FACT CHECK: Amazon's Postal Shipping Rates
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.