Federal Trade Commission Received Documents July 1, 1996 P894219 B18354900192 THE FEDERAL TRADE COMMISSION COMMENTS OF U.S. WATCH PRODUCERS IN THE U.S. VIRGIN ISLANDS ON "MADE IN U.S.A." CLAIMS IN LABELING AND ADVERTISING "Made in U.S.A." Policy Comment FTC File No. P894219 Winston & Strawn Peter N. Hiebert Edward F. Gerwin, Jr. Michael L. Sibarium Counsel For Belair Quartz, Inc. Hampden Watch, Inc. Progress Watch Company Tropex Incorporated Unitime Industries, Inc. THE FEDERAL TRADE COMMISSION COMMENTS OF U.S. WATCH PRODUCERS IN THE U.S. VIRGIN ISLANDS ON "MADE IN U.S.A." CLAIMS IN LABELING AND ADVERTISING "Made in U.S.A." Policy Comment, FTC File No. P894219 PREFACE "It is not enough for regulatory agencies to simply enforce those laws entrusted to them. It is at least equally important to be alert to the question of whether the laws they are enforcing are up-to-date and continue to make sense." Chairman Robert Pitofsky, Statement Accompanying the Release of "Anticipating the 21st Century: Competition and Consumer Protection Policy in the New High-Tech Global Marketplace," A Report by Federal Trade Commission Staff (June 3, 1996) ("Anticipating the 21st Century"). "[M]ultiple government definitions for the same terms would have the potential to mislead consumers." Federal Trade Commission, Enforcement Policy Statement on Food Advertising at 7, reprinted at 59 Fed. Reg. 28,388 (1994). INTRODUCTION These comments are submitted on behalf of a group of United States watch producers (the "U.S. Watch Producers") composed of Belair Quartz, Inc., Hampden Watch, Inc., Progress Watch Company, Tropex Incorporated, and Unitime Industries. Each of these companies is incorporated and has its principal place of business in the United States Virgin Islands ("USVI"). The U.S. Watch Producers employ U.S. workers to produce watches in the U.S. Virgin Islands which are sold throughout the United States. These companies represent a sizable portion of the remaining U.S. watch production industry. The U.S. Watch Producers have a keen interest in this proceeding. As explained below, they have been prevented from marking their U.S.-made watches as "Made in the U.S.A." due to conflicts between the country-of-origin rules of the U.S. Customs Service ("Customs") and the Federal Trade Commission ("Commission" or "FTC"). The U.S. Watch Producers urge the Commission to abandon its "all or virtually all" standard for making unqualified "Made in U.S.A." claims. Such a standard no longer makes sense in a world of increasing globalization, changing consumer perceptions, and profound shifts in domestic and international policies favoring free trade around the world. "Made in the U.S.A." claims like all country-of-origin claims should be governed by harmonized international standards. The elimination of different origin standards for foreign and domestic products will ensure transparency in the global marketplace, enhance the competitive position of U.S. producers and help prevent the confusion and deception of U.S. consumers. The Commission should adopt the "substantial transformation" test applied by Customs as its sole test for determining the origin of both domestic and foreign products. Under this well-established standard, a product is "made" in the place where it takes its final identity and is transformed into a new and different article. For example, under the Customs test, watches are "made" where the watch movement is produced. Adoption of this reasonable test would eliminate current conflicts between the origin rules administered by Customs and those administered by the Commission, as well as conflicts among the Commission's origin rules themselves. Moreover, because substantial transformation is the conceptual basis for emerging international origin standards, the Commission's adoption of this test would greatly aid international efforts to harmonize origin rules. If properly implemented by the Commission, a substantial transformation test would best serve the interests of both U.S. consumers and producers. BACKGROUND Each of the U.S. Watch Producers makes watches in the U.S. Virgin Islands.(1) The U.S. Watch Producers play a significant role in the economy of the USVI and constitute a significant portion of the remaining U.S. watch production industry. In their USVI facilities, these companies produce watch movements long recognized as the very "guts" of a watch from parts procured from worldwide sources.(2) The production of watch movements requires numerous complex operations, involving inspection, quality control, re-working and testing of some 35 to 45 individual parts prior to, during and after assembly.(3) These labor-intensive operations, which are more fully described in Exhibit A, require substantial investment in diversified precision equipment and employee training and add considerable value to the finished watch. Despite their significant manufacturing operations in the United States Virgin Islands, the U.S. Watch Producers have been prevented by the Commission's origin rules from employing the "Made in the U.S.A." designation on their U.S.-produced watches. In January 1994, the government of the U.S. Virgin Islands and certain of the U.S. Watch Producers sought a ruling from Customs that the laws and regulations administered by Customs would not prohibit the use of the "Made in the U.S.A." designation on watches produced in the USVI from movements produced in the USVI. The requested ruling was clearly in accordance with Customs' precedent, including the "Drill Bits" decision, in which Customs had held that it would not bar the importation into the customs territory of the United States of an article marked "Made in the U.S.A." if the article was substantially transformed in the USVI.(4) In addition, the requested ruling comported with the "long-standing Customs policy" that, for purposes of substantial transformation, "the country of assembly of a watch movement is the country of origin of a watch."(5) In its response, Customs affirmed its traditional country-of-origin rules for watches and its ruling in the Drill Bits decision. However, Customs refused to issue the requested ruling. Customs' refusal was not based on its laws, regulations or decisions but, rather, on the fact that it had been "informally advised" by the Commission staff that such a ruling might not be in accordance with the Commission's country-of-origin requirements.(6) The U.S. Watch Producers believe that this Customs decision underscores the untenable conflict between Customs' modern substantial transformation origin rule and the Commission's outdated, ambiguous and unfair requirement that "all or virtually all" of a product's parts and labor must be of U.S. origin. The "all or virtually all" standard also fails to account for the global nature of the international watch industry. U.S. watch producers and their foreign competitors manufacture watches from parts produced in many nations. Indeed, due to the decline in the domestic watch industry in recent decades, it is highly unlikely that U.S. producers could manufacture watches from 100 percent U.S. parts. Under these circumstances, it is reasonable to adopt the Customs rule that watches originate where their movements are made. The continued application of the Commission's country-of-origin doctrine is unfairly preventing American firms whose U.S. workers unquestionably "make" watches "in" the United States from employing the "Made in the U.S.A." designation. Moreover, different federal agencies' application of different standards for making unqualified "Made in U.S.A." claims whether marked on a product, package, or in other advertising contribute to consumer confusion about the meaning of country-of-origin disclosures. The Commission should eliminate this conflict by rationalizing and harmonizing its country-of-origin rules on the basis of the substantial transformation test. DISCUSSION I. The Commission's Current Approach To "Made in the U.S.A." Claims Is Based On Outdated Assumptions, Deprives Consumers of Useful Information, Conflicts with International Standards And Unfairly Penalizes U.S. Producers. A. Overview of Conflicting Country-of-origin Standards Applied By Different Federal Agencies 1. Federal Trade Commission Standards During the Post-World War II period, the Commission developed a body of law requiring that foreign manufacturers disclose the country of origin of their products. The doctrine was crafted through numerous advisory opinions and a few litigated decisions, all interpreting Section 5 of the FTC Act. By the 1960s, the Commission took judicial notice of the factual basis of the doctrine: "[1] a belief or assumption by a substantial segment of the buying public that the product, not being clearly marked otherwise, was made in America; and [2] a preference by such buyers for the American-made product. . . ." In re Manco Watch Strap Co., Inc.(7) The purpose of the disclosure requirement was to allow consumers to distinguish between U.S. and foreign products.