FTC: Made In The USA Comments Concerning Electronic Industries Association ("EIA") and the Consumer Electronics Manufacturers Association ("CEMA")--P894219
FEDERAL TRADE COMMISSION
Washington, D.C. 20580
In the Matter of
Request for Public Comment on Proposed Guides for the Use of U.S. Origin Claims in Product Advertising and Labeling
"Made in USA Policy Comment"
COMMENTS OF THE
The following comments are submitted on behalf of the Electronic Industries Association ("EIA") and the Consumer Electronics Manufacturers Association ("CEMA"), a sector of EIA, in response to the Commission's request for public comment on its Proposed Guides for the Use of U.S. Origin Claims, announced in the Federal Register on May 7, 1997.
EIA ("EIA" hereafter includes CEMA) has participated fully in these Federal Trade Commission proceedings and appeared at the Commission's March 1996 "Made in USA" Workshop. The comments which follow represent a consensus developed from many electronics companies with differing points of view. EIA and its members have a significant interest in the outcome of the Commission's review of "Made in USA" and other U.S. origin claims in product advertising and labeling.
EIA's 1000-plus member companies represent every major sector of electronics, including components, consumer electronics, electronic information, industrial electronics, government electronics, and telecommunications. These companies contributed to the more than $123 billion in U.S. electronics exports in 1996. Overall, the electronic industries generated more than $422 billion in factory sales in 1996, and more than 1.7 million Americans in over 16,000 establishments make their livelihood in the electronic industries.
CEMA, a sector of EIA, is the principal U.S. trade association of the consumer electronics industry. The 400 CEMA members, ranging from large corporations to small businesses, have over 700 manufacturing facilities throughout the United States. CEMA members design, manufacture, export, distribute and sell a wide variety of consumer electronics equipment, including: television receivers; personal computers; video cassette recorders (VCRs); audio speakers and systems; home office equipment; cellular telephones; and a myriad of new electronic devices being developed and brought to market. This year, U.S. consumers will spend almost $1,000 per household on consumer electronics.
EIA appreciates the Commission's diligent, comprehensive review of "Made in USA" and other U.S. origin claims and congratulates the Commission on moving to a more realistic approach to "Made in USA" labeling. The Proposed Guides for the Use of U.S. Origin Claims ("Proposed Guides" or "Guides") give consideration to many issues of concern to the U.S. electronics industry. By establishing more realistic measures, the Commission will encourage U.S. production of the electronic products used by Americans.
To better reflect consumers' expectations and the nature of the typical electronics manufacturing process, EIA believes that certain provisions in the Guides should be modified. Consumers expectations, other country-of-origin standards, and even the plain dictionary meaning of the words dictate that the test for "Made in USA" should turn on whether the predominant portion of the process of manufacturing that particular product occurs in the U.S.
While EIA strongly supports the Commission's approach in providing manufacturers with two "safe harbors" for unqualified claims, the proposed safe harbors focus too much on the origin of raw parts and too little on the process of actually making the product. EIA believes that the first safe harbor properly recognizes that a product should be considered made in the U.S. when it is created in the U.S. from components that are primarily, but not wholly, of U.S. origin. Unfortunately, this safe harbor relies on a content value test that traces back to the raw elements and basic supplies that go into parts that then go into components. This is an inappropriate method to use for complex manufacturing processes such as those of the electronics industry. Any test for parts content should instead look only one generation or "step" back in the manufacturing process.
The second safe harbor properly focuses on the actual process of creating the product, but may be unduly restrictive, depending upon the meaning of the term "significant." The second safe harbor should make clear that the test is met when there are two substantial transformation steps in the U.S. and the first step creates a majority of the major components used in the second step. In the case of most electronics products, the major components are the electronic subassemblies that are the central functioning elements of the product. Thus, the key factor in determining whether an electronics product assembled in the United States is "Made in the USA" should be whether most of the electronic subassemblies are made in the U.S. This will also allow for clearer, more consistent application of the Guides, and it will allow products created in the U.S. to be identified to consumers.
EIA and CEMA Comments on Proposed Guides
Set forth below are EIA and CEMA comments on the Commission's analysis.
