“Bupyew ui6uo yo Ayunoo
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pue uojenujuos spoddng

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g-4 aged

F-15


Customs Activities

During 1993-95, Customs had a total of 1,229 cases involving marking.” Approximately
98 percent were for ruling letters, requests for internal advice, protests, and issuing rules.
The remaining 2 percent were miscellaneous projects related to marking. Approximately 5
percent of total were protests subject to further administrative review, and about 1 percent
were subject to judicial review.

These data include 4 petitions under section 516. Since 1980 to the present, only 4 petitions
under section 516 concerning country-of-origin marking have been filed with Customs.
Domestic producers filed petitions on the marking of hinges in September 1995, safety
glasses in July 1995," cast iron soil pipe in March 1994, and frozen produce in September
1993.83 Customs made a decision only on the petition for cast iron soil pipe, as the petition
on frozen produce is being held in abeyance pending proposed rulemaking.“ No decision
has been made on the petition on safety glasses, which was filed in 1995. Customs denied
the petition on hinges, stating that it did not have the statutory language to propose the rules
desired by the petitioner.*°

A significant portion of rulings and internal advice requests, and all protests, requests for
further review, rulemaking, and 516 petitions, are conducted by the Special Classification
and Marking Branch in the ORR at Customs Headquarters in Washington, DC. This branch
has approximately 8 to 9 attorneys, including one attorney manager. In some instances, legal
advice will be sought from Customs’ Office of the Chief Counsel. Many rulings are also
issued by national import specialists at the New York Seaport.

Imported goods are subject to inspection at the 301 ports of entry in the United States. As
of May 1996, the processing and handling of imported goods was principally carried out by
6,449 Customs inspectors and 1,130 import specialists. In fiscal year (FY) 1995,
approximately 2 to 3 percent of the approximately 13 million entries and of the 26 million
cargo lines were inspected.** Primarily through such inspections, Customs issued 29,981
marking violations in FY 1995, compared with 42,11] issued in FY 1993 (table 3-2)’ In
FY 1995, Customs estimates that the rate of compliance with the marking laws was
approximately 96 percent, however marking violations as a share of total entries was only
approximately a quarter of 1 percent.

” Letter from the Honorable George J. Weise, Commissioner of Customs, June 14, 1996.

® 60 F.R. 49970-49971, Sept. 27, 1995.

®! 60 F.R. 35792-35793, July 11, 1995.

® 59 F.R. 10764, Mar. 8, 1994.

® 58 F.R. 47413-47414, Sept. 9, 1993.

* Prior rules were overturned by the Court of Appeals for the Federal Circuit in 1994.
See 60 F.R. 6464-6466, Feb. 2, 1995. Pillsbury Co. alleges that Customs applied procedures with
respect to a section 516 petition that furthered the interests of other domestic producers to the
detriment of Pillsbury. Hogan & Hartson, on behalf of the Pillsbury Co., prehearing submission,
Mar. 28, 1996, p. 27.

®5 Robert G. Hayes & Irene Ringwood, on behalf of Hager Hinge Co., submission to the
USITC, p. 12.

% Official of the U.S. Customs Service, Office of Strategic Trade, telephone interview
with USITC staff, June 18, 1996.

*’ Letter from the Honorable George J. Weise, Commissioner of Customs, June 14, 1996.

3-19


Lim, Jeen-Su, William K. Darley and John O. Summers. “An Assessment of Country of Origin
Effects Under Alternative Presentation Formats,” Journal of the Academy of Marketing Science,
Nol.22 No. 3, (Summer 1994), pp. 274-282.

Lin, Li-Wen, Brenda Sternquist. “Taiwanese Consumers’ Perceptions of Product Information Cues:
Country of Origin and Store Prestige,” European Journal of Marketing, Vol. 28, No. 1, (1994), pp.
5-18.

Maheswaran, Durairaj. “Country of Origin as a Stereotype: Effects of Consumer Expertise and
Attribute Strength on Product Evaluations,” Journal of Consumer Research, Vol. 21 (Sept. 1994), pp.
354-365.

Mammarella, James. “Retailing Goes Global -- With Glitches,” Discount Store News, Vol. 34, No. 2
(Jan. 16, 1995), p. 1.

Maronick, Thomas J. “An Empirical Investigation of Consumer Perception of ‘Made in USA’
Claims,” International Marketing Review, Vol. 12, No. 3 (1995) pp. 15-30.

McGee, Lynn W. and Rosann L. Spiro.“Salesperson and Product Country of Origin Effects on
Attitudes and Intentions to Purchase,” Journal of Business Research, Vol 22, No. 1, (Jan. 1991), pp.
21-32.

Modic, Stanley J. “Reader Survey Shows: Imports Still Stir Emotions,” Purchasing World, Jan.
1990, pp. 25-26.

Nishina, Sadafumi. “Japanese Consumers: Introducing Foreign Products/Brands into the Japanese
Market,” Journal of Advertising Research, April/May 1990, pp. 30-45.

Okechuku, Chike. “The Importance of Product Country of Origin: A Conjoint Analysis of the
United States, Canada, Germany, and the Netherlands,” European Journal of Marketing, Vol. 28,
No.4 (1994), pp. 5-19.

Papadopoulos, Nicholas, Louise A. Heslop and Jozsef Beracs. “National Stereotypes and Product
Evaluations in a Socialist Country, International Marketing Review, Vol. 7, No. 1, (1990), pp. 32-47.

Parameswaran, Ravi, and Attila Yaprak. “A Cross-National Comparison of Consumer Research
Measures,” Journal of International Business Studies, Vol. 18, No. 1, (Spring 1987), pp. 35-49.

