Federal Trade Commission Received Documents Jan 16 1996 B18354900044 Secretary UNITED STATES OF AMERICA BEFORE THE FEDERAL TRADE COMMISSION __________________________________________ ) In the Matter of ) ) SUBMISSION OF NEW BALANCE MADE IN USA POLICY ) ATHLETIC SHOE, INC. COMMENT ) ) FTC FILE NO. P894219 ) __________________________________________) Comments By New Balance Athletic Shoe, Inc. In Response to Request for Public Comment Regarding "Made in USA" Claims New Balance Athletic Shoe, Inc. ("New Balance") hereby submits the following comments in response to the request by the Federal Trade Commission for public comment in preparation for its proposed workshop on the use of "Made in USA" claims in product advertising and labeling. 60 Fed. Reg. 53,922 (October 18, 1995). Introduction New Balance urges the Commission to establish a standard allowing the use of an unqualified "Made in USA" label where domestic materials and labor comprise the majority of the cost of manufacturing the product and final assembly takes place within the United States.{1} New Balance believes such a standard would be not only appropriate and realistic for manufacturers in today's "global economy," but also completely consistent with consumers' expectations. The "all, or virtually all" domestic components/materials and labor standard relied on by the Commission in its recent actions against Hyde Athletic Industries, Inc. and New Balance originated in post-World War II anti-Japanese sentiment and has not been reexamined for at least 30 years. As the Commission has recognized, the world has changed vastly since the 1940's and, in particular, the marketplace in which products are manufactured, imported, exported, and sold has changed dramatically since the "all, or virtually all" standard was first articulated. The verb "made" now encompasses a range of different manufacturing concepts (including "produced," "built," "assembled," "fabricated," "stitched" and "constructed"), and not all steps in the manufacturing process necessarily take place in the same plant or even in the same country. Competition from imports that cost far less to produce, and the frequent unavailability of some components or materials due to U.S. suppliers themselves going out of business or moving offshore, have created a climate in which, for many industries, maintaining a U.S. manufacturing base becomes more difficult each day. Given these changes, the "all, or virtually all" domestic content and labor standard is simply unrealistic, and impossible for almost any domestic manufacturer to meet. There has also been a concomitant change in consumers' understanding of product country of origin, global competition, and the necessity of sourcing components and materials from a variety of sources around the world. Today's consumers understand that many industries have become more international, and that even so domestic manufacturers have an increasingly difficult time competing with imported products made in countries where the cost of labor, taxes, and compliance with government regulation may be far lower than in the United States. Consumers know that most of the products they purchase have parts or materials that come from more than one country, including "American" automobiles and electronic equipment. At the same time, American consumers have become increasingly concerned about the widely reported exodus of American jobs that occurs when U.S. manufacturers establish or move their manufacturing operations offshore to take advantage of lower labor and other costs. U.S. consumers' understanding of the term "made" therefore focuses on where the labor in constructing or fabricating the product takes place. On the other hand, consumers can be "deceived" by the fact that many "U.S. companies," -- that is, companies whose executive or administrative headquarters are located here and whose profits benefit the U.S. economy, often because they enrich U.S. stockholders -- may not manufacture any of their products within the borders of the United States, and many U.S. companies may send out U.S.-manufactured components for assembly in other countries. An updated standard, one that encourages and supports U.S. manufacturers who are struggling to maintain their domestic manufacturing base -- and thereby providing manufacturing jobs within the United States -- will serve the dual interest of those consumers who not only want to obtain truthful and accurate information on the origin of products, but also want to support U.S. industry and jobs in their purchases. Rather than deceiving consumers, an unqualified "Made in USA" label on a product that has more than 50% U.S. labor and components and for which final assembly has taken place inside the United States, would provide consumers with truthful information consistent with their understanding that buying U.S.-made goods supports our economy and helps to provide jobs for U.S. workers, while at the same time encouraging struggling U.S. manufacturers to maintain their domestic manufacturing bases and allowing them to compete fairly with imports. CONTEXT At the outset, New Balance wishes to address the context in which it submits these comments. Over the past three years, New Balance has devoted significant time and resources to analyzing the issues concerning "Made In USA" claims, the Commission's own stated standard requiring "all, or virtually all" domestic labor and content for the use of such claims, and the perception of today's consumers of the meaning of "Made in USA" claims. In addition, New Balance underwrote two empirical studies designed to measure consumer perceptions of "Made in USA" claims in different contexts, and an economic analysis of the impact of imposing a 100% domestic content requirement on U.S. manufacturers who wish to label their U.S.