(8) The doctrine that emerged was tied closely to this rationale. Over the years, FTC staff informally advised the public that staff read the litigated cases and advisory opinions to stand for the following general propositions: (a) No disclosure of foreign origin was required where the value of the foreign content was less than 50% of the value of the finished product; and (b) Disclosure of a foreign country of origin was required if more than 50% of the value of the finished product was from one or more foreign countries.(9) With respect to "Made in U.S.A." claims, the Commission's decisions and advisory opinions suggested that such claims may be made only in conjunction with the sale of a product under the following circumstances: (a) the product has no foreign parts, or at least none that are "substantial" or "significant" in nature. In such cases, an unqualified "Made in U.S.A." marking may be used; or (b) the product has significant foreign parts, in which case a qualified "Made in U.S.A." marking may be used only if there is also a "clear and conspicuous" disclosure of the foreign parts and their foreign origin. See e.g., 16 C.F.R.  15.215, 15.216, 15.217, 15.218, 15.224. Rapid changes in international trade patterns began during the 1970s.(10) At the same time, FTC enforcement of the country-of-origin disclosure doctrine grew dormant. Although FTC staff attorneys informally responded to questions from the public about the Commission's position on "Made in U.S.A." claims based on earlier published decisions and opinions, our research indicates that the Commission itself did not issue an administrative complaint, order or advisory opinion for nearly two decades. Indeed, the Commission even stopped publishing synopses of previously-issued advisory opinions in the Code of Federal Regulations after 1988.(11) On September 24, 1994 after decades of non-enforcement the Commission shocked the commercial world by issuing administrative complaints in Hyde Athletic Industries, Inc. and New Balance Athletic Shoe, Inc. In these cases, the Commission announced that an unqualified "Made in U.S.A." claim for footwear may only be used on a product if "all, or virtually all, of the components and labor" of the product "are of U.S. origin." 2. U.S. Customs Service Well before the Commission developed its foreign origin disclosure rules, Congress enacted this country's principal country-of-origin marking law, the Tariff Act of 1930.(12) The statute requires that every article of "foreign origin" `imported into the United States, unless excepted, be marked to indicate its "country of origin." Customs regulations define "foreign origin" as a "country of origin" other than the United States, or its possessions and territories. The "country of origin," in turn, is defined as the country of "manufacture, production, or growth" of any article of foreign origin entering the United States.(13) In determining a product's "country of origin" under the marking law, Customs looks to the last "substantial transformation" performed on the product. In enacting the country-of-origin marking requirement, Congress had at least two purposes in mind: (i) to inform consumers of the country of origin of products; and (ii) to provide a competitive advantage for U.S. producers. Congress "intended that the goods [be marked] so that at the time of the purchase the ultimate purchaser may, by knowing where the goods were produced, be able to buy or refuse to buy them, if such marking should influence his will."(14) Congress also intended to protect American manufacturers and, based on the assumption that American consumers prefer goods made in the United States, to confer a competitive advantage on domestic producers of products in competition with foreign rivals.(15) Thus, Congress recognized that foreign origin disclosure laws must accommodate at least two different policy objectives protecting both consumers and domestic manufacturers. Congress delegated the responsibility of developing regulations that balance these objectives to Customs. Customs also has country-of-origin responsibilities under Section 43 of the Lanham Act. Enacted in 1946, Section 43 of the Act authorizes Customs to bar importation of any products that bear a "false designation of origin." Although the Act permits Customs to bar the importation of products which bear marks "tending falsely to describe or represent" goods or services generally, the statute only authorizes Customs, in the case of markings of origin, to bar importation of a product on the ground that its designation "is false." (Emphasis added). While we have found no relevant legislative history on the point, it would appear that the drafters limited Customs' ability to bar the importation of products based on their designated origin in which such designation was "false," presumably a higher threshold for enforcement than the "tending falsely" standard applicable to other marks. Unlike the Tariff Act of 1930, the Lanham Act is not limited to markings of "foreign origin"; thus, Customs may bar importation of a product marked" "Made in U.S.A.," only if such marking is "false." 3. Application of Conflicting Standards To U.S. Watch Producers The potential for conflicting results under each of these country-of-origin regimes is illustrated in their application to the watch industry. The Commission incorporated its general country-of-origin principles in the Guides for the Watch Industry in 1968.(16) The Watch Guides were "administrative interpretations of laws administered by the Commission for the guidance of the public in conducting its affairs in conformity with legal requirements."(17) Guide 2 provides that industry members should not use any "promotional materials, advertising, labels, tags, or marks . . . which have the capacity or tendency or effect of misleading or deceiving purchasers or potential purchasers . . . [w]ith respect to the country of origin of [watch] industry products."(18) Guide 10 is more specific. That section evidently last amended in 1970 provides that watches having movements of foreign origin, or movements which contain parts of foreign origin, should not be offered for sale or sold unless they are accompanied by a clear and conspicuous disclosure of the country or countries of origin of the movement.(19) The Watch Guides provide that the countries of origin of a watch movement are both (1) the country where the movement was assembled and (2) the country in which its substantial and significant parts have been manufactured. The two-part origin test of Guide 10 conflicts with Custom's position that the sole basis for determining the country of origin of a watch for marking purposes is the country in which its movement is assembled.(20) Under the Customs test, where unassembled parts of a watch movement from one country are assembled in a second country, the country of assembly of the movement is the country of origin of the finished watch for marking purposes under 19 U.S.C.  1304. Unfortunately, this is not the only example of how the remaining U.S. watch industry has been subject to conflicting country-of-origin marking rules of different federal agencies. Until recently, the Commission's Guides for the Metallic Watchband Industry (21) purported to require the marking of detachable, metal watchbands with their country-of-foreign origin, even when such bands were sold attached to a watch. Although the Watchband Guides were recently combined with the Guides for the Jewelry Industry,(22) and the specific country-of-origin disclosure requirements removed,(23) a general prohibition against misrepresentation of the origin of watchbands remains.(24) The Watchband Guides purported to require a U.S. watch manufacturer to add a label on a watchband with the foreign country of origin of the band -- for example, China -- even if the band were sold as part of the watch itself. If the watch were made in the U.S.A., the manufacturer would not legally be obligated to indicate origin on the watch under Commission precedent. Indeed, if the watch were made in the U.S.A. of imported parts, the Watch Guides would prohibit marking the watch "Made in U.S.A." If the manufacturer failed to include such an affirmative "Made in U.S.A." claim on the watch itself, consumers may be led to believe that the entire watch were made in the country of origin indicated on the band -- China. Such a result is far more likely to create consumer confusion than any "Made in U.S.A." marking on the same watch.(25) B. The Commission's Rules are Based on Outdated Assumptions There are a number of reasons to question the continued validity of the two assumptions upon which the Commission based its country-of-origin doctrine: (1) that consumers believed that they are buying American goods unless they are informed of the contrary and (2) that domestic consumers prefer domestic-made goods.