Federal Trade Commission Received Documents JAN. 19, 1996 B18354900062 January 9, 1996 Office of the Secretary Federal Trade Commission Room 159 Sixth Street and Pennsylvania Avenue, N.W. Washington, D.C. 20590 RE: Compaq Computer Corporation: Comments Regarding FTC "Made in USA" Advertising and Labeling Policy (FTC File P894219) Dear Sirs: Compaq Computer Corporation, a major United States manufacturer of computer equipment, headquartered in Houston, Texas, welcomes this opportunity to submit comments regarding the Federal Trade Commission's standard for advertising and labeling products offered for sale in the United States (or their packages) with "Made in USA" claims. As discussed herein, Compaq submits that the FTC's current policy relating to "Made in USA" advertising and labeling claims should be harmonized with the country of origin marking requirements applicable to such products pursuant to the Customs laws, and particularly section 304 of the Tariff Act of 1930, as amended (19 U.S.C. Section 1304). Compaq requests the opportunity to participate in the Commission's forthcoming workshop on "Made in USA" claims in advertising and labeling. I. Background As set forth in the Request for Public Comment in this matter, the FTC has maintained a high threshold for unqualified "Made in USA" claims.(1) In recent years, as manufacturing has expanded and diversified globally, United States manufacturers have adopted global sourcing strategies. These strategies have minimized production costs, maximized production efficiencies and economies of scale, and delivered new technologies to business and individual consumers at the lowest possible costs. Nowhere has this trend been more pronounced than in the electronics industry. That is not to say, however, that American-made electronic products which incorporate foreign-origin components are not properly considered "Made in USA". Product research, design and engineering activities are conducted in the United States. Capital-intensive and labor-intensive manufacturing operations performed in the United State impart high "value added", transforming 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 firms. It is also noteworthy that consumers of electronic products, in addition to being technologically savvy, tend as well to be reasonably well-informed with respect to the globalization of the electronics industry. In addition to meeting the FTC's "Made in USA" labeling rules, Compaq and other United States manufacturers are required to mark their products and their packages in accordance with country of origin marking rules imposed under section 304 of the Tariff Act of 1930 (19 U.S.C. Section 1304), as administered by the United States Customs Service. Section 304 requires that all goods imported into the United States, or their packages, be marked permanently, legibly and in a conspicuous place so as to advise an "ultimate purchaser" in the United States of the good's country of origin. Hence, the customs marking rules serve much the same purpose as the FTC rules. Imported goods and materials are exempt from such marking only when they are "substantially transformed" in the United States into new articles of commerce, having a name, character, or use different that their constituent materials. See 19 C.F.R. Section 134.45(a); United States v. Gibson-Thomsen Co., 27 U.S. 298 (1940). In addition, goods of Canada and Mexico, imported into the United States, are exempt from marking 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. Section 102.20.(2) Customs' marking rules also are used to determine a good's origin, for duty rate purposes, and for purposes of the enforcement of various quantitative import restrictions. United States manufacturers must also cope with any other newly-developed rules of origin imposed for purposes of administering tariff and nontariff preferences. These include tariff preference origin rules imposed pursuant to the North American Free Trade Agreement (NAFTA), the Generalized System of Preferences (GSP), the Caribbean Basin Economic Recovery Act (CBERA), the Andean Trade Preference Agreement (ATPA), the United States-Israel Free Trade Agreement Act (FTAA), as well as procurement rules such as the Buy American Act and the General Agreement on Tariffs and Trade (GATT) Government Procurement Code. Because rules of origin have assumed a central importance in international trade, the United States has joined its fellow members of the World Trade Organization (WTO) in a multilateral Agreement on Rules of Origin, which prescribes a three-year international study aimed at developing harmonized rules of origin for merchandise trade. Compaq can anticipate situations in which these various rules of origin may operate to produce inconsistent results. The likely upshot of such inconsistency is increased costs and compliance burdens for manufacturers, as well as increased confusion on the part of consumers. Consequently, it is Compaq's position that if the FTC's labeling rules were harmonized with Customs' country of origin marking requirements,(3) manufacturers would not incur the additional expense of monitoring compliance with two potentially conflicting origin criteria, and consumers could be more appropriately advised of the origin of the goods which they purchase. II. Discussion With these preliminary observations in mind, Compaq now turns to a consideration of specific questions propounded by the Commission.