Comments on Consumer Perception Analysis
EIA in its initial comments recommended that, if a U.S. electronics producer uses primarily U.S.-built subassemblies and performs the remaining manufacturing steps in the U.S., its products should be eligible for a "Made in USA" label, whatever the source of the basic electronic and mechanical parts used to build those subassemblies. EIA explained that such a standard, applied properly, would meet the expectations of consumers with regard to "Made in USA" labels and advertising. We believe that position is supported by the studies presented to the FTC, by testimony at the workshop, and by most of the Commission's own conclusions in its Proposed Guides.
The Commission's proper role is to prevent sellers from making insupportable claims about where their products are "made," not to endorse political efforts to give "Made in USA" an unnatural meaning. A producer that says its product is made here should be required to show simply that the statement is true within the normal meaning of those words. Many parties seeking an overly strict standard are not promoting a customary meaning of the word "made," but rather an extreme meaning designed to promote certain goals. Bread "made on the premises" does not mean that the wheat was grown there; jewelry "made by handicapped workers" does not mean that the gems were mined by the handicapped workers; and an imported radio "Made in Japan" does not mean it is made wholly of Japanese parts. Goal-oriented arguments that "made" means much more when it refers to U.S. manufacturing should be rejected by the Commission.
Absent evidence to the contrary, the test for whether a product is "Made in USA" should comport with the plain meaning of the word "made." That meaning is easily found in any dictionary(1) or thesaurus(2). The test should be based on whether the normal manufacturing process for that particular product occurs predominantly in the U.S. and is completed in the U.S. If a producer starts with the basic materials, sub-components, or other inputs that are typically considered the raw materials for product X, and uses these inputs to manufacture product X in the United States, then product X by any appropriate definition should be considered "Made in USA," whatever the source of the basic inputs. There was considerable evidence introduced in the form of consumer perception studies that showed that the consumers inherently and basically believe that "Made in USA" means what the words themselves convey; that is, that the product was manufactured, brought into being, created in the U.S. (Guides at 25036) Thus, the consumers (not surprisingly) agree that "Made in USA" means that the normal process of manufacturing takes place in the U.S. This should therefore be the heart of any "Made in USA" test.
Based on responses to targeted "content" questions in the second part of those studies, the Commission states that the basic consumer understanding of "Made in USA" is not limited to the process of creating the product but also has some expectations with regard to the origin of the parts used. Even if the Commission's interpretation of this portion of the studies is correct, however, it is not a basis for discounting the consumers' initial basic understanding of "Made in USA." Rather, the two portions of responses should be read together. The best way to do this is to interpret the consumers' responses to these "content" questions in the context of their more elementary belief that the test should turn on the process of "making" the product . Thus, responses with regard to parts content should be interpreted to pertain to the parts that are created as part of the normal process of making that particular product, not to raw materials or basic multi-use piece parts that are not created as part of that process.
Comments on Consistency with Other Statutory and Regulatory Requirements Analysis
The Commission in its Proposed Guides evaluates other existing tests for country of origin. The Commission considers the Buy American Act standard, and also similar tests in other countries, as well as NAFTA. These tests vary, but they generally require that final substantial transformation and a substantial portion of the content one step back be domestic. While the Commission rejects these as models on the ground that these tests are designed to achieve different goals than the Commission, this is not necessarily the case. For example, the Buy American Act is certainly designed to support U.S. manufacturers, and to ensure that the government is getting high quality goods. These are exactly the two goals that the Commission found that consumers were seeking in buying "Made in USA" products. Thus, the Buy American test is a legitimate guide for the Commission based on its purpose. Similarly, the NAFTA preference standard is designed to ensure that the product in question is truly the product of a NAFTA country.