Parameswaran, Ravi and R. Mohan Pisharodi. “Facets of Country of Origin Image: An Empirical
Assessment,” Journal of Advertising, Vol. 23, No. 1 (Mar. 1994) pp. 43-56.

Schweiger, Gunter, Gerald Haubl and Geroen Frideres. “Consumers’ Evaluations of Products
Labeled ‘Made in Europe,’” Marketing and Research Today (February 1995), pp. 25-33.

G-6


in one of more of the countries listed on the container. In these cases the container may be
marked "Made in... or... .""8

Other electronics products

With regard to country-of-origin marking of articles returned to the United States after
having been advanced in value or improved in condition outside the United States, there is
an exception to the rule that they be marked to indicate the country origin as the country in
which the last substantial transformation occurs. Any item eligible for entry under HTS
subheading 9802.00.80 is entitled to this exemption and is considered a product of the
country of assembly for purposes of section 304. For example, flexible magnetic recording
disks assembled in Mexico from coated magnetic disks made in the United States and a hub
and protective shell made in Mexico are eligible for importation under subheading
9802.00.80 and to be labeled "Assembled in Mexico.""?

Other regulations that are part of the country-of-origin marking process are relevant to these
goods. In addition to the country-of-origin marking, the FCC requires that registered
telecommunications terminal equipment and registered protective circuitry display not only
the FCC registration number and other information, but also the country of origin if the
equipment is not manufactured in the United States.” It is possible that conflicting NAFTA
country-of-origin rules exist, although no instances were noted.

Compliance Concerns

The Commission received comments from 25 companies in the electronics sector in response
to its survey.”7 Two industry associations representing semiconductor manufacturers
testified at the public hearing held in connection with this study. The Commission also
received written submissions from four industry associations representing firms in the
electronics sector and four written submissions from individual firms in the electronics
sector. Together these responses provide information from firms in the semiconductor,
electrical components, office machines, computer, telecommunications, and consumer
electronics areas. Almost all firms responded that they experienced some difficulties with
marking, although the difficulties varied by industry sector and product. The following
information is based on the 25 survey responses unless otherwise noted.

Several different problems were identified with marking. Mentioned most often are the
difficulty of determining origin for products made with components of multinational and
constantly changing origin, and the costs and technical challenge of marking small items.
Many of the electronics firms contacted feel that, given U.S. marking regulations, it is hard
to determine a definitive working definition of origin from product to product. Also, they
stated that they had difficulty in meeting FTC "Made in USA" labeling standard due to the

8 U.S. Customs ruling HQ 734761 Oct. 16, 1992.

1° U.S. Customs ruling HQ 732018, Feb. 7, 1990.

2° 47 CFR 68.300(b)(4). This equipment and circuitry is defined in 47 CFR 68.2. The
country of origin is determined in accordance with 19 U.S.C. 1304 and regulations promulgated
thereunder.

2! Staff contacted 47 firms to request information for the survey.

6-5


Global Perspective on Legal Regimes

Country-of-origin marking laws were first enacted in the 1880s° in various European
countries to distinguish imported goods (particularly German goods) from domestic goods,
and became mandatory in the United States in 1891 with the enactment of the Tariff Act of
1890. While a number of industrialized countries maintain country-of-origin marking
regimes, the United States is considered to maintain the broadest and most stringent set of
marking requirements. U.S. marking laws originally covered “all articles of foreign
manufacture;”” however, certain classes or kinds of products have been excepted, such as
crude substances and most steel products, either through legislative or regulatory
amendments. Country-of-origin marking has been handled somewhat differently by various
countries. Many countries rely extensively on laws that prohibit misrepresentations of
origin, while other countries limit country-of-origin marking requirements for imports to
certain products.* European Union (EU) member states are prohibited from requiring
country-of-origin marking of domestically produced and imported products, as this would
violate Article 30 of the Treaty of Rome that established the EU. Marking of products by
EU companies is voluntary. The EU and member states maintain laws and regulations,
usually related to consumer protection, that prohibit misleading and false claims of origin.”
Germany, for example, applies through domestic legislation the Madrid Agreement on the
Suppression of False or Misleading Declarations of Origin of 21 March 1925,'° to the
marking of imports or exports, and also has treaties with some countries regarding the
geographic origin of goods."

A number of countries with marking requirements limit them principally to finished articles
for retail sale or to products where domestic production is quite sensitive to import
penetration. Canada requires conspicuous country-of-origin marking, in English or French,
for goods of personal or household use; certain hardware items (excluding hand tools, except

6U.S. Tariff Commission, Dictionary of Tariff Information (Washington: GPO, 1924),
pp. 206-207.

7 Section 6 of the Tariff Act of 1890.

® In the GATT’s early days, country-of-origin marking was recognized as a trade issue. A
GATT Working Party was established to examine proposals by the International Chamber of
Commerce for the basis of an international arrangement regarding marks of origin, though no
arrangement resulted. GATT, Basic Instruments and Selected Documents, Fifth Supplement:
Decisions, Reports, etc. of the Eleventh Session (Geneva: GATT, Jan. 1957), pp. 103-108.

° See European Court of Justice cases 113/80 Commission vs. Ireland, 1981, ECR 1625
and 207/83 Commission v. United Kingdom, 1985 ECR 1201. See also Nicholas A. Zaimis, EC
Rules of Origin, ( London: Chancery Law Publishing, 1992), pp. 86-88.

1° This treaty is maintained by the United Nations World Intellectual Property
Organization.

" Strobl, Killius & Vorbrugg, Business Law Guide to Germany, 2d ed., (CCH Editions,
Ltd.: Bicester, Oxfordshire, 1988) pp. 103.

