Federal Trade Commission Received Documents Jan 17 1996 B18354900052 Secretary Before the Federal Trade Commission ____________________ "MADE IN USA" POLICY COMMENT FTC File No. P894219 ____________________ SUBMITTED ON BEHALF OF FOOTWEAR INDUSTRIES OF AMERICA, INC. Lauren R. Howard Collier, Shannon, Rill & Scott 3050 K Street, N.W. Washington, D.C. 20007 (202) 342-8505 Counsel to Footwear Industries of America, Inc. January 17, 1996 Before the Federal Trade Commission COMMENTS OF FOOTWEAR INDUSTRIES OF AMERICA, INC. REGARDING "MADE IN USA" CLAIMS IN PRODUCT ADVERTISING AND LABELING Footwear Industries of America, Inc. ("FIA") submits these comments in response to the Federal Trade Commission's notice soliciting public views on the FTC's policy concerning "Made in USA" claims in product advertising and labeling. 60 Fed. Reg. 53,922 (1995). FIA is the national nonprofit trade association representing U.S. manufacturers and distributors of nonrubber footwear, and their suppliers. In general, FIA believes that the FTC's policy requiring goods be all or virtually all American-made before an unqualified "Made in USA" claim can be made is entirely too stringent in today's global economy. We submit that this standard unfairly prevents "all, or virtually all" U.S. companies from describing their products as American-made, even when such products have substantial domestic content. We therefore recommend that the Commission modify its labeling standard to permit unqualified claims if U.S. materials, direct labor and manufacturing overhead exceed 50 percent of all such costs and final assembly of the product is performed in the United States. In making this determination, the Commission should require manufacturers to look only one step back in the manufacturing process. Our responses to the specific questions posed by the FTC are as follows: 1. When consumers see product advertisements or labels stating or implying that products are "Made in USA," what amount of U.S. parts and labor do they assume are in the products? We believe that the modern American consumer does not assume that a "Made in USA" label means 100 percent domestic content. There can be no doubt that such consumers realize that the United States imports a large of variety of raw materials and components for use in the manufacture of finished goods. They obtain this knowledge from information available in the media and from their own experience working in industries more and more reliant on foreign parts. Even the FTC's own consumer perception survey using Huffy bicycle and Smith Corona typewriter ads corroborates this point: approximately one half of the respondents believed that a "Made in USA" claim meant that less than 80 percent of the parts and labor to produce the good was domestic. a. Are there surveys, copytests, or other direct evidence of consumer perception that will aid the analysis? We are not aware of any surveys addressing this issue, except those prepared for the New Balance litigation. b. How has increased consumer knowledge of foreign imports or foreign components affected such perceptions? How much knowledge of foreign sourcing of components do consumers have? FIA believes that such perceptions are clearly influenced by increased consumer awareness of the escalation of imported inputs and finished products. As indicated above, we submit that consumers -- especially through their workplace experience -- have a general cognizance of the increased amount of foreign sourcing. c. How much, if at all, is consumer perception of "Made in USA" claims affected by the type of product, complexity of the product, or other factors? FIA believes that American consumers are well aware of the global nature of today's business environment. However, we are not aware of any evidence demonstrating that consumers have different perceptions of American content based on such factors as the type or complexity of the product. d. Do consumers attach higher domestic content to products claimed to be "Made in USA" when the claims are presented with greater prominence or frequency? When they are featured in advertising, as opposed to merely on labels? FIA is not aware of any evidence demonstrating the effect of more prominent or frequent "Made in USA" advertising on the consumer. 2. What are the costs and benefits of an "all or virtually all" threshold for "Made in USA" claims, versus a lower threshold (e.g., 50%)? There are clearly significant costs in insisting on an "all or virtually all" standard for unqualified "Made in USA" claims. First, U.S. consumers are denied information about which products are significantly produced in the United States and thus cannot take account of this factor when making their purchasing decisions. Second, domestic manufacturers that have made significant investments in plant and equipment and that employ a significant number of U.S. workers are denied the competitive advantage of informing consumers that their products involve a significant amount of U.S. materials and labor. Third, the virtual 100 percent standard forces manufacturers that export their goods to foreign countries to maintain -- and keep track of -- different labels for the same products depending on their ultimate destination. This additional burden is cumbersome as well as costly. Finally, requiring that labels provide a great deal of detailed information may well be infeasible, especially when the product is small in size. A lower threshold, such as 50 percent, will obviate the above problems. a. What are the precise benefits of being able to make unqualified "Made in USA" claims for lower domestic-content