Federal Trade Commission Received Documents Jan 19 1996 B1835490059 Ablondik Foster, Sobin & Davidow, P.C. Attorneys and Counsellors 1130 Connecticut Avenue, N.W., Suite 500 Washington, D.C. 20036 (202) 296-3355 Fax (202) 296-3922 January 18, 1996 BY HAND DELIVERY Office of the Secretary Federal Trade Commission Room 159 Sixth and Pennsylvania Avenue, N.W. Washington, D.C. 20580 Re: "Made in USA Policy Workshop Comment and Request to Participate" FTC File No. P894219 Dear Commissioners: This submission is filed with the Federal Trade Commission ("Commission") on behalf of The Stanley Works ("Stanley") to express its views on the advertising and labeling of products with Made in USA or similar representations. Stanley, a 153 year old American company headquartered in New Britain, Connecticut, is a leading manufacturer of tools, hardware and specialty hardware for home improvement, consumer, industrial and professional use. Attached is a list of the products Stanley manufactures or sells. Stanley's operations are global with 20,000 employees at 114 manufacturing and major distribution facilities in 20 countries and having sales in virtually every country of the world. As a growing multinational manufacturing company competing in markets worldwide, Stanley has a vital interest in the rules under which it must operate, particularly those governing claims of origin for manufactured products. Stanley is frustrated by what it views as the Commission's archaic "all or virtually all" standard for representing that a product is Made in USA. This standard is arbitrary and is a disservice to consumers with the potential for creating more deception than it prevents. Moreover, it places U.S. manufacturers with multi-national operations at a distinct competitive disadvantage with both foreign and other domestic producers. Strict interpretation of an "all or virtually all" rule would prohibit the marking of end-use products manufactured domestically from foreign components as being Made in USA despite the fact that all of the physical qualities and performance characteristics that make it useful and desirable to consumers were the result of American labor, technology and capital equipment. Products having those attributes should, in fairness to consumers in making choices between competing alternatives, properly be described as American-made. Otherwise, the consumers will be misinformed as to a material fact that is important to their selection. Another danger of an "all or virtually all" standard is the incongruity that would arise when the same product is exported to Mexico or Canada. The product could not be marked as Made in USA for the domestic market, but under NAFTA, must be marked as Made in the USA. Thus, U.S. companies would be denied the opportunity to inform U.S. consumers of the American origin of the product and must incur the cost of duplicate product inventories and packaging; one for domestic sales and one for export sales. Foreign competitors do not incur these costs. If the same product was made in Canada or France, for example, they could be marked Made in Canada or Made in France, respectively, whether sold in the U.S. or the country of manufacture. The Commission has taken a very different tack with respect to claims of foreign origin. In carrying out its responsibility under the law to protect consumers from deceptive or misleading labeling or advertising, the Commission has not found it necessary to apply an "all or virtually all" standard to claims of foreign origin, but has largely deferred to the Customs Service on the proper country of origin marking of those goods.{1} If, as the Commission suggests, the issue is whether origin representations deceive or mislead American consumers, the Commission should apply the same standard to all goods in determining whether the public is deceived or misled by a claim of foreign origin. Stanley urges the Commission to abandon an "all or virtually all" standard. It simply does not reflect the realities of the global economic environment. As a global enterprise, Stanley has a strong interest in the establishment of uniform origin rules as envisioned by the Uruguay Round Agreement on Rules of Origin.{2} This desire for uniformity includes uniform country of origin marking requirements for both domestic and foreign sales. As discussed in the body of this submission, it is Stanley's position that the Commission should adopt the "substantial transformation" test established by the Supreme Court in 1907 and administered by the Customs Service since then; a rule that has worldwide recognition as the fairest method for determining a product's country of origin and preventing consumer deception. Although there is not yet universal agreement on the factors to be considered in determining whether there has been a substantial transformation, the Commission should be guided by the results of this negotiation. The Commission should not replace an "all or virtually all" standard with a single, arbitrary quantitative threshold (e.g., 50 percent of the value of the goods, etc.) applicable to all products. DISCUSSION I. The Objective of Section 5 of the Federal Trade Commission Act and Section 304 of the Tariff Act Are Identical To Prevent Consumer Deception. In its Federal Register Request for Public Comment{3} ("Federal Register notice"), the Commission characterizes both its statutory mandate and that of the Customs Service as two governmental entities operating to achieve different goals. However, a review of the two statutes and their interpretations shows this not to be the case. While the Commission and the Customs Service regulate different aspects of commerce, both agencies work toward thwarting deception of the ultimate purchaser of goods by regulating the origin marking of products. The Federal Register notice states that the Commission derives its power to regulate the use of "Made in USA" marking from its general statutory mandate to prevent "unfair or deceptive acts and practices" under section 5 of the Federal Trade Commission Act ("FTC Act").