For any product that has a multi-phase production process, the Buy American, NAFTA and similar country-of-origin tests tend to approve those products that are produced in that country from basic materials (whatever their origin) through the normal production phases to the final product. Even though some of the tests are nominally content tests, for the multi-step manufacturing of electronics products, they focus on the origin of the electronic subassemblies used in the final production step (that have themselves been created from smaller parts) and thus are part of the overall process of producing the final product. These tests do not look at the origin of the basic piece parts or raw materials used to make those electronic subassemblies. If the Commission adopts a content test of some kind, it should be similar in function to these existing tests; that is, a test that is designed to be a surrogate for a manufacturing process test. That process is essentially the creation --the "making"-- of the subassemblies, and from the subassemblies, the creation --the making-- of the final product.
Comments on First Proposed Safe Harbor: 75 Percent Content Test
In the Proposed Guides, the FTC has offered one safe harbor where U.S. manufacturing costs are at least 75 percent of total manufacturing costs and the product was last substantially transformed in the U.S. Under the Commission's proposal, in order to calculate this 75 percent of costs, a U.S. manufacturer would have to trace back past the source of the components used to create the product and determine the source of the sub-parts and other inputs used to make those components. Then, if there were materials from which those subparts were made, the manufacturer would have to trace where those materials were created. As explained above, it is more appropriate under the Commission's mandate, more consistent with consumer views, and more consistent with all other tests for true manufacture of the product that any such content analysis should use a "one-step-back" approach. This approach looks at the origin of the subassemblies used in the final manufacture of the product.
A one-step-back approach is consistent with basic consumer views that "Made in USA" means that the product is manufactured or created here. The initial step in making a product is the transformation of basic raw materials or parts into separate product components or subassemblies. For a bike, it is the creation of products such as the frame, wheels, handlebars, gears, brakes, pedals and seat; or for a refrigerator, it is the creation of a motor, compressor, coils, frame and shelves. Any book on bicycle manufacturing or refrigerator manufacturing would cover these steps, but it would not cover steel-making or rubber-making. Thus, if a content test focuses on where these one-step-back subassemblies are made, it will properly reflect where the final product is "made," because the production of these subassemblies and their subsequent manufacture into a bike or a refrigerator is what the bike or refrigerator industry does; it is how the product is "made."
In the case of an electronics product, the one-step-back approach would look back primarily to where the electronic subassemblies were created. These subassemblies represent the basic functional elements and a substantial majority of the value of an electronics product. They are generally created when raw "piece parts," (for example, transistors, capacitors, integrated circuits, and similar small parts) are connected to circuitry ("populated") on a blank printed circuit board or some other subassembly platform to create, for example, a logic board, an audio module, or a data processing subassembly. Through this process, piece parts with discrete identifiable characteristics (e.g., 12 capacitors, 8 transistors, 2 memory chips, and an oscillator) are transformed into more complex products with very different characteristics (e.g., a complex printed circuit board subassembly).
While the Commission has proposed a 75 percent content test, EIA continues to believe that the content percentage should be in the range of 50 percent. This is the test in several of the other country-of-origin tests cited by the Commission, such as the Buy American test, and is higher than some country of origin tests designed to ensure true production in a given country. As the Buy American test has recognized, a 50 percent-of-components standard combined with a final manufacturing step requirement is sufficient to ensure that the predominant part of the overall production process occurs in the U.S. Whatever percentage is used, it should reflect the fact that the origin of the raw materials or piece parts is less important relative to the question of where the product is actually "made" than whether the basic manufacturing steps occur primarily in the United States.
In keeping with this focus, in any content test, all costs pertaining to the process of "making" the product, from inception through engineering, design, development, and manufacture of the product (including all factory overheads and management costs), should be included to the greatest extent possible in any content calculation. Indeed, these are the costs that are the best indicators of where the designers, engineers, assemblers, and other workers who create that product are, where the "industry" is, and thus where the product is "made." Costs of basic materials and parts from which the products are created should not be considered; they do not show where a product has been created. Similarly, costs incurred after the product is completed, tested and packaged may not be appropriate to determine where a product is made.