products? What impact would this have on firms that now meet the higher standard? On firms that might be able to raise their domestic content to meet a lowered threshold? As indicated above, a lower "Made in USA" threshold would allow firms with significant domestic content to inform consumers of that fact and would minimize the production problems entailed in differing labeling requirements. FIA does not believe that a lower standard would adversely affect U.S. firms because it is virtually impossible to meet a 100-percent test in today's global economy. Moreover, a lower threshold would have the advantage of encouraging American companies to do more domestic sourcing so that they could proclaim their American content. b. What difficulties are there in making truthful comparative or qualified claims that reveal that the product is not wholly domestic? A qualified claim, such as "Made in USA with domestic and foreign parts," would not allow consumers to distinguish between goods made with significant or minimal foreign parts. As a result, such labeling would not assist their decision-making process if they chose to purchase goods with substantial enough domestic content to qualify as an American-made product. Moreover, space limitations may prevent a lengthy disclosure on the labelling of small consumer items. Finally, such labeling may not comply with the customs requirements of foreign countries which generally require a simple, clear "Made in USA" label. Nor does it resolve the problems inherent in requiring special labels to meet the FTC policy. c. What are the costs and benefits of alternative thresholds (e.g., 50%, 75%, products "substantially transformed" in the United States)? FIA urges the Commission to adopt the alternative threshold of 50 percent materials, direct labor and manufacturing overhead, applied with a one-step back rule. A lower threshold would allow consumers to make an informed decision when trying to differentiate between products with minimal and substantial U.S. processing. Such a rule would also ensure that a product marked "Made in USA" had substantial domestic content and would give U.S. manufacturers an incentive to source components domestically. A 50-percent test would also give manufacturers sufficient flexibility to maintain their labeling, even if their sourcing changed somewhat during their production process. A specific percentage, such as 50 percent, would have the additional advantage of giving clear guidance to the business community with regard to their obligations under the law. By contrast, a "substantial transformation" test does not ensure that a product has substantial domestic content, given that products assembled in the United States from imported components could meet the criteria of that standard. d. What are the costs to consumers, when the actual domestic content in "Made in USA" products is lower than consumers are led to believe? FIA believes that consumer expectations will be met if a product with an unqualified "Made in USA" label has more than 50 percent domestic content. Moreover, the FTC has an obligation to educate the consumer with regard to any standard it ultimately issues. If the Commission makes the consumer aware of its standard in this area, consumer perceptions of a "Made in USA" claim will reflect the criteria adopted by the agency. e. If adding qualifications to "Made in USA" claims sometimes is impractical or costly due to space limitations, are there alternative phrases that meet this concern and also adequately inform consumers of foreign content? Do such formulations as "USA 80%" satisfy these concerns? It is hard to envision satisfactory alternatives to the "Made in USA" label. Authorizing the description of specific percentages would not help -- and would in fact be counterproductive -- because each product line -- not to mention, each product within a line -- might have a different percentage. Such an alternative would be entirely too costly and burdensome. f. What do consumers understand the phrase "Assembled in USA" to mean? Would consumers view such a term as suggesting that the product may have substantial foreign content? How much foreign content? What are the costs and benefits of allowing such a claim for a product where there is only minimal domestic assembly? Approval of the phrase "Assembled in USA" would not satisfactorily address the problems in this area and would engender new difficulties. First, the phrase could be used for products that were assembled in the United States entirely from domestic materials, or it could be used to denote U.S. assembly of all foreign inputs. Second, a label with such a designation would not likely meet foreign customs requirements, thereby necessitating a dual labeling system. 3. What are the costs and benefits of using the same tests for "Made in USA" claims as those imposed by U.S. Customs requirements ("substantial transformation"), the Buy America Act (50% cost), and other domestic content statutes or rules? The "substantial transformation" test used by the U.S. Customs Service has the benefit of bringing the FTC standard into conformity with a standard used by another federal agency and thereby eliminating the inconsistencies between the policies of these two governmental entities. However, because the traditional "substantial transformation" test does not use objective criteria, it does not ensure predictability and consistency in administration. As a result, the manufacturing community may not be given sufficient guidance as to what conduct is proper under the law. Further, it does not ensure that products making "Made in