(26) First, the twin predicates of FTC's country-of-origin doctrine emerged in the shadow of World War II. In Segal v. Federal Trade Commission, for example, a three-judge panel issued a per curiam decision affirming the Commission's findings of consumer preference for domestic goods and consumers' beliefs that unmarked goods are made "at home."(27) The court upheld the Commission's order against an importer of goods from Japan, noting in language that would certainly be suspect today that "any hostility to goods of Japanese origin is likely to have increased since the war, and is likely to continue for some time after the peace."(28) As World War II receded in our national memory, other nations' economies flourished. An international march toward free trade has resulted in a wide range of both imported finished products and imported component parts for use in products otherwise "made" in the U.S.A.(29) Today there are many indications that U.S. consumers no longer assume that products without any designation of origin are products of the United States. Americans are well-aware of the highly-publicized decline of many domestic industries, particularly in consumer products such as electronics, textiles, and shoes. International joint ventures and foreign-owned plants are increasingly common within the United States. The mixed domestic and foreign content of consumer products, such as automobiles and computers, has become a familiar topic of recent media stories. In short, there is good reason to believe that the buying public may no longer believe that a product with no designation of origin was made in the U.S.A. Second, consumer attitudes towards foreign-made goods have evolved. In the years after World War II, American consumers tended to prefer domestic products because U.S.-made goods were widely presumed to be superior to nearly all foreign products. In recent years, however, consumers have developed a much more favorable view of the quality of foreign products.(30) Where U.S. goods are favored, the margin of preference over imports is slim for many products.(31) Even blue collar workers, who traditionally have favored U.S. merchandise, have emerged in recent years as purchasers of foreign goods because they perceive certain foreign goods to be of high quality.(32) To the extent that consumers continue to favor U.S.-made goods, there are many indications that this preference is now based on a "patriotic" desire to support U.S. workers, rather than any presumption about superior quality.(33) C. Consumers and Businesses are Confused By Conflicting Origin Standards Changing assumptions about product origin issues have also created great uncertainty among both consumers and producers. The various statements and studies already submitted in this proceeding underscore the fact that American consumers are confused about the origin of products and the meaning of country-of-origin designations. Many consumers, for example, assume that products sold by American companies or with "American" brand names are, in fact, made in the United States.(34) Consumers also attach many different and often contradictory meanings to the "Made in the U.S.A." designation.(35) Moreover, while studies show that consumers of "Made in the U.S.A." products generally wish to promote jobs in the United States, they also suggest that consumers are uncertain and confused about the degree of U.S. content in products labeled with the "Made in the U.S.A." designation.(36) For these and other reasons, consumers often have limited confidence in the "Made in the U.S.A." designation, especially as applied to complex products.(37) The Commission itself has contributed to both consumer and producer confusion in several respects. First, the Commission has applied different standards to claims of U.S. and foreign country origin. Under the Commission precedent, a country of foreign origin must be disclosed if approximately 50% of the product's content is from a single foreign country of foreign origin.(38) Some commentators have further suggested that the Commission does not apply the domestic "all or virtually all" test but, instead, largely defers to Customs and its test of substantial transformation in evaluating affirmative foreign origin claims. Because claims of U.S. and foreign origin are judged on entirely different bases, the buying public is prevented from making "apples-to-apples" comparisons between products. A reasonable buyer surely does not understand that a "Made in the U.S.A." product must be all or virtually all U.S. content, while a product "Made in Japan" may, on the other hand, have substantial content from other countries. As Customs has noted in its comments in this proceeding, the meanings of "Made in the U.S.A." and similar foreign origin designations should be the same unless the public is informed otherwise.(39) Second, the Commission's application of the "all or virtually all" standard for determining a product's country of origin differs significantly from the substantial transformation test that Customs uses to determine country of origin. The Commission has previously acknowledged that "[m]ultiple government definitions for the same terms would have the potential to mislead consumers."(40) Manufacturers that mark their products in accordance with Customs regulations find that they may need to advertise them differently. Similarly, retailers who sell imported products may find that they cannot rely upon the country-of-origin markings on the products that they have purchased when advertising the products for resale. Finally, the Commission's absence of enforcement activities during the two decades preceding the Hyde and New Balance cases has exacerbated the problem of inconsistent definitions. During this period, consumers in this country have witnessed a profound explosion in international trade, lower tariffs, reduced non-tariff barriers, and technological developments that reduced transportation costs.(41) Given these changes, it is no wonder that consumer perceptions of what "Made in U.S.A."means as reflected in other comments previously submitted in these proceedings vary with the nature of the product, the status of the domestic industry for that product, and the age of the consumer. The Commission's dormancy in the face of this increasing globalization had caused many to question the continued validity of the "all or virtually all" standard prior to the announcement of the Hyde and New Balance cases. D. Conflicting Origin Rules Impose Unfair Burdens and Competitive Disadvantages on U.S. Manufacturers The patchwork of conflicting international country-of-origin rules imposes substantial compliance costs on businesses. These costs are ultimately borne by consumers. As the FTC Staff recently noted Businesses that market in countries with different legal standards must adjust their promotional material and tailor their sales practices to suit each country. The trade statistics suggest that for many companies, it is worth the trouble and expense. But other companies are discouraged by the costs and legal uncertainties.(42) Conflicts between the Commission's "Made in the U.S.A." requirements and the marking rules of other nations place unfair burdens on many U.S. manufacturers. Producers that are prohibited by the Commission's rules from using "Made in the U.S.A." designations on a product sold domestically are often required to employ the designation when the same product is exported.(43) As a result of these conflicts, many U.S. manufacturers are required to make separate production runs of the same product for domestic and foreign markets or to establish special packaging or relabeling operations for products destined for export markets. These additional steps impose unnecessary costs and burdens on U.S. business and, ultimately, on U.S. consumers.(44) The many foreign producers whose home countries employ some form of the substantial transformation test, on the other hand, can often avoid such additional costs and burdens when exporting to the United States because their domestic labeling is generally acceptable for Customs marking purposes. The Commission's insistence on an "all or virtually all" requirement is also unfair to U.S. watch producers and other U.S. manufacturers who employ significant numbers of American workers and have substantial U.S. facilities but cannot practically use all or virtually all U.S. parts. The Commission's strict origin rule denies many of these American producers the competitive advantage of informing consumers that a product was produced with significant U.S. input. On the other hand, the Commission does not impose similar restrictions on foreign products produced in countries of origin that are highly regarded by many consumers. Thus, in many instances, a foreign-made watch or other foreign product could benefit in the U.S. market from the label "Made in Germany," or "Made in Switzerland," even though the product contains significant input from other nations. A competitive U.S.