Federal Trade Commission Received Documents Jan. 22, 1996 B18354900084 Electronic Industries Association RESPONSE OF ELECTRONIC INDUSTRIES ASSOCIATION TO FEDERAL TRADE COMMISSION QUESTIONS ON "MADE IN USA" LABELING "Made in USA Policy Comment," FTC File No. P894219 January 19, 1996 The following responses are submitted on behalf of the Electronic Industries Association for each of the questions propounded by the Federal Trade Commission in its Federal Register Notice of October 1995 pertaining to labeling of products. There are currently more than 1,000 member companies of the Electronic Industries Association (EIA) representing every major sector of electronics, including components, consumer electronics, electronic information, industrial electronics, and government. The electronics industry is one of the most important manufacturing sectors within the U.S. economy, generating more than $328 billion in factory sales in 1994. The electronics industry now accounts for 20% of U.S. merchandise exports, double the level of the early 1980s. More than 1.8 million Americans in over 16,000 establishments make their livelihood in the electronic industries, and over 16% of U.S. manufacturing workers are employed by the U.S. electronics industry. GENERAL SUMMARY EIA has decided to play an active role in this Commission proceeding because its members feel that it is important that the Commission's prior unattainable standard of 100% U.S. content be replaced with a standard that can be achieved by electronics products that are truly produced (not just final-assembled) in the United States. It is also desirable for the United States to take steps to reduce the number of different government standards for country-of-origin marking and labeling that companies must consider. The Commission can take a constructive step by abolishing its outdated 100% standard and adopting a standard closer to existing, tested government standards which are accepted by industry and used daily to determine country-of-origin, such as "Buy American" or "double substantial transformation" standards. The standard for labeling electronics products sold to consumers should not focus on where the raw materials come from, but rather on whether the normal manufacturing process for those products occurs predominantly in the United States. Accordingly, EIA recommends that if a U.S. electronics producer uses primarily U.S.-built subassemblies and performs the remaining manufacturing steps in the U.S., that product should be eligible for a "Made in USA" label, whatever the source of the basic electronic and mechanical components. Such a standard, applied properly, should meet the expectations of consumers with regard to "Made in USA" labels and advertising. The Commission should also work to develop a solution for companies that want to mark their products consistently whether sold in the U.S. or overseas. In summary, the EIA responses below to each of the specific FTC questions are based on four central tenets: (1) The Commission's prior position based on 100% U.S. content is not only inappropriate, it is counter-productive. Because virtually no modern-day electronics product contains 100% U.S. content, it precludes any electronics manufacturer, no matter how "American" its operations, from communicating that fact to consumers. This leaves consumers less informed. (2) For electronics products sold to consumers, the test for "Made in USA" labels and advertising should not focus on the source of electronic and mechanical "subcomponents" that are the raw materials of the electronics industry, no more than it should determine where a chair is made based on the source of the raw lumber. If an electronics product is created in the United States, primarily from subassemblies that are made in the United States, that product should be considered "Made in the USA," whatever the source of the basic parts used in the subassemblies. If possible, the Commission should accomplish this through application of a standard that is similar to an existing proven standard such as the "Buy American" standard. (3) Without contradicting the above tenet, the Commission's solution should allow U.S. manufacturers to use the same simple product origin marking for a product whether it is sold in the U.S. or exported under foreign customs country-of-origin rules. Consistency will eliminate the costly need to re-label products. (4) The Commission should not allow a manufacturer to use "Made in USA" labels and advertising based on mere final assembly of an electronics product in the United States. A product should be promoted as "Made in USA" only if it meets the test described in tenet (2). Two final additional points are worth highlighting. First, the Commission should undertake, if necessary, a proactive role in this area. The Commission should not simply survey the current population and then try to develop a test that meets every divergent assumption. Instead, the Commission should establish a meaningful, preferably time-tested standard that reflects the realities of electronics production and educate the public on what that standard is. This will avoid confusion. Second, the Commission should take steps to ensure that the standards it adopts are also used by States and other jurisdictions. If not, confusion, inefficiency and inconsistency will continue to surround this subject. RESPONSES TO COMMISSION QUESTIONS (The Commission's questions are summarized below) QUESTION 1. What amount of U.S. parts and labor do consumers assume are