USA" claims will have substantial domestic content because this test may permit products assembled here from significant amounts of imported components to qualify. For these reasons, the U.S. Government abandoned the "substantial transformation" test when it developed the rules of origin affecting trade among NAFTA countries. Rather, these new rules rely primarily on a tariff shift approach; in other words, if an imported good changes tariff classification after further manufacturing in a NAFTA country, origin is conferred. The tariff shift approach thus provides more predictability and uniformity of interpretation than its "substantial transformation" predecessor. The Buy America test permits government purchase of goods if they are manufactured in the United States and the cost of the American components exceeds 50 percent of the cost of all components. 48 C.F.R.  25.101, 25.102(a). In making this determination, only the end product and its components must be considered. Id. This test provides more objective criteria and meets FIA's preferred threshold of 50 percent. It also employs a "one-step back" rule, which we believe would be useful. However, it has the disadvantage of excluding the cost of U.S. labor from the calculation. The International Trade Administration of the Department of Commerce applies a 50-percent test with a different formulation. Under the Market Development Cooperator Program, which provides financial assistance to promote the export of U.S. goods, goods are considered American-made if they have "substantial inputs of materials and labor originating in the United States, [with] such inputs constituting at least 50 percent of the value of the good or service to be exported." 59 Fed. Reg. 21,750 (1994). Such a standard would ensure that there is sufficient domestic content to justify a "Made in USA" claim. 4. Do foreign customs officials prohibit the addition of qualifying phrases on "Made in USA" labels? Information not readily available. 5. How should the proportion of domestic content be measured with respect to "Made in USA" claims? As indicated above, FIA recommends that the FTC use a 50- percent material/direct labor/manufacturing overhead test as the threshold for unqualified "Made in USA" claims, provided the finished product is finally assembled in the United States. That test should be based on the following formula: ___ Percent = (Cost of U.S. materials + U.S. direct labor + U.S. mfrg overhead) x 100 (Cost of U.S. materials + U.S. direct labor + U.S. mfrg overhead + foreign materials + foreign labor){1} This equation would result in the percent of domestic content of a particular good. Materials in this context encompass raw materials, components and other inputs. Except where U.S. materials are sent abroad for further processing, there is no necessity to separately calculate the value of foreign labor because such labor is already included in the purchase price of the imported material. However, if U.S. materials are subjected to further processing in a foreign country, the American materials should be counted as part of the domestic content and the foreign labor should be taken into account separately as part of the foreign value added. In addition, manufacturing overhead should be defined to include costs related to domestic production, such as fringe benefits, indirect labor, plant and equipment, and the expenses of manufacturing departments such as engineering, purchasing and personnel. In determining the percentage of domestic analysis, manufacturers should be required to look only one step back, i.e., to the materials purchased by the manufacturer for further processing. To require further inquiry would be burdensome, costly, unreliable and infeasible. Manufacturers are simply not equipped to track the country of origin of the products of their suppliers' suppliers. In sum, if the percentage of domestic content exceeds 50 percent and the good is finally assembled in the United States, FIA submits that it should be allowed to bear an unqualified "Made in USA" label. a. In determining the U.S. value added by parts and components, is it sufficient to determine the purchase cost of parts and components made in U.S. plants? Do other measures better measure the U.S. content from the consumer's perspective? For determining the extent of the U.S. value added by parts and components, FIA believes that it is sufficient to ascertain the purchase cost of domestic raw materials, components and other inputs used in producing the end product. However, once the value of U.S. parts and materials is determined, the value of U.S. direct labor and manufacturing overhead should be taken into consideration. b. Should the determination of U.S. value added by parts and components exclude raw materials? If so, what should be the definition of raw materials? As indicated above, industries should be required to look only one step back in the manufacturing process. If raw materials fall within the scope of that inquiry, they should be taken into account; if they do not, they should not be considered. c. What are the costs and benefits of requiring sellers to determine the source of all components and subcomponents before making "Made in USA" claims? While manufacturers should be able to determine the source of raw materials and components they purchase directly, it is entirely infeasible to make sellers determine the source of subcomponents and other inputs that are incorporated into the parts they purchase. Suppliers often buy inputs from a variety of sources, depending on market conditions, and do not keep track of which inputs go into which