-made product could not, however, bear the "Made in the U.S.A." mark in identical circumstances. At a time when some foreign countries are employing country-of-origin marking requirements as unfair trade barriers to protect domestic producers, the United States appears to be doing precisely the opposite. The current conflicts between the origin rules of Customs and the Commission (and between the Commission's own rules for U.S.- and foreign-origin designations) are tilting the international playing field against our nation's own producers and in favor of similarly-situated manufacturers in foreign countries. The Commission should assure that any future rules eliminate this discriminatory treatment and that all claims of origin are judged on the same basis. E. The FTC Rule is Contrary to Emerging International Origin Rules If the Commission continues to apply its current, highly restrictive test to "Made in the U.S.A." claims, the United States and its consumers and businesses will increasingly find themselves out of step with emerging, international country-of-origin criteria. In the Uruguay Round negotiations which led to the creation of the World Trade Organization ("WTO"), over 100 countries recognized that differences in country-of-origin rules often result in discrimination against imported products and interfere with the free flow of international trade. These negotiations resulted in the 1994 Agreement on Rules of Origin (the "Agreement"), which established a multi-year work program to clarify and harmonize nonpreferential rules of origin for trade in goods. These harmonized rules "are intended to make country-of-origin determinations impartial, predictable, transparent, consistent and neutral, and avoid restrictive or distortive effects on international trade."(45) The Agreement sets forth certain guiding principles for the development of harmonized rules of origin. With respect to articles produced in more than one country, the Agreement provides that the country of origin should be "the country where the last substantial transformation has been carried out."(46) Much detailed work will still be required in applying the general principle of substantial transformation to specific products and situations.(47) However, it is clear that worldwide rules of origin will continue to be rationalized and harmonized on the basis of the substantial transformation principle. As illustrated by the current conflict between the country-of-origin requirements of the Commission and Customs (as well as the conflict between the Commission's own conflicting rules for U.S. and foreign origin designations), there simply is no rational way to reconcile the "all or virtually all" test with substantial transformation.(48) Unless the Commission conforms its country-of-origin criteria to the emerging international rules, U.S. consumers will increasingly be confused, U.S. businesses will increasingly be burdened and U.S. international competitiveness will continue to suffer. II. The FTC Should Develop a Rational "Made in the U.S.A." Test Which Conforms With Existing Customs Service Requirements and International Standards. A. The Goal of a Uniform, International Standard For Country of Origin Markings is a Legitimate Objective for the Commission The Commission should avail itself of this opportunity to move toward a single, national and eventually, international standard for assessing a product's country of origin for marking, labeling, advertising and other promotional purposes. As explained above, the current patchwork of country-of-origin regulations and inconsistent enforcement has contributed to consumer confusion and injured domestic businesses. In Anticipating the 21st Century, Commission staff recognized the need for the FTC to reexamine its consumer protection mission in the new, global marketplace. Staff recommended two means by which the FTC could play a role in developing new approaches to consumer protection law enforcement. These proceedings provide the Commission with an important opportunity to put both staff recommendations into practice. First, staff suggested that the Commission "ensure that its own regulations do not impose unnecessary burdens on companies that are in or want to get into the global marketplace. "(49) The FTC's "all or virtually all" country-of-origin standard differs from the Customs substantial transformation test, the NAFTA tariff shift test, and foreign country-of-origin laws. It imposes precisely the types of unnecessary costs on producers and ultimately consumers that could be avoided through interagency and international coordination. Second, staff recommended that the Commission "participate in international dialogues concerning more harmonious, consumer protection standards worldwide."(50) Indeed, staff specifically recognized that a number of labeling regulations, including certification-of-origin requirements, may be appropriate for harmonization. The Commission should not miss this opportunity to harmonize its country-of-origin analysis with that of Customs, and to advocate in the international arena for the adoption of a uniform standard for country-of-origin determinations that would be applicable to both markings and other forms of advertising. B. The Commission Should Eliminate the Origin Rule in its Watch Guides The Commission's first step toward harmonizing its country-of-origin rules with those of Customs and other international bodies, is to eliminate inconsistent positions taken in its own guides and regulations. Should the Commission move toward a single, "substantial transformation" standard, references to industry-specific country-of-origin tests contained in various Commission guides would become redundant and unnecessary. The present origin rule contained in the Watch Guides combines the Customs' "substantial transformation" test with a variant of the Hyde "all, or virtually all" test. While the Guides provide that the origin of the watch is the origin of its movement, two different tests for the origin of a watch movement are set forth: (1) the country in which the movement is assembled (the Customs substantial transformation test); and (2) the country in which its substantial and significant parts have been manufactured (an all or virtually all test). The practical effect of combining these two tests is to completely eviscerate that portion of the Guides that would otherwise track the Customs rule. This effect is pronounced in the context of watches, since very few parts are available from domestic manufacturers. Abolition of the country-of-origin provisions of the Watch Guides is consistent with the Commission's broader regulatory agenda to eliminate unnecessary, outdated, and duplicative regulations. The Commission recently abolished detailed country-of-origin disclosure provisions that were previously included in the Guides for the Metallic Watch Band Industry.(51) In May, 1996, the Commission acted to abolish the Metallic Watchband Guides and to relocate their remaining substantive provisions (less the aforementioned country-of-origin provisions) into the Guides for the Jewelry Industry,(52) The Commission should follow this example in abolishing the country-of-origin provision of the Watch Guides. C. Adoption of a Uniform National and International Country-of-Origin Standard for Marking and Advertising Purposes is Consistent with FTC Practice in Other Contexts and Within Its Jurisdictional Mandate The Commission has looked for guidance from other federal agencies on a number of occasions to assist it in determining whether a given practice is "deceptive" or "unfair" within the meaning of Section 5 of the Federal Trade Commission Act. The Commission's adoption of Customs' substantial transformation test would be consistent with the FTC's practice in other contexts. Although the Commission has adopted analytic principles for determining whether a given claim is either unfair(53) or deceptive,(54) it has previously adopted enforcement policies for specific industries that take into account other policy considerations as well. One example of this multi-agency approach is the Commission's 1994 Enforcement Policy Statement on Food Advertising. The Commission announced that it would apply the Food and Drug Administration's ("FDA") standardized definitions for absolute nutrient content terms (such as "low," "high" etc.) when those terms are used in advertising.(55) The FTC policy acknowledged that the FDA intended its regulatory approach to be dynamic and "to respond to changes in science and consumer understanding of nutrition and diet-disease issues."