Federal Trade Commission Documents Received Jan. 16, 1996 B18354900041 To: Office of the Secretary From: Frank J. Altschul, Jr., Federal Trade Commission 63 Boxwood Terrace Room 159, 6th St. & Penn Ave. Red Bank, NJ 07701-6707 N. W. Washington, DC 20580 Tel: 908-747-5942 Subj: Comments from a non-participant for "Made in USA.- Workshop" January 12, 1996 FTC File No. P894219 I do not plan to attend the workshop. General Statement: As a consequence of the following comments, I urge the Federal Trade Commission to continue its current threshold of "all or virtually all" standard, for the "Made in the USA" label. Due to the great amounts of misinformation given either consciously unconsciously by the media, manufacturers and retailers, the "Made in USA" label is the only simple and fast way consumers can be sure they are purchasing a product that is all or virtually all made with domestic labor and materials. Furthermore, the USA label tells the consumer that the product should have been manufactured according to all existing federal and state safety and quality standards, laws and regulations and that existing environmental standards have been met. Comments: Question: When consumers see product advertisements or labels stating or implying that products are "Made in the USA", "Made in America", or the equivalent, what amount of U.S. parts and labor do they assume are in the products? Answer: As a consumer, when I see a "Made in USA" or equivalent label, I know the product is totally made with both U.S. labor and domestic materials. Question: Are there surveys, copytests, or other direct evidence of consumer perception that will aid the analysis? Answer: Within the past few years, many retailers have begun to offer elaborate descriptions in their advertisements and catalogs as to the origin of the materials and labor of the products they sell. This has served to educate the consuming public to the fact that both labor and materials can be sourced, whole or in part, from either domestic or foreign sources. Examples would be Exhibit "A" where one learns that parts of the materials such as the lining can be sourced either domestically or foreign, while the labor remains U.S. Exhibit "A" Or Exhibit "B" where there is a split in labor, part of the knitting being domestically and part foreign, with the material being entirely foreign. Or Exhibit "C" where there is mention of fabric and the word "Imported" with no reference to the U.S., teaching us that in this case, both labor and materials are foreign. And finally, Exhibit "D" where again fabric is mentioned, with no reference to foreign, teaching the consumer that this product is totally USA, both in labor and materials. Question: How has increased consumer knowledge of foreign imports or components affected such perceptions? Answer: Increased knowledge of foreign imports and components has shown that all of this type of outsourcing has nothing to do with better quality labor or materials, but rather is associated with lower cost labor and materials. I cannot offer an example of an announcement by a U. S. company reporting the closing of their domestic factories in favor of foreign locations where the reason for moving is to "make a better product". I cannot offer this because no such example exists. Every announcement I have seen states that the company is outsourcing overseas in order to obtain cheaper labor and/or cheaper materials. Further, once the move has been made, no mention of better quality is stated. I have yet to see a "Crafted with Pride in China" label. Therefore, my perception of outsourced product is one of inferiority and of domestic as superior. Question: How much knowledge of foreign sourcing of components do consumers have? Answer: Consumers only have as much, or as little, information on foreign sourcing as manufacturers and retailers give out. Some information given is useful as in Exhibits "A", "B", "C", and "D". Others are not. Some is confusing and some misleading; Some information is downright silly as in Exhibit "E". Are the parts 92% U.S. or Canadian????? QUESTION: How much, if at all, is consumer perception of Made in USA claims affected by the type of product, complexity of the product, or other factors? Answer: Type of product or complexity is irrelevant. While it is easy to be lulled into the misconception that so-called minor components are unimportant and it makes no difference where they are made, nothing could be farther from the truth. A highly complex automobile is just as inoperable with a ruptured radiator hose as is a simple pair of pants with a broken zipper. Finally, there is an old saying, "A chain is only as strong as its weakest link". I might add, "regardless of its type or complexity". Exhibit "B" Exhibit "C" Exhibit "D" Exhibit "E" Question: Do consumers attach higher domestic content to products claimed to be Made in when USA claims are presented with greater prominence or frequency? When they are featured in advertising, as opposed to merely on labels? Answer: No, Made in USA means just that, whether advertised or merely on labels. A product cannot be 110% Made in USA. However, there is no doubt domestic content and labor is more easily recognized by calling attention to it in adverting. Questions: What are the costs and benefits of an "all or virtually all" threshold for Made in USA claims, versus a low threshold (e.g. 50%)? Answer: One can argue "costs and benefits" until one is blue in the face since it is such a complex subject, however, certain facts, when taken by themselves, help to answer the question. (1) Outsourcing is not the best way to do business. Shipping is costly and time is an important factor. The ideal is to be near ones suppliers and market. This is why all the large corporations (Dupont IBM, Motorola) manufacture for the domestic market in the U.S. with local material and