end product. To require such comprehensive tracking would be difficult for every manufacturer, but exceptionally hard for those that use a substantial quantity of small inputs from various countries. d. What are the costs and benefits of permitting "Made in USA" claims where the seller has determined that a sufficient percentage of parts and components "one step back" in the manufacturing process were made in U.S. plants? Two steps back? At some other stage in production? FIA urges the Commission to adopt a one-step back rule for evaluating whether a manufacturer has utilized sufficient domestic content to make an unqualified "Made in USA" claim. As indicated in response to question 5(c), a manufacturer should be able to determine (or obtain a certification) as to where its raw materials were produced or its components were made. However, any further information will be difficult, if not impossible, to obtain. Thus, while a shoe company would be able to determine whether the upper or sole it purchased was made in the United States, it could not readily ascertain the source of the petroleum products used to make the plastic derivatives for the soling material or the country where the cattle was slaughtered to produce the hides that were tanned into leather for shoe uppers. Moreover, even keeping track of the country of origin of raw materials and other inputs will be difficult for a manufacturer that uses products from a variety of sources. e. What types of costs, other than direct labor costs, should be added to the domestic content measure at the stage of final assembly? Only direct overhead? If general overhead (e.g., real estate taxes, administrative costs), how can the measure be defined to avoid sellers from artificially inflating the domestic content? As previously stated, FIA supports a 50-percent material/direct labor/manufacturing overhead standard. Such a test includes consideration of direct or manufacturing overhead but does not require inclusion of the additional elements constituting general overhead. FIA believes that the formula should encompass the costs that are most directly related to U.S. production (i.e., materials, direct labor and manufacturing overhead) while excluding those that are less directly related to the manufacture of a product. f. Should the profit to the final U.S. assembler of the product be counted toward domestic content? No. FIA does not believe that profit should be included because it is not a "cost" of manufacturing the product. g. What are the costs and benefits of a case-by-case determination that requires sellers to have a "reasonable basis" for their "Made in USA" claims, rather than requiring a particular method of computing domestic content? Would this lesser certainty provide insufficient guidance or fail to deter misleading "Made in USA" claims? A "reasonable basis" test would have the benefit of allowing a manufacturer to demonstrate that in fact his product was sufficiently American to justify the use of an unqualified "Made in USA" label. However, the costs of such an approach outweigh this benefit. We fear that the FTC and the manufacturer would too often disagree on whether the basis was reasonable. Moreover, there would be insufficient guidance to companies on what the FTC considered an appropriate amount of domestic content. 6. What form of guidance should the Commission offer with respect to "Made in USA" claims? a. Should the form of guidance be case-by-case enforcement, an enforcement policy statement, guides, or a rulemaking? Are there other forms of guidance that would be more useful or cost efficient? FIA believes that the Commission should issue guides on their "Made in USA" policy so that industry is given adequate notice of the agency's stance on this issue. In addition, the FTC would maintain some flexibility if its experience under a new standard justified subsequent modification of its approach. b. Should the Commission offer a bright-line test whereby sellers can make "Made in USA" claims only if the product contains a specific percentage of domestic cost? If a non-numerical threshold for permitted claims is adopted, would it be helpful to establish safe harbors within that threshold to establish what types of claims always would be permitted? FIA prefers that the Commission adopt a bright line standard to govern these issues. However, if the FTC ultimately approves a non-numerical test, we strongly urge the Commission to set forth safe harbors within the threshold so that companies have some guidance on the agency's enforcement policy. * * * In sum, Footwear Industries of America, Inc. urges the Commission to adopt a standard that requires U.S. materials, direct labor and manufacturing overhead exceed 50 percent of all such costs, provided that the end product is finally assembled in the United States and that a one-step back rule is adopted. FIA appreciates this opportunity to provide the FTC with its views on this matter of significant importance to the domestic nonrubber footwear industry. Footnotes: {1} Foreign labor should only be separately calculated if U.S. materials are sent abroad for further processing. In that event, the American materials should be counted as part of the domestic content and the foreign labor should be taken into account separately as part of the foreign value added. However, if U.S. materials are not used in the processing performed in the foreign country, no separate addition should be made for foreign labor since the value of such labor must necessarily be included in the price the foreign material manufacturer charged to the U.S. end product producer.