Federal Trade Commission Received Documents Jan 22 1996 B18354900095 Secretary Seagate Seagate Technology 408/438-6550 920 Disc Drive Telex. 176455 SEAGATE SCVL Scotts Valley, California Fax: 408/438-0558 95066-4544 January 19, 1996 Office of the Secretary Federal Trade Commission Room 159 Sixth and Pennsylvania Avenue, N.W. Washington, D.C. 20580 Attn: Mr. Robert Easton, Special Assistant, Division of Enforcement Re: "Made in USA Policy Comment," FTC File No. P894219 Dear Mr. Easton: These comments are submitted on behalf of Seagate Technology, Inc., 4900 Scotts Valley Drive, Scotts Valley, California ("Seagate"), in response to the Federal Trade Commission's (the "Commission") Request for Public Comment in Preparation for Public Workshop Regarding "Made in USA" Claims in Product Advertising and Labeling, published in the Federal Register on October 18, 1995. 60 Fed. Reg. 53,922 (October 18, 1995). Seagate requests that it be permitted to participate in the workshop announced in the Federal Register on December 19, 1995, 60 Fed. Reg. 65,327 (December 19, 1995), and submits these comments as required by the December 19, 1995 notice. Background Seagate is the largest manufacturer of computer disk drives in the world. Seagate currently manufactures disk drives, components and sub assemblies in three U.S. locations, Minneapolis, Minnesota, Oklahoma City, Oklahoma and Scotts Valley, California. Seagate also imports disk drives and major components (such as head disk assemblies) from its Asian subsidiaries in Singapore, Thailand and European subsidiary in Ireland. Seagate's disk drives, manufactured in the United States, Asia and Europe are assembled from parts and components manufactured in the United States and in one or more foreign countries. Assessment of Current Standard Seagate submits that the current standard for "Made in USA" marking, requiring that "all or virtually all" domestic content, is unworkable, impractical and inconsistent with current consumer perceptions and expectations. In particular, in the computer disk drive industry, there are no disk drives on the market today that meet the Commission's high standard for "Made in USA" marking. The result is that no disk drives, even those manufactured in substantial part in the United States, may carry the "Made in USA" marking. The underlying policy for the Commission's traditional "Made in USA" standard was the belief that "U.S. made" products were superior in quality to "foreign made" products. The consumer needed to know the origin of a product so that it could be certain it was purchasing a well-made and high quality item. In the last 40 or so years, however, many foreign made goods and components have developed a reputation for quality as well. The mark "Made in Japan," once thought to connote an inferior good, now represents a standard of quality that often meets or exceeds that of similar U.S. produced goods. Thus, the underlying rationale for the Commission's traditional "Made In USA" standard has changed and has led to the need for the Commission to reexamine the standard's purpose and function. The "Made in USA" mark is, however, still important to the consumer, but for different reasons. Seagate submits that a consumer may still prefer to purchase a U.S. made good over a foreign produced, not necessarily for quality reasons, but because of a preference to support U.S. labor and the jobs that are created by having some type of production facility in the United States. Consumers are, however, fairly sophisticated and recognize there are now few products that contain "all or virtually all" domestic content (particularly at the raw material level). This should not mean, however, that no or very few products may be labeled "Made in USA." The effect of this would be to so dilute the "Made in USA" mark as to make it meaningless. A standard must be established that will convey to consumers that a significant amount of U.S. labor and jobs went into a product's creation, but at the same time be one that is practical and workable. U.S. manufacturers competing in the United States and abroad are confronted with a vast number of differing United States standards for determining the country of origin of a good that it produces. For government procurement purposes, there are at least three different standards: (1) the Buy American Act 50% domestic content standard; (2) the Trade Agreements Act and previously U.S.