in "Made in USA" products? EIA Response: With respect to an electronics product, EIA does not expect that consumers think in terms of percentages of parts and labor, but rather assume that the manufacturing steps normally involved in making that electronics product are performed in the United States. Subquestion 1 (a): Are there surveys for this industry? EIA Response: We know of no surveys that have been done on electronics products, which may be quite different than other types of products in terms of consumer perceptions. Subquestion 1 (b): How has increased consumer knowledge of foreign imports affected consumer assumptions? EIA Response: It is likely that consumers are increasingly aware that basic electronic parts are sold globally as raw materials for electronics products and have no expectation that all the raw electronic parts used by an American manufacturer will be from any one country. Subquestion 1 (c): How much is consumer expectation affected by the type of product? EIA Response: EIA expects that for complex electronics products, the consumer is much more likely to perceive that some of the content of a U.S. product is foreign. Subquestion 1 (d): Does greater prominence or frequency of claims affect consumer perception? EIA Response: While we know of no survey of consumers on this issue with respect to electronics products, it stands to reason that more prominent and assertive claims of U.S. manufacture would affect consumer perception. Small, unevocative markings that are inconspicuous may produce different expectations than bold labels and advertising with evocative claims. QUESTION 2. What are the costs and benefits of a 100% content rule versus a lower threshold? EIA Response: The use of a 100% content rule is completely counter-productive in the electronics industry where virtually no consumer product has 100% domestic content. Such a rule lessens consumer knowledge by precluding any differentiation between U.S. and non-U.S. products. Subquestion 2 (a): What precise benefits come from a lower threshold; will it hurt those that meet the 100% threshold? EIA Response: Because virtually no U.S. electronics product manufacturer could consistently meet a 100% content threshold, there is no down-side to moving to a more useable standard. To the contrary, moving to a standard that is attainable by the manufacturers that have full-scale U.S. production facilities will encourage electronic product manufacturing in the U.S. and help customers differentiate between products. Subquestion 2 (b): What are the difficulties in making qualified "Made in USA" claims on labeling or advertising? EIA Response: Because sourcing requirements and parts costs change continually, any specific qualifier based on percentages (e.g. "Made in USA using 65% U.S. parts") would also be subject to constant change -- at great expense and burden to the company. Moreover, there would be consumer (and industry) confusion as to exactly how the percentage was calculated. More generic limitations on the claim (e.g. "Made in USA of foreign components") would water-down the message so much that it would not be useful in differentiating between real U.S.-made goods and those only final-assembled in the U.S. Subquestion 2 (c): What are the costs and benefits of alternative thresholds, such as 50%, 75%,"substantially transformed," etc.? EIA Response: Alternative thresholds will make it possible for American electronics producers to communicate the fact that their products are made in the U.S. Therefore, the Commission should move to an alternative test. Any test that is based on a percentage of raw material content, however, is not appropriate for electronics products. The test should focus on whether most of the manufacturing steps normally involved in producing the particular product are undertaken in the U.S. If the product is created in the United States, predominantly from subassemblies made in the United States, that product should be considered "Made in the USA," whatever the source of the raw parts used in the subassemblies. This standard has similarities to the "Buy American" test and to the "double substantial transformation" types of tests currently used to grant preferential treatment to goods produced in favored foreign countries or regions. Use of a "substantial transformation" standard would have the benefit of creating a consistent standard for marking products, whether sold in the U.S. or abroad, generating efficiencies for producers and lending consistency and predictability to product markings. However, such a standard should be used only if it can be limited in a way that does not allow mere final assembly in the U.S. to justify a "Made in USA" claim. Substantial transformation itself is the subject of extensive study and activity, as governments attempt to establish clearer, more consistent global criteria for country-of-origin determinations. If the criteria ultimately adopted result in a situation in which certain electronics products could meet a substantial transformation test, despite the fact that they are not truly made in the U.S., there may be some lesser marking that could be used (perhaps a single small inconspicuous marking such as "Product of U.S." with no advertising claims in its packaging or promotion). Such a simple marking might be used without misleading U.S. consumers if the FTC educates consumers that such a marking does not mean that the product was truly made in the U.S. or requires labeling on U.S. packaging that indicates this fact. Subquestion 2 (d): What are the costs to consumers if domestic content is less than believed? EIA Response: As noted in the response to Question 1., in the case of electronics products, the consumer is likely to be buying a "Made in USA" product because he believes that it helps support a U.S. producer or ensures U.S. workers are building the product. If a U.S. electronics producer uses primarily U.S.