{4} Id, 53923. The notice goes on to describe the mandate under which the U.S. Customs Service governs the marking of imported goods as one geared primarily towards collecting duties and determining quotas: The Tariff Act requires, specifically for purposes of quotas and duties, that products entering the United States bear "the English name of the country of origin of the article," and that one foreign country be designated as the country of origin. * * * * * The latter approach would have the benefit of applying one set of rules to both claims of domestic origin and claims of foreign origin. However, the substantial transformation test is principally aimed at determining a country of origin for purposes of tariffs and quotas, not anticipating the degree of domestic content that consumers would attach to affirmative Made in USA claims. Id, 53925 (emphasis added). While the Commission may be aware of its own statutory mandate, its statement that Customs' responsibilities with respect to origin marking are "principally . . . for purposes of tariffs and quotas" is inaccurate. The country of origin marking provision in section 304 of the Tariff Act of 1930, as amended (19 U.S.C. 1304), is specifically directed to the protection of the ultimate purchaser as its prime objective. Section 304 states in pertinent part: . . . every article of foreign origin . . . imported into the United States shall be marked in a conspicuous place as legibly, indelibly, and permanently as the nature of the article . . . will permit in such a manner as to indicate to an ultimate purchaser in the United States the English name of the country of origin of the article. 19 U.S.C.  1304(a). The statute specifically authorizes the Secretary of the Treasury by regulation to "[r]equire the addition of any other words or symbols which may be appropriate to prevent deception or mistake as to the origin of the article . . ." 19 U.S.C.  1304(a)(2) (emphasis added). In U.S. v. Friedlaender & Co., 27 CCPA 297, C.A.D. 104 (1940), often cited by both the courts and the Customs Service in country of origin marking decisions, the Court of Appeals described Customs' mandate: Congress intended that the ultimate purchaser should be able to know by an inspection of the marking on imported goods the country of which the goods is [sic] the product. The evident purpose is to mark the goods so that at the time of purchase the ultimate purchaser may, by knowing where the goods were produced, be able to buy or refuse to buy them. Thus, in the area of origin marking regulation, the Customs Service acts pursuant to statutory direction, while the Commission derives its authority indirectly from the broad mandate to prevent deceptive and misleading claims. Both agencies, however, are charged with ensuring that consumers are able to make their purchasing decisions based upon accurate origin information. Consequently, since the Congressional objectives are the same, the rules for determining the origin of a product should be the same. This would ensure that a claim of origin did not deceive or mislead American consumers. It would also ensure that American companies are not hindered by having to comply with conflicting rules intended to achieve the same objective. II. An "All or Virtually All" Standard Must Be Changed In the Hyde{5} and the New Balance{6} cases, the FTC sought to impose an "all or virtually all" standard for the use of Made in USA on a product: "all or virtually all" of the component parts of a product must be made in the United States and "all or virtually all" of the labor in assembling the product must be performed in the United States. The FTC solicited comments to the proposed Hyde consent decree. The majority of the responses received were opposed to the standard, most stating that the standard does not accurately reflect the modern global realities which U.S. manufacturers face. Stanley agrees that an "all or virtually all" standard does not reflect global realities. In the hand tools industry, it is extremely difficult, if not impossible, for American manufacturers to obtain all or virtually all materials or components from domestic sources in many instances. Many companies are forced to import steel because it is not available from domestic sources. However, even when it is available, much of the domestically produced steel contains imported iron ore.{7} In addition, nickel, chromium and other raw materials used in manufacturing hand tools must be imported because they are either not mined in the U.S. or mined in insufficient quantities.