FTC: Made In The USA Comments Concerning Keith H. Smith--P894219
Electronics Manufacturers and Consumers of America
Keith H. Smith
August 11, 1997
Office of the Secretary
Re Made in USA Policy Comment
Dear Mr. Secretary:
On behalf of the International Electronics Manufacturers and Consumers of America (IEMCA), I am writing pursuant to the notice published by the Federal Trade Commission ("Commission") on May 7, 1997 (62 Fed Reg 20519).
IEMCA is a trade association founded in 1987 and located in Washington, D.C. IEMCA's principal members are leading manufacturers of consumer electronics, optical, telecommunications, and computer products. IEMCA's associate members are leading electronics retailers. The U.S. investment of IEMCA's members and their direct suppliers exceeds $75 billion, their annual U.S. sales exceed $100 billion, and they employ over 300,000 American workers.
IEMCA warmly commends the Commission for the very substantial potential improvement in its current Made in USA guideline that is incorporated in the Commission's proposed new guideline published on May 5, 1997. When the Commission adopts a final new guideline, IEMCA urges the Commission, at the least, not to retreat in any way from the liberalization of the current guideline embodied in the proposed new guideline. IEMCA also urges the Commission to harmonize its final new guideline with current U.S. Customs criteria for country of origin marking for imported products, thus easing administration and enforcement of the new guideline.
In comments submitted to the Commission on July 1, 1996, IEMCA strongly recommended that the Commission adopt a clearcut "substantial transformation" guideline to replace the current "all or substantially all" guideline. IEMCA continues to strongly prefer that course of action. In its 1996 comments, IEMCA made the following points:
A copy of IEMCA's full submission to the Commission dated July 1, 1996, is attached to this letter for your immediate reference.
Keith H. Smith
July 1, 1996
By Hand Delivery
Office of the Secretary
Re: Made In USA Policy Comment, FTC File No. P894219
Dear Mr. Secretary:
Pursuant to the notice published by the Federal Trade Commission ("Commission") on April 26, 1996 (61 Fed. Reg. 18600), the attached comments are submitted on behalf of the International Electronics Manufacturers and Consumers of America (IEMCA). As set forth in its comments dated January 22, 1996, and as discussed at the Commission's workshop of March 26-27, 1996, IEMCA urges the Commission to revise its current policy respecting use of "Made in USA" claims in product advertising and labeling.
COMMENTS ON THE FEDERAL TRADE
"Made in USA Policy Comment," FTC File No. P894219
The Federal Trade Commission ("FTC" or "Commission") announced last October that it was conducting a comprehensive policy review of "Made in USA" claims in product advertising and labeling. The Commission invited all interested parties to submit comments and also invited certain interested parties to participate in a workshop on this topic that was held March 26-27, 1996. The International Electronics Manufacturers and Consumers of America (IEMCA) filed comments on January 22, 1996, and participated in the March 26-27 workshop, at the invitation of the FTC. The following additional comments of IEMCA address certain of the "supplemental questions" published by the Commission in its Federal Register notice extending the comment period for this review proceeding. 61 Fed. Reg. 18600 (April 26, 1996).
IEMCA is a U.S. trade association composed of 21 foreign-owned U.S. manufacturers and distributors of consumer and office electronics products, computer products, and telecommunications equipment. IEMCA members also include U.S. retailers of the products of IEMCA members. The U.S. investment of IEMCA's members and their direct suppliers exceeds $75 billion, their U.S. sales exceed $100 billion, and they employ over 300,000 American workers. Accordingly, IEMCA provides an important perspective in this FTC review on the interests of electronics companies that manufacture and market their products in the United States and globally.
IEMCA members confront and must comply with rules of origin and marking/labeling requirements in the United States and virtually every national market world-wide. Origin marking obligations and rights are of significant importance to IEMCA. IEMCA members firmly believe that manufacturers of electronic products in the United States -- that have committed significant capital investments, that employ thousands of U.S. workers, and (most importantly) that actually "make" their products in the United States -- should be allowed to label and market those products as "Made in USA." The current FTC policy precludes such a claim. This policy denies manufacturers the
right to market and label the domestic origin of their products, and it deprives consumers of the right to knowledge about the U.S. origin of those products. Therefore, IEMCA has actively participated in the FTC's review, including participation in the March 26-27 workshop. IEMCA's continuing concern about this matter has prompted these additional comments.
