Federal Trade Commission Recieved Documents Jan. 16, 1996 P894219 B18354900029 Department of the Treasury U.S. Customs Service Jan 16 1996 MAR-2 RR:TC:SM 559521 MLR Office of the Secretary Federal Trade Commission Room 159 Sixth and Pennsylvania Avenue, N.W. Washington D.C. 20580 RE: Made in USA Policy Comment, FTC File No. P894219 Dear Sir: This is in reference to the request for public comment regarding the use of "Made in USA" claims in product advertising and labeling, published October 18, 1995, in the Federal Register. The following comments are offered by the U.S. Customs Service ("Customs"). I. Consumer Perception of Made in USA Claims and the New Global Economy A. Direct Evidence of Consumer Perception The Commission states that it seeks to ensure that consumers can choose products on the basis of accurate information including claims regarding the country of origin of products, as required by 15 U.S.C. 45 which is the authority directing the Commission to prevent deceptive acts and practices. In determining whether a representation is deceptive, the Commission has evaluated the consumer's interpretation of an unqualified "Made in USA" claim, which historically has meant that an article contains "all or virtually all" domestic content. Customs is responsible for the enforcement of the marking statute, section 304, Tariff Act of 1930, as amended (19 U.S.C. 1304) which provides that, unless excepted, every article of foreign origin imported into the U.S. shall be marked in a conspicuous place as legibly, indelibly, and permanently as the nature of the article (or container) will permit, in such a manner as to indicate to the ultimate purchaser in the U.S. the English name of the country of origin of the article. Section 134.1(b), Customs Regulations {19 CFR 134.1(b)}, defines "country of origin" as the country of manufacture, production or growth of any article of foreign origin entering the U.S. Further work or material added to an article in another country must effect a substantial transformation of the article in order to render such other country the "country of origin" within the meaning of the marking laws and regulations. Such determinations are made on a case-by-case basis, but Customs relies on various court decisions which define the substantial transformation test. For example, in determining whether the combining of parts or materials constitutes a substantial transformation, the issue is the extent of operations performed and whether the parts lose their identity and become an integral part of the new article. Belcrest Linens v. United States, 573 F. Supp. 1149 (CIT 1983), aff'd, 741 F.2d 1368 (Fed. Cir. 1984). Section 134.35, Customs Regulations (19 CFR 134.35), provides that for country of origin marking purposes, a substantial transformation of an imported article occurs when it is used in a process of manufacture, which results in an article having a name, character, or use differing from that of the imported article. Therefore, once Customs considers an article to be substantially transformed as a result of further processing in the U.S., Customs does not require such article to be marked with a country of origin after the further processing. At this point, as Customs consistently has so noted in its rulings, it is then within the jurisdiction of the FTC to decide whether an article may be labeled "Made in USA." Under the substantial transformation test, the origin of an imported article does not necessarily mean that "all or virtually all" of the article's content originates from one particular country, and Customs has not performed any public studies as to the perception of country of origin markings for imported articles. However, it is Customs opinion that the meaning of "Made in (foreign country)" and "Made in USA" for country of origin marking purposes should be the same unless the public is otherwise informed that it is not. Customs also allows an article to be marked with information in addition to the country of origin, such as "Made in (foreign country A) with (foreign country B) components," which for Customs' country of origin marking purposes has the same meaning as a marking without the supplemental information, unlike the FTC's qualified versus unqualified "Made in USA" claims. Accordingly, it is Customs opinion that while a "Made in USA" claim (meaning "all or virtually all" domestic content) is not deceptive and would satisfy the substantial transformation test, the different meanings attributed by Customs and the Commission are likely to confuse the consumer especially in circumstances where an imported article is substantially transformed for Customs' country of origin marking purposes, but does not satisfy the "all or virtually all" domestic content requirement, and, therefore, need not be marked at all. B. The Impact of Increased Globalization of Production on Consumer Perception. The Commission also assesses the "Made in USA" claim based upon the consumer's awareness of increased foreign manufacture. While Customs does not determine the country of origin based upon consumer knowledge of foreign sourcing for a particular product, in applying the substantial transformation test, a case-by-case examination may be made of facts regarding where the components of an article originate, where they are assembled, and the essence of the article. In order to make these case-by-case country of origin determinations more predictable, transparent, and objective for goods imported from a NAFTA country, Customs has codified and implemented the principles of the substantial transformation standard in interim