I don't think they subsidize through other rates. They tend to lose money every year, and their rates for packages under 1 lb are significantly better than UPS or FedEx.
They do subsidize through rates. The UPU is set up so that the last mile of a receiving country is charged to the sender as if it were in the sender's country. This is made up from other revenue the carrier in the receiving country makes.
I mean I don't think they increase other rates to cover those costs, because they don't actually cover their costs at all. They spend more than they take in and their rates are still, for lighter packages anyway, significantly better than either FedEx or UPS.
What do you mean spend more than they take in? The USPS is in the black, save for some strange law that they must prefund pensions 50 years in advance (any company would be running a loss if they had to do this).
The USPS can't increase their domestic prices but there is good indication that they are charging more to offset this. There are complaints in this thread even about the cost of shipping abroad, as international shipping is not regulated like domestic postage rates if I remember right. So the USPS uses outbound international shipments as a cost center to make up for the subsidy to China.
The article states there is a ~$500M subsidy to China through UPU rates.