-made products as "Made in USA." New Balance would like to provide the Commission, the public, and parties interested in these issues and in the Commission's proposed public workshops with as much helpful information as possible. New Balance believes that some of the results of its own thinking and study of these issues would be useful to the process the Commission has announced it will undertake. While New Balance is constrained by the pending administrative enforcement action against it from submitting its expert studies for placement on the public record,{2} New Balance has, to the extent possible, relied on and incorporated the results and findings of those studies in formulating the comments presented herein. In addition, New Balance wishes to raise another issue at the outset. As it has argued elsewhere,{3} New Balance believes that the question whether, when and how a U.S. company can inform consumers that it is a U.S. manufacturer is inextricably linked to questions of the extent of the company's U.S. manufacturing operations and the degree to which it uses domestic components -- the question at issue in the Commission's request for comment and proposed public workshops. In order to formulate realistic and useful policy/guidelines, it is critical to look at the entire question of when a U.S. company can advertise the fact that it makes products in the United States or that it is a "U.S. manufacturer," including the domestic vs. imported content of a company's U.S.-manufactured goods and the extent to which the company also sells products that are imported. This seemingly simple question has more permutations than ever before in our history. Consider, for example, the following generic "profiles" of manufacturing companies, all of which have some substantial link to the U.S. economy: 1) Company A is incorporated in the United States; its corporate headquarters are in the United States and all its executive personnel are located here. Its research and development operations are located here, but it does not provide a single manufacturing job in the United States for U.S. citizens, and not a single one of its products is manufactured here. Is Company A a U.S. manufacturer? Can its ads imply that? 2) Company B has been located in the United States since the 1920s. All of its products are manufactured in its United States plants. Its product's name is synonymous with U.S. industry. Yet Company B relies more and more on imported components, because without the cost savings realized through sourcing some components offshore, the company could not compete with imports and would either have to downsize dramatically (thereby eliminating U.S. jobs), shut down, or move offshore. Is Company B an American manufacturer? Does it produce U.S.-made products? Can it advertise that? What if it doesn't need to say either, because the company or brand name alone is enough to make consumers believe they're "buying American"? What if Company B has also started selling a line of imported products? Can it no longer claim that it is a U.S. manufacturer? Or that its products made in its U.S. plant by American workers are made in the U.S.? 3) Company C is a foreign company. Consumers know it as a foreign company whose products compete with American-made goods in a competitive market. Consumers believe that U.S. competitors are hurt by Company C's imports, and the recent loss of jobs at a U.S. competitor company was widely reported in the press. Company C starts a U.S. subsidiary and sets up a manufacturing plant in the United States. It starts making one line of its product here, thereby providing some number of U.S. manufacturing jobs. It imports several key components that are made in its home plant back in its headquarters country. All plant management and executive personnel are U.S. citizens, but its profits go back to the parent company in a foreign country. Does Company C produce U.S.-made goods? Is it a U.S. manufacturer? What if its U.S. subsidiary is called "Company C USA"? 4) Company D is a U.S. company whose "signature" product is made in the U.S. with a majority of domestic components. The Company also sells under its label another line of goods that are imported, and labeled as having been made in a foreign country. The majority of Company D's sales are from its domestically-produced goods. The line of products that it imports simply cannot be produced competively in the U.S. Can Company D say in its ads that it's a U.S. manufacturer? 5) Company E is a start-up manufacturing company that employs a large number of workers in a U.S. plant. Its only manufacturing plant is located in the U.S. Company E cannot obtain some components from U.S. suppliers because every other U.S. company that makes the same product has moved offshore, and the suppliers have followed. Company E makes the most "American" product in its class. Is it an American manufacturing company? Can it call its products U.S.-made? Can it advertise that? As the above scenarios indicate, the issue is not a simple one. It implicates important policy questions and includes multiple facets that need to be studied together for maximum usefulness. In the following discussion, New Balance has roughly followed as its organizational framework the broad outline of issues numbered I through III at pages 53924-53926 of the Federal Register Notice. I. Consumer Perceptions of Made in USA Claims The question of what U.S. consumers understand the term "Made in USA" to mean has two important components. The question encompasses not only consumer understanding of the meaning of the phrase, but also consumer preferences -- that is, do consumers have specific associations with that term and its implications that influence their buying behavior? These two components are inextricably linked: if a consumer is motivated to buy a product labeled "Made in USA" over one that is not so labeled, what satisfaction does the consumer get from doing so? Put another way, what implications do consumers think flow from that purchasing decision? Just because the country where a product was made might impact consumers' purchasing decisions does not mean consumers care or even think about where some of the product's components originate. In fact, most consumers are concerned about U.S. labor and jobs, and not about materials and components. Their perceptions of the words contained in the phrase -- the verb "made," the preposition "in," and the noun "USA" -- reflect that concern: consumers interpret the phrase literally, as informing them what country the product was made in, not the source of the components the product is made of. A. The Direct Evidence of Consumer Perceptions. Consumer research into how "Made in USA" claims are perceived shows that today's consumers are fairly sophisticated in their understanding that not all steps in the manufacturing process necessarily