Federal Trade Commission Received Documents Jan 22 1996 B18354900102 Secretary NEMA - Setting Standards for Excellence National Electrical Manufacturers Association 1300 North 17th Street, Suite 1847 Rosslyn, VA 22209 (703) 841-3251 Fax (703) 841-3351 tim_feldman@nema.org Timothy Feldman Vice President, Government Affairs January 22, 1996 Office of the Secretary The Federal Trade Commission Room 159 Sixth and Pennsylvania Avenue, N.W. Washington, DC 20580 RE: Made in USA Policy Comment, FTC File No. P 894219 The National Electrical Manufacturers Association (NEMA) is pleased to offer the following comments on the referenced subject. NEMA is the largest trade association representing American manufacturers of products used in the generation, transmission, distribution, control, and end-use of electricity. The industry serves a domestic market of approximately $100 billion, exports over $15 billion, and employs 500,000 workers. NEMA manufacturers produce a wide range of industrial products, components for consumer products and consumer products, especially in the area of lighting equipment. Before addressing the specific questions posed by the Commission in the October 18, 1995 Federal Register notice, NEMA will outline its recommendations and primary concerns with the current FTC standard, which requires a product be produced with all or virtually all 100 percent domestic content and labor before it can be labeled as "Made in America". Particularly because of the breadth of impact and potential complexity of this issue, the Commission may want to consider a distinction between industrial products and consumer products. Guidelines could then be limited to consumer products which is consistent with the Commission's focus and scope of enforcement. Industrial product customers have the resources and abilities to decide acceptability of a product's source, within the purpose of any FTC labeling guideline, without the availability of such a label. NEMA Recommendations (1) The Commission should consider alternative methodologies that appropriately capture the essence of the product under consideration. NEMA does not recommend a product-by-product analysis, rather that the FTC recognize and take into account the complexity of products in high-technology American industries. Using a domestic content calculation is not realistic for high-technology industries because the number of piece-parts, subcomponents, components and subassemblies incorporated in the final product make such a calculation administratively burdensome and nearly impossible. (2) Specifically, the standard for labeling electrical products should focus on whether the product is manufactured primarily in the United States. This methodology recognizes the importance of manufacturing at the subassembly level and beyond, which substantially transforms the basic foreign (and domestic) components into an American product. This formula more fairly acknowledges that the source of electrical products' greatest cost, value and essence is found at the subassembly level rather than the basic component level. (3) The Commission should seek to minimize burdensome administration costs to the manufacturer associated with compliance to the standard. Allowing U.S. manufacturers to use the current U.S. Customs test of substantial transformation would enable NEMA companies to use the same calculation regardless of the targeted market and do much to alleviate the undue costs and regulation associated with country of origin labeling. (4) Finally, the Commission should create a standard for labeling electrical products that addresses the consumer's perception of an American product that is highly technical in nature. It is NEMA's belief that this can be achieved while allowing manufacturers to use a calculation that focuses on the essence of the product's composition. NEMA Concerns with the Current Standard 1) The FTC labeling standard is inflexible and ignores the importance of the production process in high technology industries such as the electrical industry. In industries such as the furniture industry, the primary costs and the essence of the product are derived from the raw materials and labor necessary for production. In such technology industries, the use of a domestic content methodology is reasonable and practical to calculate, because the basic components found at the beginning of the production cycle make up the essence of the product at the end of the production cycle. Electrical products produced by NEMA companies, however, are generally highly technical requiring complex subassemblies and complicated manufacturing processes. It is these subassemblies and manufacturing processes that define the essential nature of the product rather than the basic parts or subcomponents used at the beginning of the production cycle. The Commission standard does not recognize this distinction. The calculation of 100 percent domestic content and labor is based on a manufacturing process that rarely exists for NEMA companies in today's global marketplace. The raw materials and the basic parts or subcomponents of an electrical product represent a small part of the total cost of the product. Rather, the essential aspect of an electrical product is defined by the engineering and manufacturing of its subassemblies and the manufacturing necessary to produce the final product. This does not, however, make electrical products produced in the United States any less of an American product than a lower-technology product produced from 100 percent domestic content. For example, the fluorescent lamps produced by our lamp manufacturers contain a material content equaling less than 10 cents. The technology and capital invested into the manufacturing process necessary to economically assemble these parts equals tens of million of dollars. This assembly is not simply attaching parts. Rather, it entails complex manufacturing that is essential to the essence of the lamp. Manufacturers who perform this manufacturing process in the United States, are unable to identify the product as American because some of the components, which reflect a fragment of the cost of producing the product, are foreign made. The Commission's labeling standard, therefore, unfairly discriminates against American manufacturers who may source the piece parts or subcomponents of their products from foreign countries but focus their manufacturing activity in the United States. Based on the application of the Commission's 100 percent requirement, U.S. consumers intent on buying an "American" electrical product may find no product so labeled. This is misleading and prevents consumers from receiving labeling information on which to make informed choices. 