for the foreign markets, in or near these markets, and utilize local materials if available. (2) Outsourcing is not needed in most cases. Virtually all raw materials and fabricated components are available or can be quickly available from within the United States. There are exceptions, of course, such as coffee. However with little or no domestic competition, the coffee industry has prospered with a totally imported raw material processed and packaged with American labor. (3) Outsourcing of labor and materials is not driven by a desire for better quality or efficiency. It is important to note that while outsourcing is driven by a desire to obtain lower cost labor and materials, it is also driven by a desire to avoid state and local taxes, to avoid pension and healthcare benefits, to avoid environmental manufacturing standards and regulations, to avoid Social Security, Workman's Compensation and unemployment payments and to avoid OSHA compliance. All of these savings help to balance out the inconvenience and high cost of shipping outsourced material. (4) In the long run, outsourcing does not benefit the consumer. In retail it is called a "loss leader". Initially, merchandise is sold at or below cost to hook the sucker. After time, savings disappear. In the 1980s, outsourced products were cheaper. In the 1990s that is all gone. Refer to Exhibits "F" and "G". While this is not exactly an apples to apples comparison, it is close enough. Since the Made in USA Workshop appears to be mainly concerned with outsourced materials rather than labor, I have chosen to compare outsourced and domestic materials in these exhibits. Both are taken from catalogs received within the past month. It is impossible to get an exact comparison because a retail company probably doesn't have exactly the same product made in various places and with different materials. In Exhibits "F" and "G" we see samples of the same type of garment made with the same type of material. The differences appear to be mainly in the fabric pattern and decorative trim. It would seem that consumers still have to pay more for a plaid with a little more trim, even though the fabric is outsourced. Who benefits from outsourcing? It doesn't appear to be the consumer. Question: What are the precise benefits of being able to make unqualified Made in USA claims for lower domestic-content products? Answer: Allowing Made in USA claims for lower domestic content would be a disaster. It would eliminate the constitutional guarantee of freedom of choice. My own personal choice is that I do not want to purchase anything made in China because of that country's deplorable human rights record. It is hard enough for me to exercise this choice now, since much China-made material can be disguised within the qualification of "Imported". The qualification alerts me to look more closely at labels, etc. So far I have been success To permit China-made material to hide behind a lower-domestic content Made in USA claim would rob me of my constitutional right of choice. Question: What impact would this have on firms that now meet the higher standard? Answer: Appellation Controlled Medoc is a definitive French wine region claim. Wines with this appellation are made from Medoc grapes only in Medoc wineries. Wines made with grapes from the Medoc and other regions are not Appellation Controlled Medoc. They are monopole. A Frenchman will fight you to retain this appellation. Red is a definitive color. Red+Blue is not Red. It is Purple. Made in USA is a definitive claim. Made in USA+China is not Made in USA. It is Made in USA of imported material. Any variation from a definitive claim should properly be handled as a qualification as it is now (e.g. Made in USA of imported material). This policy cannot be changed without destroying the original policy. To destroy this policy would do great harm and be an unthinkable disservice to both the firms that now meet the higher standard and we consumers. Exhibit "F" Exhibit "G" Question: What impact would this have on firms that might be able to raise their domestic content to meet a lowered threshold? Answer: It would have absolutely no impact whatever nor create an incentive to raise domestic content. Why? First, look at the reason for having lower domestic content. The reason is to obtain lower cost, not better quality. If a firm outsourced for better quality, it would want to retain that quality, not lower it. In a few instances where firms outsource for better quality, they let you know it (e.g. Peruvian Pima yarn as in Exhibit "B") and use it as a sales tool. If there were a lower threshold, there would be no reason to drop the Peruvian yarn in favor of domestic, nor would there be any reason to conceal it. When firms outsource for lower cost, they refer to it as "Imported". I believe a lower threshold would have the opposite effect by encouraging firms with 60% to drop to 50% if a 50% threshold were adopted and it might encourage some firms now meeting the higher standard, to lower it. It is a well publicized fact that once firms engage in "chasing lower costs" it becomes an endless cycle. Now that labor costs have risen in Korea and Japan, firms are moving to China and Indonesia. After, NAFTA, there wasn't a large move to Mexico because of political and financial turmoil. Question: What difficulties are there in making truthful comparative or qualified claims that reveal that the product is not wholly domestic? Is qualifying claims more difficult in this context than in other advertising or labeling contexts (e.g. "30% lower in fat than the leading brand")? Do advertising and labeling pose the same considerations? Answer: The answer to this question is that "30% lower in fat than the leading brand" claims have proven misleading, useless, etc, etc. and have been abandoned in favor of the new "Nutrition Facts" label. Any