Federal Trade Commission Received Documents Jan. 22, 1996 B183549000990 INTERNATIONAL BUSINESS-GOVERNMENT COUNSELORS, INC. 818 CONNECTICUT AVENUE, 12TH FLOOR, WASHINGTON, D.C. 20006-2702 January 19, 1996 Mr. Donald S. Clark Office of the Secretary Federal Trade Commission (FTC) Room 159, Sixth and Pennsylvania Avenue, N.W. Washington, D.C. 20580 "Made in USA" Policy Comments, FTC File No. P894219. Dear Secretary Clark: On behalf of Polaroid Corporation, we respectfully submit the following comments with regard to the Federal Trade Commission's request for comments as published in the Federal Register on Wednesday, October 18, 1995 (60 Fed. Reg. N0. 201 53922). Polaroid Corporation commends the FTC for its attention to this important issue and requests that its representatives be allowed to participate in the upcoming workshop. For the reasons described herein, Polaroid respectfully submits that the current "Made in USA" standard is unworkable and commercially unreasonable. For this reason, Polaroid suggests that any new standard be harmonized with existing Customs marking rules, specifically the existing Customs NAFTA Marking Rules found in 19 C.F.R. 102.2. Polaroid, based in Cambridge, Massachusetts, has annual sales of over $2 billion and invests over $160 million annually in research and development. Polaroid designs, manufactures, and markets worldwide a variety of products principally instant image recording fields. These include electronic imaging recording devices, conventional films, and light polarizing filters and lenses. The principal products of the company are used in professional and amateur photography, industry science, medicine and education. Polaroid is one of the largest camera manufacturers in the world and is the world's largest supplier of instant photographic equipment, including instant cameras and instant film. The importance of country of origin product labeling has drastically increased as companies compete in a global marketplace. As heightened international trade flows and economies of scale intensify competition, global sourcing of inputs, components and finished goods has enhanced the need for accurate country of origin product information. These changes have intensified the challenge for business and government alike to provide consumers with meaningful and accurate country of origin information. The FTC's recent consideration of "Made in USA" is important to foster strength and global competitiveness for US companies and provide consumers with meaningful and accurate country of origin information. Accordingly, as an enterprise whose markets span all continents, the Polaroid Corporation has a significant interest in the FTC's resolution of a new "Made in USA" standard. BACKGROUND The FTC has long taken the position that a product may not be labeled with an unqualified "Made in USA" claim unless it is composed entirely, or almost entirely, of US materials and components, and unless it is manufactured entirely, or almost entirely, with US labor. As a consequence of this extremely demanding (and unclear since entirely means 100% and what does "almost" mean?) standard, few manufactured products are currently being lawfully labeled as "Made in USA." The FTC has ruled that the presence of any significant foreign component precludes an article from being labeled "Made in USA" even where that material is subjected to further processing in the US during the course of manufacturing.(1) The FTC threshold for the "Made in USA" claim was difficult to meet decades ago, when the standard was adopted. In recent years, as manufacturing has expanded and diversified globally, US companies have adopted global sourcing strategies. This trend exists in the film, chemical, and electronics industries as well as many other sectors of the economy. As new technologies are developed, older technologies have been shifted to more efficient manufacturing sites, often off-shore. Specialized components and subassemblies for worldwide use are produced in single plants which can achieve economies of scale. As a result, there are fewer products on the market today whose components are all made in the US. In spite of these developments, products made in the US with the use of foreign-origin components do contain a high degree of US value added. Product research, design and engineering activities are conducted in the United States. Capital-intensive and labor-intensive manufacturing operations are performed in the US to transform domestic and imported components into new and unique articles of commerce, with names, characteristics and uses different from those of the components. These products are "Made in USA" under any reasonable commercial standard, and are recognized as such when exported to foreign markets. The FTC's labeling standard should be modernized to reflect the current manufacturing and sourcing practices of United States companies. In addition to the FTC's "Made in USA" labeling rules, US manufacturers are required to mark products and their packages in accordance with the country of origin marking requirements imposed under Section 304 of the Tariff Act of 1930 [19 U.S.C. Section 1304] and administered by the US Customs Service. Section 304 requires that all goods