FTC: Made In The USA Comments Concerning Dynacraft Industries, Inc.--P894219
August 11, 1997
Office of the Secretary
Re: Made in USA Policy Comment
Dear Mr. Secretary:
On behalf of Dynacraft Industries, Inc. ("Dynacraft"), a major importer of bicycles, we submit herewith six paper copies of written comments in response to the Commission's May 7, 1997 Federal Register notice (62 FR 25020). We also provide Dynacraft's comments on 3.5" disk, in WordPerfect version 5.1, formatted for DOS.
If you have any questions, please contact the undersigned.
Bruce M. Mitchell
BEFORE THE FEDERAL TRADE COMMISSION
"MADE IN U.S.A." CLAIMS IN PRODUCT LABELLING AND ADVERTISING
FTC File No. P894219
COMMENTS OF DYNACRAFT INDUSTRIES, INC. REGARDING
PROPOSED "MADE IN U.S.A." SAFE HARBOR GUIDELINES
August 11, 1997
COMMENTS OF DYNACRAFT INDUSTRIES, INC. IN RESPONSE TO
THE FTC'S PROPOSED "MADE IN U.S.A." GUIDELINES
These comments are submitted on behalf of Dynacraft Industries, Inc. ("Dynacraft"), a Massachusetts corporation engaged in importing and selling bicycles to mass merchandisers and discount retailers located throughout the United States. Dynacraft submits these comments in response to the request by the Federal Trade Commission ("FTC") for comments on its proposed guides for the use of U.S. origin claims. 62 Fed. Reg. 25020 (hereinafter, "FTC Notice").(1) These comments focus particularly on the FTC's first "safe harbor" proposal, which is to allow the unqualified use of any U.S. origin claim (e.g., "Made in U.S.A.") for "products whose U.S. manufacturing costs constitute 75% of total manufacturing costs and were last substantially transformed in the United States." FTC Notice at 25020. As discussed below, Dynacraft objects to the FTC's proposal to adopt this more lenient standard for the use of a "Made in U.S.A." advertising or labeling claim. Nevertheless, should the FTC decide to implement its proposal, Dynacraft urges the FTC to require "Made in U.S.A." claimants to prove that U.S. origin and foreign origin costs are fairly calculated.
A. "Made In U.S.A" Claims Should Be Defined By The Beliefs And Opinions Of U.S. Consumers
In the process of considering its proposed guidelines, the FTC should be mindful of the fundamental purpose of the "Made in U.S.A." claim. Unlike country of origin rules for tariff assessments or quota allocations, the "Made in U.S.A." label regulated by the FTC is purely a means of communicating an attribute of one's goods to consumers. See, e.g., FTC Notice at 25038. In essence, it is a way of advertising to the consumer what a claimant believes to be a desirable feature of a product. Thus, the yardstick for the FTC's "Made in U.S.A." policy should be the opinions and beliefs of the U.S. consumers.(2) If it is otherwise, then the "Made in U.S.A." claim becomes meaningless. The term must derive its meaning from the understanding of the average consumer because it is this understanding which gives the term its intrinsic value.
Furthermore, in order to preserve the commercial value of the "Made in U.S.A." claim, the term must be held to the highest possible standards. No harm is done if use of "Made in U.S.A" requires more U.S. content than some consumers believe is necessary. The potential for harm arises from devaluing the term by allowing its use in instances when a significant percentage of consumers feel it is inappropriate. If the FTC adopts a more liberal policy for "Made in U.S.A." claims, one which is contrary to the beliefs and opinions of a significant percentage of consumers, then consumers will rapidly come to feel that it is an empty statement. Consequently, they will have less of an incentive to seek out and purchase goods bearing a "Made in U.S.A." label. In turn, manufacturers will have less of an incentive to maintain sufficient U.S. content levels to make a "Made in U.S.A." claim because the claim will be less attractive to consumers.
