Federal Trade Commission Received Documents July 1, 1996 P894219 B18354900177 Before the Federal Trade Commission ____________________ "MADE IN USA" POLICY COMMENT FTC File No. P894219 ____________________ SUBMITTED ON BEHALF OF FOOTWEAR INDUSTRIES OF AMERICA, INC. Lauren R. Howard Collier, Shannon, Rill & Scott 3050 K Street, N.W. Washington, D.C. 20007 (202) 342-8505 Counsel to Footwear Industries of America, Inc. July 1, 1996 Before the Federal Trade Commission POST-WORKSHOP COMMENTS ON THE FTC'S "MADE IN USA" POLICY SUBMITTED BY FOOTWEAR INDUSTRIES OF AMERICA, INC. On behalf of Footwear Industries of America, Inc. ("FIA"), we submit these comments in response to the Federal Trade Commission's ("FTC's") request for additional views following the workshop on its "Made in USA" standard. 61 Fed. Reg. 18,600 (1996). FIA believes that the FTC's current policy regarding the labelling and advertising of products as American-made does not comport with consumer perceptions and is entirely too stringent in the modern global economy. FIA therefore urges the Commission to modify its standard to permit unqualified "Made in USA" claims if U.S. materials, direct labor and manufacturing overhead exceed 50 percent of all such costs and final assembly of the product is performed in the United States. In making this determination, manufacturers should only be required to look one-step back in the manufacturing process. In the alternative, FIA requests that the FTC permit companies to make U.S.-origin claims provided they have a reasonable basis therefor. To this end, FIA generally endorses the submission by the Ad Hoc "Made in USA" Coalition which, in response to suggestions at the FTC workshop, developed a consensus among industries concerned about the FTC's "Made in USA" policy. Using the "reasonable basis" approach formulated by the Commission to address environmental claims, the consensus statement establishes three safe harbors to guide industry conduct, including a value-added test similar to FIA's proposal, the North American Free Trade Agreement preference rules (adjusted to exclude consideration of Mexican and Canadian content), and a "majority of processing" standard. However, consistent with FIA's view that products making claims of U.S. origin must have significant domestic content, FIA believes that "majority of processing" safe harbor contained in that submission should be modified to require a minimum of 50 percent U.S. content. A. FTC Consumer Perception Study The FTC's consumer perception study does not support its policy requiring that all or virtually all of the direct labor and materials of a product with an unqualified "Made in USA" claim be American. The Commission's copy test data indicate that only an insignificant minority of consumers understand such claims in that manner. The majority of consumers recognize that a "Made in USA" claim describes where the product "came into being." When the United States is claimed to be the country of origin, it means, at a minimum, that significant processing occurred in this country. More specifically, FIA believes that the following conclusions can be drawn from the FTC's consumer perception study. First, it is clear that consumers believe that a "Made in USA" claim denotes the use of American labor. This conclusion is evident from the fact that approximately 65 percent of the copy test respondents either repeated the "Made in USA" phrase or responded with a virtually identical phrase when queried about the meaning of "Made in USA." Since such consumers are likely to use the word "made" according to its dictionary definition, the copy test results show that consumers perceive a product as being created in this country if the materials are either formed or modified, or the components parts are put together, in the United States. The American Heritage Dictionary (Second College Ed.) 758 (1991). In fact, only a small minority of the copy test consumers believed the phrase "Made in USA" indicated that all parts of a product were made in the United States. When asked generally about what a "Made in USA" claim meant, only seven percent of the total sample stated that such a claim indicated that the parts were 100 percent American-made. In corroboration, approximately 70 percent of the copy test respondents answered "no" when asked specifically whether a "Made in USA" claim denoted where a product's components were made. Thus, the FTC's consumer perception study does not substantiate the agency's position that products must be "all, or virtually all" of U.S. content to bear an unqualified claim of domestic origin. Rather, it supports the view that a "Made in USA" policy need only require significant processing in the United States. FIA's proposed standard does just that by requiring more than 50 percent U.S. value-added plus final assembly in the United States. We urge the Commission to adopt these criteria or, in the alternative, the "reasonable basis" approach developed by the Ad Hoc "Made in USA" Coalition. B. Responses to FTC Questions The following responses address the supplemental questions raised in the Commission's April 26th Federal Register notice. 1. "All, or Virtually All" Standard a. One-Step Back Rule FIA believes that it is impractical to require a manufacturer to make inquiries beyond the suppliers from whom he purchases materials or components. For that reason, FIA suggests that the manufacturer be able to rely on the representations of his suppliers that their products are American-made. However, to make such representations, suppliers would also have to meet the 50-percent test set forth above, looking one-step back to their own vendors. Raw materials should only be excluded if they are not indigenous to the United States. If the purchased component meets the criteria, the entire cost of the component should be included in the calculation as part of the cost of U.S. processing. The only exception to this provision would be if the component involved U.S. materials sent abroad for further processing and then returned to the United States for inclusion in the end product. In that event, the cost of the U.S. materials should be treated as part of domestic costs and the cost of the foreign processing should be treated as part of the foreign costs. Thus, throughout the chain of supply, each level should only be able to make "Made in USA" claims if their products meet the percentage test imposed on the finished product manufacturer. 