(4) A. What are the costs and benefits for the various labeling standards? As noted above, the FTC's stringent policy relating to labeling goods as "Made in USA" seems commercially unreasonable in an age of global sourcing and component specialization. Many goods manufactured in the United States are "substantially transformed" for purposes of the Customs laws, and need not be marked to show a foreign country of origin. At the same time it appears that the FTC's current rules might operate to preclude these articles from being marked "Made in USA." If such merchandise were marketed with no designation of origin whatsoever, this would certainly not be a helpful communication to United States consumers, and could be a disadvantage for U.S. manufacturers and those who distribute American-made products. 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 making purposes, is the last country where the article underwent a "substantial transformation" prior to entering the United States. 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? Furthermore, it appears that there are 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 electronics industry, where specialized and non-specialized components can be arranged into virtually infinite configurations which perform unique functions. Compaq submits that a product should be permitted to be truthfully labeled as "Made in USA" if it is "substantially transformed" in this country into a new and unique article of commerce, pursuant to Customs' origin marking requirements.(5) The 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." Compaq urges the FTC to reject quantitative tests of origin (e.g., tests based on a specified percentage of domestic content). Such tests are arbitrary, difficult to administer(6) and can lead to absurd or anomalous results. Similarly, value-based rules of origin are difficult and expensive for American manufacturers to administer. Minor changes in a producer's sourcing patterns, or in the price for a given component, can change a country of origin determination. Furthermore, two companies performing the same operations in the United States may receive different origin determinations simply because they may have paid different prices for a given material or component. B. What are the costs and benefits of using the same tests for "Made in USA" claims as those imposed by U.S. Customs requirements ("substantial transformation"), the Buy America Act (50% cost), and other domestic content statutes or rules?) As noted above, there is merit to the adoption of a "Made in USA" labeling rule which is consistent with the country of origin tests used by the United States Customs Service for origin marking purposes. The test should be related to the nature of the merchandise (as in the case of the "substantial transformation" rule or "tariff shift" principles of the NAFTA Marking Rules), rather than under a numerical standard such as that used under the Buy American Act. C. How should the proportion of domestic content be measured with respect to Made in USA claims? It is Compaq's observation that it is incorrect to assume that there is some empirical connection between a product's so-called "domestic content" and the issue of whether, as a practical and commercial matter, it can be said to be "Made in USA." There are circumstances where an article may contain few or no materials of United States origin, but nonetheless may be considered a United States product for nonpreferential and even preferential tariff purposes.(7) If United States manufacturers were required to determine the source of all components and subcomponents before making "Made in USA" claims, as the FTC has suggested,(8) the costs would be substantial. Manufacturers would be required to make significant investments in tracking the sources of components, and the values of components, on a continuous basis, for each product which they manufacture. Where components are sourced from multiple suppliers, or are commingled inventory, these accounting systems can become exceedingly complex. The United States Court of International Trade recently recognized that the costs attendant to the establishment and operation of such inventory management systems can constitute "irreparable harm" to a business, sufficient to justify preimportation review of a marking requirement.(9) Thus, rather than forcing American manufacturers to invest substantial sums in order to comply with "domestic content" rules of origin,(10) the FTC should use United States Customs Service marking rules (whether based on "substantial transformation" or "tariff shift" principles) as the basis for judging the permissibility of "Made in USA" claims.(11) Use of the Customs framework would also comport with the goal of regulatory efficiency by providing a single origin test familiar to industry and avoiding the need for the FTC to provide case-by-case guidance or special rulemaking consideration. D. What form of guidance should the Commission offer with respect to "Made in USA" claims?