In sum, by adopting a threshold for "Made in U.S.A." claims that is lower than many consumers expect or believe is appropriate, the FTC will undermine the very purpose for regulating the use of the claim. More marketers will be able to use "Made in U.S.A." claims without running afoul of the law, but the benefit derived from using the claim will be reduced. Consumers will become jaded to the use of the term, and its commercial value will diminish.(3)
B. The Consumer Survey Results Do Not Support The Creation Of More Lenient "Made In U.S.A." Claims
Given the undisputed purpose of a "Made in U.S.A." claim, the strongest support for whether or not the FTC should adopt a more lenient definition of this term is found in the results of the Gallup and Robinson Survey commissioned by the FTC to investigate consumers' interpretations and attitudes towards "Made in U.S.A." claims ("G&R Survey"). However, the results of the G&R survey clearly do not support the FTC's proposed guidelines.
One of the most disputed G&R Survey results is the response to the direct question "When you see the phrase 'Made in the U.S.A.' on a product label, what do you think that means?" In response to this one question, the majority of consumers, almost 61%, stated that this claim meant the product was made in the U.S.A. without any further elaboration or qualification. G&R Survey, p. 2 of Attitude Survey Results and Table 2 statistics.
The FTC has dismissed this survey result as a tautology used by consumers who "are likely unaware that there are various alternative constructs for evaluating 'Made in U.S.A.' claims." FTC Notice at 25037. Besides being less than complementary about the average consumer, this conclusion also directly conflicts with the FTC's belief that "consumers increasingly realize that products are made globally." FTC Notice at 25038.(4) If consumers are more cognizant of global production capabilities, then they also are more likely to appreciate that "Made in U.S.A." might have a meaning that differs from the plain language of the term.
Nonetheless, most consumers did ascribe a plain meaning to the term "Made in U.S.A." Therefore, a reasonable conclusion to draw from this survey result is that most consumers still believe that the use of the claim "Made in U.S.A." means that the product is literally made in the United States. Additionally, out of the consumers who felt it necessary to qualify the meaning of "Made in the U.S.A." the vast majority stated that the claim guarantees that all of the product is made in the United States.(5) Thus, while the meaning of the answers to this survey question may be debateable, it is certainly clear that this survey result does not show support for the FTC's proposed 75% safe harbor policy.(6)
The other data from the G&R Attitudes Survey also fails to support the FTC's proposed guidelines. Table 1 from the G&R Attitudes Survey shows that only 67% of the consumers surveyed would approve of a "Made in U.S.A." label for a product with 70% U.S. cost and assembled in the U.S. Out of this 67%, only 26% "strongly agreed" with the use of a "Made in U.S.A." claim, compared to 20% that strongly disagreed with the use of that claim. This 70% U.S. cost/U.S. assembly scenario most closely resembles the first safe harbor requirements proposed by the FTC, and may exceed those requirements in some situations (see discussion below). Yet, as the survey shows, a significant percentage of consumers would feel deceived if a product meeting these criteria bore the label "Made in U.S.A." In fact, the survey shows that a full 22% of the consumers polled would object to the use of the claim for a product with 90% U.S. cost and U.S. assembly, a threshold that far exceeds the FTC's proposed safe harbor requirements.
Given the results of the G&R Survey, it would be contrary to the FTC's fundamental mission to adopt a standard for the use of "Made in U.S.A." that does not meet the beliefs and expectations of the vast majority of consumers. As discussed above, adopting a "Made in U.S.A." policy that is more lenient than the clearly expressed beliefs of most all consumers will cause more harm than benefit.
C. If The 75% Safe Harbor Is Adopted, The FTC Should Ensure That U.S. Content Is Calculated In A Fair Manner
If the FTC does adopt its proposed 75% safe harbor, it must ensure that marketers calculate U.S. content in an accurate and objective fashion. The natural inclination will be for marketers to perform cost calculations in a manner that tips the scales towards U.S. content. Given the already shaky consumer support for the lower 75% U.S. content standard, the FTC must ensure that inflated U.S. content (or deflated foreign content) calculations do not further erode the integrity of the "Made in U.S.A." claim.
The following points are comments on how the FTC might avoid U.S. and foreign content comparisons that do not comport with the impressions or understanding of the average consumer.