2. Percentage Content Standard a. What specific percentage threshold for domestic content should a product have to meet to be considered "Made in USA"? What is the basis for choosing that threshold? FIA recommends that the FTC use a 50-percent material/direct labor/manufacturing overhead test as the threshold for unqualified "Made in USA" claims, provided the finished product is finally assembled in the United States. FIA chose the 50-percent threshold because a product with that level of domestic content contains significant U.S. processing and comports with the domestic content levels required by the Buy America Act (41 U.S.C.  10a; 48 C.F.R.  25.101, 25.102(a)), the Commerce Department's Market Development Cooperator Program (59 Fed. Reg. 21,750 (1994)), Canada's deceptive practices standards, and the regional value content standard of the North American Free Trade Agreement. b. What cost should be included (and which excluded) in calculating a product's domestic content? A standard requiring more than 50 percent domestic content should be based on the following formula: ___ Percent = (Cost of U.S. materials + U.S. direct labor + U.S. mfg overhead) x 100 (Cost of U.S. materials + U.S. direct labor + U.S. mfg overhead + foreign materials + foreign labor) Materials in this context encompass raw materials, components and other inputs. Raw materials should only be excluded if they are not indigenous to the United States. Except where U.S. materials are sent abroad for further processing, there is no necessity to separately calculate the value of foreign labor because such labor is already included in the purchase price of the imported material. However, if U.S. materials are subjected to further processing in a foreign country, the American materials should be counted as part of the domestic content and the foreign labor should be taken into account separately as part of the foreign value added. In addition, manufacturing overhead should be defined to include costs related to domestic production, such as fringe benefits, indirect labor, plant and equipment, and the expenses of manufacturing departments such as engineering, purchasing and personnel. c. Is the percentage of domestic content of a product likely to fluctuate significantly over time because of currency fluctuations or because of routine changes in sourcing for certain inputs? Sourcing changes will affect the percentage of domestic content. Manufacturers will therefore have to provide themselves with a margin of error to meet their compliance obligations. 3. Substantial Transformation Standard For several reasons, FIA does not believe the Customs Service's substantial transformation test should be adopted by the FTC without modification. First, its lack of objective criteria does not give manufacturers sufficient guidance as to what conduct is proper under the law. Second, it does not ensure that products making "Made in USA" claims will have substantial domestic content because this test may permit products assembled here from significant amounts of imported components to qualify. This concern is not limited to particular products (such as footwear) because virtually any product could have a new name, character and use after its foreign components are finally assembled in the United States. For the same reason, FIA also opposes the adoption of the NAFTA marking rules which simply codify Custom's substantial transformation test. Finally, FIA cannot endorse the NAFTA tariff preference rules as the sole means of complying with the FTC's "Made in USA" requirements. Even though they typically require a certain percentage of domestic content, they do not take into account U.S. materials sent abroad for further processing. For example, the NAFTA tariff preference rule for footwear requires that there be at least 55 percent regional value content and that the uppers originate in a NAFTA country. Thus, this test does not permit a shoe to qualify for preferential treatment if the non-NAFTA upper is made from U.S. leather, even if it meets the 55 percent test. FIA believes that all U.S. materials should be taken into account, regardless of whether they are processed in the United States or abroad. We therefore prefer a straight percentage test, with U.S. materials credited on the domestic side of the equation and the foreign labor registered on the foreign value side. Although FIA cannot subscribe to the above formulas as the sole criteria for determining whether a "Made in USA" claim is appropriate, FIA would not oppose a two-part standard which required that goods meet the FIA's 50-percent domestic content test set forth above as well as Customs' substantial transformation criteria. In fact, FIA's requirement that final assembly be performed in the United States would generally ensure that such a product would have a new name, character and use as a result of U.S. operations and thus fulfill Customs' substantial transformation requirements. Such a standard would also comport with consumer perceptions because the product would come into being in the United States and involve significant U.S. labor. 4. Other Issues Under its current policy, the FTC requires that "all, or virtually all" of a product be made in the United States in order for a manufacturer to make an unqualified "Made in USA" claim. The Commission also allows companies to make qualified claims if they do not meet the "all, or virtually all" standard. However, this exception does not meet the needs of the consumer or the manufacturer and thus should not serve as the basis for continuing the FTC's current policy. First, FIA does not believe that qualified claims, such as "Made in USA of foreign and domestic parts," assist U.S. consumers in their purchasing decisions. Such disclosures do not give any indication whether or not the foreign content is substantial or minimal. Thus, a label with a qualified claim could readily give a deceptive impression about the amount of U.S. content, such as when a product is comprised of 70 percent foreign and 30 percent domestic parts. While a percentage indicator (such as "Made in USA of 70% foreign and 30% domestic parts") would address this problem, it is a completely impractical solution because product sourcing generally changes too frequently for such labels to be of much utility. Manufacturers would be required to maintain labels with every conceivable mix of components in order to ensure compliance. It is also infeasible to expect manufacturers to track production carefully enough to keep up with frequent changes in sourcing. FIA therefore strongly believes that unqualified "Made in USA" claims should be permitted so long as the product contains more than 50 percent domestic content. * * * For the reasons set forth above, Footwear Industries of America, Inc. urges the Federal Trade Commission to modify its "Made in USA" policy consistent with the proposals contained herein. Respectfully submitted, Lauren R. Howard Counsel for Footwear Industries of America, Inc.