take place in the same country, and that the vast majority of consumers asked to define the phrase either focus on what country the product was made in (i.e., where the labor took place) and/or on its positive consequences for the United States' economy and labor. New Balance relies on and refers to the results of the following consumer studies in its comments about consumer perceptions of the meaning of "Made in USA": 1) the 1991 Smith Corona Copy Test cited by the Commission in its October 18, 1995 Notice ("Smith Corona Test"); 2) "Consumer Attitudes Toward Product Sourcing," a study conducted in May 1994 by the International Mass Retail Association and the Gallup Organization, provided to New Balance by Commission Staff in discovery; 3) "New Balance Ad Test," a copy test conducted in April 1995 by Commission Staff in conjunction with the administrative action against New Balance ("Ford Test"); 4) "Consumers' Perceptions and Understanding of Made in USA' in the context of New Balance Athletic Shoes," one of the studies by the marketing expert retained by New Balance in conjunction with the case against it ("New Balance Label Study"), March 1995; and 5) "Consumers' Perceptions of Four Made in USA' Advertising Themes for Athletic Shoes," the second study conducted by New Balance's expert ("New Balance Ad Phrase Test"), March 1995.{4} 1. Consumer Understanding of "Made in USA" Overwhelmingly, consumers' specific perceptions of "Made in USA" claims relate to supporting the U.S. economy and preserving domestic manufacturing jobs in light of the well-documented exodus of American companies to countries where the cost of labor is far less than in the United States. Without prompting, in response to open-ended questions about what the phrase "made in USA" means, the vast majority of consumers focus on where the labor in putting the product together takes place (i.e., "made here and not in a foreign country") and on the provision of U.S. jobs; only a tiny percentage mention anything to do with components or content, and an even smaller number express the view that "all" of the product is domestic in origin. In New Balance's Label Study, for example, 35% of respondents focused on the positive economic consequences for the United States implied by a "Made in USA" label. Included in that category are 22% of respondents who expressly stated that "Made in USA" means jobs or work for U.S. citizens, the highest percentage of any specific response. A similar result was seen in the Ford Test; of two groups of consumers, 26% and 29%, respectively, gave a response that the U.S.-made message in the ad meant jobs for U.S. workers.{5} Examples include: "made in the U.S. by U.S. people," "keep America working," "jobs, work and income for families in America," "American workers made it," and "in today's climate, we want to keep jobs in America." Additional consumers gave responses that it would help the U.S. economy or trade deficit ("the money stays right here in the U.S.") In the New Balance Ad Phrase Test, 23% of respondents gave responses about providing American jobs, and 9% said that it benefits the U.S. or "keeps the money here." Likewise, in the Smith Corona Test, 12% mentioned that "Made in USA" means jobs or employment, 9% gave answers relating to helping the U.S. economy, and 4% gave a response focused on "keeping dollars here" or helping the trade deficit. Overwhelmingly, however, consumers understand the term "Made in USA" to mean that the product was assembled or produced within the United States by U.S. workers, without reference to the origin of parts or materials. Forty percent of respondents in the New Balance Label Study responded to the question "what does Made in USA mean" by saying that the product is "made here," "produced in the United States," "made here by American workers," "assembled in the U.S.," or "not foreign made." In the Ford test, in response to the question, "What did the ad mean when it said or implied that New Balance athletic shoes are made in the U.S.," 36% of one group and 42% of the other replied that the product was "made in the U.S.," "made in America by Americans," "U.S. made," "not an import," "made in this country" or the equivalent. The responses of consumers who did mention the product's content, or refer to separate steps in the manufacturing process, demonstrate that as manufacturing and trade have become more global, so too have consumers' perceptions shifted to comprehend that there are a variety of steps in the manufacturing process and that some of those can take place in different countries. In New Balance's Label Study, for example, when asked what the term "Made in USA" meant in the label on the shoe they were shown, one consumer responded that "the majority of the shoe is made in the United States," and another stated "assembled in America, but made in Japan." Another consumer specifically said that the label "Made in USA" means "ranges from being assembled to parts and constructed in the USA," and another responded that he or she was "a little skeptical -- pieces are made somewhere else, but constructed here." In the Ford test, consumers gave similar responses to the open-ended questions: "it's not completely domestic," "the shoes are sewn together in the U.S.," and "probably [means] that they are assembled in the U.S." These consumer studies demonstrate that consumers understand "made in" to refer to where the product is put together -- where the labor takes place -- rather than to its content; that consumers are fairly sophisticated in their understanding of the global marketplace; and that their interest in the country of origin of the products they buy is the result of a wish to help the U.S. economy and see manufacturing jobs remain in this country. Consumers simply do not focus on the content or raw materials that go into the product at all. Indeed, the results of the Ford test, New Balance Label Study and New Balance Ad Phrase Test were strikingly similar in that regard. In the unaided, open-ended part of the questionnaires, in response to the question "what does the phrase Made in USA mean," "what did the ad mean when it said Made in USA'" or "what do you think of when you see this phrase," the most frequent responses were that it meant made here/not imported and that it is associated with supporting the economy or providing jobs for U.S. workers. Only a small number of respondents in any of the tests mentioned the origin of components or materials in their answers to the unprompted, open-ended questions: approximately 2% in the Ford test; 4% in the New Balance Ad Phrase Test and 13.5% in the New Balance Label Study, even when follow-up probes ("what do you mean?", "anything else?") were given by the interviewer.