_______________ To the extent that the FTC adopts a "Made in USA" labeling standard which is consistent with Customs marking requirements, United States manufacturers would largely be able to look to Customs for guidance regarding marking requirements, for example through the agency's pre-importation rulings program. Indeed, the Customs Service currently makes origin determinations in connection with the Buy America Act; these preference determinations have a rationale similar to that of the FTC's origin labeling rules -- that of providing consumers with pertinent origin information. Should Customs "codify" its rules of origin (as the agency has done with the NAFTA Marking Rules of 19 C.F.R. Section 102.20), American manufacturers may be able to discharge their legal obligations by applying these codified rules, minimizing the need for Customs and the FTC to expend agency resources on case-by-case administration. Indeed, if the FTC agrees that Customs' marking rules furnish an acceptable basis for "Made in USA" marking claims, the FTC could adopt Customs' regulations, either as parallel regulations, or by reference. Noting that the WTO Rules of Origin Study is ongoing, Compaq submits that, if the United States decides to adopt a "global" rule of origin for merchandise trade in the future, the FTC requirements for "Made in USA" claims should be revised to bring them into harmony with the global rules. III. Conclusion In the judgment of Compaq Computer Corporation, the FTC's stated policy regarding unqualified "Made in USA" claims is arbitrary and inconsistent with modern commercial and manufacturing practices. It imposes a higher standard on United States manufacturers than is imposed on manufacturers and importers of foreign-made goods. Compaq urges that the FTC adopt a more commercially reasonable and administrable rule that takes into account the sophistication of modern consumers. Country of origin marking rules administered by the United States Customs Service offer the best model for the development of a "Made in USA" labeling test. While Customs' marking rules are far from perfect, United States manufacturers who utilize foreign-origin components are obligated to comply with them. Furthermore, whether the Customs test is based on "substantial transformation" rules, the "tariff shift" principles of the NAFTA Marking Rules, or some future standard to be developed in the WTO Rules of Origin Study, Customs will at least be following a considered rule of origin which is motivated by the same consumer-notification goal as the FTC's "Made in USA" labeling policy. Harmonizing FTC labeling requirements with Customs' marking rules will minimize United States manufacturers' costs of compliance and packaging, while streamlining enforcement burdens for the FTC. Compaq Computer Corporation stands ready to discuss these comments in further detail at the FTC's upcoming "Made in USA" policy workshop. Please contact the undersigned if there are any questions regarding these comments. Respectfully submitted, Peter J. Allen Attorney, Corporate Operations Footnotes: (1) 60 Fed. Reg. 53922, 53923 (Oct. 18, 1985). (2) The United States Customs Service has proposed replacing the traditional "substantial transformation" standard for marking exceptions with "tariff shift" standards set forth in the NAFTA Marking Rules. See 59 Fed. Reg. 110 (Jan. 3, 1994) (3) This is not to suggest that United States Customs Service marking rules are internally consistent in all cases. However, Customs has recognized that inconsistencies sometimes occur, and has proposed harmonizing its rules. (4) Certain of the FTC's requests for comments address questions for which Compaq has no responsive information. For example, Compaq does not have available any empirical surveys or copytests concerning consumer perceptions of country of origin claims. (5) Whether the "substantial transformation" test is expressed n the traditional manner [a change in "name, character or use" as set forth in 19 U.S.C. Section 134.35(a)] or according to "tariff shift" principles [as in the case of the NAFTA Making Rules, 19 C.F.R. Section 102.20] is irrelevant, so long as the test is commercially reasonable and credits important value-added manufacturing operations performed in the United States. (6) Typical problems encountered in the development 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 manufacturing costs", of total cost of production, or according to some other formula; > Determining whether intermediate products, produced in the United States in part from imported materials or components, should be treated as domestic or foreign (i.e., should "self-produced" components and "roll up" be recognized?); > 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" > Determining how to allocate overhead costs which relate to the production of more than one product. (7) For example, under the NAFTA Annex 401 preference rules of origin, a high speed laser printer manufactured in the United States (Harmonized Tariff Schedule heading 8471) may be considered a NAFTA-originating good, entitled to preferential duty rates, if its major subassemblies are assembled in the United States and final integration takes place in this country -- even if none of the parts of the printer have United States origin. The "five part" NAFTA Annex 401 preference rule of origin for these printers is one of the most carefully considered, and one of the strictest, rules of origin under NAFTA. (8) See 60 Fed. Reg. at 53927 (9) See CPC International Inc. v. United States, Slip Op. 95-132 (Ct. Int'l Trade July 24, 1995). (10) An alternative requirement that a manufacturer have a "reasonable basis" for believing that its goods meet a particular domestic content level (rather than requiring specific computation of such content) is probably to ambiguous to be enforceable, and could invite fraud and abuse. (11) In the event that the FTC determines that a value-based content rule must be adopted, Compaq submits that the preferred model for such a test would be the "Regional Value Content" calculation formula set forth in the North American Free Trade Agreement (NAFTA).