{8} Thus, many companies believe they satisfy the strict interpretation of an "all or virtually all" standard, although they may not, which means that hand tool manufacturers using what they believe to be steel made in the U.S.A., may have difficulty honestly representing their products as Made in USA unless the substantial transformation test is applied. Within the mechanics hand tool business, there is the general perception that where the tools are made is an important consideration to many customers. Unlike the users of many products, there is strong belief among end-users of hand tools that the quality they demand is associated with being American-made. But as noted above, to impose an "all or virtually all" standard would require many companies to stop claiming Made in USA which could mislead consumers and harm businesses. American consumers would be unaware that the important attributes of the tool the precise fit, strength, toughness, durability, safety features, and lasting value are attained through the efforts of American workers in American plants. Similarly, if the Commission chooses instead to simply lower the threshold to some arbitrary percentage of U.S. content (e.g., 50%, 75%), or require qualified claims (e.g., USA 80%), that too would be unacceptable because its precise meaning is not apparent, and a lower threshold would perpetuate the additional and unnecessary costs and manufacturing inefficiencies associated with maintaining two distinct product and packaging inventories to service the domestic and foreign markets. Those costs are not insignificant. A packaging change alone, without considering the additional administrative costs associated with maintaining dual inventories, costs Stanley roughly $250 per stock keeping unit. That amount multiplied by the thousands of individual products made by Stanley graphically illustrates the steep, unnecessary costs of maintaining dual inventories. A single test for all origin claims based on the concept of substantial transformation would eliminate those unnecessary costs, retain U.S. jobs and increase the competitiveness of many American companies. With an "all or virtually all" standard, there would be little incentive to create or retain manufacturing jobs in the U.S. for products that require imported material or components because, aside from the dual packaging costs, many products can be manufactured more cheaply overseas. III. In Adopting a New Rule, the Commission Should Use the Substantial Transformation Test for Determining Whether a Product is Made in USA For determining whether a Made in USA claim is accurate, Stanley believes the Commission should adopt the objective standard that emerges from the current rules of origin harmonization negotiations conducted under the auspices of the World Trade Organization. The starting point for the negotiations is the substantial transformation test. The test provides a judicially created, long used, widely accepted approach to origin determinations: an article that undergoes processing in two or more countries is the product of the country in which it last underwent a substantial transformation. The concept of substantial transformation can be traced back to the Supreme Court case of Anheuser Busch Brewing Assn. v. United States, 207 U.S. 556 (1907), in which the Court stated: Manufacture implies a change, but every change is not manufacture, and yet every change in an article is the result of treatment, labor and manipulation. But something more is necessary, as set forth and illustrated in Hartranft v. Wiegmann, 121 U.S. 609. There must be a transformation; a new and different articles must emerge, having a distinctive name, character or use.' In the current international negotiations to harmonize rules of origin begun at the World Customs Organization, conducted under the auspices of the World Trade Organization, the "last substantial transformation" standard has been accepted as the basic principle around which the discussions will revolve. As the U.S. Statement of Administrative Action{9} summarily states: Article 9 [of the ARO] establishes fundamental principles and objectives for the harmonized rules, including objectivity, predictability, and coherence. . . The basic principle under which the Committees will conduct their work is that a product will be considered to originate in the country in which it was "wholly obtained" or, if the product is produced in more than one country, in the country where it was last substantially transformed. SAA, 234. Although substantial transformation has been adopted worldwide, the international negotiations will focus on the factors, and the order in which they should be considered, in determining whether a substantial transformation has occurred. While there is unanimous agreement that a "new and different article must emerge, having a distinctive name, character or use," the negotiators will attempt to agree on the simplest, fairest, most transparent method for determining whether a substantial transformation has been achieved. The U.S. and Canada in the U.S.