(56) Thus, while protecting consumers from deception was certainly an objective of the policy, evaluation of actual consumer perceptions of claims was not the sole basis on which the policy was developed. Moreover, the Commission recognized that "[c]onsumer understanding will be improved if the agencies responsible for regulating the use of express or implied " nutrient content claims have "consistent requirements for use of these terms." (57) Although the Food Advertising policy was developed in response to FDA actions taken pursuant to the Nutrition Labeling and Education Act of 1990 ("NLEA"), (58) the principal that consumer education reduces the likelihood of consumer deception is equally applicable here. The Commission should combine its effort to harmonize the use of country-of-origin descriptors including "Made in U.S.A." claims with a consumer education effort to provide the public with the understanding that "Made in U.S.A." connotes that a product was substantially transformed in the United States. III. The "Substantial Transformation" Test Should be the Sole Basis for Evaluating the Legality of "Made in the U.S.A." Claims The U.S. Watch Producers urge the Commission to employ Customs' substantial transformation test as the basis for evaluating both "Made in the U.S.A." and claims of foreign origin. Under this test, an article which undergoes processing in, or contains components from, two or more countries is the product of the country in which it last underwent a substantial transformation. This well-established origin rule comports with emerging international standards. Moreover, it will provide a fair, rational and consistent basis on which to judge origin claims, especially in combination with proactive efforts by the Commission to educate consumers. A. Substantial Transformation is a Well-Established and Reasonable Basis for Determining Origin The principle of substantial transformation which Customs applies to origin claims was established by the Supreme Court in 1907.(59) Over the years, Customs and the courts have established a substantial body of administrative and judicial precedent on the application of this test to specific articles and activities. Customs also routinely applies the substantial transformation test to new products and circumstances and has significant expertise in analyzing related technical and legal issues. Substantial transformation is understood and widely accepted by industry. Companies that import products into the United States have significant experience with the concept of substantial transformation, as well as with Customs' requirements that they retain records to substantiate their origin claims. U.S. exporters to the European Union and other jurisdictions that apply a substantial transformation test also have similar experience. Substantial transformation is also a rational standard for determining the country of origin of products produced from inputs from various countries. This test recognizes that some functional changes and processes are so significant as to create an entirely new article, while other, less substantial changes or processes do not result in a new item.(60) Substantial transformation provides an entirely reasonable basis for determining where articles of mixed origin are "made." In evaluating origin claims, the Commission, like Customs and various foreign governments, should determine that a particular article is "made" in the place where it took on its final identity or was transformed into a new item. Thus, if an article resulted from substantial transformation in the United States, that article should be able to bear the "Made in the U.S.A." designation. B. Substantial Transformation is Consistent with Emerging Global Rules Adoption by the Commission of the substantial transformation principle employed by Customs would greatly assist the Commission in conforming its rules of origin with emerging international origin principles. As noted previously, the International Agreement on Rules of Origin has established a multi-year program for the international harmonization of rules of origin on the basis of the general principle of substantial transformation. This harmonization process is expected to be difficult and potentially contentious because different countries employ different means of evaluating when a substantial transformation has occurred. The Agreement on Rules of Origin generally favors the "tariff shift" approach generally utilized in the NAFTA Rules of Origin. However, the Agreement would also permit substantial transformation to be defined on the basis of (i) "technical" rules which list specific manufacturing or processing operations that confer origin or (ii) "value-added" rules which confer origin where a specified percentage of work was done or value added in a country(61) The difficulty of this harmonization process is illustrated by Customs' recent decision not to extend its NAFTA Rules of Origin to U.S. imports from all countries but, rather, to continue its analysis of this issue.(62) The Commission would greatly facilitate its ability to conform to eventual global rules of origin by beginning to evaluate "Made in the U.S.A." and all other country-of-origin claims under the Customs substantial transformation test. By adopting the Customs test, the Commission would put itself "on the same page" with Customs and the Congress. This would facilitate a coordinated U.S. position in international origin negotiations Additionally, the Commission's use of Customs' substantial transformation test would provide it with valuable experience with the substantial transformation principle and would facilitate the Commission's eventual adoption of harmonized international rules based on function or process. C. The Use of a Substantial Transformation Test Would Benefit Consumers and U.S. Producers A primary purpose of the country-of-origin marking requirements administered by Customs is to prevent the deception of consumers. Section 304 of the Tariff Act of 1930 requires that [E]very 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). Moreover, the statute authorizes Customs to require the addition of other words or symbols "to prevent deception or mistake as to the origin of [an] article." Id. 1304(a)(2). The courts have also recognized the important consumer protection role of the marking statute.(63) In implementing its statutory consumer protection responsibilities, Customs has consistently applied the substantial transformation test to determine the origin of products sourced from multiple foreign countries. Moreover, many foreign countries employ a version of the substantial transformation test in evaluating origin claims. As noted previously, even the Commission itself has essentially adopted the same test in evaluating claims of foreign origin. This widespread use of the substantial transformation test in the context of consumer protection seriously undercuts claims that consumers would be mislead or deceived by origin claims based on this test. Indeed, continued enforcement of the Commission's current, inconsistent origin standards causes far greater deception of consumers than would the adoption by the Commission of a well-publicized "Made in the U.S.A." test based on substantial transformation. There is considerable evidence that consumers do not understand exactly what the "Made in the U.S.A." designation means. Moreover, a rational consumer would be hopelessly confused if he or she realized that the Commission evaluates claims of U.S. and foreign origin on entirely different bases. Clearly, a well-explained, rational origin test based on established Customs precedent would greatly improve this confused situation. Adoption of the Customs' test would not, as some have asserted, "weaken" the significance of the "Made in the U.S.A." designation. In the current confused environment, many consumers simply do not know what the "Made in the U.S.A." mark really signifies. As shown by the success of the FDA's food labeling rules, the adoption of the well-publicized substantial transformation rule could provide the consuming public with a common understanding of "Made in the U.S.A." claims. Moreover, such a rule would benefit many firms including the U.S. Watch Producers that produce goods in the United States through the use of substantial U.S. facilities and labor and would be consistent with consumer desires to promote U.S. jobs.