regulations known as the "Marking Rules" (19 CFR Part 102) through the use in large part of a "change in tariff classification approach." Customs has proposed to utilize these interim regulations for importations from all countries. See 59 FR 141 (January 3, 1994) and 60 Fed. Reg. 22312 (May 5, 1995). II. The Costs and Benefits of an "All or Virtually All" Standard Compared to Other Standards A. Impact on Domestic Commerce The Commission seeks comment on the relative costs and benefits of an "all or virtually all" standard and a lower threshold, such as 50 percent. Customs' country of origin determinations based on the substantial transformation test, while influenced by an article's source of components, is not based on any percentage threshold. Customs only uses value-content criteria for purposes of some of its preferential tariff treatment programs, such as the Generalized System of Preferences, and only after it has been determined that the article is "a product" of the beneficiary developing country. It is Customs opinion that any percentage threshold basis for allowing "Made in USA" claims would be inconsistent with current Customs' practices, and practically unenforceable, especially when different percentage thresholds must be verified for markings such as "Made in USA of domestic and imported parts," "Made in USA with at least 70 percent U.S. parts and labor," "The most U.S. content of any leading brand," or "Assembled in USA." Additionally, percentage threshold limits would be in conflict with Customs' current country of origin marking requirements for U.S. articles assembled abroad. For example, under section 10.22 of the Customs Regulations (19 CFR 10.22), products which are assembled abroad from U.S. fabricated components and are eligible for a partial duty exemption under subheading 9802.00.80, Harmonized Tariff Schedules of the United States (HTSUS), must be marked with the country of assembly as the country of origin, even when the assembled article is composed of 100 percent U.S. components and even when such assembly operation would not be considered as resulting in a substantial transformation of such components if they were not of U.S. origin. To eliminate the confusion created by the origin marking mandated by section 10.22, Customs has proposed the removal of this section so that the determination of the country of origin of all assembled articles would be made under the substantial transformation test (which includes the Part 102 rules). With the removal of 19 CFR 10.22, Customs proposes to allow the phrase "Assembled in" to be considered as synonymous with the country of origin indicators "Made in" or "Product of" when the country of origin of the article is the country of assembly. B. Impact on International Trade The conflict between the FTC's evaluation of "Made in USA" claims with the textile and apparel rules of origin under Section 334 of the Uruguay Rounds Agreements Act (19 U.S.C. 3592) is especially evident as it applies to certain textile articles, such as comforters, handkerchiefs, bed linen, scarves and bandannas. Customs has determined that pursuant to section 334, the country of origin of these articles is the origin where the fabric is made, not where the articles are assembled. See 19 CFR 102.21. It is also Customs' position that section 334 is applicable for determining country of origin for marking under 19 U.S.C. 1304. Therefore, if, for example, down comforter fabric of Chinese origin is imported into the U.S., to be stuffed with down and assembled in the U.S. into a finished down comforter (classified in subheading 9404.90 (HTSUS)), the origin of the comforter would be China, the origin of the fabric, and, accordingly, Customs would require that the comforter be marked to indicate "China" as the country of origin. We recognize that Customs' position regarding the application of section 334 rules of origin to the country of origin marking requirements under section 1304 has led to some apparent conflicts between Customs' and the FTC's origin labeling requirements for certain textile goods. Prior to the change in the origin rules by the enactment of section 334, Customs had considered the assembly of down comforters (including filling of down) to represent a substantial transformation of imported fabric, and when such assembly operation was performed in the U.S., the assembler was considered for purposes of the marking requirements under section 1304 as the ultimate purchaser of the imported fabric. We are advised that in the foregoing instances, the FTC had allowed the assembled down comforters to be labeled, "Made in the U.S. from imported fabric." In a recent congressional inquiry on behalf of a manufacturer of down comforters, Customs has been requested to allow the marking "Comforter Assembled in USA; Fabric Made in China," for down comforters imported after the effective date of the section 334 rules. However, since Customs will allow the phrase "Assembled in" to be considered as synonymous with "Made in" if the proposal to remove section 10.22 is adopted as a final rule, the marking proposed above will not be an acceptable origin marking under 19 U.S.C. 1304. Nevertheless, Customs is considering alternative origin markings, which would satisfy sections 334 and 19 U.S.C. 1304 and, at the same time, allow some kind of reference to the U.S. processing that is performed. The cost of an "all or virtually all" standard as opposed to the substantial transformation test is also exemplified for products of the U.S. returned to the U.S. duty-free under subheading 9801.00.10, HTSUS. If these articles