-Canada Free Trade Agreement, and then the U.S., Canada, and Mexico in NAFTA, agreed that rules of origin based initially on a tariff classification change approach meets the above criteria. The tariff classification change approach is based on the notion that processing which results in a change in the tariff classification of an article has substantially transformed that article. However, because the Harmonized Tariff Schedules were not intended to determine the origin of products, the NAFTA countries recognized the limitations on using them for that purpose. For example, the roughly formed shape of an article or a part of an article that is substantially transformed may often be classified for convenience under the same tariff heading both before and after processing. Consequently, the drafters of the NAFTA origin rules adopted supplemental criteria for determining whether a substantial transformation occurs, such as a value-added concept, the "regional value content" (materials, labor and overhead), or the requirement that certain "critical processes" be performed in a country, or a combination of these. The NAFTA origin rules are not perfect, but Stanley believes those rules offer a model that should be followed by the Commission because they are rules tailored to the manufacture of individual products. For some products, the tariff classification change approach adequately reflects a substantial transformation, but for other products, an approach based on value-added, or U.S. content, or "critical processes" performed in the U.S., would be needed to fairly inform consumers of the real contribution from American parts and labor. Attempts to develop and administer objective rules for determining origin of manufactured products and when they can be represented to be Made in USA would be an overwhelming and unnecessary task for the Commission to undertake, particularly given the decisions by the federal courts, including the Court of International Trade, the Court of Appeals for the Federal Circuit, and their predecessors, which articulate a well developed body of law for determining country of origin. In addition, the NAFTA negotiators have already done much of the work and the current international negotiations are designed to achieve the same end. Once an international agreement is reached and the U.S. implements the agreement, Stanley recommends that the Commission incorporate the agreement and any implementing regulations adopted by the Customs Service into its own regulations. Stanley recognizes that the Commission may not wish to wait the many years it may take for the harmonized rules of origin to be negotiated and then adopted by the U.S. In that case, Stanley recommends that the Commission adopt the substantial transformation concept for determining whether an article is Made in USA. Use of substantial transformation would unify and harmonize domestic marking regulation. Instead of having to look to Customs' regulations for guidance on certain marking issues and then to the Commission regulations for guidance on others, business could look to a single, uniform set of marking regulations. IV. The Commission Should Not Adopt a Pure Quantitative Approach Many commenters on the Hyde proposed consent agreement advocated changing the Commission standard to one which expressly states an arbitrary, specific percentage requirement for domestic content. Stanley does not agree. There is no litmus test that can be applied to a broad spectrum of manufactured goods that could serve as a useful guide for determining whether consumers may be deceived or misled by a Made in USA claim. Aside from the inherent difficulties in establishing one fair domestic content percentage applicable to all products and computing domestic content, as the Commission noted in the Request for Public Comment, if the Commission adopts a pure quantitative approach, some domestic manufacturers will continue to experience the same additional costs arising from the present Commission standard: dual packaging and product inventory systems would be perpetuated, requiring manufacturers to maintain different labeling types and manufacturing processes for products that qualify under the internationally harmonized rules of origin but do not qualify under the Commission's quantitative criterion. This would continue to place U.S. manufacturers at a competitive disadvantage with their foreign competition, which always results in a loss of U.S. jobs. More realistic and fairer to all concerned consumers and business would be the reasoned application of the relevant factors for determining country of origin that have been developed by the courts over the decades. Moreover, a review of the proposals put forth pursuant to the Hyde proposed consent agreement, shows that those recommending the use of a specific percentage of domestic content do not explain how such a quantification would be substantiated and what would be included in the calculation. If the Commission were to adopt such an approach, it would have to determine a threshold of domestic processing and value-added which approximates an appropriate level of U.S. material and processing, and define the method for determining variable costs to be included and allocating fixed costs. This task would, to a great extent, duplicate Customs' effort in developing detailed, complex accounting regulations (the Appendix to Part 102 of the Customs Regulations (19 CFR Part 102)) needed to implement the regional value content under NAFTA. All