1-3


for ensuring the proper country-of-origin label. One firm noted that bilingual labeling
requirements of Canada have caused some shipping delays at the border.

Compliance Costs and Benefits

The firms responding to the Commission country-of-origin marking survey indicated that
the major types of costs incurred in complying with marking requirements are the physical
marking costs, costs for new printing plates, inventory costs for multiple source packaging,
label design costs, and inventory control costs.

Most companies surveyed were not able to quantify the cost of complying with U.S.
country-of-origin labeling requirements. One firm, the Pillsbury Co., submitted cost
information as proprietary data that cannot be published, but did reveal the types of costs
Pillsbury expected to incur related to country-of-origin marking in 1996. These included
direct internal costs, contractor and consultant costs, and modernization or purchase costs.
If front panel labeling is required, Pillsbury also would incur increased costs for front panel
label redesign and as a result of downtime to change labels that would cut productivity.'”
One firm stated that it cost approximately $100,000 annually, or about 8 percent of their
packaging costs, to comply. Another firm noted that it has not calculated the cost of
complying with marking requirements because compliance is a cost of doing business that
it cannot control and as such is included under general overhead expenses. Several firms
estimated that the cost of complying with marking requirements was insignificant (from less
than 1 percent to 1.5 percent of the retail price for frozen vegetables depending on the
vegetable mix). One firm noted that compliance costs could be reduced with a de minimis
tule for imported content of frozen vegetable mixtures.

NFPA is concerned that “a food company that sources ingredients from several countries
would be required to maintain label inventories covering all options.”"“° This is viewed as
being expensive and impractical. However, many of the firms noted that they already
voluntarily mark their packages (usually such marking is coded) to identify the sources of
materials in the finished product as a good manufacturing practice. This is currently done
to meet product liability and recall requirements and to comply with regulations issued by
State and Federal agencies charged with regulating food products. United Foods states that
it does “not incur any identifiable cost in complying with country-of-origin marking
requirements.”'” Pillsbury stated that “Pillsbury inventory management system does not
include the function of tracking the country of origin of vegetable products.”"“” The current
Pillsbury inventory management system tracks the date a shipment of vegetables is received,
the lot number, and the identity of the supplier, but it does not maintain and process
country-of-origin information. Incorporating the latter function would require a major
modification to multiple computer systems, to track and process information at the following

13° Hogan & Hartson, on behalf of the Pillsbury Co., posthearing submission to the
USITC, Apr. 25, 1996, p. 9.

140 National Food Processors Association, posthearing submission to the USITC, Apr. 25,
1996, p. 1.

141 United Foods, Inc., written submission to the USITC, Apr. 23, 1996, p. 3.

12 Hogan & Hartson, on behalf of the Pillsbury Co., posthearing submission to the
USITC, Apr. 25, 1996, p. 8.

6-36


adversely affected if a change in Customs marking requirements results in Stanley relocating
its domestic operations overseas."!” :

Stanley also states that if the rules of origin for mechanics hand tools were changed (e.g.,
adoption of the NAFTA Marking Rules to all imports) to require marking based on the
country in which the raw forging was produced, it would be anomalous with the rules of
NAFTA partners and cause Stanley to incur additional costs estimated at $9 million initially
and $4.5 million annually thereafter to cover duplicate inventories, packaging changes, and
additional book keeping charges."'*

7 See written submissions to the USITC from Rack Technology, Inc., Apr. 22, 1996;
Lone Star Gas Co., Apr. 22, 1996; Component Specialty, Inc., Apr. 29, 1996; and Consolidated
Casting Corp., Apr. 18, 1996.

8 Ablondi, Foster, Sobin & Davidow, P.C., on behalf of The Stanley Works, posthearing
submission to the USITC, Apr. 25, 1996, p. 18.

6-31


U.S. International Trade Commission

COMMISSIONERS

David B. Rohr, Chairman
Don. E. Newquist
Carol T. Crawford
Janet A. Nuzum
Peter S. Watson
Lynn M. Bragg

Robert A. Rogowsky
Director of Operations

Vern Simpson
Director of Industries

Address all communications to
Secretary to the Commission
United States International Trade Commission
Washington, DC 20436


CHAPTER 6
Industry Sector Analyses

This chapter contains examinations of marking problems, concerns, benefits, and costs for
the producers and consumers in several specific industries. Included for analysis are the
electronics, steel, pharmaceuticals, hand tools, frozen vegetables, automobiles and parts,
textiles and apparel, and footwear industries.

Electronics

electronics sector include computers, Industry Profile
communications equipment, office

machines, audio and video recorders ‘Trade data 1995 (billion dollars):

and players, television receivers, and U.S. shipments - 375.0
recorded media containing data, US. imports . 170.0
images, and sound. Among the major USS. exports... 120.0
types of intermediate goods in the Apparent US. consumption... 4250
electronics industries are Import share of apparent U.

semiconductors, printed circuit boards, consumption (percent) AO

and a wide variety of subassemblies Source: Compiled by USITC staff based on. official statistics
designed for use in most of the finished _ of the U-S. Department of Commerce.

goods identified above, as well as
capacitors, resistors, and other

electronic components. ‘Over the past decade, electronics manufacturers have adopted
an increasingly global approach to production and

‘Trends in Globalization

. . procurement decisions. As price competition in these
Specific Marking ‘industries has intensified, manufacturers have felt increasing
Requirements pressure to identify low-cost sources of supply for

standardized electronic components, such as printed circuit

: . boards. Particularly in the case of computers and

During most of the electronics age, the communications equipment, leading U.S.-headquartered
impact of country-of-origin marking — manufacturers have shifted away from a vertically integrated
requirements on electronics producers _ business model in search of better ways to trim production
has been limited by the high degree of costs through outside procurement of key electronic parts.
geographical concentration of
production and assembly in these

industries. However, the purchasing of components in recent years has become global.
Finished goods often are assembled from components produced in multiple countries. This
has given rise to a new set of problems that has emerged for U.S. electronics firms. If
subsequent processing in the United States does not result in substantial transformation, the
good is considered an imported article. Section 304 of the Tariff Act of 1930 requires that,
unless excepted, every imported article of foreign origin must be clearly labeled with its
country of origin. Included in the category of items subject to strict marking rules are

6-1


specifically require country-of-origin markings." — In conjunction with the regional

offices,'*" which act as investigatory arms of the FTC, the Enforcement Division also
monitors claims about the country of origin of articles, such as “Made in USA.”

