Federal Trade Commission Received Documents Jan. 19, 1996 B18354900064 LAW OFFICES STEIN SHOSTAK SHOSTAK & O'HARA A Professional Corporation Suite 807 1620 L Street, N.W. Washington, D.C. 20036-5605 Fax (202) 659-4237 (202) 223-6270 January 19, 1996 Office of the Secretary United States Federal Trade Commission Room 159 Sixth Street and Pennsylvania Avenue, N.W. Washington, D.C. 20580 Re: Use of Labeling "Made in U.S.A." - FTC File No. P 894219 On behalf of our client, Packard Bell Electronics of Sacramento, California, we are pleased to offer the following comments on the Notices which the FTC had published in the October 18 and December 19, 1996 issues of the Federal Register [60 F. Reg. at 53922 and 65327] concerning standards to be adopted for the use of marking or labeling on products which indicates that they originate in the U.S.A. or America. Packard Bell is one of the world's largest manufacturers of personal computers, and currently has approximately a 12 percent share of the U.S. market for personal computers. Additionally, a substantial portion of Packard Bell's overall business relates to the manufacture in the U.S. of personal computers for export to and sale in Canada and the Far East. Packard Bell's main manufacturing facility is located in Sacramento, California, at which approximately 4,000 persons are employed in manufacturing computers from components of both foreign and domestic origin. It is expected that Packard Bell will manufacture millions of computers this year at its Sacramento facility. The processes used in manufacturing these computers do not differ materially from those used on assembly lines for manufacturing most consumer products, such as automobiles, and include extensive assembly and processes incidental thereto, testing at various stages and "burn-in" prior to the finished product being packaged for sale and shipment. Most of Packard Bell's computers currently contain "state-of-the-art" features, including high capacity hard disk drives, multi-media capability with stereo sound, high speed fax/modem devices, television/FM radio capability and sophisticated telephone answering systems with speakerphone capabilities. Packard Bell's marketing and engineering staffs, which are also located in the U.S., are constantly investigating the addition of new features to its computers and new applications for its products. For example, Packard Bell was the first personal computer manufacturer to market computers which can be operated by remote control devices. THE CURRENT FTC STANDARD The FTC's current standard for using marking or labeling indicating that a product was "Made in America", "Manufactured in the U.S.A." etc. requires that virtually all components and labor originate in the U.S. In its Federal Register Notices, the FTC has recognized that its current standards warrant reexamination and may require change. Industrial manufacturing and processing has changed over the last forty years on a worldwide basis, because of increased intercountry competition and pressure to keep costs and prices from increasing. In many industries, and particularly in the consumer electronics area, some types of components are not manufactured at all in the U.S., or are domestically manufactured in such small quantities that it is impossible to obtain the volume of U.S.-made components necessary to support large manufacturing operations. Accordingly, in many instances, it is virtually impossible to source all or virtually all components domestically at any price. With respect to the personal computer industry in particular, certain types of components, such as DRAM's, and other electronic components (diodes, transistors, capacitors, etc.) are either not manufactured at all in the U.S. or are made in very small quantities in this country. Accordingly, to the best of our knowledge, there are no personal computers sold in the U.S. which are currently able to carry a "Made in America" label, because no such product is made with all, or virtually all U.S. components and labor. However, there are computer manufacturers, including Packard Bell, which engineer, design and manufacture computers in the U.S. using significant amounts of U.S. origin components and labor. For example, most of the computers which Packard Bell manufactures in Sacramento contain U.S. origin microprocessors or CPU's, U.S. origin software and motherboards which are manufactured in the U.S. from U.S. and foreign components using the most sophisticated surface mount technology. These computers contain approximately 55% U.S. content (components and labor), and an even higher percentage of U.S. content when research and development costs are included. As a result of the above situation, many consumer electronics products having high volumes of U.S. content (both labor and components) are currently being prohibited from carrying a "Made in America" label. Because both domestic and foreign consumers desire to purchase products made in the U.S., the prohibition on marking products, "Made in America", unless they are virtually 100% U.S., and even though they have significant amounts of U.S. content, makes them less competitive in world markets with those from other countries. In some instances, the inability to mark products as having been "Made in America" may even result in entire manufacturing operations being shifted out of this country to help save on labor costs. Accordingly, the current FTC labeling standards clearly contribute to products which have high U.S. content being noncompetitive. Second, other Federal agencies, such as the Customs Service, as well as some foreign countries, have standards regarding the origin of products which differ substantially from those adopted by the FTC. The existence of multiple origin standards not