Federal Trade Commission Received Documents July 1, 1996 P894219 B18354900180 AIAM The world's Leading Automakers July 1, 1996 Mr. Donald S. Clark Re: Made in USA Policy Comment Office of the Secretary FTC File No. P894219 Federal Trade Commission Room 159 Sixth and Pennsylvania Avenue, NW Washington, DC 20580 Dear Mr. Clark: On behalf of the Association of International Automobile Manufacturers (hereinafter "AIAM", we respectfully submit the following comments with regard to the Federal Trade Commission's (FTC) request for additional comments as published in the Federal Register on Friday, April 26, 1996, (61 Fed. Reg. No. 82 18600). For the reasons discussed herein, we submit that the current policy requiring products labeled "Made in the USA" to be manufactured "all or virtually all" with United States materials and labors, makes this claim nearly impossible for any manufacturer (especially any automobile manufacturer) to achieve given the globalization of modern manufacturing practices. AIAM recommends that the Commission adopt a case-by-case approach that reviews specific ad claims and the meaning of those claims to consumers. AIAM believes that a single standard cannot be universally applied to automobiles and all other industries. AIAM is the trade association representing the interests of 22 subsidiaries of international automobile companies doing business in the United States. AIAM member companies are both importers to the United States and exporters from the United States. In America, our member companies have invested billions of dollars in developing manufacturing facilities, developed supplier relationships, trained American workers, designed automobiles, conducted research and development, and literally participated in every stage of manufacturing. We appreciate the opportunity to comment. The attachment provides additional information to the FTC's comprehensive review of "made in the USA" claims and the responses to most of the specific questions set forth by the Commission in its request for comments. Respectfully submitted, Philip A. Hutchinson, Jr. President and CEO Re: Made in USA Policy Comment FTC File No. P894219 On January 22, 1996, the Association of International Automobile Manufacturers ("AIAM") submitted comments in response to the Commission's October, 1995 Federal Register notice regarding "Made in USA" claims. In response to invitations at the FTC's Public Workshop on this subject on March 26 and 27, 1996, formalized at 61 Fed. Reg. 18600 (April 26, 1996), AIAM hereby submits these supplementary comments further to urge the Commission to adopt a "case-by-case reasonable basis" approach in this area, following its traditional approach to analyzing advertising claims. Although there were a large number of conflicting views at the beginning of the Workshop, AIAM supports what appeared to be a growing consensus in favor of a "reasonable basis" standard that would include general rules, specific examples and "safe harbor" provisions akin to the FTC's "Green Guides." This approach is in fact the only feasible way to give guidance both to industry and to the public about the enormous range of consumer products and, at the same time, to be faithful to the accumulated evidence about consumer perception of "Made in USA" claims. We agree with the consensus of the Workshop participants that a "one-size-fits-all" standard would be confusing, misleading, and counter-productive, especially if that standard is adapted from statutes or regulations designed to implement policies and goals wholly unrelated to consumer deception. A. The Perception Data If anything is clear from the consumer perception data shared at the Workshop, it is that consumers have even more varied and sometimes conflicting ideas about the meaning of "Made in USA" and related terms than most of us would have imagined. While a number of respondents gave the mirror response that "Made in USA" means "Made in USA," without much embellishment, a substantial segment associated "made" with "assembled," and saw little connection to parts and components. For example, the FTC copy test showed that 49 percent of all respondents who were given the "Made in USA" claim responded that the claim implied something about where the product was assembled. Only a very small percentage viewed "Made in USA" as involving virtually all parts and labor. Many respondents, however, were willing to accept a "Made in USA" claim on products that contained significant amounts of foreign parts, provided that the product was assembled in the United States. These perception studies rest only on questions about relatively simple products, such as pens, clothing, household goods, and running shoes. It is extremely difficult to project these findings directly onto even moderately complex consumer products, much less onto automobiles. Given how generally the public views the claims in the first place, it seems virtually impossible to develop an "all or virtually all" test, or some other form of bright-line numerical indicator, that can accurately reflect consumer views about all products. The futility of trying such approaches is demonstrated by the very types of questions the