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The label on the wood table reads "Made in U.S.A." In this day of global sourcing, what does that really mean? Not surprisingly, the answer depends on which federal agency you ask. The Federal Trade Commission (FTC) is grappling with the issue right now. Its current rules are in conflict with those of the U.S. Customs Service, the Buy American Act and the North American Free Trade Agreement (NAFTA).
At a workshop in Washington, D.C. scheduled for March 26 and 27, 1996, the FTC will address the fate of the Made in U.S.A. label under its jurisdiction. Right now, the FTC considers something made here if its components and labor are "all or virtually all" made in the States, i.e. 90% domestic content, a standard the FTC based upon consumer surveys conducted in 1991. The question the agency will review is whether or not that standard should be adjusted in light of tremendous changes in how industry does business now vs. 1991. By way of example, Mattel makes its Barbie dolls all over the world. Likewise Applause Inc. makes its plush toys all over the world. Both have their corporate headquarters in Southern California. Should all their products be considered Made in America? What about Levi Strauss which again makes its products all over the world, as well as the U.S.? How about, Douglas Aircraft which builds its planes in the U.S. but generally from foreign-made parts? what about the Toyota - General Motors plant in Northern California where union workers make automobiles which include major components (e.g. engines) from foreign countries? Just how should Made in U.S.A. be determined? Do consumers even care where goods are made?
The issue cane into focus when the FTC sought to fine two shoe companies over what were claimed to be deceptive advertisements. In each instance, the company used some foreign components to make shoes in the U.S. The FTC took the position that 90% of the value of the shoes was not of domestic origin and, therefore, both companies were in violation of the agency's regulations. After many adverse comments from the public and vigorous objection by the companies involved, the FTC decided to reconsider the consent decree it had entered into with Hyde Athletic Industries Inc. It also put off making a decision on its case against New Balance Athletic Shoes. Inc. The New Balance situation is a good example of today's manufacturing environment. New Balance cannot source all its components in the U.S. because certain soles are no longer made here. Nonetheless, New Balance adds more than 70% of the value of its shoes through its U.S. manufacturing process. Should such a product qualify for the Made in U.S.A. label?
Recognizing tremendous public interest in this issue, on July 11, 1995 the FTC announced it would conduct a comprehensive review of consumer perception of Made in U.S.A. advertising claims. In announcing its decision to conduct a review of its standards, the FTC made clear that it was proceeding against Hyde and New Balance on the grounds that a substantial portion of each firm's product line was assembled overseas from foreign parts and a substantial portion of those products assembled in the U.S. was composed of foreign parts - facts which apply to most American manufacturers today.
In a Federal Register notice issued October 17, 1995, the FTC invited comments. It received 150. Many objected to the existing standard as too stringent because it did not reflect current commercial reality or consumer perceptions. Many commentators also objected because the FTC standard contradicts those imposed by the U.S. Customs Service, the Buy America Act and NAFTA.
A primary objective of the FTC is to enhance consumer choice. In that regard, the FTC and Customs rules are in accord. In the case of U.S. Customs, the purpose of 19 U.S.C. §1304 (the marking statute) is to require each and every item being imported to be labeled with its country of origin in as permanent, indelible and conspicuous a manner as the article will allow. This standard is intended to allow the consumer to know the origin of the article under consideration for purchase so that if origin is an issue, the consumer has the necessary facts to make an informed decision. Such information is particularly important in circumstances of strongly held opinions about certain countries, for example the sanctions consumers imposed on South Africa during its apartheid days.
While the standards imposed by the FTC and Customs are similar in their purpose, they are different in their application. Customs determines origin through a standard called "substantial transformation," a topic covered in our September 26, 1995 column. That standard traces its origins to 1908 and the Anheuser-Bush Brewing Ass'n v. U.S. case [207 U.S. 556 (1908)]. Substantial transformation occurs when you start with one product (the imported item) and end up with another (the finished good or component). Using the furniture example which started this article, if the wood came from Malaysia and was made into tables at a plant in Southern California, those tables would be of American origin for Customs purposes. Whether they would qualify for FTC purposes would depend on an analysis of the costs to see whether 90% of the value was added in the States. The outcome could depend on whether or not the wood was cut by hand. If by hand, the labor cost is probably higher than if cut by machine or robot. Should origin determinations turn on such a factor? Doesn't encouraging higher cost labor limit the number of jobs and drive up the price of the finished good? Does it make the company less efficient in its manufacturing process?