only makes labeling more costly for domestic industry to administer than for products which are totally manufactured overseas, but in some instances could also subject domestic manufacturers or importers to enforcement measures (e.g., with respect to products intended for the export market labeled "Made in U.S." pursuant to another country's standards, but which are later imported into the U.S. for sale domestically). Domestic manufacturers should not be mandated to mark their products using multiple standards, depending on whether they will ultimately be marketed in this country or will be exported, because it is impossible to know the ultimate destination of the products being manufactured. For example, it is virtually impossible to know whether some major multinational retailers will be marketing the computers which Packard Bell sells to them only in this country, or both in this country and others. In summary, the extremely high domestic content currently mandated by the FTC causes products having large amounts of domestic content to be noncompetitive, while the existence of multiple origin standards greatly increases administrative costs. Accordingly, Packard Bell welcomes the FTC's initiative to reexamine its standards, and believes that the adoption of virtually any system which lowers the amount of domestic content required for products to be marked "Made in America" will help alleviate the problems caused by the current standards. PROPOSED STANDARDS As the FTC is no doubt aware, rules administered by the U.S. Customs Service already exist for determining the origin of imported products for Most-Favored-Nation purposes and for purposes of the Customs marking statute (19 U.S.C. 1304). The basic rule of origin used by Customs is that of substantial transformation, defined in numerous court decisions as indicating that a product's origin is that country in which a new and different product was created having a new name, character or use. In recent years, the Customs Service has proposed using changes in tariff headings, approximating the results obtained by using the traditional substantial transformation test, as the basis for determining the origin of imported merchandise. At the current time, the World Trade Organization [WTO] is engaged in an exercise to harmonize customs rules of origin on a worldwide basis. In other instances, separate customs rules of origin exist with respect to preference programs administered by the Customs Service. These programs include the North American Free Trade Agreement [NAFTA], the Generalized System of Preferences [GSP], the Caribbean Basin Initiative [CBI], the U.S.-Israel Free Trade Agreement, etc. The NAFTA rules of origin are generally based on tariff shifts, but in many instances have backup rules based on a Regional Value Content [RVC]. GSP, CBI and the U.S.-Israel Free Trade Agreement require a certain percentage of the customs value of imported merchandise to have originated in one of the countries which are the subject "Beneficiary Developing Countries" [BDC's] of those Programs. Under these Programs, components from other than BDC's may be substantially transformed into subassemblies in BDC's, which permits the value of the subassemblies to be counted towards the overall BDC content required. Packard Bell believes that it would be best, if possible, to use one rule of origin for all purposes. However, using whatever change in tariff rules are agreed upon by the WTO has a major drawback - such rules are only in the early stages of development and are not expected to be finalized for many years. Accordingly, while Packard Bell does not object to using whatever change in tariff rules are finally adopted by the WTO, it may be impractical to wait for the development of such rules with respect to the use by the FTC of standards for labeling products as having been "Made in America" in the meantime. Packard Bell has also had experience with the NAFTA rules, which generally require that a product have a qualifying Regional Value Content for the purpose of conferring origin. Packard Bell believes that the use of such rules would be administratively burdensome, because they require tracking the origin and costs of virtually all components in finished products at an early stage in the manufacturing process. In the case of products having hundreds or thousands of parts, or having interchangeable components originating from both domestic and foreign sources, the costs associated with the use of RVC are so administratively burdensome that they would contribute to making U.S. products noncompetitive with like products manufactured overseas. Rather, if the FTC believes that some value-based system must be adopted to insure that a sufficient volume of domestic input is contained in products labeled as having been "Made in America", then in that case, the best of all of the approaches available is probably that currently used in the GSP Program, adjusted, as necessary, to mandate that a reasonable amount of U.S. content is present (i.e., 51%, but no greater than 55% for the personal computer industry). The FTC should also permit products which are assembled in the U.S., but which do not meet whatever value-content test is adopted for "Made in America", to be marked as having been "Assembled in America" or "Assembled in America with parts of U.S. and foreign origin", etc. Packard Bell also respectfully requests that it be represented at the workshop which the FTC intends to conduct on March 26 and 27, 1996. In this regard, the FTC should note that the undersigned and our law firm specializes in Customs and international trade law and has over 60 years of experience in this area, including the development and administration of rules of origin. Very truly yours, Bruce N. Shulman