1. A safe harbor claim must be based on actual manufacturing costs.
The FTC has stated that, rather than publishing an itemized list of specific costs which may be included or excluded in calculating 75% U.S. content, it will allow marketers to take into account all costs included in the "finished goods inventory cost" or "cost of goods sold" used for accounting purposes. FTC Notice at 25044. While these may be widely used accounting terms, it should also be noted that both terms are subject to interpretation and possible manipulation. Therefore, the FTC should ensure that marketers take the most objective and verifiable approach available when calculating U.S. content so that consumers are not deceived about the actual attributes of the product.
For example, the G&R Attitude Survey relied upon by the FTC, in which 67% of consumers agreed that a product with 70% U.S. content/ U.S. assembly could be labeled "Made in U.S.A.," simply asked consumers their opinion if "[t]he U.S. parts and the U.S. assembly together account for 70% of the total cost." G&R Attitude Survey at 1. This question does not mention manufacturing overheads that might be included in costs of goods sold or a finished goods inventory cost (e.g., depreciation on expensive, and possibly foreign-built, automated assembly equipment that is now being used in place of U.S. workers). Had the survey stated that the 70% U.S. content could include all costs that might possibly be incorporated into one of these accounting terms, then probably a much smaller percentage of consumers would have agreed with the "Made in U.S.A." claim based on the 70% content.
In light of this possibility, the FTC should ensure that U.S and foreign content are calculated using complete and accurate manufacturing costs -- regardless of how they are designated for accounting purposes. As an alternative to references to finished goods inventory costs and the cost of goods sold, we urge that the following guidelines for calculating U.S. and foreign costs be adopted. In calculating the U.S. portion of total manufacturing costs, the following costs should be considered:
2. The cost of foreign parts should include all costs related to buying and importing the items.
Obviously, the calculation of foreign content should include all costs directly associated with purchasing foreign parts and bringing them to the U.S. assembling facility. These costs would not be incurred but for the marketer's decision to buy the foreign parts, and the marketer certainly considered all such costs as part of the "price" of the component when deciding whether to source the component in the U.S. or abroad. Therefore, the marketer should not be allowed to ignore these costs in an effort to reduce its foreign content percentage and qualify for the 75% safe harbor provision.
While many costs related to purchasing foreign parts are easily recognized, some off-shore expenses may not be as apparent. For example, assume a bicycle manufacturer purchases tires in China and ships them to the U.S. by way of Hong Kong. Beyond the Hong Kong-to-U.S. freight expenses, U.S. duties and brokerage costs, this transaction will also entail freight and insurance costs for shipping the tires from China to Hong Kong. Additionally, the tires will be subject to a tax levy both upon entering and exiting the port of Hong Kong. There could also be a charge for a freight consolidator in Hong Kong. Furthermore, the U.S. buyer might well have paid a sales commission in the course of sourcing and purchasing the tires.
These additional expenses are all part of the acquisition cost of foreign materials or components and, hence, are properly classified as manufacturing costs; i.e, they are just as directly related to the cost of the tires as the money paid to the tire manufacturer. However, they may not be as apparent when viewing a P&L statement showing purchase prices for parts.(7) The foregoing costs could well be buried in the general overhead accounts of the company (SG&A) which are not included in inventory values or costs of goods sold. It is important that all such costs be included in comparison of U.S. and foreign value content because a marketer seeking to make a "Made in U.S.A." claim will undoubtedly include all possible U.S. manufacturing costs in its U.S. content calculation -- many of which would go far beyond the average consumer's understanding of "U.S. parts and labor." Thus, these costs must be included in an effort to keep the comparison of U.S. and foreign values on a level playing field.
3. U.S. overhead related to parts sourcing should be properly allocated between U.S. and foreign parts.
A marketer may wish to include all manufacturing overhead physically located in the U.S. as part of its U.S. value calculation, but some of these costs should be properly allocated over both U.S. and foreign inputs for safe harbor purposes. For example, a bicycle marketer seeking to use a "Made in U.S.A." claim may import dozens of components from all over the world. While it may control and monitor the purchases and shipments of these foreign components from its U.S. facilities, the costs incurred in these activities are more properly allocated to foreign content. These costs would include personnel needed to place purchase orders, track foreign shipments and monitor the quality of imports. Additional personnel might also be needed to travel overseas to maintain relationships with existing foreign vendors and research new sourcing options.