FTC raised in the Federal Register notice about the proposed "all or virtually all" test. Should marketers look back one or two steps in the manufacturing process to determine the origin of the components of a product? Should raw materials be excluded? What constitutes a "step" back in the manufacturing process anyway? Is there a single definition of a "step" back that can be used across products or industries? Would the number of steps back depend upon whether the consumer product is simple or complex? The consumer perception data make clear that few, if any, consumers even think about these types of questions when encountering a "Made in USA" claim. The Commission is left to choose between two courses. First, it can come up with guiding principles, examples and "safe harbors" that will allow advertisers to use various terms in a way the public will understand them. Second, the Commission can create standards and bright-line numerical tests that will result in a "Rube Goldberg-like" system that bears little relationship to a consumer's perception of a particular product. The perception data simply leave no room for a "one-size-fits-all" standard for "Made in USA," whether it be a "50 percent" standard or a "virtually all" standard. There is no disagreement about this among automobile manufacturers. The American Automobile Manufacturers Association (AAMA) has taken the same position: that the Commission should adopt a "case-by-case reasonable basis" approach. B. The Workshop Discussions The discussions at the Workshop amplified the results of the perception data. Although the participants expressed a broad range of views, these views frequently depended on the specifics of the particular consumer product, for example, a one- or two-piece hand tool versus a complex piece of machinery. Thus, the exchanges at the Workshop made the same point as the empirical data, that is, that it would be very difficult and ineffective to lump together cars, pens, and running shoes under one "bright-line" standard. The Workshop discussion further reinforced how difficult (and wrong) it would be to base a consumer deception standard on statutes drafted for political or economic purposes wholly unrelated to consumer deception. For example, the method for determining the origin of a vehicle's parts is so convoluted under the American Automobile Labeling Act ("AALA") that the National Highway Safety Administration, which is charged with administering the AALA, has stated that the same car with identical parts could have a US/Canadian content as low as 11 percent or high as 53 percent -- based solely on whether the parts were obtained from an "outside" or "wholly-owned" supplier. Tariff, procurement or other statutory schemes also dictate mandatory requirements that serve purposes entirely unrelated to the risk of misleading consumers. In contrast, for most consumer products there is no statute requiring the country of origin to be disclosed in advertising for the product. Advertisers may choose whether to use a "Made in USA" express or implied claim and are not generally subject to governmental scrutiny unless such a claim is false or misleading. Moreover, the Commission traditionally has permitted advertisers to craft their advertising messages as they see fit, so long as they meet criteria for truthfulness. Thus, relying on mandatory standards that are not deception-oriented will restrict, perhaps unconstitutionally, the right of advertisers to convey truthful country of origin statements. The Workshop's focus on a variation of the U.S. Customs Service's "substantial transformation" test was not based on the fact that a Customs' policy directly applied to consumer advertising (which it does not), but on the more fundamental point that, in many respects, the "substantial transformation" test approximates how consumers actually perceive "origin" designations. Even those in support of such an approach, however, indicated that it would not work in all cases. For instance, the Workshop participants appeared to agree that products that undergo only simple assembly in the United States, but contain substantial amounts of foreign content, should not be allowed to be labeled simply "Made in USA." As the discussion evolved, the FTC staff itself provided the idea of issuing general rules, with examples and "safe harbors," similar to what the Commission had done in its "Green Guides" in 1992. This contribution greatly accelerated the growing consensus for a "case-by-case" approach based on principles, examples and "safe harbors." AIAM supports such a resolution. The Green Guides analogy exhibits many attractive benefits: ÀÀ The Commission need not (and should not) anticipate, or restrain, the virtually unlimited number of truthful messages an advertiser could convey in an advertisement. ÀÀ The flexibility to use either express or implied claims to convey truthful information about the source of labor, parts or other "country of origin" attributes of a product is preserved. ÀÀ The Commission may provide guidance both on what message is likely to be conveyed to consumers by certain claims and on what advertisers are required to have for substantiation of