Federal Trade Commission Received Documents Jan 16 1996 B1835490046 Secretary IMRA INTERNATIONAL MASS RETAIL ASSOCIATION 1700 North Moore Street Suite 2250 Arlington, VA 22209 COMMENTS OF THE INTERNATIONAL MASS RETAIL ASSOCIATION BEFORE THE FEDERAL TRADE COMMISSION ON MADE IN USA POLICY COMMENT AND MADE IN USA WORKSHOP-REQUEST TO PARTICIPATE FTC FILE NUMBER P894219 JANUARY 16, 1996 Phone: (703) 841-2300 Fax: (703) 841-1184 INTRODUCTION The International Mass Retail Association (IMRA) represents 170 mass retailers that include discount department stores, home centers, catalogue showrooms, dollar stores, variety stores, warehouse dubs, deep discount drugstores, specialty discounters and off-price stores. Collectively, IMRA retail members operate more than 54,000 stores in the U.S. and abroad and employ over a million people. The retail members represent the overwhelming majority of the $282 billion mass retail industry. IMRA's member companies have a strong and direct interest in the issue of how country of origin information--particularly "Made in the USA" claims--are presented to the consuming public. We welcome this opportunity to comment on the specific questions posed by the Federal Trade Commission (Commission") in its Federal Register notice of October 18,1995. In addition, IMRA respectfully requests the opportunity to participate in the public workshop on this issue scheduled for March 26-27,1996. IMRA's phone number is 703/841-2300, our fax number is 703/841-1184. Please address all phone, fax or written communication on this matter to Ms. Robin Lanier, Vice President, International Trade & Environment, 1700 North Moore Street, Suite 2250, Arlington, VA 22209. CONSUMER PERCEPTION OF MADE IN USA CLAIMS la. Are there surveys, copytests, or other direct evidence of consumer perception that will aid the analysis? Recently, IMRA commissioned a Gallup Poll on consumer attitudes toward product sourcing. A copy of this study is attached for the Commission's information and review. The study provides both direct and indirect information about how consumers view country of origin labels, and how important such labels may or may not be in driving consumer purchases. In this study, conducted in May 1994, the Gallup Organization asked a series of questions of a nationally representative group of adults who were the primary clothing and consumer good shoppers for their households. The study concludes that while Americans say they prefer American products to those produced overseas--suggesting that there may be a net benefit to marketing products as "Made in the USA"--that preference is shallow at best. Indeed, the preference for "American" goods is affected by the product's price and falls off sharply if the "American" good is more expensive. The study also indicates that consumers perceive 'American' to represent better quality than "foreign produced" goods. The Gallup Organization concluded that some consumers' willingness to pay more for "American" goods appears to be motivated not by patriotism toward American workers, but by perceived quality. Indeed, when asked how much extra consumers might be willing to pay just to "protect American jobs" for footwear and textiles, the median monthly amount reported was only $8.00. So, if consumers choose a product because it is "American" it probably isn't because they are patriotic. The study also clearly shows that country of manufacture is not a very important factor in a consumer's purchasing decision, in any event. This evidence suggests that while American consumers give lip service to buy American programs, such programs may have little impact on sales. When the respondents were asked to rate the importance of five factors that might influence the purchasing decision, consumers indicated that the country of origin of a product is the least important factor, rating well below such obvious factors as warranty, price and product features. More important, only 34 percent of respondents indicated that they 'always' try to determine the origin of a product. Twenty-two percent of purchasers, never or rarely try to find out where a product is made. lb. How has increased consumer knowledge of foreign imports or foreign components affected . . . perceptions? How much knowledge of foreign sourcing of components do consumers have? The IMRA/Gallup study shows, albeit indirectly, that consumers often confuse "American made" products with "American brand" products, suggesting that consumers' have little understanding of global component sourcing and manufacture. For example, the study indicates that consumers perceive "American" products as being of higher quality than products from other countries. In the break out of product areas, the study shows that 66 percent of the consumers surveyed believe that U.S. toys are of higher quality than those produced in foreign countries. This is a very revealing response since the United States has no significant toy manufacturing capacity and didn't in 1994. Indeed, the United States recently agreed to eliminate all import tariffs on toys because these tariffs hurt U.S. toy makers who largely produce their products overseas. Two conclusions can be drawn from this obvious misapprehension on the part of the IMRA study respondents. First, consumers are not generally aware of the industries in which the United States has a competitive advantage. Second, and far more important for the purpose of the Commission's investigation, consumers respond to the quality represented by American brand names as much as, and perhaps more than, they do to the "Made in the USA" label. So, for example, consumers are not fully aware that some products carrying recognized U.S. brand names like Kodak, or Fisher Price, or Procter and Gambel, or Ford are foreign made. Indeed, consumers believe that these American branded products represent high quality and U.S. value, even when they bear very dear and permanent country of origin labels indicating their foreign manufacture. 