2) The Commission's current labeling standard is inconsistent The Commission's labeling standard is inconsistent with other Federal government program requirements, resulting in greater inefficiencies and costs for the American manufacturer. An American product should be an American product no matter the market in which it is sold. Under today's conflicting rules, however, NEMA member companies face high administrative costs associated with compliance to numerous calculations. Internationally, these inconsistencies are being addressed under the World Trade Organization. The most common test utilized around the world is the test of substantial transformation. The WTO Customs Working Group is considering adopting substantial transformation as the preferred approach. The Commission's review of its labeling standards provides a unique opportunity for the United States to assess its inconsistencies on a domestic level and in doing so, improve the competitive position of American manufacturers. Currently, different calculations are used under North America Free Trade Agreement rules of origin, the U.S. Customs' rules of origin, the Buy American provisions, and the FTC's labeling standards. There should be regulatory consistency within the Federal government as to the definition of an American product. Such consistency will promote regulatory efficiency and reduce the administration costs and loss of manufacturing time associated with complying with contrasting requirements. Stream-lining the regulations will reduce these inefficiencies, thereby improving U.S. productivity and competitiveness vis-…-vis its foreign competitors. Responses to Commission questions listed in the October 1995 Federal Register NEMA provides the following responses to specific questions based on those which we have a reasonable amount of data and expertise to make a claim. The questions are summarized and numbered in order with the Commission's Federal Register notice. Question 2: What are the costs and benefits of an "all or virtually all" threshold versus a lower threshold? NEMA does not agree with the Commission's sweeping application of the domestic content methodology for all industries. The costs to the electrical sector are two-fold: 1) the Commission's methodology and the 100 percent requirement excludes NEMA member companies from making a fair assessment of their products as American-made and 2) it erroneously leads the American consumer to believing that electrical products are not produced in the United States. NEMA can find no benefit associated with the "all or virtually all" threshold to either the manufacturer or the consumer. This standard is essentially unattainable in the electrical sector despite the significant level of domestic content and manufacturing. Additionally, the "all or virtually all" threshold does not benefit the consumer as it prevents him from making informed choices when purchasing electrical products. While a lower threshold is more appealing, with regard to electrical products, a substantial transformation approach provides a more reasonable basis for a Made in America claim. Question 2 (b): What difficulties are there in making truthful comparative or qualified claims that reveal that the product is not wholly domestic? From the perspective of the electrical industry, qualified claims are unrealistic and therefore not utilized by NEMA companies due to the complex nature of electrical products and the administrative costs associated with calculating comparative or qualified claims. Sources for parts and components change frequently due to quality and price fluctuations, performance and safety standard requirements and macroeconomic conditions such as exchange rate fluctuations. Additionally, the Commission has not provided a clear definition between parts that are components, subcomponents, piece-parts, or subassemblies. There also are no guidelines indicating how many steps back in the manufacturing process the manufacturer must go to make qualified claims. Question 2 (c): What are the costs and benefits of alternative thresholds? The greatest benefit of an alternative threshold is that it would for the first time allow American electrical product manufacturers to inform their customers that the product is American made. As stated in our opening comments, NEMA believes there should be greater consistency among the various thresholds used by the Federal government. We have the following comments regarding two of the alternative thresholds: 1) The U.S. Customs' test of substantial transformation The Customs' rules of origin test of substantial transformation is used to calculate the origin of all products entering the U.S. from non-NAFTA countries. It is also used by a number of countries around the world, including the European Union. Under this calculation, imported goods are substantially transformed in the United States by being subjected to domestic manufacturing that result in an article having a new name, character, or use. In the electrical industry, it is this "domestic manufacturing" that very often defines the true essence and value of the product and transforms it into an American product. We do not assume to include - nor support the inclusion - of products that simply undergo final assembly in the United States from foreign components. Rather, we are including only those products that may utilize foreign parts but are essentially defined by a manufacturing process that occurred in the United States. Use of the Customs' test also meets NEMA's goal of greater consistency among Federal program requirements. NEMA would support the Commission incorporating a limiting clause that would prevent products that were assembled in the United States from taking advantage of the "Made in America" label. Under these circumstances, it would be more appropriate to use an alternative label such as "Assembled in America". 