Substantial transformation as a standard is generally used throughout the world. However, how it is determined changes depending on the locality and the specific product or industry under review. Each country can be expected to take reasonable steps to protect its primary domestic industries. As a result, substantial transformation is generally determined using one of three methods: by the amount of value added, the process employed or where the process occurred. Most countries use different methods depending on the particular product or industry in question. The result is companies that ship to various countries are faced with different standards, depending on the destination of the specific shipment. As a result, one of the early things agreed to at the Uruguay Round of negotiations which resulted in the establishment of the World Trade Organization (WTO) was that there should be internationally agreed upon rules of origin. If such standards can be established, then there need be only one label affixed to a particular product. In addition, if there is only one standard, a company can be more efficient in its manufacturing process because multiple labeling is not required. It also makes companies more efficient in their record keeping in terms of the documentation which supports claims; only one set need be maintained rather than one set to support each of the different standards which apply.
NAFTA is an altogether different consideration. In the New Balance case, NAFTA had a 50% value added requirement which was met. A similar result is reached were the Buy American Act to apply. Its standard is a 50% domestic value added requirement, too.
The FTC review will address a host of issues such as how to compute the value added (how many steps back into the production process will the company be required to go in order to determine the origin of the components or parts involved?). May general overhead be added to the cost of production to meet the domestic content requirement? How should total product cost be determined? What is interesting about these questions is they are the very same ones being addressed by the WTO in its origin determination efforts.
The FTC will, of course, go beyond the standard setting stage and also deal with consumer perception in order to determine the accuracy of an advertisement. Its decision may well turn on the sophistication of consumers. There are also other interesting questions. Should industries which add a larger percentage of value than others somehow be rewarded in their advertising claims? If so, how should that be accomplished? Should the label say "Made in America from foreign and domestic components?" If so, such language is again in conflict with the Customs' requirement that there be one country selected for origin purposes. The exception in the Customs' context is where foreign components are assembled under one specialized program. In those limited circumstances, Customs allows a label which says "Assembled in (for example) Mexico from U.S. Components." Should a label authorized for limited use by Customs be allowed more widespread use under the FTC rules and regulations? If so, does such action hamper manufacturing efficiency by reverting back to exactly the problem the WT0 is trying to solve - the lack of uniformity of decision making criteria and label content?
The label on the wood table reads "Made in U.S.A." In this day of global sourcing, what does that really mean? Not surprisingly, the answer depends on which federal agency is asked. The Federal Trade Commission is grappling with the issue right now because its current rules are in conflict with those of the U.S. Customs Service, the Buy American Act and the North American Free Trade Agreement.
At a workshop scheduled for March 26 and 27 in Washington, D.C., the FTC will address the fate of the Made-in-U.S.A. label under its jurisdiction. Right now, the FTC considers something made in the United States if its components and labor are "all or virtually all" made in the States (i.e. 90% domestic of content) a standard the FTC based upon consumer surveys conducted in 1991.
The question the agency will review is whether that standard should be adjusted in light of tremendous changes in how industry does business now as opposed to how business was conducted in 1991. For example, Mattel makes its Barbie dolls, and Applause Inc. makes its plus toys all over the world. Both have their corporate headquarters in Southern California. Should all their products be considered Made in America?
What about Levi Strauss, which again makes its products all over the world, as well as in the U.S.? How about Douglas Aircraft, which builds its planes in the U.S., but generally from foreign-made parts? And what about the Toyota - General Motors plant in Northern California, where union workers make automobiles that include major components (e.g. engines) from foreign countries? Just how should Made in U.S.A. be determined? Do consumers even care where goods are made?
The issue came into focus when the FTC sought to fine two shoe companies for what were claimed to be deceptive advertisements. In each instance, the company used some foreign components to make shoes in the U.S. The FTC took the position that 90% of the shoes' value was not of domestic origin; therefore, both companies were in violation of the agency's regulations. After many adverse comments from the public and vigorous objection by the companies involved, the FTC decided to reconsider the consent decree it had entered into with Hyde Athletic Industries Inc. It also put off making a decision on its case against New Balance Athletic Shoes. Inc.
The New Balance situation is a good example of today's manufacturing environment. New Balance cannot source all its components in the U.S. because certain soles are no longer made here. Nonetheless, New Balance adds more than 70% of the value of its shoes through its U.S. manufacturing process. Should such a product qualify for the Made in U.S.A. label?