II. THE FTC SHOULD REVISE ITS POLICY AND ADOPT THE "SUBSTANTIAL TRANSFORMATION" STANDARD
The Commission's existing rule for allowing unqualified "Made in USA" claims in product advertising or labeling has required that such products be "all or virtually all" of domestic origin. As the Commission noted in its April 26 notice, under the "all or virtually all" standard, sellers may label their products "Made in USA" only if all or virtually all of the component parts of there goods were made in the United States and all or virtually all of the labor in assembling their goods was performed in the United States. 61 Fed. Reg. at 18601. Two overriding reasons voiced by interested parties prompted the FTC to initiate the comprehensive review of this policy: (1) lack of a clear definition of the "all or virtually all" standard; and (2) belief that, under any reasonable definition, the "all or virtually all" standard simply provides an unworkable standard in today's global manufacturing and marketing environment. As IEMCA and many other parties commented in written submissions and at the workshop, the existing FTC policy fails to reflect market realities and, equally troubling, it conflicts with the origin and marking rules applied by the U.S. Customs service ("Customs") and the customs authorities of other countries.
As the April 26 notice indicated, written submissions and discussion at the workshop focussed on three primary options for standards regarding unqualified "Made in USA" claims: (1) the existing "all or virtually all" standard; (2) a "percentage content" standard; and (3) the "substantial transformation" standard. No consensus was reached at the workshop on the preferred option for the FTC to adopt as its standard. In light of all written comments and information presented at the workshop, including the various consumer surveys, IEMCA firmly believes that option (3) substantial transformation provides the most appropriate standard for the FTC to apply regarding unqualified "Made in USA" claims. The FTC should adopt the substantial transformation rule as a "safe harbor" upon which producers and marketers can rely in justifying their domestic origin claims.
A.The Commission Should Adopt the Substantial Transformation Standard for "Made in USA" Claims
IEMCA strongly urges the Commission to adopt the substantial transformation rule used by Customs for determining the country of origin of imported products. Adoption of the substantial transformation standard would provide the most appropriate means of satisfying consumer expectations that a Made in . . . marking really identifies where the product was made, and it would avoid the problems posed by the alternative options discussed at the workshop. The substantial transformation standard is based on Customs' test for the marking of foreign goods. It occurs when, as a result of processes performed in a particular country, a new article emerges with a new name, use, and character.
While the results of various consumer surveys presented at the workshop failed to reveal a universal consumer attitude about the meaning of "Made in USA," at least one simple perception was evident: consumers feel that "Made in USA" means that the product was "made" domestically. Nothing in the survey results indicate that consumers typically understand this to mean that 100% of the content or labor that went into producing all components of the good was domestic. Rather, as elucidated by several participants in the workshop, consumers, by and large, view the "Made in . . . language to indicate where the ultimate product came into being. Further, there is no evidence whatsoever that consumers understand a "Made in . . . " language to mean something different for domestic and foreign-made goods. Thus, "Made in USA" should be equally representative of the origin of a good as, e.g., "Made in Bolivia." Foreign origin marking requirements, imposed by Customs, are based on a "substantial transformation" test, not on an "all or virtually all" test or another alternative.
Use of the substantial transformation rule would ensure consistency for all country of origin markings on products sold in U.S. commerce. A Made in COUNTRY X claim should represent the origin of the underlying product to consumers in a consistent manner, whether the relevant country is the United States or any other country. The long-standing Customs marking rule of origin, based on substantial transformation, applies to the country of origin markings on all imports. Consumers should not be faced with a conflicting origin rule for products marked "Made in USA." The substantial transformation rule is understandable and usable, and there is a body of customs law and precedent for producers of virtually every product to follow. Further, IEMCA believes this standard best represents to consumers where the product "came into being."
IEMCA, from its initial submission in January, has promoted consistency between the FTC and Customs and foreign customs authorities. The "Made in USA" marking policy unquestionably constitutes a rule of origin and, as such, it should be made as consistent as possible with other rules of origin. In its supplemental questions in the April 26 notice, the FTC raised a series of issues about adoption of a substantial transformation standard. The FTC asked whether it should consider adopting Customs' existing general substantial transformation rule or the NAFTA "tariff classification shift" rule. The Commission also asked whether, if it adopts one approach and then Customs changes its policy, the FTC should then also change its policy. The Commission also asked what it should do if it chooses a substantial transformation option and then the World Trade Organization (WTO) establishes a different substantial transformation standard than our Congress adopts. IEMCA believes there is a simple solution to these questions: the FTC should adopt Customs' generally applied substantial transformation test and allow that any evolvement of that test will apply for FTC purposes, as well as for Customs purposes.
