FTC: Made In The USA Comments Concerning Footwear Industries of America, Inc.--P894219
September 18, 1997
Office of the Secretary
Re: "Made in USA Policy Comment," FTC File No. P894219
On behalf of Footwear Industries of America, Inc. ("FIA"), I submit this statement in response to the Federal Trade Commission's request for public comment on the proposed guides for the use of U.S. origin claims. 62 Fed. Reg. 25,020 (1997). FIA is the national nonprofit trade association representing U.S. manufacturers and distributors of nonrubber footwear, and their suppliers.
At the outset, FIA wishes to commend the FTC for its comprehensive review of the standard for evaluating "Made in USA" claims and for the substantial modifications it proposes to its current policy. FIA is pleased that the Commission recognizes the "vast changes in the international economy since the Commission first required that goods labeled `Made in USA' be wholly domestic." Id. at 25,040. As the Commission accurately noted, "[i]ncreasing globalization of production suggests that a requirement that even minor parts be all made in the United States is outdated and inflexible." Id. The FTC also properly acknowledges consumer awareness of this phenomena. Id.
FIA therefore strongly supports the FTC's abandonment of its current policy requiring that products be all or virtually all American-made before bearing U.S. origin labelling. In addition, FIA endorses the proposed standard which permits a marketer to make an unqualified "Made in USA" claim if the product is substantially all made in the United States. Id. at 25,044. Such a standard will provide the consumer with necessary information about domestic content and give American companies needed flexibility for their sourcing requirements.
FIA further approves, in principle, the Commission's two alternative safe harbors for meeting the "substantially all" standard. As FIA suggested in its prior submissions, a percentage content test will provide American manufacturers with a "bright line" threshold that will enable companies to readily determine their compliance with the FTC's enforcement views. In addition, the 75 percent threshold is a much more realistic requirement for domestic content in today's global economy. In quantifying U.S. content, FIA agrees with the FTC's proposal to include manufacturing overhead in the calculation and count U.S. materials and inputs as U.S. costs, even if they have been assembled or further processed abroad.
The Commission must also be praised for modifying the U.S. Customs Service's "substantial transformation" standard for use in this context. In its prior submissions, FIA asked the FTC not to adopt the "substantial transformation" test as it currently applied by Customs because it would not ensure that a product contained significant domestic content. FIA was concerned that products assembled in the United States substantially, or even entirely, from imported components could meet the criteria of that standard. However, by requiring that both the significant inputs and the end product be substantially transformed in the United States before a U.S.-origin claim can be made (i.e., by insisting on a double substantial transformation), the FTC has addressed this problem and ensured that only products with substantial domestic processing can be labelled "Made in USA."
However, while FIA generally applauds the FTC's efforts to deal with this complicated issue, FIA believes that the proposed guides must be modified further. Of particular concern is the FTC's proposed 75 percent threshold for its percentage content safe harbor. While a vast improvement over the Commission's current virtually 100 percent requirement, FIA believes that the evidence in the record justifies a lower threshold. As indicated below, FIA urges the Commission to adopt a majority U.S. content test (i.e., more than 50 percent), which FIA has advocated throughout this proceeding. Our views on this and other remaining issues are set forth below.
1. The FTC Should Permit An Unqualified "Made in USA" Claim if a Product's Domestic Content Constitutes a Majority of Total Costs.
The FTC has proposed that unqualified U.S. origin claims be authorized if a product contains at least 75 percent U.S. content. Id. However, this threshold is too high because a product that contains more than 50 percent U.S. content clearly qualifies as "substantially all" made in the United States.
a. Other Government Agencies Recognize that a Product With a Majority U.S. Content Has Sufficient Domestic Origin.
The FTC misunderstands the relevance of the Buy American Act, 41 U.S.C. § 10a, and the Commerce Department's Market Development Cooperator Program, 59 Fed. Reg. 21,750 (1994), to its current inquiry. These programs are important because they reflect the views of other federal agencies that products with more than 50 percent U.S. content are sufficiently American to qualify for substantial federal benefits.
The Buy American Act gives preference in the procurement process to goods that are "substantially all" made in the United States. 41 U.S.C. § 10a. To qualify for this preference, U.S. components must exceed 50 percent of the cost of the product's total components. 48 C.F.R. §§ 25.101, 25.102(a) (1996). Significantly, the Buy American Act and the FTC's proposed guides both use a "substantially all" standard; yet, the FTC plans to require a minimum of 75 percent U.S. content -- a threshold that far exceeds the 50 percent threshold in the procurement process.