In order to take account of fluctuations in content, the Commission has proposed an averaging approach. The fact that such averaging would be necessary at all emphasizes the burdensome and inappropriate nature of the "tracing back" content approach proposed by the Commission. It points up the fact that not only would the manufacturer have to keep constant records and values for all the parts that it purchased, but also would have to compel its suppliers to generate and report such information for their purchases and costs, to be updated each time a supplier changed one of its own sub-parts suppliers or processes. It would be an accounting nightmare. In the electronics industry, any content percentage that includes the basic electronic piece parts costs would fluctuate daily, as particular small parts were received from different suppliers and plugged into the manufacturing line. By contrast, a content test that looked "one-step-back" to where the subassemblies and other final components were created would not be subject to fluctuations as often because the change in origin of a few piece parts would not change the origin of the major subassemblies produced using those piece parts.
Comments on Second Proposed Safe Harbor: Double Substantial Transformation
The second safe harbor proposed by the Commission is where the product is last "substantially transformed" in the U.S. and all significant inputs into the final product were last substantially transformed in the U.S. EIA supports the second safe harbor proposed by the Commission, with one modification. The Commission should modify or clarify the concept of all "significant" components with a requirement that the final components transformed in the U.S. constitute most of the total component value, or, for electronics products, that the primary electronic subassemblies be produced in the U.S.
EIA has previously shown that the test should require that a simple majority of the final inputs value be of U.S. origin, or should turn on where the principle subassemblies are made. Such an approach has been found appropriate and realistic in the Buy American Act, as discussed above, as well as the NAFTA test. If the Commission is not willing to use either of these methods, it should at least provide that if a product is manufactured (substantially transformed) in the U.S., and 70 percent of the final components from which it is made (in terms of value) were themselves manufactured (substantially transformed) in the U.S., then the product is made in the U.S. Support for a 70 percent double substantial transformation test is found within the Commission's own analysis of consumer expectations. Based on the results of the consumer studies, the Commission concludes that a substantial majority of consumers believe that, so long as a product is substantially transformed in the U.S. and has no more than 30 percent foreign inputs, it is a product that is made in the U.S. (Guides at 25041) The Commission also finds that where a product has 75 percent overall U.S. content, it has "a relatively minor amount of foreign content." (id.) Such a figure would reflect at most a 70 percent US-input content, given that the full cost of final U.S. production would be part of the 75 percent US total content figure.
There is no established basis in the studies to judge what consumers meant when they responded to targeted study questions regarding parts "content." However, it is clear that the manner in which the questions were asked was directed at content only one step back. For example, Question 2 of the Commission's 1995 study states: "This [product] is assembled in the United States using U.S. and foreign parts" (emphasis added). Clearly, the parts that go into the final assembly of the product are the one-step-back parts; in the case of electronics, these are primarily electronic subassemblies. Based on consumers' first reaction to what "Made in" means, and in the absence of other indicia, the consumer would view as a U.S. subassembly any subassembly that came into being in the U.S., rather than in a foreign country. Therefore, when the consumers responded that 70 percent of the inputs used in assembly of the product should be U.S., the best interpretation is that they meant that 70 percent of the inputs used when the product was ultimately assembled were themselves created in the U.S.
This comports with the consumers' normal first reaction to what "Made in" means, as evidenced by the consumer surveys discussed above. At first instance, the consumers thought that "made" simply meant manufactured, brought into being, etc. The basic understanding of consumers answering the FTC survey questions would be that an input was U.S. if it came into being in the U.S. Therefore, the Commission's conclusion that consumer expectations that a product with 70 percent US. inputs qualifies for a "Made in USA" label would be met if 70 percent or more of the components used in the final substantial transformation of the product are themselves substantially transformed in the U.S.
This same ultimate result is attained by establishing what level of foreign content should be deemed "significant" under the Commission's proposed second safe harbor language. The Commission's proposed safe harbor requires all "significant" inputs in the second substantial transformation to be substantially transformed in the U.S. The significant inputs to most electronics products are the electronic subassemblies. Thus, this second safe harbor should turn on the country of origin of these components. Moreover, "significant" in this context must mean significant to the consumer in determining the origin of the product. For these purposes, the Commission itself has concluded that less than 30 percent foreign content is not sufficiently significant in the minds of consumers to make a "Made in USA" label inappropriate. (Guides at 25041) Thus, if the Commission will not accept the majority of final components value test urged by EIA, the Commission should at least establish this 70 percent threshold, pursuant to its own conclusions, as the proper test for whether the use of non-U.S. components are "significant" under the second safe harbor. For electronics products, the Commission's focus should be on electronic subassemblies.