The FTC may initiate an investigation into alleged unfair or deceptive trading practices on
the basis of a complaint from consumers or businesses, at the request of its Congressional
oversight Committees, or on its own motion if it finds evidence that it warrants an
investigation. Generally, the investigative process and report are nonpublic so as not to
disclose company operations.

If the FTC believes a violation of the law has occurred, it first will seek voluntary
compliance of the alleged violator by entering into a “consent order.” If the company signs
a consent order, it need not admit the violation, but is required to cease the practice as
outlined in an accompanying complaint. However, if agreement on the consent order cannot
be reached, the FTC may issue an “administrative complaint.” This requires a formal
proceeding before an administrative law judge, in which evidence is submitted, testimony
is presented, and witnesses may be examined and cross-examined by opposing sides. If the
judge finds against the respondent, then a “cease and desist order” may be issued. Initial
decisions by administrative law judges may be appealed to the full Commission of the FTC.
Final decisions issued by the FTC may be appealed to the U.S. Court of Appeals, and
ultimately, to the U.S. Supreme Court. If its position is upheld, the FTC, in certain
circumstances, may then seek consumer redress in court.’ If the company violates the
order, the FTC also may seek civil penalties or an injunction."

If the FTC staff finds evidence of unfair or deceptive practices in an entire industry, it can
recommend that the Commission initiate a rulemaking proceeding to issue a “trade
regulation rule.” During this process, the public will be offered opportunities to attend
hearings and file written comments. The Commission is required to consider these
comments along with the entire rulemaking record before making a final decision on the
proposed rule. Once issued, these mules have the force of law.’ An FTC rule may be
challenged in any of the U.S. Courts of Appeal.

FTC cases in the 1940s through the 1960s'*> laid the foundation for the current standard of
unqualified “Made in USA” claims, which require that the product be composed of wholly
domestic parts and labor. Consistent with the “wholly domestic” standard established by
case law, in the late 1960s and early 1970s the FTC issued more than 100 public advisory

30 Others include, but are not limited to, the Appliance Labeling Rule, the Automotive
Fuel Ratings, the Care Labeling Rule, the Mail or Telephone Order Rule, the Negative Option
Rules, the Used Car Rule, the Fair Packaging and Labeling Act, and the Unordered Merchandise
Statute.

131 The FTC maintains regional offices in Atlanta, Boston, Chicago, Cleveland, Dallas,
Denver, Los Angeles, New York, San Francisco, and Seattle.

2 16 CFR 3.81. The FTC, under The Equal Access to Justice Act (S U.S.C. 504), may
seek the award of attorney fees and other expenses to eligible individuals and entities who are
parties to adjudicative proceedings under part 3 of 16 CFR.

133 U.S, Federal Trade Commission, A Guide to the Federal Trade Commission, 1995,
pp. 20-21.

4 Ibid, p. 21.

135 See Vulcan Lamp Works, Inc., 32 F.T.C. 7 (1940), Joseph H. Meyer Bros., 47 F.T.C.

49 (1950), and Windsor Pen Corp., 64 F.T.C. 454 (1964).

3-28


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F-20


package in order to be considered conspicuously marked,'** but indicated at that time that
marking on the back would be permissible if certain conditions were followed.'”

Some frozen vegetables processors, represented by the American Frozen Food Institute
(AFFI), maintain that NAFTA Marking Rules improperly depart from the traditional
substantial transformation principle to rules based on a change in tariff classification. '*°
Because of the wording for the heading covering frozen vegetables in the Harmonized Tariff
Schedule and the rules based upon it, the NAFTA Marking Rules require that frozen
vegetable mixtures be marked to indicate the country of origin of each component of the
mixture instead of the country of origin of the final product.'*' This group is concerned that
Customs will adopt NAFTA Marking Rules as the new mules of origin governing
merchandise from all sources. With regard to substantial transformation, the NFPA believes
that the food preservation process is “unquestionably a substantial transformation of the
product and should continue to be recognized as such.”"?

Compliance Concerns

From the comments received during the Commission survey, there is little consensus among
frozen vegetable food processors regarding the necessity, cost, consumer reaction, and
correct application of country-of-origin marking requirements. Some processors are
concerned that the United States is not enforcing the requirement that the country of origin
be displayed conspicuously on retail packages of imported frozen vegetables.'° They are
also concerned that current law is not sufficiently specific as to the size and placement of
country-of-origin marking. The International Brotherhood of Teamsters shares in these
concerns.'** Other vegetable processors have concerns that NAFTA Marking Rules may
communicate wrong or misleading information to the ultimate consumer. In particular,
Pillsbury notes that “in cases where fungible materials from different countries are
commingled, the regulations (19 CFR 102.11(b)(2)) allow the goods’ origin and markings
to be determined on the basis of certain inventory management methods.... [which] hardly
effectuates the marking law’s goal of advising a United States consumer of a product origin
at the point of purchase.”"**

18 This is in line with Customs’ practice of requiring importers to place foreign
country-of-origin marking near any U.S. flag or reference to the United States or America on any
product.