companies, large and small, claiming Made in USA would have to be prepared to present to the Commission detailed cost of production analyses in support of Made in USA claims. Such analyses can be extremely costly and therefore should be avoided when, for most products, the tariff classification change rules offer a simple, effective method for determining country of origin. Moreover, the additional personnel needed by the Commission to administer and enforce a pure quantitative approach would be enormous and wholly inconsistent with the current Government downsizing trend. VI. Conclusion An "all or virtually all" rule for claiming Made in USA has been criticized by our trading partners as a nontariff barrier to trade in violation of GATT. For this and the other reasons expressed in the body of this presentation, the Commission should continue its abandonment of an "all or virtually all" standard for claiming Made in USA and replace it with the "bright- line," objective country of origin rules that emerge from the international harmonization activities, which is based on the substantial transformation test. If the Commission acts before the international negotiations are concluded and chooses a methodology for determining whether a substantial transformation has occurred, Stanley supports adoption of the tariff classification change approach plus supplemental criteria used in the NAFTA rules of origin for determining entitlement to preferential tariff treatment. Stanley believes the Commission should offer this guidance through a rulemaking procedure under 5 U.S.C. 552. VII. Request to Participate in Made in USA Workshop The Stanley Works requests the opportunity to participate in the public workshop to be held March 26 and 27, 1996 at FTC headquarters in Washington, D.C., and would be represented by the undersigned. My telephone number and fax number are included on the first page of this submission in the firm letterhead. Sincerely, Richard H. Abbey On behalf of The Stanley Works RHA\bh Footnotes: {1} In cases involving unmarked goods, the FTC has required disclosure of foreign origin where the total cost attributable to the domestic content in such goods has been less than 50%. See, e.g., Segal v. FTC, 142 F.2d 255 (2nd Cir. 1944). {2} The Uruguay Round concluded in a wide-reaching agreement liberalizing trade and establishing the World Trade Organization. Final Act Embodying the Results of the Uruguay Round of Multilateral Trade Negotiations, December 15, 1993, 33 I.L.M. 1 (1994) (signed at Marrakesh April 15, 1994). Attached to the main agreement were a number of annexes, one of which was the Agreement on Rules of Origin ("ARO"). The ARO provides a framework for the implementation of harmonized rules of origin under the auspices of the World Customs Organization ("WCO"). Although a consensus was not reached for the actual harmonization of the rules of origin of the member nations, the ARO establishes a three-year work program that is intended to study various rules and lead to such a harmonization. {3} FTC: Request for Public Comments in Preparation for Public Workshop Regarding "Made in USA" Claims In Product Advertising and Labeling, 60 Fed. Reg. 53922 (October 18, 1995). {4} 15 U.S.C.  45. {5} Hyde Athletics Industries, Inc., F.T.C. File No. 922-3236. {6} New Balance Athletic Shoe, Inc., F.T.C. Docket No. 9268. {7} In 1994, 21% of the iron ore consumed in the production of steel was imported (Bureau of Mines, Mineral Industry Surveys, Annual Review - 1994). {8} In 1994, imports accounted for 100% of all chromium and nearly 100% of the primary supply of nickel (Bureau of Mines, Mineral Industry Surveys, Annual Review - 1994). {9} The U.S. Statement of Administrative Action ("SAA") is a document which was created by the Executive branch and submitted to Congress in compliance with section 1103 of the Omnibus Trade and Competitiveness Act of 1988, the legislation which delegated fast-track authority to negotiate a final agreement under the Uruguay Round. The SAA represents the view of the Executive branch as to its interpretation and application of the agreement. STANLEY PRODUCTS Consumer Tools Stanley Tools. Carpenter's hand tools, tool boxes, paint preparation and application tools, masonry tools and agricultural tools. Industrial Tools Stanley Mechanics Tools. Mechanics' hand tools, air tools, electronic diagnostic tools and tool boxes. Stanley Storage Systems. Cabinets, racks and engineered handling systems for inventory control, storage and retrieval. Mail Media. Custom-designed precision tool kits and safety products. Engineered Tools Stanley Fastening Systems. Pneumatic nailers and staplers, fasteners, and office products. Stanley Hydraulic Tools. Mounted and hand-held hydraulic breakers, shears, crushers and specialty tools. Stanley Air Tools. Torque-controlled fastening tools for vehicle assembly. Hardware Stanley Hardware. Consumer, residential, architectural hardware, closet doors, organizers, mirrored doors and decorative wall mirrors. Stanley Acmetrack. Bifold and sliding closet doors and closet organizing systems. Specialty Hardware Stanley Door Systems. Residential garage and entry doors, garage door openers and home automation products. Stanley Access Technologies. Power operated doors, gates, sensors and parking systems.