Customs currently applies a single country of origin marking rule based on substantial transformation for all products other than those originating in a NAFTA country. While the NAFTA marking rules, which utilize a "tariff shift" approach for determining whether a substantial transformation has occurred, have been proposed for application to all U.S. imports, that rule has not yet been (and may never be) adopted by Customs. If that rule is adopted, then that rule will be the Customs rule of substantial transformation. Thus, a substantial transformation-based policy adopted by the FTC will remain in force; the underlying application of the substantial transformation test will evolve with the meaning of that term as applied for all Customs rule of origin purposes. The FTC need not worry about changing its policy in the future unless it somehow conflicts with the Customs-applied marking rules of origin. Thus, if the WTO establishes a new substantial transformation test that Congress and Customs adopt, that new test will be the substantial transformation standard, and the FTC will not need to change its basic policy.
In fact, such a result would be IEMCA's ultimate hope. The primary purpose of the Uruguay Round Agreement on Rules of Origin under the WTO was the international harmonization of rules of origin. As stated by the U.S. International Trade Commission, the Agreement is designed to harmonize and clarify nonpreferential rules of origin for goods in trade on the basis of the substantial transformation test; achieve discipline in the rules' administration; and provide a framework for notification, review, consultation, and dispute settlement. These harmonized rules are intended to make country-of-origin determinations impartial, predictable, transparent, consistent, and neutral, and to avoid restrictive or distortive effects on international trade." International Harmonization of Customs Rules of Origin; Inv. No. 332-360, 60 Fed. Reg. 32339 (June 21, 1995).
B. The FTC Should Drop the Existing "All or Virtually All" Standard
The existing "all or virtually all" standard has essentially amounted to a 100% domestic test - - a test which electronics producers cannot pass, even when they clearly "make" their products in the United States. Electronic products manufacturers, whether U.S.- or foreign-owned, do not make their decisions as to which component piece parts to use in their production based on the "nationality" of those piece parts. Production of electronics products today depends on the use of components from multiple countries of origin. Thus, the "all or virtually all" standard effectively prohibits electronics producers in the United States from indicating the U.S. origin of their products when sold in the U.S. market. Nevertheless, the same producers of the same electronic products may be required to identify the U.S. origin when the products are sold in foreign markets.
Adopting a "one step back" rule, whereby marketers would be required to look only one step back in the manufacturing process, might render domestic origin claims more attainable for some electronics producers in the United States. However, it would do so only sporadically, allowing the claim to producers of some products for which there may be an active U.S. component/subassembly industry, while denying the claim to producers of products for which components and/or subassemblies are not made domestically. Moreover, a "one step back" rule would have little, if any, meaning for consumers, who focus on where the ultimate product is "made."
C. The Commission Should Not Switch to a Percentage Content Standard
For reasons similar to those stated above, IEMCA opposes adoption of a percentage content standard. As described in the April 26 notice, such a standard would be a cost-based or value- added standard that would focus on the percent of domestic content and labor of a particular good. A "Made in USA" marking would be allowed if the product was made, for example, with at least 50% domestic parts and labor. 61 Fed. Reg. at 18601. The consumer survey results in no way demonstrated that consumers understand "Made in USA" to mean that some specific minimum percentage of the production costs are domestic. There is no indication that buyers of electronic products focus on the specific percentage of domestic or foreign content in their understanding of a Made in . . . marking. In fact, any attempt by consumers to do so would be in vain, because foreign country of origin markings required by Customs based on the substantial transformation test would routinely fail a percentage content standard.
An equally important reason for opposing a percentage content standard is the complexity such a rule would impose on producers and marketers of goods. A percentage content standard, no matter what specific percentage is chosen, poses an accounting nightmare for producers of sophisticated electronic products, with components and production costs from multiple sources. A cost-of-production or value added requirement would add a burdensome and complicated new layer to the rules of origin requirements already faced by IEMCA members. Moreover, as suggested by the Commission's own questions in the April 26 notice (61 Fed. Reg. 18602), cost fluctuations for components in electronic products would render such a system completely inconsistent and unworkable; a product might pass, e.g., a 50% content test one day and, after component cost fluctuations, fail the same test on another day, even though the exact same product using the exact same foreign and domestic inputs is "made" in the United States.
Based on all information provided to the Commission in this comprehensive review, there can be no doubt that the existing "all or virtually all" standard for unqualified "Made in USA" claims fails to provide a reasonable basis for U.S. producers to declare the U.S. origin of their products. The current policy confuses consumers with a rule of origin for U.S. products that conflicts with the rule of origin applied to all imports. The FTC must revise and relax the standard. For the reasons discussed above, in its January 22 comments, and at the March 26-27 workshop, IEMCA strongly believes that the substantial transformation standard provides the most appropriate option for the FTC to adopt in place of the current unusable policy. IEMCA urges the FTC to give full consideration to the value of making its rule consistent with other rules of origin, while at the same time providing consumers with the best indication of where products are actually "made."