­lowed to do this.

A sec­ond point re­quir­ing elab­o­ra­tion is the state­ment Trump made about the USPS los­ing bil­lions of dol­lars be­cause it de­liv­ers pack­ages for Ama­zon at a very be­low cost.tech­ni­cally, the USPS is los­ing bil­lions, so he is right in that part of his state­ment. The pub­lic 10-K re­port states, “The Postal Ser­vice has in­curred cu­mu­la­tive net losses of $65.1 bil­lion from 2007 through 2017.” In FY 2017, the USPS had to­tal rev­enues of $69.6 bil­lion, drop­ping some $1.8 bil­lion from what it re­ceived in FY 2016.

The mis­take Trump makes is in the sec­ond part of his com­ment, blam­ing Ama­zon for at least part of the loss be­cause it is pay­ing be­low cost. Be­sides the le­gal obli­ga­tion that the USPS can­not sell at less than cost, the USPS’S own fi­nan­cial state­ments show that the de­cline in rev­enue is com­ing pri­mar­ily from mar­ket-dom­i­nant prod­ucts, such as mail – not from the pack­age-ser­vice “com­pet­i­tive prod­ucts” it of­fers. In the USPS’S own press re­lease on the sub­ject, dated Novem­ber 14, 2017, it said, “The lower rev­enues were driven largely by ac­cel­er­ated de­clines in First-class and Mar­ket­ing Mail vol­umes.” Fur­ther, the press re­lease said, “In 2017, mail vol­umes de­clined by ap­prox­i­mately 5.0 bil­lion pieces, or 3.6 per­cent, while pack­age vol­umes grew by 589 mil­lion pieces, or 11.4 per­cent, con­tin­u­ing a multi-year trend of de­clin­ing mail vol­umes and in­creas­ing pack­age vol­ume.” Even more im­por­tant to note is that, as the press re­lease con­tin­ues, “the growth in [the USPS’S] Ship­ping and Pack­ages busi­ness pro­vided some help to the fi­nan­cial pic­ture of the Postal Ser­vice as rev­enue in­creased $2.1 bil­lion, or 11.8 per­cent.” So Ama­zon not only is not pay­ing be­low cost but the pack­age busi­ness is clearly one of the bright spots for the USPS go­ing for­ward.

A third mis­taken state­ment that Trump has made re­gard­ing the Ama­zon ship­ping de­bate is “ev­ery time [the USPS] de­liv­ers a pack­age,” it “loses one dol­lar and 47 cents.” He is wrong. As with many other things he says, this has been taken out of con­text and is not cor­rect as stated. A more ac­cu­rate state­ment is one that Trump was likely fed from The Wall Street Jour­nal’s writer Josh Sand­bulte, who said that “it is as if ev­ery Ama­zon box comes with a dol­lar or two sta­pled to the pack­ing slip – a gift card from Un­cle Sam.” But that state­ment is highly mis­lead­ing even though it is also of­ten be­ing quoted.

What Trump is at­tempt­ing to cite is a num­ber from a study that Cit­i­group Global Mar­kets’ Citi Re­search pub­lished in April 2017. It noted that the “com­pet­i­tive prod­ucts” mar­ket seg­ment the USPS is cur­rently serv­ing is a much larger share of its busi­ness now, ver­sus what it was when the PAEA of 2006 be­came law. The re­port pointed out that “when the PAEA was passed, com­pet­i­tive prod­ucts were as­signed a 5.5% share of the USPS’S in­sti­tu­tional costs and this per­cent­age has re­mained un­changed de­spite” con­tin­ued growth in the pack­age ship­ping busi­ness while the reg­u­lar mail busi­ness has de­clined as a per­cent­age of sales. This means it is likely that the al­lo­ca­tion of the USPS’S in­sti­tu­tional costs for the pack­age busi­ness to­day is prob­a­bly un­der­stated and should be cor­rected. The re­port went on to say that “in or­der for the USPS to break even over­all within three years’ time, it would need to charge an es­ti­mated $1.46 per pack­age shipped in FY 2017, $1.41 in FY 2018 and $1.36 in FY 2019.” Those num­bers would both cover op­er­at­ing costs and pro­vide money to pay for the Postal Ser­vice Re­tiree Health Ben­e­fits Fund. The USPS has not paid any­thing for the re­tiree fund since 2012.

Once again, Trump’s num­ber is roughly right (just a penny off the fig­ure in the Citi Re­search re­port), but the state­ment about the USPS los­ing $1.47 ev­ery time it ships a pack­age is wrong. What is in­stead true is that if the USPS wanted to take the tac­tic of rais­ing ship­ping rates by $1.46 per pack­age shipped and then con­tinue with the plan Citi is sug­gest­ing, it could break even in three years.