° For example, if references to the United States, America, or U.S. geographic names
were removed from the front panel.

130 American Frozen Food Institute, prehearing submission to the USITC, Mar. 27, 1996,
and posthearing submission to the USITC, Apr. 25, 1996.

131 This concern could be addressed if the rule for the specific tariff heading were to be
changed.

8 Statement of Dr. Allen W. Matthys, vice president, technical regulatory affairs,
National Food Processors Association, transcript of hearing, p. 235.

13 United Foods, Inc., written submission to the USITC, Apr. 24, 1996, p. 1.

14 International Brotherhood of Teamsters, AFL-CIO, written submission to the USITC,
Apr. 25, 1996, p. 1.

135 Hogan & Hartson, on behalf of Pillsbury Co., prehearing submission to the USITC,
Mar. 28, 1996, p. 20.

6-34


CHAPTER 4

U.

. Industry Perspectives

This chapter provides an overview of costs, benefits, concerns, and recommendations of U.S.
companies regarding U.S. country-of-origin marking requirements. Company concerns with
country-of-origin marking issues relate to both mandatory requirements as well as rules
governing voluntary marking. Some U.S. companies contend that the existence of, and
changes to, marking requirements may impose costs without providing commensurate
benefits to the company involved or to consumers.

To determine the importance of country-of-origin marking to U.S. companies, the
Commission conducted a telephone survey’ of U.S. companies (some of which may use
foreign-made components in their operations) that produce a broad range of products in the
agriculture; chemicals; minerals, metals, and miscellaneous manufactures; machinery; and
textiles, apparel, and footwear sectors.” A total of 512 companies were contacted and 435
companies responded, either in whole or in part, to the Commission’s telephone survey.’
Companies and trade associations also provided written submissions to the Commission that
included recommendations on changes to U.S. marking requirements and regulations.‘

Globalization of Production Affects Country-of-Origin

Marking

Globalization of production, whether to reduce costs, penetrate new markets, or for other
reasons, has spurred increased global purchasing of commodities and components. As a
result, many products are no longer wholly produced within a single national boundary. In
many industries, product research, design, and engineering take place in one country, the
production of components and parts occurs in other countries, and valued-added capital- or
labor-intensive manufacturing or assembly occur in yet another country. Therefore, a

' It should be noted that, since response was voluntary and this survey was not a random
sample, the survey results may not be representative of particular sectors. Views occasionally
diverged between companies within the same industry. There were a number of cases where one
company provided cost data while others indicated they could not quantify the data or believed
such costs to be minimal or negligible. Therefore, results from the survey cannot be extrapolated
to generalize about a particular industry or the economy as a whole.

? See appendix E for a copy of the survey.

> Not all companies responded to all parts of the Commission’s telephone survey, the
number of company responses (provided in the “Overall” column of the tables presenting survey
results) is used to calculate the percentage of responses to each question.

‘ The Commission held a public hearing on Apr. 10, 1996. A summary of industry
concerns, costs, and benefits drawn from company submissions appears in appendix F.

4-1


Qa Customs has proposed that the country-of-origin marking rules applied to
NAFTA goods (19 CFR 102) be applied to all imports to the United States.
This proposal, which uses a change in tariff classification (CTC or “tariff-
shift” rules) for determining origin,’ has raised concern among industries as
to how or whether CTC will continue to recognize significant value-added
from U.S. operations. Customs has stated that a shift would allow the United
States to have a system of uniform rules of origin that could then be proposed
to the WTO effort to harmonize rules of origin. A number of companies
indicate that the NAFTA rules could represent a change from the current
country-of-origin marking requirements and that WTO harmonization may
change the requirements for a second time, resulting in an excessive
compliance burden. In part as a result of Congressional concerns, Customs
has decided that the proposal to extend Section 102 to all trade should not be
adopted as a final rule at this time but rather should remain under
consideration for implementation at a later date.’

a Many interested parties offered suggestions for changes to the existing
marking regimes. The suggestions that were offered most often were: (1) to
limit country-of-origin marking to imported goods for retail sale; (2) to pass
legislation excepting certain additional imported products and their
containers from country-of-origin marking; and (3) to harmonize the
Customs rules of origin and the FTC standard for unqualified “Made in
USA” claims. A summary of these suggestions is provided in table A, which
appears at the end of this Executive Summary.

Consumer Benefits of Country of Origin

a Country-of-origin marking is perceived by many industry representatives and
consumer groups" as an important tool that enables consumers to
differentiate between domestic and imported products, and to make informed
purchase decisions. However, one consumer group, Consumers for World
Trade, believes such marking can be misleading and costly, given the
complexities of globalized production. ~

a Country-of-origin is only one of many factors that consumers consider when
making a purchasing decision. Often, country of origin is less important than
other factors such as price, quality, warranty, product features, brand name,
and the reputation of the seller; however, it can be the determining factor
when making a purchase decision. Also, research suggests country-of-origin
is more important to older than to younger Americans.

The CTC approach is generally based on the concept of substantial transformation.

5 61 F.R. 28933, June 6, 1996.

4 Commission contacts or groups providing views included the Consumer Federation of
America, Public Citizen, Consumers Digest, The Consumers Union, Consumers for World Trade,
Made in USA Foundation, Crafted with Pride in U.S.A., International Brotherhood of Teamsters
AFL-CIO, Union Label and Service Trades Department AFL-CIO, and the National Consumers
League.


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F-16


ORGANIZATION AND WITNESS

Danaher Corporation, Washington, D.C.