2) The Buy American test Subject to certain exceptions, the Buy American Act provides that goods must be manufactured in the United States "substantially all" from goods produced here to qualify for government procurement. Regulations specify that goods qualify under this statutory provision if they are manufactured in the United States and the cost of their U.S. components exceeds 50 percent of the cost of all their components. In making this determination, only the end product and its components must be considered with components defined as those article, materials and supplies "incorporated directly" into the finished goods. This test, like the substantial transformation test, discounts the source of the raw materials, subcomponents and basis parts in a product. As with the substantial transformation test, it acknowledges the significance of subassembly manufacturing to the essential nature of electrical products. This test does not achieve the level of consistency in calculations that NEMA companies are seeking. Although the Buy American calculation is used for Federal government procurement sales, for many of our companies, those sales account for a small percentage of their total sales. Sales to other markets generally make up a larger percentage of their total sales. Additionally, the final assembly requirement of the Buy American Act can unfairly discriminate again products of high U.S. content that, for economic reasons, are assembled in another country. Manufacturers of these products lose government sales due to the final assembly requirement. NEMA does not support such unfair treatment in a revised "Made in America" labeling requirement. NEMA manufacturers of electrical products that are lower-tech in nature and in the last quarter of their product cycle generally have more success at calculating the domestic content of their products but often are unable to sell their products of high domestic content to the Federal government. For example, one NEMA member, Pass & Seymour/Legrand, a leading manufacturer of electrical wiring devices such as conventional wall switches and receptacles, has provided product marked "Made in Mexico" that has been rejected on Federal construction projects. The absurdity of this is that 92 percent of the cost of the product is U.S. content. The only value added in Mexico is the final assembly and packaging. The above example, which is not unique, illustrates both the inconsistency in current Federal labeling requirements and is persuasive in support of the Customs substantial transformation test. Question 3: What are the costs and benefits of using the same tests for Made in USA claims such as those imposed by U.S. Customs requirements or the Buy American Act? Please refer to our response in question 2(c). To summarize, the benefits of these alternative tests are that they capture more completely the contribution of American technical expertise at the subassembly level and beyond. Question 5: How should the proportion of domestic content be measured? As previously stated, focusing solely on the proportion of domestic content in products to define their origin unfairly excludes the electrical industry from communicating to their customers the true origin of their product. The manufacturing process that occurs in the United States at the subassembly level and beyond should be taken into account. Question 5(a): Is it sufficient to focus on the purchase price of parts and components? No. Due to the technology incorporated into electrical products at the subassembly level, simply focusing on the parts and components of the product ignores the significance of further manufacturing. In stating this, we are drawing a clear distinction between simple final assembly of components and further manufacturing. Question 5(b): Should the determination exclude raw materials? When using a process-based approach, raw material may be a factor in the determination. However, under this approach, the use of foreign raw material or piece parts that undergo a transformation due to further manufacturing in the United States should not preclude U.S. manufacturers from make a "Made in America" claim. Question 5(c): What are the costs and benefits of requiring sellers to determine the source of all components and subcomponents? The costs would be prohibitively high for the electrical sector due to the complexity of the products and therefore totally unworkable. Question 5(d): What are the costs and benefits of a "one step back" content analysis for components versus some other stage? NEMA does not support the use of a "one step back" content analysis for much the same reason we do not support determining the source of all components and subcomponents. The administrative costs would be extremely high due to the complex nature of electrical products. Additionally, in highly engineered products such as electrical products, the difficulty of trying to distinguish between different steps and define what is one step back in the production process makes the calculation nearly unworkable. Question 5(e): What other cost should be added to a content analysis? NEMA does not support a content analysis approach for the electrical sector because of the complexities involved and its failure to capture the significance of the manufacturing process for electrical products. However, if it considers this approach, the Commission should include the costs of research and development, product testing and conformity assessment, engineering, investment and other costs associated with the production of high-technology products. Question 5(f): Should profit be included? No. NEMA does not support the inclusion of profit in any calculation. Question 6: What form of guidance should the Commission offer with respect to Made in USA claims? Should the form of guidance be case-by-case enforcement, enforcement policy statement, guides, or a rulemaking? We applaud the Commission's efforts to involve the stakeholders from the beginning as it reviews the current labeling guideline. It is only by involving all the stakeholders from day one that the Commission can create a fair and workable standard. NEMA believes guidance should be developed by the Commission based on the cumulative input from the stakeholders through the written submissions and the workshop. Once the Commission drafts a proposal as a result of this exercise, NEMA would strongly recommend the Commission set up another workshop so the stakeholders can review and provide input to any proposed changes. This may prevent confusion down the road. Any final guidelines published by the Commission should be enforced on a case-by-case basis. NEMA and its 550 member companies appreciate the opportunity to offer the foregoing comments on this very important matter and look forward to any inquiries or requests for further information on our views. Sincerely, Timothy Feldman