Tim Walsh

15th September 2018

Congress of the Federation of European Envelope

Manufacturers

Tallinn

Final

Trade-Related Aspects of Cross-Border

Postal Ecommerce

Industry Partnering For Growth and Innovation

Shaping Postal, Parcel and

Ecommerce Policy and

Standards

DMAB25 Years

Postal and

Parcel

Experience

Across 60+

Countries

Shipper Needs Buyer Needs

Cost certainty

Low shipping

fees

Low cost

tracking

Reliable and

fast shipping

times

Parcel visibility

and notification

Simple return

processes

Low complexity as

per domestic

shipping

Assurance on

compliance issues

Data and visibility

around the order

Supply-chain

integration to

delivery partners

for efficiency and

quality

Timely inventory

re-integration on

returns

Cross-Border Trade Policy Environment

Agenda: Cross-Border Ecommerce Change Drivers

What constitutes a desirable trade-related policy framework for the future of cross-

border ecommerce where regulatory requirements balance trade facilitation with the

need to promote safe, efficient, fiscally-secure and “trade creating” cross-border

ecommerce?

Striking this balance is critical especially in context of massive volume growth in

time-sensitive, small packets – outbound, inbound return/refund processes;

Terminal

Dues

Illicit

Trade,

Counterfeit

Goods/IPR

Tax, Duty

DeMinimis

& Excise

Aviation

Securityeg Hazmat

Product

Safety

Prohibition

and

Restrictioneg CITES

Customs

Processes,

IT & Other

Agencies

Returns

and VAT

Recovery

External

Costs

Supply-Chain and Delivery Dynamics

Border Control(Fiscal and Non-Fiscal)

Trade

Facilitation

The geography of trade originally supported by the flow of letters which projected

merchants’ authority over goods/ money that travelled independently across geographies;

While letter networks determined the boundaries of trade its effectiveness was only as

vibrant as the distribution networks on which it operated: mule, camel, caravan, ship;

Medieval merchants protected the security of commerce by:

packaging and labelling (“bales and bundles”);

contract enforcement via reputation management; and

the management of customs and the “bureaucracy of trade” as a “key differentiator;*

Ultimately Genoese-centred commerce triumphed over Islamic trade because Italy

protected commercial transportation as a state obligation;

The scale/shape of international trade was ultimately limited by wind patterns until the

invention of steamships (1850-1900) which reduced costs, improved quality and re-

created trade routes globally (“1st-wave globalisation”);

“2nd-wave globalisation” (based on Jet engine and post-war trade liberalisation and rules-

based institutions) has given way to “3rd-wave globalisation” or the potential for the

individualisation of trade, based on the internet;

A Brief History of Cross-Border Trade

*Goldberg, J.L. (2012:12). Trade and Institutions in the Medieval Mediterranean, CUP.

Trade Fundamentals Remain: network efficiency and integrity;

customs management; security; data associated with flow of goods;

labelling; global rules and agreements

Cross-Border Ecommerce and Trade: Three Economic Insights

Trade between two countries,

based on comparative

advantage, determined by

factor endowments,

technology and/or other

genuine cost advantages

Trade Creation Trade Diversion

Exchange on the basis of

distortions such that trade

from least cost production

countries is displaced by

trade from otherwise higher

cost countries

Versus

Cross-border ecommerce which is

efficient, sustainable and likely to

engage political and other

stakeholders, long-term

Non-economic derived advantages

in ecommerce are likely to be

contested, unsustainable and

ultimately inefficient

2. Cross-border ecommerce = $500bn (IPC, 2018): the fastest growing segment of

world trade (= $17tr) but still only 3% of total global trade. Online ecommerce’s ability

to build “scale without mass” raise fundamental tax issues: where is the value

created?; where is the “place of establishment?”;

1. Ecommerce overturns economists’ “proximity model”

showing a strong, negative effect of distance on trade:

each 1% increase in distance between 2 countries is

associated with a fall of 0.7-1% in trade*

*Krugman and Obstfeld, 2006

Prices/ Choice

Employment

Exports

3.