1c. How much, if at all, is consumer perception of "Made in the USA" claims affected by the type of product, complexity of the product or other factors? The IMRA/Gallup study indicates that consumers are more likely to pay attention to the country of origin of certain types of products, like clothing, automobiles, and consumer electronics than other kinds of products. Again, this differentiation may have more to do with perceived quality than other factors. American consumers perceive imported consumer electronics to be of higher quality than American products, on the other hand they perceive American clothing to be of much higher quality than foreign clothing, perhaps reflecting the decades-old advertising campaigns Cotton, Inc., and the 'Crafted with Pride' program. What the IMRA/Gallup poll does not say is whether consumers understand the difference between the manufacturing processes represented by clothing and consumer electronics. More important, it does not dearly differentiate between consumer perceptions of "American" brand names and "Foreign" brand names. Panasonic Corporation--a Japanese brand name--produces televisions in the United States--the IMRA/Gallup poll suggests, but does not directly prove, that American consumers perceive a Panasonic Television as an import, regardless of its label. DEVELOPING A NEW STANDARD FOR UNQUALIFIED CLAIMS 2a. What are the precise benefits of being able to make unqualified Made in the USA claims for lower domestic-content products?... Based on the IMRA/Gallup poll it appears that there is very little benefit to be gained at all by aggressively advertising "Made in the USA." While consumers give lip service to such products, their ultimate purchase of goods is based on the standard factors of quality at a good price. General "feel-good" advertising like "Crafted With Pride," or the "Cotton, Inc." advertisements may contribute to the notion that U.S. goods are of higher quality. American brand goods appear to have an edge in perceived quality, depending on the type of product, and can demand slightly better prices (on the basis of that perception). However, the study suggests that most consumers simply don't pay attention to the country of origin of products. It is hard, in this context, to justify the Commission's 'all ox virtually all' standard. "Made in the USA" labeling and advertising may be irrelevant and may not drive increased sales of specific products. To the extend that it is at all relevant, however, such a standard penalizes those companies with substantial U.S. manufacturing operations who might be able to successfully challenge consumer perceptions of U.S. brands that are wholly imported and labeled as such. Maintaining the "all or virtually all" standard will not significantly drive decisions on where to place manufacturing capacity. The IMRA/Gallup poll shows that consumers don't really pay much attention, so it only stands to reason that companies will not base their investments in manufacturing capacity on the basis of a lowered value added standard. Other factors, such as labor costs, infrastructure and supply lines will continue to drive foreign investment decisions. 2c. What are the costs and benefits of alternative thresholds (e.g. 50 percent, 75 percent, products "substantially transformed" in the Untied States)? IMRA, believes the Commission should revamp its current standard so that companies representing significant U.S. manufacturing operations can compete more effectively with U.S. brands that have no U.S. manufacturing. Please note, IMRA is not advocating any changes in the current method of designating or labeling foreign country of origin. We believe the current FTC and Customs service requirements for prominent, and in some cases, permanent labels are sufficient to educate consumers about the country of origin of a product-if they would bother to look at them. The fact that consumers choose not to look at these labels, and, continue to respond to the perceived nationality of "brand names" is not, in our judgment, an issue of deceptive advertising, merely a reality of the marketplace. Building on this perception, IMRA believes that the "all or virtually all" standard is outdated in today's global environment, and perhaps more important, unfairly penalizes U.S. companies who have substantial manufacturing operations in the United States, but who cannot fully claim that all or virtually all of their products is made in the United States. Even though Americans do not know it, many American manufacturing firms have to rely upon foreign sources for components to production. For example, U.S. bicycle makers are dependent upon foreign sources of derailleurs and brakes--essential equipment on all bikes. Corduroy jacket and pants manufacturers, even those using union labor, are dependent upon foreign sources of corduroy fabric. U.S. trade policy regularly recognizes the plight of such companies. Temporary, permanent, and special access program duty suspensions and remissions are almost always aimed at such U.S. manufacturers. For example, bike parts are entered into the U.S. duty free. Even in the sensitive textile and apparel sector, free trade agreements like the North American Free Trade Agreement (NAFTA) have special programs for "fabrics in short (U.S.) supply." IMRA believes that the Commission needs to create a standard that recognizes and rewards substantial U.S. manufacturing operations. Obviously there are several ways the Commission could proceed. It could allow unqualified "Made in the USA" claims for substantial value (or value, added) in the United States. Similarly, the Commission could develop or use a "processing" standard for such claims. IMRA believes there is no one correct way to proceed, in fact each of these approaches has merit for some kinds of products. To this end, IMRA believes Commission must recognize one central fact of life: manufacturing processes differ widely between and among sectors and product groups, so that no single rule of thumb will be fair to all. A rule