(64) Finally, such a rule would not disadvantage those firms that employ all or virtually all U.S. inputs and labor in their products. The Commission's new requirements could specifically permit truthful claims of very high U.S. content, such as "Made in the U.S.A. exclusively of U.S. parts." In the context of clear, new origin rules, such claims might have considerable additional value for certain products. D. Other Origin Tests are Inappropriate and Unworkable The adoption by the Commission of origin rules based on tests other than substantial transformation (or similar function or process tests) would lead to a host of problems for the Commission and business. The use of origin rules based on value or percentage content would require the Commission to set up entirely new regimes to determine content. In establishing new value-based rules, for example, the Commission would have to wrestle with such complex issues as (i) whether costs should include only direct costs such as labor and materials or also include overhead, general and related expenses; (ii) whether labor should be measured on the basis of cost, effort or time; and (iii) whether product value should be determined on a product-by-product basis or on an average basis. Similar issues would have to be addressed in establishing a percentage-based content system. Moreover, the Commission's problems would not end once such a system is established. For example, the implementation and enforcement of new value or percentage-based rules would require complex accounting and auditing rules and the establishment of new functions within the Commission. Value or percentage-based rules would also pose numerous problems for U.S. businesses. Understanding and implementing the new system would create substantial financial and compliance costs for business. For example, companies would face entirely new accounting and auditing burdens. Moreover, in today's dynamic global economy, the domestic and foreign content of products would shift constantly. Many companies would have to monitor exchange rates, component sourcing and design changes to assure that a product "Made in the U.S.A." in one month was not a foreign product in the next. As explained previously, the substantial transformation test is well-established and understood by industry. The adoption of a substantial transformation rule by the Commission would pose far fewer difficulties than would value- or percentage-based rules. Moreover, by adopting such a rule, the Commission would facilitate its eventual transition to the WTO's global origin rules, which will likely be based on function or process. E. Substantial Transformation is an Appropriate Test for Watches The domestic watch manufacturing industry illustrates a number of the many benefits of adopting substantial transformation as a means of evaluating origin claims. As explained previously, the U.S. Watch Producers produce watch movements and finished watches in the U.S. Virgin Islands. These watches and watch movements are considered by Customs to be products of the United States for marking purposes. Under Customs' long-standing application of the substantial transformation test, the country of origin of a watch is the place where the watch movement was assembled.(65) Customs has refined this well-established test through a number of specific Customs rulings and through informal interpretations by its technical and legal specialists. Watch producers worldwide are familiar with Customs' origin rule and the U.S. Watch Producers have had substantial experience in complying with this generally straight-forward and predictable rule. Customs' specific origin rule for watches also provides a reasonable basis for determining where a watch is "made." Timekeeping is the essential function of a watch. The watch movement is the component which provides this primary function. A substantial transformation rule based on where the watch movement was produced thus best captures the essence of where the watch itself was made. Moreover, the Customs rule reflects the substantial U.S. labor and production facilities employed in producing both watch movements and finished watches, as described in Exhibit A. Finally, Customs' traditional origin rule for watches illustrates the manner in which substantial transformation rules can be integrated into emerging global origin rules. Although the NAFTA Rules of Origin rely on a "tariff shift" methodology, the NAFTA negotiators were able to assure that these rules reflected the traditional policy that the origin of a watch is determined by the place where the movement is made. Indeed, Customs has specifically rejected proposals to revise its tariff shift rules in a manner which would depart from its long-standing rule of origin for watches.(66) Such a transition would be much more difficult if the Commission were to retain its current origin test. CONCLUSION For the foregoing reasons, the U.S. Watch Producers respectfully submit that the Commission should apply the Customs substantial transformation test in determining whether products may be marked or advertised as "Made in the U.S.A." or with words of similar import. With respect to watches, the Commission should affirm the Customs substantial transformation rule that watches originate in the country where the movement is produced. Accordingly, the U.S. Watch Producers should be permitted to mark their USVI - produced watches "Made in the U.S.A." WINSTON & STRAWN ____________________________ By: Peter N. Hiebert Edward F. Gerwin, Jr. Michael L. Sibarium 1400 L Street, N.W. Washington, D.C. 20005 (202) 371-5700 (202) 371-5950 Counsel for Belair Quartz, Inc. Hampden Watch, Inc. Progress Watch Company Tropex Incorporated Unitime Industries, Inc. EXHIBIT A BELAIR WATCH CORPORATION 1995 Swanhmoro Avenue. Lakewood. Now Jersey oo7oi Phone (908) 905-01 00 11 Tc 11 Free Ordertine.- (800) 223-1664 (outside N.J. only) FAX: (908) 367-3215 page 1/ of 3 I) MOVEMENT ASSEMBLY: movements are received in the Virgin Islands in completely unassembled format. The typical movement contains approximately 35 - 45 individual parts, each of which must be carefully inspected and controlled prior to, during, and after assembly. Movement assembly is broken down into four phases. Most V.I. watch companies assemble many different TAovement calibers, to meet the various dozands of the -marketplace, and therefore their investment in diversified equipment and training is very substantial. Phase (A) involves the control of the mechanical items (bridges, wheals, jewels, etc.), and this phase requires the interface of highly trained technicians. Phase (B) involves the control of the electronic elements of the movement (E-bloc, stepping motor, battery, etc.), which requires the largest amount of high tech equipment necessary to control, r*gulate, and re-program E-Prom modules. We must constantly invest in now software and equipment to keep pace with the constantly changing electronic technology. Phase (C) involves the actual assembly operations which is the most labor intensive. Atmospheric systems must be carefully controlled to prevent dust, humidity, and temperatures changes, all of which can be very damaging during this most critical stage. Phase (D) involves the final control of the finished movement. The movement is subjected to many series of tests (motor running test, torque test, electronic shock test, etc.), to uncover any possible hidden defect which could have been overlooked during the first three phases of movement assembly. After assembly the finished movements are -placed into special temperature controlled storage rooms, until they are ready for final watch assembly. 06/28/96 14:53 0908 367 3215 111(lkilz 11,IMI( C(lill 0003/004 BELAIR WATCH OORPOPATION 1 M Swarthmore Avenue, Lakewood. Now Jersey 08701 Phone (909) 906-01 00 11 TOO Free OrderUns: (800) 223-1664 (outside N.J. only) FAX: (900) 367-321 S page 2 of 3 II) WATCH ASSEMBLY There are four critical stages in watch assembly. Stage (1) is the incoming inspection of all component parts. All parts are subjected to an extensive battery of tests (e.g. stress, corrosion, magnetic, shock, opening/closure pressure,etc.), to determine what adjustments are r*quired. It is almost always necessary for the V.I. watch factories to maintain full milling, cutting, and polishing facilities, so as to facilitate all required f inishing, stamping, re-sizing, etc., as is required to bring parts into required tolerances. Stage (2) involves all component assembly operations, such as crystal and gasket insertion, tube insertion, bonding of top rings, and insertion and assembly of buckles, links, pin insertion and control, dial printing, etc. once the individual components are in the ready stage we move on to the third state. Stage (3) involves the integration of case, bracelet, dial, hands, stem, and all parts together with the assembled movement. This is a very involved phase, as it requires very diversified tooling and equipment to reach completion. For example, dial and hand setting requires very high precision equipment with tolerances of 0.005 mm, so as to level, set, and regulate, and correctly position hands so that they interact correctly together, and with calendar discs, dial, am/pm settings, and watch case height restrictions, etc. Bracelets must be attached at correct declining angles. Stems must be cut on automated machines, so as to achieve the perfect angle at tip, and precisely correct length. Case backs must be closed with automatic (torque controlled) machines, with gaskets very carefully positioned, so as to achieve precise closure. This entire operation must take place in a dust free, thermostatically controlled environment, to prevent any damage to the exposed movement during assembly. Parts are handled by workers wearing special static controlled gloves, using vacuum screwdrivers, to minimize direct handling of critical parts. 