GDP

5.8%

Cross-Border Postal Ecommerce Small Packet Market

Sources: Forrester; E-marketer; 2017; IPC, 2018

4 platforms (Amazon, ebay, Alibaba, Wish) account for two-thirds of cross-

border ecommerce items: growing around 30% p.a.;

Posts have 70% share supported by pricing (TDs), light-touch postal customs

clearance and operational fit:

84% of cross-border ecommerce items <2kg (51% below 500g):

46% of items globally fit into the mailbox;

Most packets sorted, transported and delivered in letter post or mixed

networks;

Posts’ share down 3% (2016-2017) due to often poor service levels on some

lanes and competition, including from express carriers’ focus on <2kg items,

outbound freight competition and others;

Global Growth Projections (CAGR) 2017-2021

Retail

5.1%

Online

Retail

14.7%

Cross

Border

Online

Retail

27.5%

Average order values:

< €10 = 18%;

< €24 = 39%

Significant current volumes at risk if

costs rise (for any reason): higher

price elasticity to lower the AOV;

A priori, the lower the AOV the

greater likely propensity for “trade

diversion”

The Changing Global Architecture of Ecommerce:

Customs, De Minimis, EAD and Tax Issues

Asia

• China Ecommerce

Law, effective 1/1/19

• China e-data law in

place. Likely to follow

EU timeframe

• De Minimis Removal +

Tax on inbound:

Australia, 10%

(1/7/18); NZ, 15%

(2019)

• Australia’s Home

Affairs Dept

considering a $5-7 tax

on all inbound low-

value parcels to cover

the (external/social)

costs of bio-security

screening;

• APEC Cross-border

ecommerce facilitation

framework, 2017

Americas

• US Law requiring e-

data in place

• STOP Bill requires

USPS to transmit EAD

95% of cross-border

packets by end 2022;

• S. Dakota v. Wayfair

Supreme Court

decision: tax where

users are located;

• US de minimis ($800)

under discussion

within NAFTA

• US Customs and

Border Force

Ecommerce strategy

• Brazil new law for

electronic pre-advice

to reduce delays

being developed

• Brazilian tax ID (CPF)

for every packet;

Global

• OECD-supported registration-

based consumption taxes on B2C

ecommerce sales

• 2016 revised CN22/23 forms with

additional data fields (HS code,

CoO, tel number of sender and

recipient

• UPU EAD 2021 roadmap to

improve security screening, fiscal

management and Leg 2 reliability;

• WCO Framework on 15 Standards

for risk management and customs

clearance, June 2018

• WCO Ecommerce strategy

• WCO SAFE 2015 Framework

enhancing airline security

• WCO-UPU customs and EAD

guide;

• ICAO-WCO aviation guidelines

The Changing Architecture of EU Cross-Border Ecommerce

Legislative Drivers

Union Customs Code: overhauls

customs, declarations and tech;

EAD mandatory for EMS,

parcels and small packets;

EU Ecommerce Package, Dec

2017:

VAT collection on items < €22

(de minimis removal); between

€22-€150; duties >€150; +

excise – requires substantial IT

development;

VAT one-stop-shop and

marketplace liability to account

for VAT;

Proposed 3% Revenue Tax

Where Value Created

CEN TC331: data exchange

standards & labels

Risks for Ecommerce Trade:

Efficiency and Delivery Risks

Clearance not aligned with

logistics processes;

Impacts on the Physical

Supply-Chain: (i) inbound

routing of product into EU; and

(ii) location/ structure of

fulfilment network;

Operational: de minimis removal

and customs tech readiness;

Complexity: Inconsistent member

state IT spec/ implementation;

Data: “mostly” understood as CN

22/23 + transport manifest data;

data quality; readiness of 3rd-

countries;

Returns: VAT recovery process

that has been paid in advance

when goods are returned;

Channel Distortion: revenue tax;

Counterfeit Goods: “Free-riding” on the IPR of Others

Counterfeits Seem To Be Increasing In International Trade*:

From 1.9% of world imports (2009) to 2.5% of world trade (2013) - 5% of EU imports;

Virtually all product categories are pirated;

China No.1 point of origin and account for 80% of all counterfeits seized (fewer than ten

countries account for virtually all of the problem – Free trade zone a particular problem);

Evidence That Ecommerce Expands Trade in Counterfeit Goods:

Demand-Side: Choice and low shipping fees drive greater consumer complicity; 7% have

bought counterfeit goods in the last 12 months; 15% among 15-24 year olds,**

Supply-Side: Greater scope for anonymity; flexibility to avoid detection; 24/7 global

reach; increasing share of small shipments, postal/ express with significantly higher

enforcement costs (detection to destruction); use of criminal marketplaces modelled on

legitimate platforms***;

But

Most counterfeits are in bulk imports – only 2% in postal/express;

Main cause of counterfeit is corruption, and failure to enforce, in provenance

countries**** – limited enforcement yet new legislative measures which threaten to

disrupt legitimate cross-border flows;

EC’s Product Safety and IPR Regulation on Compliance & Enforcement:

Concern that EU product safety standards and IPR rules are being compromised by the

ecommerce channel. Aims to: (i) protect EU consumers; (ii) ensure EU traders do not

face unfair competition; (iii) improve the effectiveness of surveillance authorities;