{6} 2. Consumer Preference for U.S.-Made Goods In general, many U.S. consumers express a preference for goods that are manufactured in the United States.{7} Most studies that have looked at the importance of "Made in USA" to consumers, including the Smith Corona Test, allow consumers to assume that all things are equal. That is, the studies have not expressly asked consumers to rank or differentiate product characteristics, such as country of origin, price, style, durability or comfort. The 1994 study conducted by the International Mass Retail Association and the Gallup Organization found that a majority of consumers say that they prefer to buy American-made goods, but that the number expressing that preference drops sharply if a price differential is introduced. In that same survey, country of origin was ranked last by consumers among a list of five factors influencing their purchasing decisions, after quality, "features," price and warranty. Fig. 1-3. New Balance's study attempted to determine the relative importance of "Made in USA" to consumers, and in addition looked at their buying habits (revealed preferences) for U.S. goods. Not surprisingly, although most respondents volunteered positive associations with "Made in USA," country of origin was ranked by consumers below comfort and fit, durability, design and style, price, previous experience with the product, and special discounts. Even consumers who express a preference for U.S.-made goods do not necessarily buy U.S.-made products when confronted with choices of imported products that may cost less, fit better, or be more stylish or popular. According to the expert who designed the Smith Corona test, a "made in USA" cue in an ad with multiple cues, was just not important to consumers. See section I.C., infra. New Balance also believes that these studies show consumers do not have a different perception of the meaning of "Made in USA" for different products. The results of the 1994 International Mass Retail Association and Gallup Organization Study suggests that many consumers care more about the country of origin of products when competition from imports in that industry and the concomitant loss of U.S. jobs has been widely publicized. Id., Figure 1-6. Just over half of the consumers who responded that they pay more attention to some products' country of origin than others indicated that they do so for cars and clothing, by far the highest percentages given for any products.{8} That study, however, did not ask consumers what they understand the phrase "Made in USA" to mean. The consistency of results in the Smith Corona Test, Ford Test, New Balance Label Study and New Balance Ad Phrase Test indicate that, regardless of product, consumers interpret the phrase "Made in USA" to mean the same thing: that the product was made in this country and that the label suggests positive economic consequences for U.S. industry and labor. Moreover, the imposition of different standards for different industries and products could only increase consumer confusion. Theoretically, a product of one type might meet the standard for an unqualified label, while one with more U.S. content might be forced to use a qualifier, when in fact both products meet consumers' expectations that American workers were provided with jobs in a U.S. factory to produce that product. In sum, consumer perceptions of the phrase "Made in USA" are consistent with respect to associating the phrase with what country the product is made in and what the implications are for U.S. workers and the U.S. economy, but "all over the map" with respect to the amount of domestic content the product contains.{9} This includes those "skeptical" consumers who think "Made in USA" should mean that the product is made with 100% domestic components, but clearly do not believe that the phrase is used that way (and therefore are not "deceived" by less than 100% domestic content). Examples from the Ford Test, the New Balance Label Study and the New Balance Ad Phrase Test abound.{10} In addition, providing U.S. jobs and helping our economy are the most frequently-occurring positive associations consumers have with the term, and in large numbers consumers focus on the simple fact that the product was "made here" and not in a foreign country, without any analysis or thought about the origin of the product's components or materials. B. The Commission's Role as "Educator" Given that consumers' perceptions of the phrase "Made in USA" encompass a broad range of responses, that consumers' main interest in U.S.-made goods is that the product is made in the United States and provides jobs and other positive economic consequences for the U.S., and that there has been a sea change in global sourcing, manufacturing and trade, a standard requiring a majority of domestic materials and labor and final assembly in the U.S. would be in the public interest. It would also be consistent with the Commission's historical role both to articulate standards and rules, and to educate consumers and industry about its standards, for the Commission to determine a realistic "contemporary" domestic content requirement for use of an unqualified "Made in USA" claim, and then to publicize that standard to consumers and industry groups. In short, "Made in USA" can be defined by the Commission, consistent with the public interest, to embrace a standard that requires that the product be "made here" with a majority of domestic inputs. While the Commission's mandate to prevent unfair and deceptive advertising and other trade practices frequently consists of enforcement responsibilities, the Commission's role also has historically encompassed both setting standards and educating the public with respect to the standards it sets. The Commission has promulgated advertising and labeling standards throughout its history by individual case enforcement, by rulemaking and by consumer and business education.