-Canada Free Trade Agreement substantial transformation standard; and (3) the soon to be implemented North American Free Trade Agreement ("NAFTA") changes in tariff classification standard (the "NAFTA Marking Rules"). For imported goods, there are a number of different U.S. Customs Service origin standards, including the traditional substantial transformation standard as well as the NAFTA Marking Rules that currently apply to trade in North America. For purposes of the antidumping law, there are yet another set of rules, and the list continues. Added to this are the wealth of state standards that have been implemented, such as the California law that requires that an article, or any part thereof, be "entirely or substantially made, manufactured or produced" in the United States in order to bear the "Made in USA" mark. California Business and Professions Code, Section 17533.7 (1961). Any standard developed and implemented by the Commission, therefore, must take into consideration the fact that U.S. manufacturers cannot be burdened by yet another new and different standard that would apply for "Made in USA" marking purposes. In this regard, the Commission should adopt an established standard with which the industry is well-versed and knowledgeable. In addition, the standard developed must be uniform and apply for both federal and state purposes. Seagate Proposals Given the diverging standards that have developed to determine when a product is of U.S. origin, Seagate submits that the standard that should apply for "Made in USA" marking is the well-established Buy American Act standard. Under the Buy American Act, a product must contain at least 50% domestic content and be subject to a final act of manufacture in the United States before it may be considered a U.S. good for procurement purposes. The computer disk drive industry is not like other industries, such as the textile industry, where there is a clear and explicit congressional mandate that a product contain nearly 100% U.S. content in order to be marked "Made in USA." Given this, it is not inconsistent with existing federal law for the Commission to adopt a more reasonable standard for other industries, including the computer disk drive industry. The Buy American Act standard has been in existence for more than 60 years and is well understood in the computer industry. It is sufficient to protect consumers' expectations concerning the "Made in USA" mark because it both requires (1) a significant amount of U.S. content, i.e., more than 50% of the value of the parts and components must be domestically produced and (2) that the final act of "manufacture" take place in the United States. If clear guidelines are developed concerning the elements of value that are considered in the 50% test as well as the meaning of the term "manufacture," the Commission can be assured that it has protected consumers' expectations that significant U.S. labor and jobs were involved in the creation of the product that is being purchased. To address the commercial realities in the computer industry that most subassemblies are produced in a foreign country, Seagate proposes that the Commission adopt the U.S. Customs Service's traditional double substantial transformation analysis to determine if a foreign subassembly has been sufficiently transformed in the U.S. so that it may be counted as a U.S. component for purposes of the 50% content test. Under this well-established rule of Customs law, a subassembly must be changed in the United States into a new article with a different name, character or use that is again used in an operation that produces a new article with a different name, character or use. Seagate also submits that guidelines must be developed concerning the use of the "Assembled in USA" mark and qualified "Assembled in USA" marks. The term "assembly" is a term of art that is clearly defined and understood in the industry to mean "any method used or join or fit together solid components, such as welding, soldering, riveting, force fitting, gluing, laminating, sewing, or the use of fasteners." Customs Regulations, 19 C.F.R. 10.16(a)(1995). It is also understood by both consumers and industry to mean something less than "Made in" or "Product of." Notwithstanding this, however, the "Assembled in USA" marking still connotes to consumers that U.S. labor content went into the product's creation and cannot, therefore, be used unless there is significant U.S. input. In this regard, Seagate submits that the mark "Assembled in USA" should only apply to products that (1) contain at least 50% domestic content (as defined for "Made in USA" purposes); and (2) are accurately described as having been "assembled" in the United States. Products not meeting the 50% domestic content test, but still "assembled" in the United States, should be permitted to be marked "Assembled in the USA with Foreign and Domestic Parts." Products assembled in the USA with all foreign components should be permitted to be marked "Assembled in the USA with Foreign Parts." Any applicable Customs requirements for marking of the foreign parts can be met by adding a specific reference to the parts or slightly revising the "Assembled in" marking on the packaging, e.g., "Assembled in USA with Foreign Parts/Motor Made in Thailand" or "Assembled in USA with Thailand Motor." In addition, it is important the Commission insure that any federal standard it develops will preempt inconsistent state law. As discussed above, there are numerous "Made in USA" standards that currently apply to goods sold in a particular state. If the Commission's standard does not preempt these state laws, it will be impossible for a U.S. manufacturer to label its products accurately as "Made in USA." Finally, Seagate submits that the Commission should make