-built subassemblies and performs the remaining manufacturing steps in the U.S., these consumer expectations should be met. Subquestion 2 (e): Are there alternative phrases such as "USA 80%" that are practicable? EIA Response: Such formulations are impracticable for two reasons. First, the percentage is likely to shift with exchange rates, price fluctuations, sourcing needs, and design modifications, and it would be impractical to change the labels with each occurrence. Second, such labels are likely to be ambiguous and confusing to customers. (See also responses to 2(b) and 5(c)). Subquestion 2 (f): What are consumer expectations, costs, and benefits of using "Assembled in USA?" EIA Response: Such a label could be appropriate for final assembly in the United States, but does not serve the purpose of distinguishing true American manufacturing from mere final assembly. Moreover, such a label may not be acceptable for international customs purposes, and thus would not assist in establishing uniform product marking. If, however, such a marking were to become acceptable for foreign customs purposes, it might provide one option for marking products that only meet the "substantial transformation" type of test in the U.S. QUESTION 3. What would be the benefits of using a "substantial transformation" test or a "Buy American" test, or some other test? EIA Response: As noted above, the "substantial transformation" test has the major advantage of allowing producers to use a single product marking wherever a product is sold. While it would not be appropriate to allow "Made in USA" labeling and advertising for products that achieve substantial transformation through mere final assembly in the U.S., the use of a small, unadvertised marking such as "Product of U.S." might be used for such products if consumers could be educated that such a marking did not mean the product was truly "Made in the USA." Such education might occur through package labeling that qualifies such origin marking or through an FTC education campaign. In order to qualify for a "Made in USA" label and advertising, a higher test should be used, and rather than creating a whole new test, the FTC should consider using a standard that acts similarly to an existing proven test, such as the "Buy American" test or the "double substantial transformation" test. Properly applied, either of these tests should be attainable by producers who truly make their products in the U.S., but should exclude producers who only final-assemble products in the U.S. The Buy American test for "Made in USA" labels has the advantages of (1) being a test that has already been used successfully by government consumers to take into account the U.S. origin of a product, and (2) of being a "one-step back" test that can be met by electronics products that are produced from subassemblies, a majority of which are also created in the U.S. The "double substantial transformation" test used for priority Customs treatment is similar, also has both of these advantages, and also is a standard that has been used regularly in the past. Under such a test, the product has to be assembled to a significant degree (which varies, and in some cases may be too low) from components that are themselves assembled, fabricated, or otherwise created in that same country. QUESTION 4. If foreign officials prohibit the use of qualifying labels, is there a substantial additional cost in adopting such labels for the U.S. market and can those costs be avoided through packaging? EIA Response: As noted above, such qualifying labels might be subject to constant change and might be of little value to consumers in distinguishing products that are truly made in the U.S. Such qualifiers might be appropriate for products only substantially transformed in the U.S. (see response to 2 above), but there could be substantial costs for some products if long qualifying labels were required. Some of these costs could be avoided if the qualifying label was placed only on the packaging or was achieved by the use of stickers as opposed to permanent labels. QUESTION 5. How should the proportion of domestic content be measured? EIA Response: As previously stated, the standard for the electronics industry should be based on the manufacturing process that takes place in the United States. It should not be based on some mechanical formula which focuses on the origin of raw materials -- i.e. basic electronic or mechanical parts -- which are used in the manufacturing process no more than the source of the raw lumber should determine whether a chair is made in the United States. Subquestion 5 (a): Is it sufficient to focus on the purchase price of parts and components? EIA Response: No; this is an inappropriate basis to determine if an electronics product is made in the U.S. See responses to question 5, above, and 5 (b) and 5 below. Subquestion 5 (b): Should the determination exclude raw materials? EIA Response: The raw materials of the electronics industry are electronic or mechanical piece parts, i.e. transistors, capacitors, terminals, wiring harnesses, screws, DRAMs, LEDs, plastic parts etc., which are