{11} Likewise, as Commissioner Mary Azcuenaga recently explained, "[a]part from case-by-case enforcement action against advertisers who disseminate false or deceptive claims about their products or services, the Commission influences the level and content of information reaching consumers in two principal ways: by issuing regulations requiring disclosure of information and by issuing regulations setting standards for certain products or services that cannot easily be evaluated by ordinary consumers." See Mary L. Azcuenaga, Advertising Regulation and the Free Market, Remarks Before the International Congress of Advertising and Free Market (May 11, 1995), available at www.ftc.gov. (emphasis added). As Commissioner Azcuenaga noted in the same speech, the Commission has recently provided consumers with guidance by setting standards for labeling and advertising of such products as insulation and electrical appliances. See id. The Commission has also recently begun the important process of setting standards and educating consumers about their rights and responsibilities with respect to computer on-line services. See Roscoe B. Starek, III, Consumer Protection in the Age of Borderless Markets and the Information Revolution, Prepared Remarks Before the Conference on Transborder Consumer Regulation and Enforcement (June 7, 1995) available at www.ftc.gov (describing importance of consumer education efforts); see also Christine A. Varney, Privacy in the Electronic Age, Prepared Remarks Before the Privacy & American Business Conference (Nov. 1, 1995), available at www.ftc.gov. Indeed, the very fact that the Commission has established an Internet site, through which the public can gain access to press releases, guides, notices and speeches, for the express purpose of "spread[ing] the word even further," illustrates the Commission's own understanding of the importance of the educational aspect of its role. Setting practical standards that are useful and meaningful to consumers and educating the public are complex and important tasks. As Chairman Pitofsky observed in 1977, "[b]eyond the objective of ensuring that consumers are provided with truthful data, advertising also should be regulated with the objective of increasing effective competition in the market. . . . protection of consumers against advertising fraud should not be a broad, theoretical effort to achieve Truth, but rather a practical enterprise to ensure the existence of reliable data." Robert Pitofsky, Beyond Nader: Consumer Protection and the Regulation of Advertising, 90 Harv. L. Rev. 661, 671 (1977). Consumers need information that is not only accurate and truthful but practical and useful as well. In seeking to develop an understanding of how domestic content claims should be measured, the Commission should thus not be limited merely to analyzing current consumer perceptions of the amount of domestic content implied by "Made in USA" claims, but can, and should, examine why some consumers care about "made in USA," and how best such claims can be practically used by consumers and industry alike. The Commission is in a unique position to consider and judge all of the relevant information before determining which standard will best meet the public's needs as a whole. Although consumer input is extremely important, ultimately it is the Commission that must determine which regulation or standard will best serve the public interest. See e.g., Guides for Select Leather and Imitation Leather Products, 60 Fed. Reg. 48,056 (1995) (to be codified at 16 CFR  24) (considering consumer comments and determining proper labeling standards for leather); see also Regulatory Flexibility Act and Periodic Review of Used Motor Vehicle Trade Regulation Rule, 60 Fed. Reg. 62,195 (1995) (to be codified at 16 CFR  455) (reviewing rule in light of public comments). Chairman Pitofsky suggested shortly after his confirmation that the Commission should be focusing on the question of "not only what the law is but what the law ought to be." See Roundtable Discussion with Enforcement Officials, 63 Antitrust L.J. 951, 961 (1995). In the current context of determining a standard for "Made in USA" claims, then, the Commission should focus not only on what the phrase "Made in USA" has meant in the past, but also on what -- given so many consumers' clear interest in supporting American industry -- it ought to mean. Where the overwhelming number of consumers think that when they buy an "American" product they are getting a product that is made in this country by American workers, then a product made in a U.S. factory with a majority of domestic inputs clearly meets consumer expectations. In addition, a standard that supports struggling U.S. industries is both consistent with consumers' interests and in the broader public interest of ensuring enhanced consumer choices. C. Comments on Smith Corona Test The Commission has specifically requested comments on the 1991 Smith Corona Test. New Balance wishes to make three points concerning the Smith Corona Test. First, the "verbatim responses" -- the individual questionnaires with responses written in by the interviewer -- have been destroyed. There is therefore no way for interested parties or the Commission to analyze or evaluate individual responses; instead, there is only the coded compilation of responses presented in the report itself. It is thus impossible to read the raw, uncoded, "narrative" answers to the two critical open-ended questions. ("Please tell me why you did/did not circle the Made in USA' phrase in the ad" and "What do you think of when you see this phrase on a product or in an ad for a product?") The absence of the actual questionnaires is all the more important because of the defective design of the questionnaire. In question 4a, when respondents were asked what they "think of" when they see the phrase "Made in USA" on a product or in an ad, there were only two listed options into which the interviewer had to fit the respondent's answer: "1) all of it/almost all Made in USA" and "2) some other mention." The interviewer is directed to "probe and clarify," but there is no separate question for the probe (i.e., "what do you mean?" or "anything else?"), and no separate space provided for the interviewer to record how he or she probed and what the answer to the probe was. Without the individual questionnaires, no one can