every attempt to work with the U.S. Customs Service to ensure that any "Assembled in" standard that would apply for U.S. assembled goods will also apply to foreign assembled goods. It would be extremely burdensome for U.S. manufacturers, such as Seagate, that assemble goods in both the United States and abroad, if a different standard were to apply to foreign assembled goods. Thus, the Commission should attempt to persuade the U.S. Customs Service to adopt consistent rules for the "Assembled in" markings that will apply to both U.S. and foreign assembled goods. Responses to Commission's Specific Questions Set forth below are Seagate responses to the specific questions raised by the Commission in the October 18 Federal Register notice. These responses are consistent with Seagate's proposals discussed above and also further illustrate the benefits to be gained from such and approach. 1. When consumers see product advertisements or labels stating or implying that products are "Made in USA," "Made in America," or the equivalent, what amount of U.S. parts and labor do they assume are in the products? Response: Consumers assume that at least 50% of the U.S. content is parts and labor. a: Are there surveys, copytests, or other direct evidence of consumer perception that will aid the analysis? Response: None of which I am aware. b. How has increased consumer knowledge of foreign imports or foreign components affected such perceptions? How much knowledge of foreign sourcing of components do consumers have? Response: Consumers' insistence for content labeling has heightened the consumers' overall knowledge about content/sourcing. I believe content/sourcing knowledge is at an all time high. c. How much, if at all, is consumer perception of Made in USA claims affected by the type of product, complexity of the product, or other factors? Response: The consumer perception is not affected by the type of product, complexity of the product, or other factors. d. Do consumers attach higher domestic content to products claimed to be Made in USA when the claims are presented with greater prominence or frequency? When they are featured in advertising, as opposed to merely on labels? Response: Consumers do not attach higher domestic content to products claimed to be Made in USA when the claims are presented with greater prominence or frequency. 2. What are the costs and benefits of an "all or virtually all" threshold for Made in USA claims, versus a lower threshold (e.g., 50%)? Response: There are no substantial benefits of a virtually all threshold. a. What are the precise benefits of being able to make unqualified Made in USA claims for lower domestic-content products? What impact would this have on firms that now meet the higher standards? On turns that might be able to raise their domestic content to meet a lowered threshold? Response: The ability to participate in "special" programs such as NAFTA & Government Procurement. b. What difficulties are there in making truthful comparative or qualified claims that reveal that the product is not wholly domestic? Is qualifying claims more difficult in this context than in other advertising or labeling contexts (e.g., "30% lower in fat than the leading brand")? Do advertising and labeling pose the same considerations? Response: The difficulty is associated with the need to track origin of components. It is compounded when components are dual sourced. Advertising and labeling pose the same considerations. c. What are the costs and benefits of alternative thresholds (e.g., 50%, 75%, products "substantially transformed" in the United States)? Response: Benefit of substantial transformation is that it does not require detailed cost analysis, tracking, etc. Cost of meeting any percentage threshold is as described above. d. What are the costs to consumers, when the actual domestic content in"Made in USA" products is lower than consumers are led to believe? Response: Consumers would be expected to pay more for a U.S. made product because of overall labor costs. e. If adding qualifications to Made in USA claims sometimes is impractical or costly due to space limitations, are there alternative phrases that meet this concern and also adequately inform consumers of foreign content? Do such formulations as "USA 80%", "Made in USA (80%)", or similar formulations satisfy these concerns? Response: Although these alternative phrases provide additional information to the consumer they would pose an extra burden on the manufacturer if required. f. What do consumers understand the phrase "Assembled in USA" to mean? Would consumers view such terms "Assembled in USA" as suggesting that the product may have substantial foreign content? How much foreign content? What are the costs and benefits of allowing such a claim for a product where there is only minimal domestic assembly? Response: Consumers understand that "Assembled in" is just that. See previous discussion, "Seagate Proposals" for more information. 