'Even the smallest mistake can result in a substantial delay, forcing us to revert back to phase two for reworking. BEL.AIR WATCli OORPORATION 1996 Swarthmore Avenue, Lakewood, Now Jersey 08701 Phone (ON) 905-01 00 11 Tall Fmo Ordorlins: (600) 223-1654 (*ulsids N.J. only) FAX: (908) 367-321 5 Page 3 of 3 Stage (4) is the final testing and control of the f inishad product. This is the most important because it is the f inal and last checkpoint before the finished watches are packed for shipping. The watches are again subjected to a series of tests, including mechanical stress and pressure tests, water and moisture resistance testing (under both vacuum and pressure) , electronic computer controlled timing and re-programming of E-Prom circuitry, plus final visual inspection uni3er 5X - 1OX magnification to uncover any damage to parts during assembly process. once all tests are passed, watches are set on time, and allowed to run for three' days, while ID,--ing fully monitored and dif f erent positions to ensure correct ti-me keeping, and calendar lumping. There is no substitute for this final three day check, which simulates normal operating conditions. BELAIR WATCH CORPORATION 1995 Swarthmorii Avenue, Lakewood. Now Jorgey 08701 Phone (906) 906-0100 9 Tell Free Orderlins: (800) 223-1654 (outwde N.J. only) FAX: (008) 367-321 5 FACSIKILE TRANSMISSION DATE: June 28, 1996 PAGE NO. 1 OF 4 TO COMPANY: Winston & strawn ATTENTION: Mr. Peter Hiebert ACKNOWLEDGE:_.XXX_YES _KO Dear Peter, As promised, please f ind attached a description of the basic assembly operations that we and the other V.I. watch firms are involved in. I would appreciate your incorporating this into your presentation to the FTC, a's I believe it will enlighten them as to the extent of our involvement, which far exceeds a simple "assembly" process. Our Now Jersey office will be closed for summer holiday, as of today until July 16. 1 personally will be overseas and will only return back on July 23. 1 would therefore appreciate receiving a copy of your finalized FTC submission today, if humanly possible. Sincerely , Alan Grunwald President AG/bm cc: Paul Sutter, Ronda Mort Clayman, JJ Irving Wein, Benrus Klaus Lehman, SMH Hamilton EXHIBIT B DEPARTMENT OF THE TREASURY U.S. CUSTOMS SERVICE 1994 MAR 2-05 CO:R:C:V 735486 RSD Peter N. Hiebert, Esq. Winston & Strawn 1400 L Street, N.W. Washington, D.C. 20005-3502 Dear Mr. Hiabort: This is in response to your request for a ruling dated January 25, 1994, on behalf of the government of the United States Virgin Islands, and several watch manufacturers located in the United States Virgin Islands regarding the country of origin marking for watches made with movements assembled in the United States Virgin Islands from parts made in Switzerland, France, Japan or other countries. We regret the delay in responding. Dials, hands, bracelets, and cases used in making the finished watches are also imported from Switzerland, Hong Kong, Taiwan, China or other sources in the Far East. The watch producers assemble the watch movement with these other parts in their United States Virgin Island plants to produce finished watches. Your clients request that customs allow such watches to be marked as "Made in U.S.A.". After considering your request, we believe that we are unable to issue a ruling at this time because the subject of your letter is under the jurisdiction of the Federal Trade Commission ("FTC"). Therefore, this response constitutes an information letter in accordance with 19 CFR 177.1(d)(2). We feel that the following information may be helpful to you. As you are aware, it has long been the position of the Customs Service that the country of origin of a watch or a clock r'N is the country of manufacture of the watch or clock movement. Accordingly,.a finished watch which uses a movement put together in the United States Virgin Islands from Swiss, French, Japanese or other country movement parts would be considered a product of the United States Virgin Islands. This is so even if the completed movement is shipped to another country, where a foreign made case, dial, and strap are assembled together with the movement to make the finished watch. Hence, because the watches would be a product of the United States Virgin Islands, they would be excepted from the country of origin marking requirements of 19 U.S.C. 1304, pursuant to the exception for articles from a United States possession at 19 CFR 134.34(l), and thus no country of origin marking on the watches would be required. However, if the country of origin of the watch strap or watch band is different from that of the watch, the strap or band would have to be marked to indicate its own country of origin. In 'addition, the special marketing requirements for watches of U.S. Additional 2 Note 4 of Chapter 91 of the HTSUS would have to be followed. Also, as a general rule, additional information regarding the imported product may be stated provided the country of origin is clearly indicated and the additional information is accurate and couplets. ' With respect to your specific concern an to whether watches which use United States Virgin Islands assembled movements can be marked as "Made in U.S.A.", the Customs Service does not have the authority to approve or disapprove the use of such markings. Customs has the authority under 19 U.S.C. 1304 to determine if an imported article is of foreign origin. If an article is daterilinod,to be of foreign origin, Customs has the responsibility of ensuring that the article is marked to indicate its country of origin unless it is excepted from marking. When Customs determines that an article is not of foreign origin, although there is no requirement under 19 U.S.C. 1304 that the article be marked with its country origin, Customs does not have the authority to approve markings which indicate that a product in of domestic origin, such as "Made in the U.S.A." Rather, the Federal Trade Commission has jurisdiction concerning the use of the marking "Made in U.S.A." and similar phrases. We have contacted the FTC regarding the subject of your ruling request. They have informally advised us that labeling watches, which are made with movements assembled from foreign made parts as well other foreign components an "Made in the U.S.A.", may not be proper because it is not in accordance with previous FTC advisory opinions and the FTC Watch Guides. It is our understanding that the FTC's concern with the "Made in U.S.A." marking on the watches is that such marking does not adequately disclose that the watches are made with significant foreign components. We recognize that much of the analysis in your ruling request is based on a ruling that customs issued on drill bits, HRL 734924 (April 26, 1993). In that case, the importer requested a ruling on whether drill bits which were substantially transformed in the United States Virgin Islands could be marked as "Made in the U.S.A." We ruled that Customs would not take any action to bar the importation of the finished precision twist drill bits which were substantially transformed in the United States Virgin Islands and labeled as "Made in the U.S.A." because we determined that the "Made in U.S.A." marking on the twist drill bits was not clearly deceptive or false. However, we noted that if a determination was issued by the FTC that such marking is not acceptable or if a court makes such a determination as on a private action under 15 U.S.C. 1125(a), Customs will enforce the determination. 3 We believe that the situation involved in this case is distinguishable from HRL 734924 because in that case we had no indication that the FTC would consider the "Made in U.S.A." marking on the drill bits an improper. However, in the present case, members of the FTC staff have indicated that the "Made in U.S.A." marking on the watches made with foreign components without additional clarification probably would violate FTC's position on the labeling products as "Made in the U.S.A." Therefore, we think it is appropriate that you first contact the Federal Trade Commission to obtain an advisory opinion on whether ell) they would find the marking the "14ade in U.S.A." marking was acceptable. The address is: Federal Trade commission, Division of Enforcement, 6th and Pennsylvania Avenue, N.V., Washington, D.C. 20508. If the FTC determines in the circumstances that you have presented that the "Made In U.S.A." marking is acceptable, Customs will that follow the course outlined in HRL 734924. Consequently under the circumstances present in this case, Customs can not issue a ruling that the marking "14ade in U.S.A." is acceptable. Again, we want to emphasize that watches which are made with movements made in the United States Virgin Islands are excepted from the country of origin marking requirements of 19 U.S.C. 1304. However, we have no authority to approve the marking, "Made in the U.S.A." Sincerely, Sandra L. Gothers Chief, Special Classification and Marking Branch Endnotes 1) Although the Virgin Islands is outside of the customs territory of the United States, the USVI is deemed to be part of the United States for most other purposes. As an unincorporated territory, the Virgin Islands is part of the U.S.A. 48 U.S.C. 1541-1645. Its citizens are citizens of the United States, serve in the U.S. military and are entitled to vote. 48 U.S.C. 1542(a). Products manufactured in the Virgin Islands are produced by American workers subject to federal health, safety and welfare standards and protections. For purposes of its country-of-origin marking requirements, Customs has ruled that products substantially transformed in the Virgin Islands may be marked "Made in the U.S.A." See HQ 734924 (Apr. 26, 1993)(drill bits made from inputs substantially transformed in the Virgin Islands can be marked "Made in the U.S.A.") (hereinafter "Drill Bits"). 