These costs are incurred as a direct result of the manufacturer's decision to source foreign rather than U.S. components, and the costs become greater as the company sources more parts abroad.(8) Surely, it would be contrary to the policy behind the safe harbor guidelines to allow a marketer to buy more foreign components and offset some of the costs of these foreign parts with the additional "U.S. manufacturing overhead" needed to oversee these foreign purchases -- thereby remaining within the 75% threshold.
The purpose of the FTC regulated "Made in U.S.A," claim is to protect consumers and to ensure that products using such a claim meet the beliefs and expectations of consumers. If the FTC adopts a "Made in U.S.A." policy that is more lenient than a significant percentage of consumers agree with, then it is essentially condoning the use of deceptive advertising. Adopting such a policy will also reduce the benefit of using a "Made in U.S.A." claim for all marketers.
As discussed above, the survey data indicates that a significant percentage of consumers do not agree with the 75% safe harbor provision.
If, however, the FTC still adopts the 75% safe harbor provision, then it must ensure that the comparisons of U.S. and foreign content are performed on a level playing field. It should not base the cost calculation on the general concepts of finished goods inventory or cost of goods sold, terms which are subject to relatively wide interpretations. Rather, the FTC should provide specific guidelines for U.S. and foreign content calculations, such as those suggested above.
1. Dynacraft was a participant in the FTC's public workshop conducted on March 26-27, 1996 to discuss proposed changes to the "Made in U.S.A." standard.
2. "In determining whether a claim is deceptive, the Commission must first determine what that representation (whether in an advertisement or label) expressly states or implies to consumers." FTC's Request For Public Comment in Preparation For Public Workshop Regarding "Made in USA" Claims, 60 Fed. Reg. 53922, 53924 (October 18, 1995).
3. However, if the FTC maintains a threshold for use of the claim that is at or higher than the beliefs of the vast majority of consumers, then the "Made in U.S.A." claim will retain its value. More marketers will have an incentive to invest in U.S. labor and production because the "Made in U.S.A." claim will be a more valuable asset.
4. See also FTC Notice at 25025, citing comments from Brown & Williamson Tobacco Co., Compaq Computer Corp., Caterpillar, Inc. and 3M stating that most consumers are aware of globalized production.
5. The percentage of consumers adding this qualification to the meaning of the term, 6.3%, is greater than the combined percentages of consumers believing that the term only means that the product is assembled in the U.S. (3.5%), partially made in the U.S. (0.6%), more than 50% made in the U.S. (1.3%), or assembled in the U.S. with more than 50% U.S. parts (0.6%). See Table 2 of G&R Attitude Survey. Thus, even among consumers who felt a need to go beyond the plain meaning of the term, the decisive majority qualified the definition in a manner that would not be met by the FTC's proposed guidelines.
6. The reluctance of many marketers to use a qualified made in USA claim (i.e., "contains 75% U.S. parts and labor") demonstrates that marketers do not believe that consumers think an unqualified "Made in U.S.A." claim presupposes some amount of foreign content. If marketers truly felt that this was a widely held belief among consumers, then there would not be such resistance to using a qualified claim. Thus, at some level, these marketers are seeking permission to misrepresent the nature of their products to consumers by obtaining a more lenient standard for unqualified "Made in U.S.A." claims. See "Comments on Proposed Made in USA Policy by the Attorneys General of Connecticut, et al." at 4-5 (January 16, 1996).
7. In the case of bicycle parts, it is even more important to capture the full costs related to foreign-sourced parts because many such parts have been granted duty-free treatment. See,e.g., U.S. Harmonized Tariff Schedule Nos. 4011.50.00 (duty free treatment for bicycle tires), 8714.94.30 (duty free treatment for bicycle brakes) and 8714.99.50 (duty free treatment for derailleurs). Clearly, this is a very strong incentive for bicycle manufacturers to use foreign rather than U.S. components. These companies should not be given the added incentive of permission to disregard many expenses related to these duty-free foreign parts when calculating foreign content for the 75% safe harbor provision.
8. In an analogous situation, the U.S. Department of Commerce in antidumping cases adjusts U.S. sales prices for selling expenses related to U.S. sales regardless of where the expenses are actually incurred. Thus, the inquiry focuses on the purpose of the expense rather than where the expense is incurred.