review or evaluate those responses, and it is impossible to determine how many respondents might have been "probed" into giving the only specific answer the interviewer was alerted to. There is also no way to tell what specific responses given by consumers were interpreted by the interviewers to fall under the "all of it/almost all Made in USA" category. Indeed, consumer responses that "most" of the content was domestic could well have been checked off as an "all of it/almost all of it made in U.S." response instead of "some other mention." Finally, as recently as July, 1995, the marketing expert who designed the Smith Corona Test published an article that was based on the results and conclusions he drew from the Smith Corona Test. Thomas J. Maronick, An Empirical Investigation of Consumer Perceptions of "Made in USA" Claims, International Marketing Review, Vol. 12, No. 3 (1995). The author acknowledges in his article that no prior study had examined consumer perceptions of what "Made in USA" means in terms of product characteristics (as opposed to product quality) or the amount of domestic components and/or labor.{12} Id. Perhaps more important, the author concludes that in an advertisement with multiple cues, a "Made in USA" cue "was not important for either complex unfamiliar products or for simple, familiar products," and observed that "there is clearly a need for further research" into the issue. He also concluded that if a product is perceived by consumers as of marginal quality the addition of a "Made in USA" cue might detrimentally affect purchasing, and if the product is perceived as being of high quality, the addition of a "Made in USA" claim "does not seem to enhance perceptions of quality among either purchasers or those considering purchase" so that the claim "may be wasted." Id. at 29-30. II. Cost-Benefit Analysis Of 100% Domestic Content Requirement vs. Lower Threshold A. Impact on Domestic Commerce There are several important benefits that would accrue to the domestic marketplace from imposition of a standard requiring a majority of domestic inputs and final assembly in the United States for the use of an unqualified "Made in USA" label. First, a standard allowing manufacturers to use the label when their products are substantially produced in this country would not only reflect the realities of modern U.S. industry, and promote and encourage companies to maintain their domestic manufacturing facilities, but also provide consumers with choices that might be important to them. As noted above, the application of the 100% domestic content standard across all industries would result in the virtual disappearance of the "Made in USA" label, a result that runs directly counter to the interests of those consumers who often or sometimes attempt to buy U.S.-made goods over imports in order to support American industry. Consumers would then have no information about country of origin of products that were not imported. For industry, given that there are strong economic incentives to move offshore and dramatically reduce labor and other costs, whatever advantage might accrue from use of the "Made in USA" label provides at least some incentive to stay in the U.S. to counterbalance the clear economic benefits of locating elsewhere. The "all, or virtually all" standard has been tantamount to a penalty imposed on those manufacturers who have made significant investments in their domestic manufacturing facilities and a commitment to keep jobs here. A standard allowing the use of "Made in USA" claims when a manufacturer uses a majority of domestic materials and labor would help to level a very uneven playing field. In addition, we must assume that consumers who care about the country of origin of the goods they purchase have a continuous utility function. That is, that they do not derive a benefit or satisfaction from buying U.S.-made goods only if purchasing 100% domestic goods, but that they would prefer a "substantially" or "mostly" domestic product over one that is not at all domestic. For those consumers, a "Made in USA" label on goods made with a majority of domestic components and labor provides the important information that the manufacturer has a U.S. plant where U.S. workers made the product. This information would not be available if manufacturers simply stopped using "Made in USA" labels because they were unable to meet the 100% requirement. In many industries, including the athletic shoe industry where imports make up almost 90% of sales in the U.S., "mostly" domestic products are the only U.S.-made products on the market. Consumers who are motivated in their purchases to support U.S. industry and jobs need to know which manufacturers have facilities in this country and are providing manufacturing jobs to U.S. workers. The use of a "qualified" label, providing information about the percentage or origin of foreign content, does not solve the above problems. First, such a qualified label suggests that the manufacturer's products are somehow "less American," even if that company's products are in fact the "most American" in their class. Second, the requirement of a qualifier is impracticable given the realities of constantly shifting sources in a global marketplace. Regardless what kind of qualifier were required, it would put U.S. manufacturers at a disadvantage compared to importers who need not qualify their labels, but only indicate a single country of origin regardless of the source of their components. Third, a "qualified" label tells consumers too little: it would not explain that the manufacturer simply could not obtain all of the components domestically, for example, or that without the cost savings realized from sourcing some components offshore (at far lower prices) the manufacturer could not price its products competitively and thereby continue to maintain its plant in the U.S. and produce its U.S.-made products. The use of "assembled" can be more problematic. Although New Balance is not aware of any consumer study designed to test what consumers understand "assembled" -- as differentiated from "made" -- to mean, the use of that term by respondents in the studies New Balance reviewed suggests that some consumers already believe "Made in USA" means "assembled in USA" and others believe that "assembled" suggests that no domestic components have been used.