2) See, e.g., HQ 735297 (Jan. 26, 1994)(movement is "guts" of watch or clock). 3) Operations involved in the production of movements include (1) quality control and inspection of bridges, wheels, jewels and other mechanical parts by highly trained technicians, (ii) quality control, inspection, reprogramming and testing of electronic components, (iii) labor-intensive assembly operations under highly controlled conditions and (iv) extensive testing of the completed movement. The production of finished watches involves additional complex operations, including (i) inspection and testing of all components and finishing, stamping and re-sizing operations required to bring parts into required tolerances, (ii) component assembly operations, (iii) the integration of the case, dial, hands, stem and all parts with the watch movement through the use of a very high precision equipment under highly-controlled conditions and (iv) extensive testing of the assembled watch. 4) See HQ 734924 (Apr. 26, 1993). 5) See HQ 735251 at 3-4 (Oct. 7, 1993). 6) A copy of Customs' June 22, 1994 information letter is attached hereto as Exhibit B. 7) 60 F.T.C. 495, 511, 512-13 (1962). 8) In re Leonard Porter, 88 F.T.C. 546, 615 (1976). 9) The case law and advisory opinions are not entirely uniform. Although staff frequently interpreted the precedents as supporting a percentage of content rule that governed disclosure, some cases held that disclosure would not be required where a foreign component used in a product becomes "lost" through manufacture to the point that its identity can no longer be ascertained. Segal v. F.T.C. , 142 F.2d 255 (1944). Nevertheless, the Commission characterized its own rulings as holding that the expression "Made in U.S.A." is an affirmative representation that a product was made "in its entirety" in the United States. See e.g., 16 C.F.R.  15.215(c)(1989). 10) See I Anticipating the 21st Century, Chapter 1, nn. 2,3 and accompanying text 11) See 54 Fed. Reg. 26,187 (1989). 12) 46 Stat. 590 (codified as amended under various sections of 19 U.S.C.). 13) 9 C.F.R.  134.1(b) 14) United States v. Friedlaender & Co., 27 C.C.P.A. 297, 302 (1940); see Globemaster, Inc. v. United States, 340 F. Supp. 974, 68 Cust. Ct. 77 (1972). 15) United States v. Ury, 106 F.2d 28, 29 (2d Cir. 1939); Ruth F. Sturm, 1 Customs Law and Administration  15.1 (3d ed. 1991). 16) 16 C.F.R. Part 245 ("Watch Guides"). 17) See Introductory Note to the Guides and Trade Practice Rules, 16 C.F.R. Part 17 (1996). Unlike Trade Practice Rules relating to country-of-origin markings for other industries such as textiles, wool and furs, the Watch Guides do not have the force and effect of law. F.T.C. v. Mary Carter Paint Co., 382 U.S. 46, 47-48 (1965); Ash Grove Cement Co., 577 F.2d 1368, 1373-74 (9th Cir.), cert. denied, 439 U.S. 982 (1978). 18) 16 C.F.R.  245.2 (1996). 19) 16 C.F.R.  245.10(a). 20) HQ 735251 at 3-4 (Oct. 7, 1993). 21) 16 C.F.R.  19.0, 1.4 (1996). 22) 16 C.F.R Part 23 (1996). 23) 16 C.F.R.  19.4(b). 24) Moreover, we understand that earlier Customs rulings also suggest that watchbands of foreign origin must bear a separate label indicating the in foreign country or origin. See, e.g., HQ 733533 (Aug. 3, 1990), 734565 (Oct. 16, 1992). 25) Although the Watch Guides would allow the marking of such a watch as "Made in U.S.A. of [country x] Parts," along with a separate "Made in China" label for the band, this multiplicity of labeling would likely result in even greater consumer confusion. 26) Manco Watch Strap Co., 60 F.T.C.495, 511 ((1962). 27) Segal v. Federal Trade Commission, 142 F.2d 255 (2d Cir. 1944). 28) Id. at 255. 29) A summary of changes that have facilitated "global competition" is included in the FTC Staff Report, Anticipating the 21st Century (May, 1996). 30) In 1972, for example, less than 50% of American consumers in a survey rated the quality of Japanese products as excellent or good, and only 12% of consumers believed that Japanese products were superior to those produced in the U.S. Study Finds 73 Percent of U.S. Consumers Rate Japanese Products as Top Quality, [Jan. - June], Int'l Trade Rep. (BNA), Vol. 8, No. 24, at 908 (June 12, 1991). By 1991, 73% of Americans believed that Japanese goods are good or excellent, and 37% believed that Japanese goods are better than domestically-manufactured products. Id. 31) Id. 32) L.A. Times, Feb. 21, 1991 at D5, col. 3. 33) See C. Min Han, The Role of Consumer Patriotism in the Choice of Domestic Versus Foreign Products. J. Advertising Res. 25, 31 (June/July 1988). 34) See January 16, 1996 Comments of the International Mass Retail Association at 3; January 16, 1996 Comments of the Made in the U.S.A. Foundation at 2-10. 35) See January 22, 1996 Comments of the American Advertising Federation at 2. 36) of the Made in the U January 15, 1996 Comments of New Balance Athletic Shoe, Inc. at 9-14; January 16, 1996 Comments.S.A. Foundation at 2-10. 37) January 19, 1996 Comments of the National Consumers League at 8-9. 38) Segal V. FTC, 142 F.2d 255 (2d Cir. 1944)(disclosure of foreign origin required where unmarked goods contain less than 50% domestic content by cost.) 39) January 16, 1996 Comments of the U.S. Customs Service at 2. 40) Federal Trade Commission, Enforcement Policy Statement on Food Advertising at 7, reprinted at 59 Fed. Reg. 28,388 (1994). 41) I Anticipating the 21st Century, Chapter 1 at 1-11 42) II Anticipating the 21st Century: Consumer Protection in the New High-Tech, Global Marketplace at 42. 43) Canada and Mexico require "Made in the U.S.A." markings on products substantially transformed in the United States under the NAFTA "tariff shift" rules. See Rules for Determining the Country of Origin of a Good for Purposes of Annex 311 of the North American Free Trade Agreement, 61 Fed. Reg. 28932 (June 6, 1996) (hereinafter "NAFTA Origin Rules"). 44) See January 22, 1996 Comments of Minnesota Mining and Manufacturing Company at 4. 45) U.S. Int'l Trade Comm., International Harmonization of Customs Rules of Origin, Inv. No. 332-360, 60 Fed. Reg. 32339 (June 21, 1995) 46) Agreement on Rules of Origin, Art. 9(1) (emphasis added). 47) For example, trade negotiators must determine for particular goods whether substantial transformation should be based on a change in tariff headings or subheadings, specified manufacturing or processing operations or ad valorem percentages or some combination of these factors. Id. art. 9(2) 48) Moreover, if the Commission attempted to extend its "all or virtually all" requirement to designations of foreign origin (by requiring, for instance, that a product "Made in Japan" be all or virtually all of Japanese origin), it is likely that foreign governments would claim that this more restrictive requirement would have "restrictive, distorting or disruptive effects on international trade" contrary to the disciplines in the Agreement. Agreement on Rules of Origin, art. 2. 49) II Anticipating the 21st Century at 43. 50) Id. 51) 16 C.F.R.  19.0, 19.4(b) (1996). 52) 16 C.F.R. Part 23 (1996). 53) FTC Unfairness Statement, reprinted in International Harvester, 104 F.T.C. 1072, 1076 (1980). 54) FTC Deception Statement, reprinted in Cliffdale Associates, Inc, 103 F.T.C. 110, 174 (1984). 55) 59 Fed Reg. 28,388 (1994). 56) Id. at 3 57) Id. at 7. Indeed, recent studies suggest that improved food labeling is increasingly being relied upon by consumers. 58) Pub. L. No. 101-535, 104 Stat. 2353 (codified in part at 21 U.S.C.  343(i),(q) and (r)). See N. Hellmich, "Reading Food Labels is Now a Consumer Staple," USA Today, June 26, 1996 at D5. 59) Anheuser Busch Brewing Assn. v. United States, 207 U.S. 556 (1907). 60) As the Supreme Court stated in 1907: Manufacture implies a change, but not every change is manufacture . . . . [S]omething more is necessary . . . . There must be a transformation; a new and different article must emerge, having a distinctive name, character or use. Anheuser Busch Brewing Assn. v. United States, 207 U.S. 556 (1907). 61) Agreement on Rules of Origin art. 9(2). 62) NAFTA Rules of Origin at 28,933. 63) In its frequently cited decision in U.S. v. Friedlaender & Co., 27 CCPA 297, C.A.D. 104 (1940), the court observed that 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 64) Such a rule would help restore, in the modern context, the original intention of Congress that country-of-origin labels provide a competitive advantage to domestic producers. See United States V. Ury, 106 F.2d 28, 29 (2d Cir. 1939). 65) HQ 735251 at 3-4 (Oct. 7, 1993). 66) NAFTA Rules of Origin at 28953.