Similarly, the Commerce Department will provide export assistance to marketers of U.S. goods. 62 Fed. Reg. 29,710 (1997). For a good to be considered "American" for these purposes, it must be produced in the United States. Goods are considered produced here if they have "substantial inputs of materials and labor originating in the United States"; in Commerce's view, substantial inputs are defined as at least 50 percent of the good's total value. Id. Again, for the purpose of obtaining a government benefit (in this case, export assistance), domestic content need only meet a 50 percent threshold.
Thus, while the FTC need not adopt a majority U.S. content test merely for consistency with other federal policies, it should acknowledge the substantive determination inherent in these standards that a product with more than 50 percent U.S. content is substantially all made in the United States. If a product with a majority U.S. content has sufficient domestic origin for the U.S. government's procurement rules (under which billions of dollars are expended) and for receipt of government's export promotional dollars, it clearly should be sufficient for the FTC's labelling requirements.
b. Other Countries Use A Majority Domestic Content Standard For Consumer Labelling Claims.
The FTC also dismisses the Buy American Act because it "does not relate in any way to the labeling of products, and its standard is not based on consumer perceptions." 62 Fed. Reg. at 25,040. However, if the FTC needs consumer labelling laws per se to justify a 50 percent threshold, it need only look to the domestic origin requirements for consumer product claims in Canada and Switzerland.
As the Commission acknowledged, these countries both specify that products have their last substantial production operation "in" country and a majority of the product's significant costs be of domestic origin. 62 Fed. Reg. 25,039. Canada requires that the product contain at least 51 percent Canadian materials or direct labor; Switzerland requires the product contain at least 50 percent Swiss material and labor. Id.
Thus, the FTC has proposed a safe harbor that is actually modelled after these countries' standards. They all have a final assembly requirement and specify a minimum domestic content level. However, the FTC's percentage content is 75 percent -- well above the 50-51 percent thresholds of these two countries. Clearly, neither Canada nor Switzerland believe that their consumers will be deceived if an origin claim accompanies a product with this substantial amount of domestic content. Given that the FTC's safe harbor already reflects the Canadian/Swiss models for such product claims, it should also incorporate their majority domestic content threshold.
c. U.S. Consumers Will Not Be Deceived If a Majority U.S. Content Threshold is Required.
Moreover, the FTC will not do a disservice to U.S. consumers if it modifies its percentage content requirement as FIA recommends.
First, as several studies indicated, country of origin is not as important to consumers as other factors, such as price, design and style. 62 Fed. Reg. at 25,035. In fact, none of the respondents in the study submitted by New Balance Athletic Shoe Company mentioned country of origin of the shoes' components when asked about factors considered in making shoe purchases. Id. Comfort, fit, durability, style and price were ranked above country of origin in consumers' decision-making process. Id.
Second, it is clear that consumers do not necessarily believe that a "Made in USA" claim means that the product was entirely produced here. Several studies found that consumers associate such claims with positive economic consequences for the United States. Id. at 25,036. Thus, in the New Balance study, the vast majority of consumers believed that a U.S.-origin claim meant that a product was "made" here, with the result that there were more jobs for Americans. The Commission's 1991 Copy Test corroborated these results, with the largest number of respondents (27 percent) stating that a "Made in USA" claim meant greater U.S. employment and an enhanced U.S. economy. Id.
But perhaps most significantly, consumers confirmed that a product with a majority U.S. content was sufficiently "American" to qualify for a "Made in USA" claim. Thus, in the New Balance study, the vast majority of consumers -- i.e., 85 percent of the respondents to the survey -- believed that a product produced by a U.S. company with more than 50 percent U.S. materials and components was made in the United States. Id. at 25,038. Significantly, only eight percent thought that it was not made here.(1)
In fact, even the Commission's own data do not support the 75 percent threshold proposed in the guides. As the FTC noted, 52 percent of respondents to its 1995 Attitude Survey agreed with a "Made in USA" claim when American production accounted for 70 percent of total production costs. Id. at 25,036. The percentage of respondents replying affirmatively increased to 67 percent when they were told that the product was assembled in the United States with 70 percent U.S. content. Id. at 25,036, 25,038. Thus, at a minimum, the record supports a 70 percent threshold, rather than the 75 percent contained in the proposed guides.