that will work for automobiles (composed of many subassemblies), probably won't work for a board game, or a shirt, or a pair of shoes. More important, most manufacturing processes have one or two essential steps that change raw materials or a component parts (like a transistors) into some other kind of product. The value of a product might be entirely in its transistors, but the process by which the transistors are changed into a radio is what's important in the consumer's perception. If you sew a shirt you've made it, whether the fabric came from New Jersey or New Guinea. So, whether the FTC adopts a value-added or a processing approach--or both, it cannot ignore the particular manufacturing process. To do so would be unfair to many U.S. manufacturers. In IMRA's view, therefore, the Commission cannot ever hope to pick a single number--like 75 percent value or 50 percent value--and create a yardstick that will be fair, or non-deceptive. For example, it is often the case in clothing manufacturing that more than 50 percent of the value is in the fabric and not the labor to produce the clothing. And yet few would argue that the process of cutting, sewing, trimming, and packaging an apparel item is a substantial processing operation that should be recognized if it is carried out in the United States. It ought not to be deceptive to say that a shirt that was cut and sewn (made) in the U.S., was made in the U.S. Such a statement, if truthful, is not deceptive, even if the value of the shirt is in the imported silk fabric. In other industries, the main value might be in a simple packaging operation. For example, the components of a board game account for very little of a game's value, while the game's packaging accounts for more than 50 percent. ff the FTC uses only a single value-added standard, then advertisers might be allowed to non-deceptively advertise a board game that was only packaged in the United States as "Made in the USA." Common sense tell you that consumers would probably consider such a claim-even if it met a value-added test--as deceptive. For this reason, IMRA believes that the Commission cannot adopt a single, value-added standard for unqualified claims that would apply across the board. Because the value added depends so much on the type of product, such a standard might be far more deceptive than other, qualified claims such as "Assembled in the U.S. out of foreign-made parts." So, while we believe the FTC should abandon its "all or virtually all" standard for USA claims, we do not support a straight percentage value-added approach. We believe that if the Commission chooses to allow advertisers to use a value added standard, that standard must be based upon an understanding of manufacturing processes and allow for differing percentages of value added for different types of products. A better approach for many products is a processing approach, such as the one used by the U.S. Customs Service. Under this approach, the country of origin of imported goods is based on where the product is "substantially transformed" from one article of commerce into another. For example, the process of transforming a bolt of cloth into a shirt (if all the processing takes place in one country) is dearly a substantial transformation. IMRA is not suggesting that the Commission adopt the U.S. Customs rules or court cases on country of origin. However, we do believe that advertisers ought to be allowed to justify unqualified claims on the basis of their significant U.S. manufacturing processes. Indeed, if those processes are significant enough to create a new article of commerce, the new article should be allowed to be labeled "Made in the USA," because, in fact, if it is a new article of commerce, it was made in the United States. So, using our simple examples above, the shirt-maker (in the absence of the special federal laws pertaining to apparel labeling) could label a shirt wholly cut, sewn, stitched and packaged in the United States as "Made in the USA," while the board game packager could not. The bike maker, who is dependent on foreign sources for brakes and derailleurs could label its product Made in the USA. In all these cases a new article of commerce has been created. We believe that a processing rule is inherently less deceptive than a value added rule. Consumers may not pay much attention to country of origin labels, and they may not base their purchasing decisions upon these labels, but we believe that consumers view substantial U.S. manufacturing operations as more important to the issue of whether something is made here, than the amount of value added here. Obviously, in today's world of global production, the determination of "substantial transformation" has become very difficult, especially when manufacturing processes are spread over several countries. Of equal importance, this approach may not work for products like automobiles composed of numerous assemblies and subassemblies, with manufacturing spread over dozens of countries. For this reason, IMRA is not suggesting that the FTC adopt a processing rule exclusively, only that those industries that can use such an approach to justifying claims be allowed to do so. The Commission could adopt a sector-by-sector value-added rule that could also, at the manufacturers' discretion, be used to justify unqualified claims. Obviously, in the case of automobiles, consumers will view a Ford as a domestic car, even if it's made in Canada, and a Honda an import, even if it's made in Tennessee. Again, the Commission must remember that consumers perceive the country of origin based on American brand names. 2d. What are the costs to consumers, when the actual domestic content in "Made in USA" products is lower than consumers are led to believe? Since consumers apparently regularly confuse 'American' brand name products for American made products, it's very hard to argue that consumers would be hurt by a less rigorous standard for advertising significant U.S. manufacturing processes. In fact, the Commission should adopt a less stringent rule if for no other purpose than to allow lesser-known brand names to compete more effectively on the basis of U.S. processing operations. 