do not satisfy the "all or virtually all" standard, but are marked "Made in USA" upon exportation from the U.S. as required by Canadian Customs for example, not only must separate sets of inventory be maintained for export purposes, but if these articles are returned to the U.S., they may be subject to detention or seizure for possible violation of 15 U.S.C. 1124 since they do not qualify to be marked "Made in USA" for purposes of the FTC. Therefore, the more difficult it is for Customs to verify a "Made in the USA" claim, the less enforceable such a marking becomes. For your further information on this issue, Customs has been informed that Canadian Customs accepts various forms of marking for goods of NAFTA parties, such as "Made in USA," "Produced in USA," "Assembled in USA," or "Made in USA with foreign components," unlike importations from non-NAFTA countries. The Commission suggests an option to permit sellers to place unqualified labels on products, such as "USA" for purposes of foreign markets as long as sellers disclose the foreign content to U.S. consumers by other means. However, U.S. Customs has been informed that while Canadian Customs accepts various forms of marking for goods imported from NAFTA parties, it is not acceptable to mark the good "U.S." or "USA" as this is considered misleading. C. The Costs and Benefits of Adopting the Country-of-Origin Rules of Other U.S. Government Agencies It should be noted that Customs utilizes the substantial transformation test not only for country of origin marking purposes under 19 U.S.C. 1304, but also for determining a country of origin for purposes of tariffs, quotas, enforcement of economic sanctions, etc. Additionally, under 19 CFR 177.21 et seq., which implement Title III of the Trade Agreements Act of 1979, as amended (19 U.S.C. 2511 et seq.), Customs issues country of origin advisory rulings and final determinations on whether an article is or would be a product of a designated foreign country or instrumentality for the purpose of granting waivers of certain "Buy America" restrictions in U.S. law or practice for products offered for sale to the U.S. Government. As the Commission notes, the Buy American Act requires federal agencies only to purchase such products that are mined or produced in the U.S., or that are at least 50 percent domestic in value. However, Customs applies the same substantial transformation test used for determining country of origin for marking and other Customs purposes in making the advisory rulings for "Buy America" restrictions. The Commission also states that the Buy American Act is not concerned with advertising or labeling, and its definition does not appear to be tailored to consumer perception of "Made in USA" claims. However, it is Customs opinion that while 19 U.S.C. 1304 does not specifically cover advertising and consumer perception, this law does require the ultimate purchaser to know the country of origin of a foreign article which inherently appears to be dependent upon consumer perception. III. Issues Regarding the Computation of Domestic Content A. A Proposed Formula for Measuring Domestic Content The Commission suggests a formula for measuring the domestic content to substantiate "Made in USA" claims. The percentage would be computed by (i) dividing domestic content (purchase cost of U.S. parts + cost of U.S. labor and direct overhead in final assembly) by (ii) total product cost. In identifying what constitutes U.S. parts, the Commission discusses computations of all stages of production. In Customs opinion, this approach would be difficult to administer, especially if documents from numerous suppliers are necessary to establish the domestic content. Furthermore, it would be difficult to verify the correctness of the cost figures. A one- or two-step approach may be a simpler method for making "Made in USA" claims. For example, if under the substantial transformation test an imported good becomes a product of the U.S. with a new name, character and use different from that possessed by the good prior to processing, a marking "Made in USA with foreign components," or "Assembled in USA" would indicate to the consumer that the article is made with foreign components. However, if an unqualified "Made in USA" claim is to be made, Customs suggests that a system be instituted such as that used for several of Customs' preferential duty programs, such as the Generalized System of Preferences or the Caribbean Basin Economic Recovery Act. Under these programs, an article may be imported duty-free into the U.S. if it is a "product of" the beneficiary developing country and a 35 percent value-content requirement is satisfied. The full value of the materials imported into the beneficiary developing country and used to produce the finished article may be counted toward the 35 percent value-content requirement if the materials undergo what is known in customs law as a "double substantial transformation." Under this standard, foreign materials can be considered "materials produced in the beneficiary country," when those materials are substantially transformed in that country into a new or different article of commerce which is then used in the production or manufacture of yet another new or different article (the final product). If the FTC applies this method, the true proportion of U.S. labor would be considered if this is deemed important. If you have any further questions, please contact Sandra Gethers, Chief, Special Classification and Marking Branch, at (202) 482-6980. Sincerely, Stuart P. Seidel Assistant Commissioner Office of Regulations and Rulings