their claims. ÀÀ A "bright-line" standard cannot reflect consumer perception regarding all products for all industries. ÀÀ A test that reflects consumer perceptions eliminates a concern about a change of standards by the Customs Service or the World Trade Organization. ÀÀ Finally, the use of examples and "safe harbor" provisions gives industries more guidance and flexibility, provided, however, that these "safe harbors" create a presumption of compliance and are not construed to mean that non-compliance constitutes a deceptive practice. APPENDIX AIAM's position is illustrated by the American Automobile Labeling Act, 49 U.S.C.  32304(b)(hereafter "AALA"), a statute specifically designed to govern automobiles. The legislation, which took effect October 1, 1994, is an excellent example of the pitfalls of relying on a statute never intended to guard against misleading advertising claims. The AALA requires that all vehicles manufactured on or after October 1, 1994, be labeled with information about US/Canada and international content. The law purportedly was intended to enable consumers to take the country of origin into account in deciding what vehicles to purchase. Under the Act, passenger cars must be labeled with the following information: ÀÀ the percentage of US/Canadian parts content; ÀÀ the names of the top two countries other than the U.S. and Canada that individually contribute fifteen percent or more of the equipment content, and the percentage for each country; ÀÀ the final assembly point by city, state, and country; ÀÀ the country of origin of the engine parts; and ÀÀ the country of origin of the transmission parts. However, when one looks at the statutory tests that govern how these disclosures are to be based or calculated, one sees numerous flaws in the AALA requirements that compels the label to misinform consumers. The information on the label confuses if not outright misleads consumers. Some examples are: A. Parts versus Labor By focusing on parts content alone, the AALA does not count the value of labor at the final assembly point. For those consumers who care about American jobs (labor) more than the location of the carmaker's corporate headquarters, the label misleads. B. The U.S./Canada Merger Under the AALA, parts manufactured in Canada will be lumped together with U.S.-made parts and labeled as "US/Canadian" content. Without concern for American consumer perception, the AALA treats Canadian-made parts as if they were "made in USA." A car with 100 percent Canadian parts that is assembled in Canada will be represented to American consumers as American-made. At the same time, AALA could label a car in the U.S. with a substantial amount of American-made parts as being of foreign origin. The attached chart showing which cars are built in the United States, Canada, and Mexico, respectively, highlights the potential for misleading consumers. C. Designation of Suppliers The AALA sets different standards for determining the value of a part. If a part installed in a car is purchased from an "allied" supplier, i.e., one that is wholly owned by the manufacturer, the value of the US/Canadian content of that part is counted. However, if the same part is purchased from an "outside" supplier, i.e., one that is not owned by the manufacturer, none of the part's value will be included in the overall value, unless the part has 70 percent or higher US/Canadian content. Thus, parts that have 69 percent American content have no American value, for purposes of the label, if the part was purchased from an outside supplier, but the same part would be counted at actual value if the manufacturer owns the supplier. Given that the Act excludes entirely the value of assembly labor, the information that will be disclosed on the label is even further misleading. D. Carlines versus Individual Cars The AALA also ignores where a particular car was made because of its mandate that the parts content be analyzed over entire carlines. For example, the identical model manufactured both in the United States and in Mexico would show the identical parts content, although the one assembled in the Dearborn assembly plant will, in fact, have a much higher percentage of American-made parts (not to mention labor). Coupled with the supplier discrimination and the inclusion of Canada for purposes of labeling, the AALA produces results that seem bizarre from the standpoint of consumer perception. For example, a car assembled in Canada with predominantly Canadian parts supplied by an "allied" supplier will appear to consumers to have been "made in USA." At the same time, a car assembled in a United States-based plant, using many parts from an "outside" supplier, will look to consumers (taking into account carline averaging) to be no different than the identical car when it is built in a foreign country. This would surely be the Humpty-Dumpty ("I use a word to mean what I want it to mean") approach to consumer protection. While this is not the forum to debate the wisdom of the AALA, the Act clearly serves as an excellent example of a law that is ignorant of consumer perceptions, and should not be used as a basis for the FTC's "Made in USA" advertising standard.