{13} For example, one respondent in the New Balance Ad Phrase Test said that "Made in USA" means "assembled or made in the U.S.," and one consumer in the Ford Test answered that "Made in USA" in the ad for athletic shoes meant "probably just that they are assembled in the U.S." In addition, many times consumers are led to believe that U.S. companies that only sell imports (but are not "foreign" companies), are U.S. manufacturers or make products here when that is not true. In both the New Balance Ad Phrase Test and a "tracking study" conducted by New Balance's ad agency in 1994, for example, more consumers said they associate the phrase "Made in USA" with Nike and Reebok than with New Balance. Whether this is due to the use of U.S. sports stars to endorse the products and appear in TV advertisements, or to other factors, it is clearly a disadvantage to U.S. manufacturers to prevent them from informing consumers that they do make products in the U.S. using U.S. labor, and the market is thereby deprived of important and accurate information that would obviously be useful to consumers, but would be blurred by qualified labels. B. Impact on International Trade and C. Cost/Benefit of Adopting Country of Origin Rules of Other U.S. Agencies. For the United States to have country of origin requirements for U.S.-made goods (imposed and enforced by the FTC) that differ from those imposed on imported and exported goods under the Tariff Act, NAFTA, and other Customs regulations and trade agreements, creates obvious inefficiencies, as well as inequities for U.S. manufacturers. First, those U.S. manufacturers who export their products would be forced to have two production runs and separate SKUs for the same product -- one for exports and one for sales within the U.S. In most instances, exported products (that are "substantially transformed" within the United States), are required to be labeled simply "Made in USA." Similarly, products imported into the United States must bear the designation of a single country of origin. Under NAFTA and Canadian customs rules, for example, New Balance is required to label the athletic shoes it sells in Canada (that contain a majority of U.S. components) as "Made in USA," and would be required to have the shoes so labeled were a shipment returned to the United States. Under the "all, or virtually all" standard, however, New Balance could not then sell those same athletic shoes in this country without removing that label or affixing another, qualifying, label. While the results might differ for different U.S. manufacturers, a system of dual, inconsistent requirements creates disincentives: it becomes more expensive to both export and sell the same products within the U.S., an expense that could be eliminated by discontinuing exports, limiting the products for export to ones that differ from those sold domestically (thereby eliminating separate production runs for the same product) or discontinuing U.S. production altogether, which would also result in fewer U.S. goods exported. While obviously not all companies would choose the most drastic measures to avoid the additional expense (and while there are clearly other economic pressures and factors taken into account in such decisions) it is simply bad policy to have our government on the one hand encouraging exports to help achieve a better balance of trade (through export financing assistance, for example), and on the other enforcing a requirement that has a disproportionate impact on those manufacturers who make their products here instead of offshore. In addition to imposing a burden on U.S. manufacturers that does not apply to companies which import all of their products into the U.S., having dual standards can only lead to consumer confusion. Consumers schooled by the Commission's "all, or virtually all" standard will come to believe that only products containing 100% parts or materials from the country of origin designated on the label will be "unqualified." Their U.S.-made bicycle, for example, would be labeled "Made in USA from foreign and domestic parts," or "Made in USA 75%" or have no label at all. On the other hand, the labels on their "Made in Switzerland" watch or "Made in Italy" leather shoes will not be qualified, so that consumers might feel deceived to learn that the watch components were made in Korea and the leather on the shoes came from Brazil. There is obvious benefit to consumers to have a single, consistent labeling system upon which to base their expectations. IV. Computation of Domestic Content The Commission has rightly recognized the difficulties perceived by industry in computing domestic content under an "all, or virtually all" standard that has been articulated without clear guidelines. If the Commission adopts a threshold requiring final assembly in the U.S. and a majority of domestic inputs, it can also define the formula to be used in determining whether the threshold is met. New Balance suggests that the amount of domestic content should be defined as over 50% of the cost of materials, direct labor and factory overhead that go into the product. This would be calculated by dividing the cost of U.S. materials, U.S. labor, factory overhead and corporate manufacturing overhead by the total cost of the product (U.S. materials, labor, and factory and corporate manufacturing overhead, plus the cost of foreign materials and foreign labor [to the extent not already included in the cost of the materials]), multiplied by 100 to arrive at the percentage of domestic content. The amount of manufacturing overhead attributable to domestic cost would be calculated using the formula currently required under NAFTA, which is in keeping with generally accepted accounting principles. CONCLUSION New Balance believes that the Commission's present reexamination of the domestic content threshold for use of an unqualified "Made in USA" claim is an important step towards setting an enforcement standard that is appropriate for today's world. New Balance urges the Commission to adopt a standard requiring more than 50% domestic materials and labor, and final assembly in the United States. Such a standard would be consistent with other U.S. policies, laws and trade regulations, as well as with consumers' expectations and need for accurate product information. In addition, such a standard