imported into the US, or their packages, be marked permanently, legibly and in a conspicuous place so as to advise the "ultimate purchaser" in the US of the good's country of origin. Imported goods and materials are not exempt from such marking unless they are "substantially transformed" in the US into new articles of commerce, having a different name, character, or use. Goods of Canada and Mexico, imported into the US are exempt from marking to indicate their foreign origin if, after importation, they undergo working or processing sufficient to work a change in tariff classification as noted in the NAFTA Marking Rules, 19 C.F.R. 102.20. There are numerous other country or origin and marking rules related to tariff preference agreements. Recognizing the commercial importance of merchandise origin rules, the US and other members of the World Trade Organization (WTO) recently signed and Agreement on Rules of Origin which calls for a three-year study aimed at developing harmonized rules of origin for merchandise trade. US manufacturers have encountered numerous situations where this multiplicity of origin rules has led to inconsistent results, and to increased costs of manufacturing and ensuring legal compliance. For example, several instances have arisen where products manufactured in the US with the use of foreign components are exempt from marking with a foreign origin pursuant to 19 U.S.C. Section 1304; however, the FTC's rules prevent the goods from being marked with the affirmative representation that they are "Made in USA". The products are thus marketed in the US with no statement concerning their origin. At the same time, when these products are exported to Canada or Mexico, they are required by the NAFTA Marking Rules to be labeled "Made in USA". To meet these conflicting requirements, US companies are often required to establish special packaging and relabeling facilities, and to design and manufacture multiple forms of packaging for different destination markets. If the FTC's rules were consistent with the country of origin marking requirements administered by US Customs, these additional costs could be avoided, and consumers could be advised of the origin of the goods which they purchase. In this regard, the Commission's goal should not be to measure what consumers think a "Made in USA" label means (or should mean), but instead to ensure that the criteria for labeling products as "Made in USA" are consistent with the criteria for labeling products with any other indications of national origin. QUESTIONS The six principal questions and several sub-questions on which FTC seeks public comment are answered to the best of the company's ability. Polaroid has not answered all of the questions. Polaroid believes that the aforementioned public workshop should shed light on many questions that the company is not in the position to answer at this time. POLAROID'S CORRESPONDING ANSWERS Question 1: When consumers see product advertisements or labels stating or implying that products are "Made in USA," "Made in America" or the equivalent, what amount of US parts and labor do they assume are in the products? and, Question 1..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? While Polaroid does not have specific empirical evidence that measures such consumer perceptions, we believe the evidence of increased consumer awareness with regard to imports in general is obvious. Consumers need only to look as far as the TV sets in their living rooms or at the vast array of products in their homes to realize that imports of finished goods and components are part of their economic reality. Last year, US consumers purchased $663 billion of imported goods (exports for that period were $512 billion). Today's consumer is surrounded by imported products and enjoys the high quality and choice afforded by an integrated marketplace. US consumers exemplify their knowledge of imports by buying imported products. Polaroid believes that this globalized marketplace has increased the knowledge consumers have with regard to foreign sourcing. The American consumer is sophisticated enough to realize that "Made in USA" product claims vis-…-vis the "all or virtually all" standards are unrealistic. As mentioned in the FTC's notice, a much smaller percentage of products assembled in the US today is comprised of "all or virtually all" US parts and labor, compared to previous decades. What does this standard mean? Is it 95-100% by value or 90-100% by value? With such an unclear standard, Polaroid agrees that fewer products can meet the standard. This trend will continue. There is increasing need for the current standard to be revisited. Question 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%)? The most obvious cost associated with the current "all or virtually all" threshold is that many companies which produce goods within the US using a degree of foreign components cannot take advantage of the valuable "Made in USA" claim for marketing, advertising or other purposes. Today's global marketplace has resulted in increased competition, which in many instances has created a commercial environment where certain goods or components are not available within the US. In fact, in very many cases, domestic