2e. 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? IMRA supports the opportunity to provide qualified claims of U.S. content, such as "80 percent of the parts and labor are U.S." or other such dear claims. Obviously such claims are difficult because of the space they require. Also, we continue to believe that goods which would qualify for "Made in the USA" under a simple processing rule ought to be allowed to make an unqualified claim. 3. What are the costs and benefits of using the same tests for Made in USA claims as those imposed by U.S. Customs requirements ... ? As indicated above, IMRA does not support the adoption of one, across the board value added standard, but rather supports a processing approach. In addition, while we prefer a processing approach, we do not necessarily recommend the adoption of the U.S. Customs Service's rules and court determinations on country of origin. As the Commission may know, the U.S. Customs Service is, itself, in the process of reexamining the way it determines whether a product has been "made" in one country or another. While Customs is not abandoning the processing approach to rules determinations, they are likely, in the future, to abandon the 'substantial transformation' rule and move to some other way of determining which process confers origin. IMRA urges the Commission to consult with Customs on this issue as it reexamines its own rules. In addition, the Commission may also be aware of the provisions contained in the World Trade Organization (WTO) treaty that initiates a global negotiation on a harmonized, world system for determining country of origin. Obviously this process will take many years, but we urge the Federal Trade Commission to get involved in the process now. It appears that the world community will probably move to some form of processing standard--perhaps based on the harmonized tariff descriptions--that will attempt--on a world-wide basis--to define what manufacturing steps confer origin. It will be a difficult task, nevertheless a desperately needed one to speed commerce around the world. IMRA hopes the Commission will adopt the world-wide origin rule, should one ever be developed. THE IMPACT ON EXPORTS IMRA's member companies are increasingly in the business of exporting consumer products to our retail operations in other countries. As third-party exporters, the issues surrounding country of origin (as well as safety and general consumer labeling) have become extremely difficult and costly. As American retailers continue their rapid expansion into the global consumer market, becoming the de-facto export trading companies for small, and mid-sized U.S. manufacturers, the issue of harmonization of origin labeling will become ever more important. Already, several IMRA member companies have been forced to overlabel U.S. products to comply with local labeling and Customs rules in many different foreign countries. This issue will not go away simply by virtue of the FTC adopting a new standard. It will continue to be a fact of life until the World Trade Organization creates a harmonized, world system for determining country of origin. Again, we urge the Commission to participate in this process and to initiate and continue a dialog with our trading partners' regulatory agencies. HOW SHOULD THE COMMISSION PROVIDE GUIDANCE IMRA believes the Commission cannot possibly hope to provide all the guidance needed on this issue in a single rulemaking. Indeed, others agencies have tried and failed. It would be better, particularly if the Commission adopts IMRA's processing approach, but even if it does not, to provide a general policy statement and guidelines outlining the general factors that the Commission will be looking for when advertisers seek to justify an unqualified "Made in the USA" claim on the basis of substantial processing or value added. The enforcement of the rule would necessarily have to be on a case-by-case basis, much as the Customs Service enforces its processing rule--"substantial transformation"-- this time. In addition, it would be helpful for advertisers if they could get pre-approval of claims--an analog to a Customs binding ruling--that the claim was not deceptive based on a processing test, or a sectoral value-added test. The FTC should not try to develop a 'bright line' standard. As stated earlier, a single value-added standard is inherently unfair and deceptive. Other U.S. agencies, principally the Treasury Department and U.S. Customs Service, are already attempting to develop a "bright line" standard for country of origin processing based shifts in the harmonized tariff system classification. This is a regulatory process that is already contentious and likely to bog down as the United States moves into the international negotiations required under the World Trade Organization to harmonize our rules with those of other nations. The Commission should play an active role in both of these venues and be prepared to adopt an international processing standard when and if it is ever developed. The Commission should not spend its time attempting to develop such a standard on its own, however. CONCLUSION The issue of Made in the USA labels is an important one for IMRA's member companies. We welcome this opportunity to present comments on this issue. In addition, IMRA has a strong interest in participating in the workshop scheduled for March 26-27 on this issue. We believe we have much to offer the workshop, on the basis of our Gallup study and experience in international trade. If you have any questions about IMRA or its views on this issue, please do not hesitate to contact Ms. Robin Lanier, Vice President, International Trade & Environment at 703/841-2300, or by fax at 703/841-1184. Attachment Consumer Attitudes Toward Product Sourcing IMRA and The Gallup Organization Study - May 1994