The global shipping landscape may go through some seismic shifts this fall, depending on the outcome of two major geopolitical events, and merchants engaged in cross-border ecommerce need to brace themselves for the potential changes.
With Theresa May out as the prime minister of Great Britain, the future of Brexit – the UK’s exit from the European Union approved in a 2016 referendum – is up in the air. As it stands, the UK is slated to leave the EU in 2019, but May’s departure made that outcome far from certain; an October vote is scheduled.
Then there’s the Universal Postal Union. Claiming the United States can’t compete in the cross-border ecommerce shipping game based on a deck stacked in favor of China, President Donald Trump has threatened to pull out of the UPU, a unit of the United Nations that sets postal rates among its 192-member countries. A UPU vote is planned for September.
“We’re going into peak season with all of this stuff going on, and it couldn’t be at a worse time for U.S. shippers,” said Patrick Kelley, Executive Vice President of cross-border shipping services provider OSM Worldwide. “Businesses have to plan now for the worst case. They can’t afford to wait until the fall to see how these votes go.”
How should U.S. merchants prepare and react to major changes like these, and how can they quickly adjust their shipping and marketing plans? At this point, Kelley says everyone is afraid to say because of the uncertainty about both outcomes – Brexit and the UPU membership. “Research and reaching out to reputable partners to assist in the guidance is critical,” Kelley said. “Also, knowing that your respective shipping partners have alternatives is key.”
A UPU Pullout Still a Possibility
Trump has called out China, which has not seen its subsidized cross-border postal rates rise at the same pace as its growing economy. Under the current rules, the UPU sets lower rates for developing countries. But this has allowed Chinese merchants to ship a package from Beijing to Boise, for example, for less than the cost of shipping it from one U.S. city to another.
Gavin Macrae, founder and managing director of UK-based logistics consultancy Pine Monkey Associates, said China has an unfair advantage over many other member countries because the UPU still treats it as if it’s a “developing economy.” Macrae feels the UPU’s rules are antiquated, harkening back to a world based more on letters and flats than small parcels, and thus haven’t evolved to meet the realities of today’s maturing ecommerce market.
This means Chinese ecommerce companies such as Alibaba and JD.com, and even San Francisco-based Wish.com, which has a large China-based selling community, can ship orders to the U.S. at a fraction of the cost of U.S. competitors targeting Chinese consumers – or even domestic ones.
Jim Okamura, a partner with retail consultancy McMillanDoolittle, says he’s seen a trend of Chinese manufacturers ramping up production to sell and ship goods into the U.S. market. Okamura also sees more cross-border ecommerce companies taking a gamble by shipping items to the U.S. via delivery duty unpaid (DDU) instead of delivery duty paid (DDP) to avoid paying tariffs, thus risking unhappy customers stuck with the bill.
“The more cross-border ecommerce grows in volume, the more regulatory scrutiny we’ll see”, Okamura said.
Many Chinese manufacturers and merchants also ship single item orders to the U.S. based on the relatively high di minimis rate of $800. That means any package shipped from China or any other country to the U.S. that’s valued under $800 is not subject to duties and taxes.
Brexit Outcome Remains Uncertain
While the U.S. is more in control of its destiny in China, it has little or no say in Brexit negotiations. Macrae said the current plan is for the UK to exit the EU in October, even without a free trade agreement.
If the UK can remain a part of the EU Customs Union, known as a soft Brexit, then the effects could be minimal for U.S. shippers. If it’s told it must leave, that could open the door for the U.S. to negotiate a free trade agreement with the UK.
The positive impact could be for the U.S., Canada and other countries. A Brexit would allow the UK to establish unilateral free trade agreements. It could also establish its own di minimis and value-added tax (VAT) guidelines for other countries.
But based on U.S. history, Macrae says a free trade agreement between the U.S. and the UK may not come swiftly and quickly.
The UK could also be at a financial disadvantage if it misses out on free trade within the EU. The EU is moving toward a zero di minimis value with VAT applicable on everything. Sweden has already implemented this.
Tammy Niemier, director of international sales for OSM Worldwide, said Brexit would bring negative logistical impacts on the overall supply chain, including backups with ferries, channels, airports and sea and inland ports.
London’s Heathrow Airport is the most popular entry point for shipping packages into Europe, so enactment of Brexit would have a major impact on U.S. retailers doing business in Europe. Again, if the UK remains in the EU Customs Union, then all bets are off.
If it does not, using Heathrow as a primary entry point for goods destined for Europe may become much more problematic, Niemier said. Packages passing through Heathrow to Europe would have to clear customs twice – once there and once at their final destination.
To learn more about the potential impact of Brexit and the UPU negotiations on cross-border ecommerce shipping, you can download our new MCM Operations Special Report, “Cross-Border Shipping: Overcoming Global Headwinds, Trade Issues” by clicking here.