George M. Sherman, President and CEO, Danaher Corporation
Snap-on Incorporated, Kenosha, WI
Dan Craighead, Vice President, International, Snap-on Incorporated
Gary Henning, Sr., Director, Corporate Development, Snap-on Incorporated

Jeanne Archibald, Hogan & Hartson--OF COUNSEL

TEXTILES AND APPAREL

Panel 6

Neville, Peterson & Williams New York, NY on behalf of

Natural Feather & Textiles, Inc., Wayzata, MN

Daniel R. Kral, President, Natural Feather & Textiles, Inc.

John M. Peterson—OF COUNSEL

American Apparel Manufacturers Association, (AAMA), Arlington, VA

Jerry Cook, Director of International Trade, Sara Lee Knit Products

Pillowtex Corporation, Dallas, TX

Charles M. Hansen, Jr., Chairman of the Board, President and CEO, Pillowtex Corporation

-More-

C-5


Company responses were divided regarding the benefits of marking. Most contended that
there was little or no advantage for consumers or firms from country-of-origin marking.
However, there were companies in several different segments of the electronics industry that
felt that because their products were not labeled "imported," they had an advantage in the
market. These companies state that their customers believe that U.S. made goods are of
higher quality and they were able to charge a premium because of this factor.

For the most part, semiconductor firms indicated that there were no benefits to
country-of-origin marking; the products are highly competitive commodity products and
customers are not concerned about country of origin. However, one firm asserted that its
customers prefer to buy semiconductors made in the United States and the company's sales
are improved by this demand. The company also said that marking enables better
monitoring and enforcement of antidumping orders. At the hearing, the SIA stated that using
final assembly-based marking on semiconductors as a basis for enforcing particular dumping
orders would be a sham because it is the point of diffusion, along with various other factors,
that is relevant for the scope of the antidumping order not the point of final assembly.**

A capacitor manufacturer noted that its customers desire country-of-origin marking because
(1) country of origin is taken as an indication of quality, (2) end customers prefer certain
countries of origin (especially the United States) and (3) customers' workers (especially
union members) prefer "Made in USA" to support the U.S. economy. Another capacitor firm
stated that marking made it easier for the company to claim duty drawback for reexports
because the same product types are produced domestically. At the hearing, the Joint Industry
Group representing electronics manufacturers stated that one of its members favored marking
because it gave the firm another means of tracking origin rather than relying solely on trade
documentation.**

One computer maker reported that it performs all final assembly operations in the United
States, so it might benefit from a more well-defined distinction in marking between "U.S.-
made" and "imported." This distinction would allow customers to choose between U.S. and
imported products. Several companies said that marking would allow the consumer to
choose between U.S. and imported products and this would benefit the companies. A
consumer electronics firm stated that foreign customers will pay a premium for a U.S. made
good, so country-of-origin marking would be of benefit.

Intel Corp. reported that customers care about quality, price, performance, and delivery
rather than country of origin. In its submission, Intel stated that marking for
country-of-origin purposes "...is not an indicator of product quality because Intel devices are
subject to the same standards wherever they ‘originate.' The relevant mark of quality on
semiconductor products is the Intel brand or logo."** However, the marking of intermediate
goods may be important to manufacturers of finished goods so that they can control their

> Statement of David Rose, director of import/export affairs, government affairs, Intel
Corp., on behalf of the Semiconductor Association, transcript of hearing, p. 145.

3 Statement of Evelyn Suarez, chairperson of the Rules of Origin Committee, Joint
Industry Group, transcript hearing, p. 75.

Intel Corp., written submission to the USITC, Apr. 24, 1996, p. 2.

6-10


origin, and restamped them with its own trademark, the fine amounted to less than 3 cents
per piece.

Although lack of harmonization of country-of-origin marking requirements is of concern,
another problem confronting the domestic steel-products industry is criteria for conferring
origin. The extent to which domestic fabricated steel-products manufacturers can mark their
goods as being of U.S. origin under current regulations varies widely by product sector. In
written submissions to the FTC, several firms, including producers of wire and wire rope®
and chain manufacturers,“ expressed difficulty in meeting the FTC’s wholly domestic-
content standard owing to global procurement of inputs (e.g., wire rod for wire rope) as the
domestic industry strives to remain competitive with imports. Numerous alternatives were
put forth in these submissions including lower domestic-content thresholds, substantial-
transformation tests, essential processing stage (e.g., the stranding operation for production
of wire rope), and wording to indicate country of processing in addition to country of origin
of inputs, among others.

Exported quantities are relatively small compared to the level of domestic production for
most steel-product sectors and many industry officials interviewed by USITC staff indicated
that they do not export or only export in small quantities. But a few respondents expressed
concern over lack of transparency in foreign regulations for products exported from the
United States; lack of harmonization between U.S. and foreign regulations, and among
various foreign regulations; and problems in tailoring proper documents for each individual
destination country. Delays at the border, the need to re-mark goods, and the need to pay
extra duties were cited by some producers of structural steel and chain products. Only one
U.S. chain producer cited market-access difficulties with foreign distribution networks and
overcoming brand loyalties.

Compliance Costs and Benefits

The major types of marking costs identified by the industry officials surveyed by the USITC
staff are infrequently and not uniformly cited and no clear pattem emerges. But
representatives of a few of the firms that process both domestic and foreign steel such as
service centers and domestic producers of fabricated steel products do cite administrative
costs of complying with regulatory agencies for their imports, the cost of warehousing,
accounting, and tracking the use or handling imports, and the added production costs
required for multiple marking lines. Only one respondent cited all these categories.