suppliers for products simply do not exist. Foreign sources are the only ones available to US manufacturers in many industries. US trade law specifically recognizes this fact by allowing for the suspension of customs duty on products not available within the US. The trade laws of other nations (e.g., the European Union) allow for similar practices as well. A lower threshold (e.g. 50%) would more fairly account for global sourcing and allow US companies to take advantage of "Made in USA" claims, however, lowering the threshold would impose a new and more onerous standard on companies. Polaroid believes these additional compliance costs would outweigh any advantage afforded by lowering the threshold. Instead, Polaroid believes that the FTC should align the "Made in USA" standard to those already in existence within US trade laws (see question #3). Another obvious drawback associated with the current "all or virtually all" threshold is that many companies which produce goods within the US using some degree of foreign components cannot advise consumers that substantial manufacturing has occurred in the US. At the same time, the Customs laws recognize that where a product is manufactured in a foreign country with components sourced in many different nations, the country of origin for marking purposes, is the last country where the article underwent a "substantial transformation" prior to entering the US. Thus a product labeled "Made in Japan" or "Made in Germany" might contain a substantial number of components from countries other than the named countries of origin. Why should products "Made in USA" be held to a different standard? There are many instances in which an article derives its character from the assembly process, rather than from any one or more of its components. This is particularly true in the photographic camera and film and electronic instrument industry where specialized and non-specialized components are arranged into virtually infinite configurations which perform unique functions. Polaroid submits that a product should be truthfully labeled as "Made in USA" if it is "substantially transformed" in this country into a new and unique article or commerce, pursuant to Customs origin marking requirements. Customs requirements recognize that a new article of commerce must be created in order for the product to be excepted from marking as a product of a foreign country. This requirement will be sufficient to prevent mere "pass through" operations from being deemed sufficient to permit an article to be labeled "Made in USA." Quantitative tests of origin based on value should not be considered, as they are too difficult to administer. Typical problems encountered in the developments and administration of these tests include the following: * Determining whether the local value content requirement should be calculated as a percentage of materials costs, of "direct cost of manufacturing," of total cost of production, or some other formula; * Determining whether intermediate products produced in the US in part from imported materials or components should be treated as domestic or foreign (i.e., the treatment of "roll up"); * Determining how "self-produced" materials should be valued; * Determining whether producers should be required to calculate local content on a product-by-product basis, or whether they should be permitted to "average" production costs over a stated period of time; or, * Determining how to allocate general overhead costs which may relate to the production of more than one product. In addition to being arbitrary, value-based rules are difficult and expensive for companies to administer. Minor changes in a producer's sourcing patterns, or in the price for a given component, can change the result of a country or origin marking determination. Furthermore, two companies performing the same operations in the US may receive different origin determinations simply because they may have paid different prices for a given material or component. The selection of any quantitative basis for an origin rule is necessarily arbitrary. If a 50% local content rule is adopted, there is likely to be no appreciable difference in goods featuring 49.5% and 50.5% local content, respectively -- although the goods would have different countries of origin under such a test. Question 2., a: What are the precise benefits of being able to make unqualified "Made in USA" claims for lower domestic-content products? Polaroid believes that there are precise benefits for being able to make an unqualified "Made in USA" claim for products containing a lower domestic content than that which is currently allowed. However, Polaroid would prefer a rule which utilizes the "substantial transformation" approach as contained within the "tariff shift" methodology (see question #3) which is consistent with both US and international trade laws and norms. Question 2.,c: What are the costs and benefits of alternative thresholds (e.g., 50%, 75%, products "substantially transformed" in the United States)? Polaroid believes that any origin threshold based on a "domestic content" standard, such as one calculated on domestic value, would pose enormous regulatory problems for Polaroid and other domestic