similar comparative claims with regard to Made in USA would be equally misleading, useless etc, etc. Questions: What are the costs and benefits of alternative thresholds (e.g. 50%, 75%, products "substantially transformed" in the United States)? Answer: Since Made in USA is a definitive claim, any variation such as 50%, 75% or substantially transformed, should be treated as a qualification statement and not incorporated as a threshold. Question: What are the costs to consumers, when the actual domestic content in "Made in USA" products is lower than consumers are led to believe? Answer: The cost to consumers is overpricing and disappointment. Outsourcing advocates claim that outsourced products offer lower prices to consumers. Initially this was true (loss leaders) but in 1996 it is not. In fact today, if you honestly compare quality of materials and workmanship, plus feature for feature, Made in USA offers better value. Question: If adding qualifications to Made in USA claims sometimes is impractical or costly due to space limitations, are there alternative phrases that meet this concern and also adequately inform consumers of foreign content? Do such formulations as "USA 80%", "Made in USA(80%)", or similar formulations satisfy these concerns? Answer: I believe the cries of "impractical or space limitations" are unfounded. I have a pair of sunglasses which has the Made in USA claim stamped on the frame and this copy takes up less than 1% of the available space. You need a magnifying glass to read it but, hey, it's there if you are looking for it. Also packaging tags and point-of-sale material offer ample opportunity to supplement microscopic qualifications on the product. I have yet to find any firm having difficulty with space limitations or practicality concerning the "Crafted with Pride in the USA" statement. Question: What do consumers understand the phrase "Assembled in USA to mean? Would consumers view such terms as "Assembled in USA" as suggesting that the product may have substantial foreign content? How much foreign content? Answer: Assembled in the USA has always meant to me, foreign, parts-assembled in U S. factories, although some minimal fabrication may occur at these factories. This has a long history. Individual parts have always had lower custom duties than finished products. When I started in the scientific business in 1960, the two sellers of analytical balances, Swiss based Mettler and Germany's Sartorius, both brought in parts and assembled them in the U.S. I don't know if this is true today. Foreign manufacturers are forever trying to change this perception. A current Toyota Camry TV commercial states "The Toyota Camry is the best automobile built in America". Question: What are the costs and benefits of allowing such a claim for a product where there is only minimal domestic assembly? Answer: I don't know why anyone would want to allow a claim where only a minimal amount has been done in support of the claim. Also, bringing in parts as opposed to finished product has been used to circumvent quotas. Allowing a claim of assembly with only minimal assembly would facilitate quota circumvention. Question: 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? Answer: This would not work because Customs requirements are only for use at the Point of Entry and are not designed to follow the product. Lack of labeling is permitted in "Substantially transformed" cases because the imported product will be substantially transformed in a later manufacturing process, such as the weaving and knitting of imported cotton. From a Customs standpoint, what is important is the Customs paperworker which states that the Cotton is from such and such country, and is signed by an official of the importer. This information is used only at the point of entry to determine Custom Duties, etc. To allow this procedure to follow through manufacturing and labeling would defeat foreign content labeling such as found in Exhibits "A","B","F" and "G" which refer specifically to cotton and other imported yarns which are Substantially transformed in the manufacturing process but are still foreign. If the Buy America Act allows only 50% cost, then I would suggest it be renamed "Buy 50% American Act". Question: Do foreign customs officials prohibit the addition of qualifying phrases on Made in USA labels? In my duties as sales manager for a manufacturer in the late 1980's and early 1990's, I sold and shipped product to Canada, Mexico, Japan, Holland, Sweden and the United Kingdom. In this capacity, I found that Customs officials on both sides of the border were primarily interested in the paperwork which accompanied the shipment. This paperwork had a space labeled "Country of origin" into which the appropriate answer was typed or written. This paperwork is the authoritative communication because it is signed by the exporter or importer as the case may be. I have no knowledge of any custom official, foreign or domestic, paying attention to any other source other than the official paperwork to ascertain "country of origin". Question: How should the proportion of domestic content be measured with respect to Made in USA claims? Answer: I believe the current policy of requiring "all or virtually all" content works fine. Also the current policy of requiring all other variations to be explained with qualifications, works fine. Percentages as a rule, are too varied and complicated to be practical. Finally, qualification space limitations never seem to be a problem when the manufacturer uses foreign material to improve quality and is proud of it as in Exhibit "B" "Knit in Peru and USA from Peruvian Pima yarns". Question: What form of guidance should the Commission offer with respect to Made in USA claims? Answer: The commission should utilize a case-by-case enforcement. Respectfully submitted, Frank J. Altschul, Jr.