In Example No. 1 presented in the Guides for the Commission's second safe harbor (Guides at 25080), the Commission uses a tape recorder as an example. This example properly focuses on electronic subassemblies and establishes a proper approach for "Made in USA" marking for electronics products if it is modified in the manner described above. The Example 1 statement that no significant non-US parts are used in the final transformation of the tape recorder should mean that the principle subassemblies are U.S. or, alternatively, that non-U.S. parts together do not represent more than 50 percent, or alternatively, 30 percent, of the total components used in the final substantial transformation. EIA believes, in any case, that if the principal circuit boards are made in the U.S., and the final manufacturing of the tape recorder is in the U.S., then the product should be considered a U.S.-made tape recorder, even if some foreign inputs are included in the final manufacturing stage.
The creation of key subassemblies and their manufacture into a final product would constitute the normal full process of making a consumer electronics product such as a tape recorder. It is what a producer of a tape recorder does; he does not make transistors or plastics. If a U.S. factory starts with basic piece parts, builds the substantial majority of its dedicated major subassembly components in the U.S. (or has them built here), and then creates the product in the U.S. (using those major subassemblies and additional parts from various sources), then the U.S. producer should, under a proper "Made in USA" test, be able to conclude without any complicated accounting exercise that the product can be labeled "Made in USA". A consumer who walked through that U.S. producer's factory would certainly conclude the same thing.
Comments on "Origin: USA" Labels
For a lesser US-origin marking to be universally effective --reducing the significant and growing international customs country-of-origin marking burden for U.S. producers who sell abroad and in the U.S.-- the lesser marking must be adequate to meet international customs standards as to wording, placement and size. Wording is the major issue. EIA had proposed the phrase "Product of U.S." because it is believed to be generally accepted by international customs authorities. Furthermore, from a consumer's point of view, "Product of U.S." is unlikely to create the same expectations as "Made in USA". (Guides at 25046, footnote 220) EIA also stated that if some even less evocative marking, such as "Origin USA," were found to be acceptable as an origin marking under foreign customs standards, such a marking could be used instead.
The Commission has proposed as a lesser product-origin marking "Origin USA." The Guides propose that manufacturers could use it on any product that is substantially transformed in the U.S. and is exported under foreign customs country-of-origin marking rules that require a U.S.-origin marking. The Commission requests comments on whether this label will be adequate for foreign customs requirements. While such a label would be adequate for some countries, EIA does not know the answer with respect to all countries but expects that the U.S. Customs Service or some other agency would have this information.
If the answer is "yes," EIA does not oppose this alternative label. However, the Commission also seeks to impose requirements for package and other markings qualifying the origin of the product when it is sold in the U.S. For small electronics goods, size constraints make qualified claims virtually impossible in the standard methods of labeling. Additional packaging or marking requirements would also impose an unnecessary burden and cost on U.S. electronics manufacturers which is not imposed on competing foreign manufacturers, who could consistently mark their products "Made in X." Thus, U.S. products will bear costs that competing foreign products will not carry. Rather than impose this burden on U.S. manufacturers, the public would be better served if the Commission would ensure that customers were not misled by such a lesser mark through education concerning the limited meaning of such marking, and through prohibitions on U.S.-origin advertising claims to consumers.
THE ELECTRONIC INDUSTRIES ASSOCIATION
1. The first dictionary definition of "make" is "to bring into being; specif. (a) to form or shape by putting parts or ingredients together." (Webster's New World Dictionary, William Collins & World Publishing, 1968) "Make" is also defined as "to bring into being by forming, shaping, or altering material." (Merriam-Webster's Collegiate Dictionary, Tenth Edition, Merriam-Webster, Incorporated, 1995) Thus, making is a process, not a content test.
2. In Roget's College Thesaurus, "make" has as its first two synonyms: "create" and "produce." (Morehead, Grosset and Dunlap, 1982).