…Sources: *OECD, 2016; Chaudry and Zimmerman, 2009; ** EUIPO, 2013. EC, 2017 report on functioning of the MoU. ***Europol,

SCOTA, 2017; ****EUIPO/ OECD: Why Do Countries Export Fakes 2018

EC’s Product Safety and IPR Regulation on Compliance & Enforcement

Proposes: a person responsible for compliance information be established within the EU

“as a necessary condition” for trading by importers:

Person’s contact details be shown “on the product, its packaging, the parcel or an

accompanying document” (Art 4 point 5);

It is not clear how this could be operationalised, still less how under-resourced surveillance

authorities would act on such information;

Being able to serve a global market without being established in every country is the very

core of SME ecommerce – tilts ecommerce playing-field in favour of marketplaces;

Neither risked-based (only a small handful of countries are responsible), practicable nor

enforceable;

Proportionate Approaches:

Industry-Wide MoU* **,

Provide a single contact point and co-operate with Member State authorities;

Consult RAPEX and take down dangerous goods within 2 days;

Effective in removing counterfeit products and fostering trust between parties;

Inter-agency co-operation in destination countries

Joined-up, inter-agency co-operation and detection at destination (penalties, seizures:;

Ability to track/trace (IT/data) consignments critical in limiting counterfeits:

Share of counterfeits in total exports is on average 7.5%, compared with only 0.5% for

economies that can track shipments;

Ecommerce Trustmarks…

* Memo of Understanding, June 21 2016 23 signatories of rights owners, platforms and associations, **Product Safety

Pledge signed by eBay, Amazon, Alibaba and Rakuten France, June 2018:

https://ec.europa.eu/info/sites/info/files/voluntary_commitment_document_4signatures3-web.pdf

European Trustmark do not include specific requirements concerning counterfeit goods,

rather:

EMOTA: “Transparent information about the trader” or “Clear, complete and

accurate product description” or “appropriate protection of minors”*;

Ecommerce Europe: product characteristics “adequately described”, delivered

based on the description,” and a reminder about “the existence of a legal guarantee

of conformity for goods.”**

The Merchant Charter is stronger: “As an online shopper with an EMOTA‐accredited

merchant, you have the right to… Convenient, reliable, safe and legally compliant

service”;***.

National Trustmarks can also be explicit**** e.g. German Trustmark, (EHI), “webshop

operators are obliged not to sell any goods that do not comply with the legal

requirements”*****;

Stronger Role For Ecommerce Trustmarks

and Industry Action?

*https://europeantrustmark.eu/en/emota/participation-criteria/ **https://www.ecommercetrustmark.eu/the-code-of-conduct/)

***(https://europeantrustmark.eu/en/for-merchants/merchants-charter/ **** shops need to be certified by a national

Trustmark that is a member or the European Trustmark to be allowed to display the European Trustmark on their website

***** https://ehi-siegel.de/fileadmin/redaktion/gos_contracts/gos-Kriterien_140624_01.pdf).

With thanks to Alien Mulyk, EMOTA, for input on European Trustmarks

Can Ecommerce Trustmarks be strengthened to address the counterfeit

and product safety issue, thus protecting “trade creating” ecommerce and

avoiding the risk of excessive legislative intervention which adds cost/

delays to the flow of cross-border items;

End-to-end electronic data, prior to loading, using

standardized messages/ interfaces, critical in

balancing control of illicit trade with facilitation

Electronic Advance Data (EAD) Origin

Post

Destination

Post

Airline

Destination

Customs

Posts

Carrier Compliance: data collected at

source; preparation of items for border

authorities (fiscal and non-fiscal);

Reduced handling costs: in context of

high volume growth;

Process Innovation To Meet New

Legislation: automated item tax/ duty

calculation and tax invoice generation in

context of LVCR removal;

Value-Added Service Opportunity:

provides platform for VAS for benefit of

shippers and recipients (DDP; tracking);

and returns VAT recovery;

Improved QofS: delivery reliability via

visibility in Leg 2; and customer service

Customs and Border Authorities

Risk-Based, On-Route Decisions:

Visibility about origin country; item

description and value; possible automated

decision-making on low risk items/flows;

Improved Data Quality, detections and

Duty/Tax Revenue Collection

Higher Throughput at Less Cost

Security Alerts: Supply-chain & aviation

security identifying high-risk and advice

on consignments (pre-loading; pre-arrival;

Risk Assessed Database Supports

Analytics: seizure from provenance

countries; protects against “trade

diversion”; interface with “control”

agencies

External/Social Costs: The Environment

Environmental and consumer concerns about sustainability shapes the trade landscape:

Social costs associated with cross-border flows are generally not reflected in prices;

Sustainability of the “Zalando Party” phenomenon?;

Primary Packaging: a major ecommerce waste stream:

Contain and protect the product, communicate the brand and integral to overall

customer experience;

Optimised for efficiency/ effectiveness across supply-chain: storage, transport,

sorting and delivery (to the door; collection points…):

Secure: limits damage and theft-proof, yet easy to open (“wrap rage”);

Attractive: SKU-specific formats and materials: consumers’ low perceived of

product in polybags?;

Efficient: designed for dimensional pricing and lowest total cost (“no air”); Box-

on-Demand opportunities: package bespoke for each order; easy returns;

Revenue Stream: Amazon planning to sell zipcode relevant ads on packets;

Sustainable: Reuse, inks, recycling, ease of disposal and curb-side recovery;

Significant risk of “single use package tax” – UK likely to proposed packaging levy in 2018

Industry-approach needed - carriers, retailers, marketplaces, envelope and

packaging industry – to capture functionality and emotion of sustainable ecommerce

packaging, at a cost-effective price – limit risk of “package tax”;

Testing re-useable compressible bag requiring less space

than standard cycle packaging – can be reused 1,000 times

Terminal Dues: Distort Cross-Border Fulfilment and Delivery

Absence of cost-reflectivity distorts:

Location of fulfilment services + split orders to ensure packages are below

the 2kg threshold:

Industrialised country retailers disadvantaged;

Suppression of outbound competition, and cross-subsidies within and

between national posts (e.g. high v. low cost; net export v net import posts);

Agreed increases in TDs rates from 2018-21, including +13% p.a. on China

inbound, will not end “trade diversion” for items below 2kg or the complaints of

developed country retailers;

TDs regime risks becoming a contentious trade issues based on likely inefficient

“trade diversion” rather than genuine “trade creation” in the fast growing, light-

weight cross-border segment – White House Memo, 23rd August 2018:

This Subsidy for China

Is Dumb as a PostFebruary 6th 2018

“The United Nations is

helping subsidize

Chinese shipping.”

March 11th 2015

Terminal Dues are the inter-postal payment charge for

delivery on ecommerce items weight less that <2kg market;

TDs based on the equivalent domestic postage:

inbound item pays same as a domestic shipper;

Impose own rates – but opt-out/reservation from

UPU Convention not permitted;

Terminal Dues Reform and Trade: 2022 and Beyond

Failure to address distortions on <2kg packets increases risk that low-value,

lightweight ecommerce flows will explode as a contentious trade issue;

A majority of UPU posts will not easily vote to eliminate their cost advantage on

lightweight packets, especially if there is no protection of the least developed

countries;

UPU Ethiopia Addis Ababa Congress, Sept 2018 called for:

“more equitable, competitive and cost-based model in particular in light-

weight packet segment <2kg”, and

alignment with >2k inbound parcel rates;

A new inbound remuneration system for light-weight packets and postal parcels

to be developed over next two years for decisions at 2020 Congress for

implementation in 2022. May include:

Greater cost coverage to deter trade diversion on low-value items;

Incentives for EAD necessary for more effective control and facilitation;

Promote QofS improvement – bonus/penalties to improve reliability,

necessary if posts are to compete in higher AOV segments once low-value,

trade distorted streams diminish;

To defray collection costs, Sweden Post levies a fee of between 75-125 SEK (≈

€7.5 - €12.5), depending on merchandise value;

Since 1st March:

Inbound Chinese volumes down 90% - from 150k to 15k per day;

Much of this decline will be the low-value “trade diverted” volumes – but tax

and collection fee hits all inbound volumes (down c. 60%);

Wish.com Swedish-bound volumes returning but as Delivery Duty Paid;

Other volume transiting into Sweden (via NL) until de minimis removed across

EU in 2021 (eg Fyndiq Swedish bargain marketplace);

Norway considering the same the same approach;

Similar cross-border volume hit might be anticipated in Australia (1/7/18), NZ

(2019), and EU (2021) e.g:

Amazon.com no longer available to Australian shoppers - only Amazon.au

– fulfilment moved to Australia arguable at a cost to efficiency;

Nordic Case-Study: The Volume Risk on Cross-Border Packets

Excessive transaction costs will constrain “trade creating”

ecommerce and not only “trade diverting” flows;

PostNord Sweden required to collect VAT (25%) and duties on all

inbound packets from 1st March 2018;

