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