would meet the broader public interest of enhancing consumer choices and supporting U.S. industry and jobs, the very reasons some consumers prefer to "buy American." NEW BALANCE ATHLETIC SHOE, INC. By its Attorneys, ______________________________________ Paul R. Gauron Barbara Healy Smith GOODWIN, PROCTER & HOAR Exchange Place Boston, MA 02109 (617) 570-1000 Dated: January 15, 1996 Footnotes: {1} "Final assembly" should be defined as "substantial transformation" (that is, a change in tariff classification pursuant to Annex 301) under the North American Free Trade Agreement (NAFTA). It is important that final assembly be performed by U.S. workers within the United States to meet consumers' expectations of "made in USA" and avoid additional inconsistencies with Customs and other labeling requirements. {2} While the Commission has dismissed all charges against New Balance relating to domestic/foreign content, the original complaint combined that charge with a charge that New Balance had made misrepresentations about its imported shoes. New Balance's studies therefore, did not separately address the content issue. To the extent New Balance may need to rely on its studies in the pending action, it cannot now make them public. New Balance notes that in its request for public comment, the Commission likewise did not make public the study conducted in March 1995 in preparation for the trial against New Balance, but only referred to the 1991 "Smith Corona test." {3} See Respondent's Brief in Response to Commission Order of July 11, 1995; and Respondent's Reply to Complaint Counsel's Brief in Response to Commission's Order to Stay Proceedings and Show Cause, In the Matter of New Balance Athletic Shoe, Inc., FTC Docket No. 9268. {4} The results of study the Commission proposed to conduct in connection with the public workshops on "Made in USA" (see 60 Fed. Reg. 48162, September 18, 1995), unfortunately were not available for review and analysis before the deadline for submission of these comments. {5} The Ford Test used a test and control version of two different ads, each shown to different consumers. New Balance refers throughout only to results of the two test ads and not the control ads, which had all references to Made in U.S.A. removed. {6} In the New Balance Label Study, the marketing expert conservatively counted responses that mentioned separate manufacturing steps (e.g., "majority of shoe is made in the U.S.," "assembled here but made overseas") as a response concerning materials. Of those, 8% of the responses recognized that not all of the parts or materials, or not all of the manufacturing process, takes place in the U.S., and only 6% mentioned that the materials were domestic or that the "whole product" was made in the U.S. Because the questionnaires from the Smith Corona test were destroyed, it is not possible to determine how many respondents mentioned parts or materials in their answers, although none of the response codes in Table 5 specifically mention parts or materials. "All of it made here" might as easily refer to consumers' understanding of where the manufacturing process takes place, not where the materials that go into the product originate. {7} For example, when consumers in New Balance's label study were asked the open-ended question, "what does Made in USA mean to you," 14% answered that they prefer to buy U.S.-made products. Similarly, in the Smith Corona test, when they were asked "what do you think of" when you see the phrase in an ad or on a product, 17% of respondents said that "Made in USA" provided an incentive to buy the product. The Ford test expressly did not test for materiality of "Made in USA" claims; nor did it ask consumers what the phrase means to them generally. Nonetheless, in response to the question "what did the ad mean when it said or implied that New Balance athletic shoes are made in the U.S." a small percentage (2-3%) of respondents volunteered that it provided an incentive to look at or buy the shoes ("I would buy shoes made in the USA over shoes made somewhere else"). {8} The complete list of results is: cars, 54%; clothing, 51%; electronics, 31%; small appliances, 15%; tools, 12%; toys, 7%; food, 6%; shoes, 3%; household products, 2%; large appliances, 2%; furniture, 2%. Obviously, the loss of jobs in the U.S. automobile industry (and supporting industries) from competition from imports has received wide coverage, and U.S.-made clothing has been the subject of a few memorable ad campaigns (the International Ladies' Garment Workers Unions' "look for the union label" campaign, e.g.). {9} In the Ford test, in response to the leading questions, "based on what the ad said or implied, what percent, if any, of the materials/labor used in the New Balance athletic shoes originates in the U.S.," 35% of one group and 39% of the other either didn't answer at all, or responded "don't know" to either or both questions. {10} "That according to the formulas determining domestic content that New Balance adheres to that. So it's not completely domestic, it doesn't have to be [to be] considered made in the U.S.'" (Ford Test); "the shoes are mostly made in the U.S., but not all parts are created in the U.S."; "most products aren't truly manufactured in U.S. ... parts and assemblage are a lot of times made in Taiwan, China" (New Balance Ad Phrase Test); "something on the shoe is made in the U.S.A., not necessarily the whole shoe" (New Balance Label Study). {11} The Commission for years has published guides for advertising and labeling covering a wide and diverse group of products and services ranging from tires to environmental marketing. See e.g., Tire Advertising and Labeling Guides, 16 CFR  228; Guides for the Use of Environmental Marketing Claims, 16 CFR  260. {12} It is noteworthy that the "all, or virtually all" domestic content standard relied on by the Commission was developed and enforced without the benefit of extrinsic evidence showing what consumers believed the phrase conveyed, if anything, about the product's domestic content. {13} New Balance notes that the use of "assembled" in the Commission's recent study (see 60 Fed. Reg. 48162), is inconsistent and confused, suggesting that the Commission itself is not clear on what the term means and that it is unlikely to learn from that study what consumers think the term means. 202554.a1