Conclusion I

“Individualization of trade” via ecommerce: Transforming the way firms operate: sourcing, supply-chain, inventory and

distribution. Promises significant economic benefits, if “trade creating”; Heightens challenge to balance control (fiscal and non-fiscal border risks)

to tackle diversion, with facilitation;

Legitimate cross-border ecommerce requires fast, simple and predictable custom formalities but such an environment also favourable to counterfeits and other “trade diverted” flows;

Essential to balance border control with trade facilitation, where policy-makers focus on proportionate, provenance-oriented, risk-based and collaborative approaches based on data and analytics;

The ecommerce industry and policy-makers have joint interests to create a cross-border regulatory eco-system which promotes the predictability, transparency, security and fair competition of “trade creating” ecommerce;

Though ecommerce is the fastest growing segment in total trade, further

growth (beyond 3% of total world trade) requires modernisation of the

trade-related rules for the efficient and effective management of the

tsunami light-weight cross-border packets;

Shipper Needs Buyer Needs

Cost certainty

Low shipping

fees

Low cost

tracking

Reliable and

fast shipping

times

Parcel visibility

and notification

Simple return

processes

Low complexity as

per domestic

shipping

Assurance on

compliance issues

Data and visibility

around the order

Supply-chain

integration to

delivery partners

for efficiency and

quality

Timely inventory

re-integration on

returns

Cross-Border Trade Policy Environment

Conclusion II

Terminal

Dues

Illicit

Trade,

Counterfeit

Goods/IPR

Tax, Duty

DeMinimis

& Excise

Aviation

Securityeg Hazmat

Product

Safety

Prohibition

and

Restrictioneg CITES

Customs

Processes,

IT & Other

Agencies

Returns

and VAT

Recovery

External

Costs

Supply-Chain and Delivery Dynamics

Border Control(Fiscal and Non-Fiscal)

Trade

Facilitation

Electronic Advance DataStrengthened

Industry-wide

Trustmarks

Company

Processes and

Actions

Postal Policy and

Agency

Collaboration

Proportionate

Legislation and

Trade Facilitation

Annexes

Ecommerce Business Model Drives Fulfilment and Delivery Integration

Traffic x conversion x basket value + Re-visit - Shipping - Inventory Return Costs

Four Critical Capabilities:

1. Get the Basics Right: merchandise, site navigation, copy, pricing, payments;

2. Drive Traffic and GMV: marketing, promotions and communications;

3. Innovation: Customer experience; choice, convenience and impact on repeat

business (AI; Augmented reality; algorithms…);

4. Supply-Chain Visibility and Integrated Delivery and Returns:

Optimise order management and fulfilment (what is stocked, where and

when) with delivery, based on SKUs and recipient needs;

Timely management and re-integration of processed returns to inventory

(returns are often carriers’ largest single stream);

Returns experience,

and immediate refund,

supports recipient

stickiness to retailers

Returns minimise

retailers’ inventory costs

and avoids mark-downs

Delivery choices/

prices critical for

successful checkout

Doorstep/ pick-up

experience shapes

overall satisfaction and

loyalty

Retailer brand

and marketing

programmes

Carrier selection based

on SKUs, value-add,

QofS and cost;

Fulfilment, Delivery and The Wider Supply-Chain

Fulfilment centre location/ numbers minimise inventory (better margin), optimise in-stock (improved customer experience) and reduce costs: For every 100 mile reduction in the distance of shipping goods Amazon reduces total

shipping costs by 50% and increases profit margin by 5-14%;

Delivery is a sub-set of a wider systems question: Order Management: Dynamic and seamless order management from DC, store,

suppliers based on enterprise view of inventory; Fulfilment: from batch processes (episodic picking, sorting and packing) to continuous

and predictable fulfilment processes; Delivery: procure delivery services optimised for the needs of the SKU category, and

the proximity of the merchandise to the recipient; Returns: Timely and visible in-transit returns, across channels;

But decisions around customer order assignment are myopic: Individual order merchandise combinations are unique and cannot (wholly) account for

subsequent downstream events: other orders, inventory replenishment, delivery delays;

Hence real-time analytics/ algorithms to drive order assignment, minimise total number shipments and optimise routing/delivery based on both the goods & recipient location;

Commercial objective is to reduce per unit costs (sourcing, fulfilment and delivery) without violating the due shipment date;

Delivery re-imagined as an extension of the supply chain for the efficient flow

of inventory – delivery and upstream integration supports the customer

experience, innovation and cost control, which in turn boosts retail growth;Houde, J-F., Newberry, P. and Seim, K. (2017) Economies of Density in E-Commerce: A Study of Amazon's Fulfillment Center Network NBER Working Paper No.

23361, April

Thank you

Tim.walsh@pb.com00 44 7743 840 396