manufacturers. Under such systems, companies would be required to conduct detailed internal cost analysis in order to accurately determine the exact domestic content for their products. Furthermore, as sourcing patterns shift, and prices of materials, labor and components change, companies would be required to constantly update their cost/value analyses. See additional discussion above about quantitative standards. The experience of the US under the US-Canada Free Trade Agreement, the Buy America Act and other regimes demonstrates that value-based content tests can be extremely cumbersome to administer. Formulating a value-based test is itself a difficult exercise. For instance, should such a test be based solely with reference to the article's materials' cost (as in the Buy America Act), or should it include labor and overhead costs as well? If the former is chosen, there is a possibility that an article which derives substantially all of its value in the United States might not qualify as "Made in USA" due to the presence of foreign materials. On the other hand, if the latter is chosen, there is a possibility that labor-intensive goods, or goods with high value added, might qualify for a "Made in USA" claim even if they contain no domestic materials. In either case, there remains the question whether the consumer is receiving meaningful origin information. Finally, a "domestic value" standard would require enormous US Government resources in order to be adequately enforced. In this environment of shrinking government resources, this does not seem to be a realistic alternative. Question 3: What are the costs and benefits for using the same tests for "Made in USA" claims as those imposed by US Customs requirements ("substantial transformation"), the Buy America Act (50% cost) or other domestic content statutes or rules? There are many benefits for using already established statutes and procedures for "Made in USA" claims, including predictability; transparency; and enforceability. Polaroid believes that the country of origin marking rules established in the NAFTA Marking Rules and those imposed by US Customs are appropriate candidates for use with "Made in USA" claims. First, these rules are already familiar to, and generally accepted by, the business community. Furthermore, companies now keep records to substantiate their country of origin marking claims as well as their claims for NAFTA preferential tariff treatment. In fact, the US Customs Service has established the Recordkeeping Compliance Manual to provide specific guidelines for importers to follow in the retention of all import records dealing with the classification and value of merchandise. This provides government with an already established "paper trail" for enforcement purposes, while providing companies with the requisite transparency needed for compliance. FTC is now considering lowering the threshold for "Made in USA" but it has not yet determined an appropriate level for that threshold. Polaroid believes that the US Customs/ NAFTA Marking Rules would perfectly establish the threshold for all products. Lowering the "Made in USA" threshold across the board (e.g., 50%) is not only inappropriate considering the FTC's mission and resources, but will place undue burden on the private sector. As described above, a value-based lower threshold will affect products differently, and result as extremely costly to companies and cumbersome to enforce. Conversely, the US Customs/NAFTA Marking Rules are specific to the products for which they apply. That is, each product is subject to a rule that has been established (through years of court precedence and technical and legal analysis) to meet the specific requirements of each article. These rules are based on the long-standing principle of "substantial transformation" which is embodied in the "tariff shift" methodology. "Substantial transformation" means that a "new and different" article of commerce has been created from components or materials. Moreover, "substantial transformation" is gauged by using the tariff shift methodology, wherein a component or article of merchandise shifts from one tariff classification to another. Thus, for "Made in USA" purposes, each product would have its own custom and judicially tested threshold. The "Buy America Act" is designed solely for the purpose of US Government procurement. It is not designed to be applied to products across the board. While this value-based system may be appropriate for procurement purposes, it will simply not be adequate for the purposes of tracking "Made in USA." Polaroid suggests that the FTC not consider these rules for "Made in USA" claims. Question 4: Do foreign customs officials prohibit the addition of qualifying phrases on Made in USA labels? If so, does the traditional FTC requirement that labels make disclosures of substantial foreign content add significant manufacturing costs where sellers wish to sell a single item in domestic and foreign markets? Would an option of stating qualifying disclosures only on packages, hangtags, etc. at time of sale in the US market significantly reduce such costs? Country of origin marking requirements differ from country to country. Most foreign customs agencies do not require (as the US does) that all products imported into their countries provide country of origin information. Qualified origin statements are often not recognized as legitimate claims and are perceived as deceiving to the consumer in many countries. Customs delays or denied entry of merchandise often result. As recent trade agreements, such as the Uruguay Round GATT Agreement, have lowered tariffs internationally, many countries are using non-tariff measures such as country of origin marking as barriers to trade. A US system that is complicated and divergent like those established in the Hyde Athletic Industries Consent Agreement, will only exacerbate problems that US manufacturers are already experiencing with foreign customs authorities. Qualified "Made in USA" claims do in fact contribute to expensive manufacturing inefficiencies. For example, under NAFTA Marking Rules a company can, and must, mark their products as "Made in USA" if they meet the specified NAFTA requirements.(2) The "Made in USA" mark, particularly in Mexico, is extremely advantageous to US manufacturers, as Mexican consumers associate US products to be of high quality and value. That same product, however, cannot be sold in the US with the same marking unless "all or virtually all" of the product is domestic. Since the NAFTA rules which rely on the "tariff shift" methodology do not comport with the FTC standard, manufacturers are faced with a costly and inefficient dilemma wherein they must run separate production runs and retain different inventories for the same products. Companies must also monitor the re-importation of their products from Mexico to avoid marking complications. This commercial environment is not advantageous to US manufacturers or consumers. Polaroid believes that the use of hangtags or other qualifying mechanisms should be used only as a last resort. The company believes that by adopting a single standard, such practices will be unnecessary. Question 5., 5.a-g: How should the proportion of domestic content be measured with respect to "Made in USA" claims? Domestic content should be measured via "substantial transformation" as embodied within the "tariff shift" methodology. Value-based systems are too onerous, inaccurate, costly, and difficult to enforce and not applicable to products across the board. Question 6., 6.a: What form of guidance should the commission offer with respect to "Made in USA" claim? Polaroid believes that if the FTC adopts a "Made in USA" labeling standard which is consistent with Customs marking requirements, US manufacturers will be able to look to the Customs Service and the Federal Trade Commission for guidance regarding marking requirements. For example through the US Custom's pre-importation rulings program, advice can be provided to manufacturers to assist them in compliance with the standard. Should the FTC "codify" its rules of origin as Customs has done with the NAFTA Marking Rules of 19 C.F.R. 102.2, American companies would then be able to discharge their legal obligations by applying those codified rules, minimizing the need for the FTC and Customs to expend agency resources on case-by-case administration. Once an objective and administrable rule has been published, the FTC can take necessary enforcement action on a case-by-case basis. CONCLUSION/RECOMMENDATIONS Polaroid agrees with the FTC that the "Made in USA" designation is commercially valuable and its integrity should be preserved. However, the current standard which only allows products which contain "all or virtually all" domestic labor and components, to benefit from this designation is unclear and too high. In today's global marketplace this standard is commercially unrealistic. As mentioned in the FTC's notice, a much smaller percentage of products assembled in the US today is comprised of "all or virtually all" US parts and labor, compared to previous decades. Polaroid agrees that this trend will continue, increasing the need for the current standard to be revisited. Companies should not be faced with an additional regulatory standard with regard to country of origin marking information. Such a regulation would impose a repetitive and costly compliance burden on the business community and FTC. Companies are already using established statutes and procedures for origin such as the NAFTA Marking Rules. Application of these rules for "Made in USA" claims makes sense. These rules will provide all interested parties with benefits including predictability, transparency and enforceability. Rather than lowering the "all or virtually all" threshold to an across the board percentage (e.g., 50%), domestic content should be measured via "substantial transformation" as embodied within the "tariff shift" methodology. Value-based systems are too onerous, inaccurate, costly, inflexible, difficult to enforce and inapplicable to all products. Thank you for considering these comments. Sincerely, James B. Clawson, IBC On behalf of Polaroid Corporation Footnotes: (1) See, e.g. FTC Advisory Opinion 2998 and Advisory Opinion 20. (2) Mexican labeling regulations specifically require that the country of origin be imprinted on articles for import into Mexico. These rules do not include unqualified origin statements.