generally ordered from piece part suppliers who offer thousands of such parts. If a content standard is used, it should focus on the dedicated subassembly components that have been produced from these piece parts to serve as elements of a particular final electronics product, i.e. populated circuit boards, hybrid modules, and other electronic assemblies. If these subassembled components are made in the U.S., and then used to produce the final electronics product in the U.S., the product should qualify for a "Made in USA" label. Subquestion 5 (c): What are the costs and benefits of requiring sellers to determine the source of all components and subcomponents? EIA Response: The costs of doing this type of detailed tracking in the electronics field are substantial and probably prohibitive for "sub-components," if this means the raw electronic and mechanical parts such as transistors, capacitors, terminals, wiring harnesses, DRAMs, LEDs, etc. The sources of the hundreds of material parts that go into each of scores of related electronic products are changing constantly because the supplies and the market for these basic parts are truly global and the suppliers themselves may often change sourcing for parts. In contrast, tracking the source of the dedicated subassemblies built to go into a particular final electronics product, such as populated printed circuit boards and major pre-assembled sections of the product, is less onerous. Subquestion 5 (d): What are the costs and benefits of a "one step back" content analysis for components versus some other stage? EIA Response: For the reasons stated in response to subquestion 5 above, the costs of doing a "one step back" content analysis are far less, and the benefits far greater, than doing such an analysis at the raw materials stage (i.e., basic electronic and mechanical parts). Because the electronics industry consists of creating the subassemblies and assembling the final products, focusing the test on where these steps are accomplished, rather than where the raw materials are made, is the best test for "Made in USA" labeling. Thus, for electronics products, if there is to be a content test, it must be one-step-back only; that is, it should look to whether a majority of the subassemblies that are used to assemble the product are themselves created in the U.S., as occurs in "Buy American" and "double substantial transformation" analyses. Subquestion 5 (e): What other costs should be added to a content analysis [numerous suggested cost areas and issues omitted]? EIA Response: This question reveals the complexity and difficulty of using a value-content test and reveals why it is preferable to use a process-oriented approach. Tracking all costs and elements of the production process and properly valuing them would be a major burden. Moreover, it would raise numerous insolvable problems of how to value components that themselves contain both U.S. and foreign components and whether it should matter if such components are purchased or made by the manufacturer. However, if such a value-content test is used by the Commission, engineering, investment, R&D and all other elements of industry operations should be considered. Subquestion 5 (f): Should profit be included? EIA Response: See response to subquestion 5 (e), above. Like the other costs which could be considered, determination of profit allocation is a troublesome and burdensome task. Subquestion 5 (g): What are the costs and benefits of having the FTC do case-by-case determinations that require a "reasonable basis" rather than establishing guidelines or standards? EIA Response: Such a case-by-case approach would only postpone addressing the need for some guidance as to when companies can and cannot use the labels. Inevitably, through cases, some standards will evolve, but probably in a somewhat confusing and unsatisfactory manner. In the meantime, uncertainty will prevail. Companies that do not participate in the particular case will be at a disadvantage. It would be better to address the issue now, establish guidelines, test the guidelines if necessary, and thereby create some constancy and certainty on this issue. QUESTION 6. What form of guidance should the FTC offer? EIA Response: The FTC should establish guidelines in the context of this proceeding, not through a case-by-case approach. While these guidelines may be tested and further refined through cases, basic guidelines are appropriate and necessary to provide guidance to the vast majority of companies that will never be subject to cases. The Commission should also publicize the guidelines to consumers, taking the lead in establishing common expectations rather than accepting consumer confusion as the necessary state of affairs. Subquestion 6 (a): Should the guidance be case-by-case? EIA Response: No, see Response to Question 6, above. Subquestion 6 (b): Should the FTC offer a bright-line test based on a specific percentage of domestic cost, or a safe-harbor if a non-numerical test is used? EIA Response: The FTC should not use a specific numerical test unless it focuses on the "one-step-back" level of components and essentially establishes a process-based standard for electronics products. Any safe harbor should also focus on the process, e.g., if the major subassemblies used in the final production of an electronics product are themselves produced in the U.S., then a company can safely portray the product as "Made in USA," as is the case under "Buy American" and "double substantial transformation" analyses.