Recognizing tremendous public interest in this issue, on July 11, 1995 the FTC announced it would conduct a comprehensive review of consumer perception of Made-in-U.S.A. advertising claims. In announcing its decision to conduct a review of its standards, the FTC made clear that it was proceeding against Hyde and New Balance on the grounds that a substantial portion of each firm's product line was assembled overseas from foreign parts and a substantial portion of those products assembled in the U.S. was composed of foreign parts - facts that apply to most American manufacturers today.
In a Federal Register notice issued October 17, 1995, the FTC invited comments. It received 150. Many objected to the existing standard as too stringent because it did not reflect current commercial reality or consumer perceptions. Many commentators also objected because the FTC standard contradicts those imposed by the U.S. Customs Service, the Buy America Act and NAFTA.
A primary objective of the FTC is to enhance consumer choice. In that regard, the FTC and Customs rules are in accord. In the case of U.S. Customs, the purpose of 19 U.S.C. §1304 (the marking statute) is to require every imported item be labeled with its country of origin in as permanent, indelible and conspicuous a manner as the article will allow. This standard is intended to allow the consumer to know the origin of the article under consideration for purchase so that, if origin is an issue, the consumer has the necessary facts to make an informed decision. Such information is particularly important in circumstances of strongly held opinions about certain countries (for example, the sanctions consumers imposed on South Africa during its apartheid days).
While the standards imposed by the FTC and Customs are similar in their purpose, they are different in their application. Customs determines origin through a standard called "substantial transformation," a standard that traces its origins to 1908 and Anheuser-Busch Brewing Ass'n v. United States, 207 U.S. 556 (1908). Substantial transformation occurs when a manufacturer start with one product (the imported item) and end up with another (the finished good or component).
For example, if wood from Malaysia is made into tables at a plant in Southern California, those tables would be of U.S. origin for Customs purposes. Whether they would qualify for FTC purposes would depend on an analysis of the costs to see whether 90% of the value was added in the United States. The outcome could depend on whether or not the wood was cut by hand. If by hand, the labor cost is probably higher than if cut by machine or robot. Should origin determinations turn on such a factor? Doesn't encouraging high- cost labor limit the number of jobs and drive up the price of the finished good? Doesn't it make the company less efficient in its manufacturing process?
Substantial transformation as a standard is generally used throughout the world. How it is determined, however, changes depending on the locality and the specific product or industry under review. Each country can be expected to take reasonable steps to protect its primary domestic industries. As a result, substantial transformation is generally determined using one of three methods: by the amount of value added, the process employed or where the processing occurred.
Most countries use different methods depending on the particular product or industry in question. Consequently, companies that ship to various countries are faced with different standards, depending on the destination of the specific shipment. As a result, one of the early things agreed to at the General Agreement on Tariffs and Trade Uruguay Round of negotiations that resulted in the establishment of the World Trade Organization (WTO) was that there should be internationally agreed upon rules of origin.
If such standards can be established, then there need be only one label affixed to a particular product. In addition, if there is only one standard, a company can be more efficient in its manufacturing process because multiple labeling is not required. It also promotes efficient record keeping of documentation that support claims. Companies need only maintain one set of records rather that one set to support each of the different standards that apply.
NAFTA is an altogether different consideration. In the New Balance case, NAFTA had a 50% value-added requirement that was met. A similar result is reached were the Buy American Act to apply. Its standard is a 50% domestic value-added requirement, too.
The FTC review will address a host of issues such as how to compute the value added. For example, how many steps back into the production process will the company be required to go to determine the origin of the components or parts involved?. May general overhead be added to the cost of production to meet the domestic content requirement? How should total product cost be determined?
What is interesting about these questions is they are the very same ones being addressed by the WTO in its origin-determination efforts. The FTC will, of course, go beyond the standard setting stage and also deal with consumer perception in order to determine the accuracy of an advertisement. Its decision may well turn on the sophistication of consumers.
There are also other interesting questions. Should industries that add a larger percentage of value than others somehow be rewarded in their advertising claims? If so, how should that be accomplished? Should the label say "Made in America from foreign and domestic components?" If so, such language is again in conflict with the Customs' requirement that there be one country selected for origin purposes.
The exception in the Customs' context is where foreign components are assembled under one specialized program. In those limited circumstances, Customs allows a label that says, for example, "Assembled in Mexico from U.S. Components." Should a label authorized for limited use by Customs be allowed more widespread use under the FTC rules and regulations? If so, such action could hamper manufacturing efficiency by reverting back to exactly the problem the WT0 is trying to solve - the lack of uniformity of decision making criteria and label content.
Published in The Daily Journal in February 1996.
Copyright © 1997 S.K. Ross & Assoc., P.C.