Total costs of marking steel products with country of origin were difficult to quantify for
most steel firms that were surveyed. Of those that did provide estimates, costs generally
ranged from nil to less than one percent of gross sales. Only one respondent, a U.S. producer
of cold-finished steel bars, indicated that the capital cost of upgrading its inventory tracking

US. pipe-fittings manufacturer, member comments to the American Pipe Fittings
Manufacturers, Inc., Apr. 24, 1996.

® Harris & Ellsworth, on behalf of the Committee of Domestic Steel Wire Rope &
Specialty Cable Manufacturers, written submission to the FTC, “Made in USA Policy Comment,”
FTC File No. P894219, Jan. 1996.

“ Diamond Chain Co., written submission to the FTC, “Made in USA Policy Comment,”
FTC File No. P894219, Jan. 1996.

6-16




APPENDIX B
Federal Register Notice

B-l


to meet the changing foreign country-of-origin requirements. A large retailer respondent and
an apparel producer respondent stated that they each have separate labeling centers in large
distribution centers, where labels, not just country-of-origin labels but also brand name and
care labels can be adjusted.

As noted earlier, the USITC received written submissions from the Crafted With Pride in
U.S.A. Council, Inc., and the International Mass Retail Association (IMRA) that discuss,
among other things, the results of surveys prepared for them on the importance of
country-of-origin marking to consumers. The survey conducted for Crafted With Pride in
U.S.A. Council, whose certification mark identifies U.S.-made textile and apparel goods,
dealt specifically with apparel and home furnishings. This survey found that about
40 percent of U.S. consumers noticed the country of origin when buying apparel and home
furnishings and that the country of origin most often cited was the United States." Among
these consumers who said that the country of origin of their purchase was the United States,
73 percent rated themselves as “very satisfied” with the item purchased, compared with only
56 percent for all consumers. This result was similar to the one of a survey conducted by
Roper Starch Worldwide Inc. during April 1995, in which 43 percent of the consumers
surveyed thought that the “Made in USA” label indicated superior quality, and that 9 out of
10 said the logo reflected superior or fairly good quality.” Both the Crafted With Pride in
USA Council and the IMRA indicated in their submissions that country of origin becomes
a consideration in consumer purchasing decisions once a consumer is satisfied with the
quality, size, style or design, and price of the product.

The IRMA/Gallup study also shows that, for apparel, 69 percent of consumers surveyed said
U.S.-made garments are of higher quality than those from foreign countries, and 11 percent
said foreign-made garments were of higher quality. However, the study shows that
Americans are often confused, believing that “American brand” goods are necessarily
“American made” goods. Consumers believe that American brand goods are domestic
products regardless of where the items are actually made, or the labels they might bear.
According to the study, one of the conclusions that can be drawn from this consumer
misapprehension is that consumers respond mostly to the perceived quality represented by
American brands.

Just over one-half of the apparel companies that responded to the USITC telephone survey
indicated that country-of-origin marking was not an important selling factor to many apparel
consumers. These companies stated that in today’s highly competitive apparel market,
consumers are looking for quality products at competitive prices. A few firms noted that
several years ago some retailers demanded “Made in USA” products, but, given current
market conditions, are now demanding lower prices for quality products. Some firms stated
that brand names are a more important factor than the “Made in USA” label, whether or not
these brand-name garments are made in the United States. One large global apparel

18 Prepared statement of Frank Schapiro, senior partner, Demand Factors, Inc., St. Louis,
MO, which prepared the survey for, and appeared on behalf of, the Crafted With Pride in U.S.A.
Council, Inc., at the USITC hearing, Apr. 10, 1996. Demand Factors conducted a series of 31
national telephone surveys among consumers between June 1985 and December 1993; these
surveys were stratified to represent a universe of retail traffic for apparel and home textiles.

219 Roper Reports 95-5, Roper Starch Worldwide Inc., New York, July 1995.

6-60


Costs to Government

The administration and enforcement of the AALA represents a small share of NHTSA’s
annual budget for operations and research of $79.0 million in FY 1995.'® Since the
implementation of the AALA, the principal cost has been for rulemaking (table 3-6).
NHTSA estimates that costs for rulemaking in FY 1996 (October-June) were about $28,000.
Costs for enforcing the AALA have been negligible.

The Lanham Act

Disputes over country-of-origin claims, although not a significant number, have also been
addressed in Federal court using Section 43(a) of the Lanham Trademark Act of 1946
(15 U.S.C. 1125), which prohibits false designations of origin and false descriptions on
goods or services. The purpose of the act is to protect consumers against deceptive
designations of the origin of goods and, conversely, to enable producers to differentiate their
products.’ Section 1125(a)(1) provides

Any person who, on or in connection with any goods or services, or any container
for goods, uses in commerce any word, term name, symbol, or device, or any
combination thereof, or any false designation of origin, false or misleading
description of fact, or false or misleading representation of fact, which—

(A) is likely to cause confusion, or to cause mistake, or to deceive as to the
affiliation, connection, or association of such person with another person,
or as to the origin, sponsorship, or approval of his or her goods, services, or
commercial activities by another person, or

@B) in commercial advertising or promotion, misrepresents the nature,
characteristics, qualities, or geographic origin of his or her or another
person’s goods, services, or commercial activities,

shall be liable in a civil action by any person who believes that he or she is or is
likely to be damaged by such act.’

This section of the Lanham Act has been cited in several cases involving country-of-origin
marking issues. In Tube Forgings of America Inc. v. Weldbend Corp. (788 F. Supp. 1150
(D. Or., Mar. 12, 1992)), a U.S. manufacturer of carbon steel pipe fittings alleged unfair
practices by a competitor to recover damages for falsely advertising the fittings as

1 Office of Management and Budget, Budget of the United States Government,
Appendix, Fiscal Year 1996, p. 998.

161 Public Law 79-489, ch. 540, 60 Stat. 427, 441, July 5, 1946. 15 U.S.C.A. 1125,
Note 3.

1 15U.S.C.A. 1125.