There is, of course, one other big prob­lem even con­sid­er­ing the break-even cal­cu­la­tion by Citi. It as­sumes that the USPS will re­tain its pack­age ship­ping sales vol­umes so the rev­enues con­tinue to flow in. How­ever, if the USPS raises its rates, it is also likely that it would be­gin to lose mar­ket share as com­peti­tors such as Fedex and UPS de­cide to go af­ter those same sales. Even worse for the USPS is that such a move might con­vince Ama­zon – one of the big­gest pack­age ship­pers in the world – to fi­nally launch a full-scale na­tion­wide de­liv­ery ser­vice in di­rect com­pe­ti­tion with the USPS. It is al­ready look­ing into this, and if the num­bers are raised too much by the USPS, Ama­zon could de­cide to step in on its own. And, un­like the USPS, Ama­zon has bil­lions it could pour into launch­ing such a busi­ness. Ama­zon also has a his­tory of be­ing will­ing to take on ma­jor losses as it en­ters a new mar­ket or in­dus­try – losses its share­hold­ers have in the long run been more than will­ing to ac­cept.

The next re­lated er­ror in what Trump is say­ing and do­ing is his re­ported re­quest to U.S. Post­mas­ter Gen­eral Me­gan Bren­nan to in­crease the rate the USPS charges for pack­ages it ships for Ama­zon and

other firms by as much as a fac­tor of two. Sev­eral peo­ple have backed up that Trump has done this and that Bren­nan has pushed back, so the record of the con­ver­sa­tions ap­pears to be true.

The mis­take for Trump is that rais­ing such rates is not as sim­ple or straight­for­ward as it sounds. In all cases, these large-vol­ume ship­ping re­la­tion­ships are con­trolled by le­gal con­tracts and are not just sub­ject to pric­ing cal­cu­lated from a ta­ble. Changes to the ex­ist­ing con­tracts as well as the cre­ation of new con­tracts must be re­viewed by a reg­u­la­tory com­mis­sion. Trump can­not dic­tate a dou­bling of rates for any com­pany, re­gard­less of how much he might like to do so. He might also run afoul of the equal­pro­tec­tion clauses in the Con­sti­tu­tion if he dic­tated dras­ti­cally dif­fer­ent rates for Ama­zon, for ex­am­ple, ver­sus other com­pa­nies ship­ping through the same ser­vice.

There is also the prob­lem noted ear­lier that if Trump does push through a ma­jor in­crease in pack­age ship­ping rates over­all for the USPS, there is a greater chance that Ama­zon might de­cide to start its own ship­ping ser­vice. Even worse, Ama­zon might de­cide to use that ship­ping ser­vice for more than just its own pack­ages and ship for oth­ers. Ei­ther way, if Ama­zon does not con­tinue to ship its cur­rent full USPS vol­ume of pack­ages in the fu­ture, the USPS will suf­fer greater losses in rev­enues and prof­its.

Be­yond all of this is what would ap­pear to be a clear abuse of power by Trump if he were to de­mand a much higher ship­ping rate for Ama­zon ver­sus other com­pa­nies. Such abuses of power against per­ceived en­e­mies of the govern­ment were part of the ar­ti­cles of im­peach­ment pre­pared against Pres­i­dent Richard Nixon. As long as Trump makes sure all com­pa­nies pay some­what sim­i­lar rates for some­what sim­i­lar ser­vices, he can avoid this.

What Trump has done that is valid and should be ap­plauded, at least for the idea, is is­sue an ex­ec­u­tive or­der on April 12 about the USPS. In it, he called for a task force to be set up to dig into the op­er­a­tions and fi­nances of the USPS and to rec­om­mend re­forms. This is prob­a­bly long over­due and if done in a bi­par­ti­san man­ner could be help­ful for all con­cerned. The prob­lems will come if Trump at­tempts to in­flu­ence the task force’s work in any way to at­tack Ama­zon. By do­ing so, he could run afoul of sev­eral is­sues al­ready de­scribed above. More im­por­tantly, he could be miss­ing a real op­por­tu­nity to take a hard look at the role that the USPS cur­rently plays – and should be play­ing – in the U.S. econ­omy. Among other things, it could be that it is time to re­con­sider the USPS’S dom­i­nance in the so-called “mar­ket-dom­i­nant” ar­eas, such as first-class mail. This is the seg­ment where the USPS has both a le­gal mo­nop­oly and a le­gal obli­ga­tion to con­tinue to send such mail through – even though that seg­ment of its op­er­a­tion loses more and more money ev­ery year.

The USPS has come a long way from its orig­i­nal cre­ation in 1792 as the Post Of­fice De­part­ment. Even then it pro­vided spe­cial rates for cer­tain bulk items. These in­cluded news­pa­pers, which the young Amer­i­can govern­ment con­sid­ered im­por­tant enough un­der its First Amend­ment that spe­cial mail­ing rates might help en­sure free­dom of the press. From those early days, it also con­sid­ered pri­vacy pro­tec­tions for first-class – and all mail – to be crit­i­cal, again as part of those pro­tec­tions for all. It did re­ceive a ma­jor over­haul when restruc­tured as the U.S. Postal Ser­vice in 1971. It then be­came a govern­ment-af­fil­i­ated pri­vate en­ter­prise that op­er­ates with some unique govern­ment re­stric­tions and obli­ga­tions. It has not been up­dated since then, how­ever – some­thing that truly is long over­due con­sid­er­ing how the role of first­class mail has de­clined and pack­age ship­ping has grown since that time.

Trump’s call to ac­tion about the USPS in his ex­ec­u­tive or­der is there­fore a good one, pro­vided he does not twist it to sup­port any per­sonal vendetta he may have against Jeff Be­zos, Ama­zon.com and The Wash­ing­ton Post.

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