3. What are the costs and benefits of using the same tests for Made in USA claims as those imposed by U.S. Customs requirements ("substantial transformation"), the Buy America Act (50% cost), and other domestic content statutes or rules? Response: Today manufacturers are required to conduct unique and separate analysis for each "special" program. When a company participates in all, the work becomes cumbersome, time consuming, and cost prohibitive. It would be more practical if there were one set of rules from which to work. It would be beneficial if the commission were to work with Customs to establish joint rules. 4. Do foreign customs officials prohibit the addition of qualifying phrases on Made in USA labels? If so, does the traditional FTC requirement that labels make disclosures of substantial foreign content add significant manufacturing costs where sellers wish to sell a single item in domestic and foreign markets? Would an option of stating qualifying disclosures only on packages, hangtags, etc. at time of sale in the U.S. market significantly reduce such costs? Response: Seagate has not experienced any prohibitions of additional phrases. However, if such phrases were required, it would be at significant cost. 5. How should the proportion of domestic content be measured with respect to Made in USA claims? Response: If the added value and content are at least 50 percent U.S. origin, the parties should be in position to make the "Made in USA" claim. a. In determining the U.S. value added by parts and components, is it sufficient to determine the purchase cost of parts and components made in U.S. plants? Do other measures better measure the U.S. content from the consumer's perspective? Response: It is sufficient to determine the purchase cost of parts and components made in U.S. plants. There are no other better known methods of determination. b. Should the determination of U.S. value added by parts and components exclude raw materials? If so, what should be the definition of raw material? Response: No. c. What are the costs and benefits of requiring sellers to determine the source of all components and subcomponents before making Made in USA claims? Response: Tracking origin, maintaining origin integrity, and binning, etc. costs money. d. What are the costs and benefits of permitting Made in USA claims where the seller has determined that a sufficient percentage of parts and components "one step back" in the manufacturing process were made in U.S. plants? Two steps back? At some other stage in production? Response: We do not believe such a claim can be made unless it is with respect to a part (i.e. subassembly) that will later undergo a second substantial transformation. e. What types of costs, other than direct labor costs, should be added to the domestic content measure at the stage of final assembly? Only direct overhead? If general overhead, (e.g. real estate taxes, administrative costs), how can the measure be defined to avoid sellers from artificially inflating the domestic content of products for this purpose? Response: By establishing a maximum profit level/margin by commodity type. f. Should the profit to the final U.S. assembler of the product be counted toward domestic content? Response: Yes. Profit to the final U.S. assembler should be counted toward domestic content. g. What are the costs and benefits of a case-by-case determination that requires sellers to have a "reasonable basis" for their Made in USA claims, rather than requiring a particular method of computing domestic content? Would this lesser certainty provide insufficient guidance or fail to deter misleading Made in USA claims? Response: If the Buy American Act standard is adopted, a reasonable basis determination for domestic content results in less administrative work and lower costs to manufacturers and consumers. Lesser certainty does not provide insufficient guidance or deter misleading claims. 6. What form of guidance should the Commission offer with respect to made in USA claims? Response: Formulation of guidelines for eligibility, software programs with established analysis guidelines, etc. a. Should the form of guidance be case-by-case enforcement, and enforcement policy statement, guides, or a rulemaking? Are there other forms of guidance that would be more useful or cost efficient? Response: There should be consistent rules applied, otherwise abuse will occur creating unfair trade practices. Policy and guidelines are a necessity. b. Should the Commission offer a bright-line test whereby sellers can make Made in USA claims only if the product contains a specific percentage of domestic cost? If a nonnumerical threshold for permitted claims is adopted, would it be helpful to establish safe harbors within that threshold to establish what types of claims always would be permitted? Response: The Commission should offer a bright-line test when sellers make Made In USA claims if the product contains 50% of domestic cost. If you have any questions or require additional information, please contact the undersigned, by telephone at (408) 439-5645 or by facsimile at (408) 438-4523. Respectfully submitted, Debby Mayberry Director, Corporate Customs and Export Administration cc: William D. Outman, II, Esq.