Federal Trade Commission Received Documents Jan. 16, 1996 P894219 B18354900023 Luggage and Leather Goods Manufacturers of America, Inc. 350 Fifth Avenue Suite 2624 New York, New York 10118 212/695-2340 FAX: 212/643-8021 LUGGAGE AND LEATHER GOODS MANUFACTURERS OF AMERICA, INC. COMMENTS TO THE U.S. FEDERAL TRADE COMMISSION (FTC) ON MADE IN USA POLICY JANUARY 16, 1996 1. INTRODUCTION AND STATEMENT OF POSITION The Luggage and Leather Goods Manufacturers of America, Inc. (LLGMA) represents the majority of US manufacturers producing luggage, personal leather goods, and handbags in the United States. LLGMA members also include the suppliers to these industries. LLGMA believes that the current "all or virtually all" domestic content standard used by the FTC to govern unqualified "Made in USA" labeling/advertising is no longer a realistic benchmark in today's global economy. Informed consumers also understand this to be the case. Moreover, except for the FTC, all other U.S. Government agencies recognize that the "all or virtually all" standard is one that can no longer be met by U.S. business.(1) -------------------------- 2 II. FTC'S ALL OR VIRTUALLY ALL" STANDARD CAN HAVE PERVERSE EFFECT As foreign, low-cost imports of travel goods flood the U.S. market, domestic producers of these products have had to adjust to stay afloat. As is the case with most U.S. industries, the travel goods industry has increased its reliance on foreign materials and components. First, as the domestic industry has grown smaller, so has its supplier base. Therefore, domestic producers often have no choice but to source off-shore for certain components, particularly hardware for luggage. Second, the cost structure of major foreign suppliers of our products is far below our own. These foreign suppliers utilize very cheap labor and have lax environmental/workplace standards. Domestic producers, facing high labor and regulatory costs, have had to employ drastic cost-saving strategies to survive. The combination of these two factors has meant that a growing amount of materials and/or components used in domestically-made goods is produced or sourced off-shore. Domestic manufacturers of travel goods believe that consumers have a preference for U.S. goods and that labels or advertising that promote "Made in USA" play an important role in some consumers' purchasing decision. The ability to exploit this preference can also favorably influence a company's decision to continue producing in the United States. Should these manufacturers, with a high level of domestic content in their products, be prohibited from using "Made in USA" labeling and advertising in order to comply with a standard that is virtually impossible to meet? Moreover, this is a standard for which the FTC has established virtually no guidelines. Is the consumer really served by the FTC's "ALL or virtually ALL" standard? We think 3 not. In fact, this stringent FTC standard can have perverse. effects on both domestic manufacturers and the consumer as the following example demonstrates: A U.S. handbag, largely made in the United States, with some foreign components, is precluded, under FTC rules, from bearing "Made in the USA" labeling or advertising; this handbag shares shelf space with an Italian handbag (labeled "Made in Italy") at the same price points. Is the "Italian" handbag "ALL or virtually ALL" Italian in content? The consumer will never know because U.S. Customs requires only that the non-Italian content in the handbag be "substantially transformed" in Italy. Thus, the product could have been merely assembled in Italy using components from many different countries and still claim Italian origin under U.S. Customs law. How is the consumer or the domestic industry served in a situation when the rules are different for foreign and domestic products? III. LLGMA RECOMMENDATION FOR NEW FTC "MADE IN USA" STANDARD The LLGMA firmly believes that a product should not bear "Made in USA" labeling or advertising unless it is over 50 percent domestic content. This position accepts, in principle, the standard adopted in other U.S. programs (i.e., Buy American Act, Market Development Cooperator Program, and NAFTA). The LLGMA's recommendation, in more detail, follows: Domestic content exceeds 50 percent of the final product's cost; final product assembly occurs in the United States. Domestic content would be calculated according to the following NAFTA regional content formula: Domestic% = Net Cost of Good - Value of Foreign Materials x 100 Net Cost of Good Where: "Net Cost" is defined as total costs (including ALL product costs, period costs and other costs) minus sales promotion, marketing and after-sales service costs, 4 royalties, shipping and packing costs, and non-allowable interest costs. This recommendation also contemplates the following principles, which the LLGMA believes should be expressly incorporated into the FTC's final policy: Use of the "one-step back" rule. Under this rule, the producer of the final product is only required to ascertain the origin of purchased components (i.e., whether U.S. or foreign). As an example, a U.S. wallet manufacturer purchases plastic inserts from a U.S. supplier. The wallet manufacturer does not need to know whether the plastic inserts were made from U.S. or foreign origin plastic (or a combination thereof). If the answer is that the inserts were made in the United States, the wallet manufacturer can attribute these costs to his domestic content; however, if the inserts were imported, these costs are to be attributed to foreign content. The value of ALL U.S. content would be attributed to domestic content. An example follows: A U.S. manufacturer purchases U.S. hides. He ships them abroad for a special tanning process, not available in the United States. Under the formula shown above, the purchase cost of the hides would be attributed to his domestic costs; the cost associated with tanning the hides abroad would be included in the costs of the foreign materials. Footnotes: (1) Following are some examples of the standards currently in use: (1) The Buy American Act standard is that the good must be manufactured in the United States and the cost of its U.S. components must exceed 50 percent of the cost of ALL its components; (2) the North American Free Trade Agreement (NAFTA) has a regional content rule of 50 percent; (3) the Department of Commerce's Market Development Cooperator Program assists companies in exporting domestic goods, so long as such goods are produced in the United States and have "substantial inputs of materials and labor originating in the United States, [with] such inputs constituting at least 50 percent of the value of the good or service to be exported.