However, FIA firmly believes that a product with a majority of U.S. content has sufficient American value to warrant an unqualified "Made in USA" claim and urges the Commission to lower its percentage content standard accordingly.
2. The FTC Should Clarify its Guidance for Taking Foreign Content Into Account Under the Percentage Content Test.
In computing costs under the percentage content safe harbor, the Commission rejected a strict "one-step back" or "bright-line" approach, instead requiring companies "to look back far enough to account for any significant foreign content." Id. at 25,045. The FTC attempts to elucidate when a manufacturer must take into account the foreign content of purchased inputs by categorizing an end product as either "simple" or "complex." Id. at 25,049. For "simple" end products (or for end products that "undergo most of their processing by the final manufacturer"), the end product manufacturer will likely only have to look at the immediate inputs into the finished product (i.e., one step back). Id. In such cases, if an input undergoes its "last significant manufacturing step" in the United States, all of the component's costs may be counted as U.S. costs. Id. However, if the end product is "complex," the FTC states that the manufacturer may have to go two steps back and take into account the foreign content of some of its inputs. Id.
Unfortunately, the FTC's discussion of these distinctions does not provide useful guidance; in particular, it is not clear what qualifies as a "simple" or "complex" product. However, the examples that follow this text yield a better indication of when the Commission would permit a manufacturer to treat 100 percent of a component's costs as U.S. costs. As a prerequisite, the last significant manufacturing step for producing the input must be performed in the United States. If that occurs, it appears, on the basis of the Example 6 concerning wallets, that all of the input's costs may be treated as U.S. costs if the input represents an insignificant percent of the total cost of the end product, regardless of whether the input contains substantial foreign content. Id. at 25,050. In addition, where an input is significant in value, Example 5 concerning computers reflects the principle that all of the input's costs may still be treated as U.S. costs if the input's foreign content is known to be insignificant. Id. Finally, Example 1 concerning lawn mowers indicates that an end product manufacturer must quantify the foreign content of an input if the input constitutes a substantial percentage of the total cost of the end product and the input contains significant foreign content. Id. at 25,049.
Since the text preceding the examples does not provide useful guidance and the examples that follow seem to yield certain principles, FIA urges the Commission to clarify the language in the text so that it reflects the guidance contained in the examples.
3. The Requirements for Use of the Lesser Mark for Exports Should be Modified.
FIA appreciates the Commission's recognition of the problems involved with producing goods for both domestic and foreign markets. We therefore strongly support the use of a lesser mark, such as "Origin: USA," for these purposes.(2) However, FIA urges the Commission to eliminate its requirement that consumer goods disclose the existence of substantial foreign content through additional labelling, such as stickers or hangtags.
FIA objects to this requirement because labelling is a burdensome and expensive process. It not only interrupts the production process but involves an expenditure of scarce funds on the labels as well as the labor for affixing them to the article or its packaging. In fact, an additional label can increase the cost of a consumer good by as much as 50 cents per item.
We therefore suggest that the FTC eliminate this superfluous labelling requirement and permit a manufacturer exporting an item that does not meet the FTC's requirements for an unqualified U.S. origin claim to label the good with a marking that reads "Origin: USA (for export)." Such a mark would allow U.S. manufacturers to avoid the burden and expense of additional labelling while at the same time alert consumers that article is labelled for export purposes. In the alternative, manufacturers should be permitted to use the phrase "Origin: USA (with non-U.S. content)." Such a marking would also have the benefit of eliminating a second labelling requirement while providing the consumer with relevant information about their purchase.
* * *
In conclusion, FIA commends the Commission for re-evaluating a policy that was inflexible and outdated in today's global economy. We strongly support the proposed guides for allowing unqualified "Made in USA" claims if goods are substantially all made in the United States. While we endorse the percentage content and double substantial transformation safe harbors, we strongly urge the Commission to incorporate a majority U.S. content threshold under the percentage content test because it will ensure that a product has sufficient U.S. value to warrant a domestic origin claim. FIA appreciates the consideration of its views on this important issue.
Very truly yours,
Lauren R. Howard
1. 1/ Seven percent responded: "Don't know."
2. 2/ FIA has no information as to whether this designation would comply with foreign country of origin marking requirements.