Cordell, Victor V. “Competitive Context and Price As Moderators of Country of Origin
Preferences,” Journal of the Academy of Marketing Science, Vol. 19, No. 2, (Spring 1991) pp. 123-
128.

Cordell, Victor V. “Effects of Consumer Preferences for Foreign Sourced Products,” Journal of
International Business Studies, Vol. 23, No. 2, (1992), pp. 251-269.

Cordell, Victor V. “Interaction Effects of Country of Origin with Branding, Price, and Perceived
Performance Risk,” Journal of International Consumer Marketing, Vol. 5, No. 2, (1993), pp. 5-20.

Darling, John R. “A Longitudinal Analysis of the Competitive Profile of Products and Associated
Marketing Practices of Selected European and Non-European Countries,” European Journal of
Marketing, Vol. 21, No. 3, (1987), pp. 17-29.

Darling, John R. and Danny R. Arnold. “Foreign Consumers’ Perspective of the Products and
Marketing Practices of the United States Versus Selected European Countries,” Journal of Business
Research, Vol. 17, No. 3 (Nov. 1988) pp. 237-248.

Erickson, Gary M., Johny K. Johansson, and Paul Chao, “Image Variables in Multi-Attribute Product
Evaluations: Country of Origin Effects,” Journal of Consumer Research, Vol. 11, (September 1984),
pp. 694-699.

Eroglu, Sevgin, A. and Karen A. Machleit. “Effects of Individual and Product-Specific Variables on
Utilizing Country of Origin as a Product Quality Cue,” International Marketing Review, Vol. 5, No.
5, (1989), pp. 27-41.

Ettenson, Richard. “Brand Name and Country of Origin Effects in the Emerging Market Economies
of Russia, Poland and Hungary,” International Marketing Review, Vol. 10, No. 5,

Ettenson, Richard, Janet Wagner, and Gary Gaeth. “Evaluating the Effect of Country of Origin and
the ‘Made in the USA’ Campaign: A Conjoint Approach,” Journal of Retailing, Vol. 64, No. 1,
(Spring 1988), pp. 85-100.

Ettenson, Richard and Gary Gaeth. “Consumer Perceptions of Hybrid (Bi-National) Products,” The
Journal of Consumer Marketing, Vol. 8, No. 4 (Fall 1991), pp. 13-18.

Fields, George. “Buy Domestic or Buy Foreign? What’s the Story in Japan?” Tokyo Business Today,
Vol. 58, No. 7 (Jul. 1990), p. 11.

Fitzgerald, Nora. “Why ‘Made in USA’ Is No Longer Making It In the USA” Adweek, Vol. 36, No.
47 (Nov. 20, 1995) p. 21.

Garland, Barbara C. and Marti J. Rhea. “American Consumers: Profile of an Import Preference
Segment,” Akron Business and Economic Review, Vol. 19, No. 2, (Summer 1988), pp. 20-29.

Goldstein, Carl. “Switch Watch,” Far Eastern Economic Review,” Sept. 20, 1990, pp. 93-94.

G-4


The U.S.

materials used to make the product in question. Some interpretations place greater emphasis
on the amount of value added by the manufacturing or assembly process. Other
interpretations consider whether the manufacturing or assembly process results in a change
of tariff classification or the character of the imported parts, components, or materials that
are used to make the article. In some of the definitions, the most important factor is the
relative importance of the imported inputs.

Many U.S. trading partners define substantial transformation in terms of a change in tariff
classification or in terms of the percentage of value that is added by the manufacturing or
assembly process. In some cases, a two-part test is used to define substantial transformation,
such as a change in tariff classification plus a value-added requirement. The value-added
requirement may be expressed as a minimum threshold or as a ceiling that limits foreign
value added. Origin schemes also commonly contain exceptions or special rules that define
specific processes or operations that either will, or will not, be deemed to confer origin.

Approach to Origin

This section describes the general approach that is currently used by Customs to define and
interpret country of origin for marking and most other purposes. As of July 1, 1996, specific
rules became effective to determine the origin of imported textiles and apparel, which are
an exception to the general approach. In addition, specific rules are used to determine
whether an imported article qualifies for preferential tariff treatment under a tariff-preference
program, such as the GSP or NAFTA. Finally, this section describes the ongoing effort to
harmonize U.S. rules of origin domestically and internationally.

Origin for Marking and Other General Purposes

In the United States, when an imported article incorporates material and/or processing that
is attributable to two or more foreign countries, then the country of origin is deemed to be
the last country where the article was subject to a manufacturing process that resulted in a
new and different article of commerce, having a new name, character, or use. This test, or
standard, is based on legal principles and precedents established in court rulings and prior
Customs determinations.'?  Country-of-origin determinations using the substantial
transformation test are made on a case-by-case basis.

Customs considers a variety of factors when determining whether a manufacturing process
has changed the name, character, or use of an imported article. Customs may take into
account one or more of the following factors: (1) the character of the imported article; (2) the
nature of the article’s manufacturing processes, as compared to the processes that are used

1 See Anheuser-Busch v. The United States, 207 U.S. 556 (1907), “There must be
transformation; a new and different article must emerge, having a distinctive name, character or
use,” citing Hartranft v. Wiegmann, 121 U.S. 609 (1887), “They had not been manufactured into a
new and different article, having a distinctive name, character or use.” See also Tide Water Oil
Company v. United States, 171 U.S. 210 (1897), “Ordinarily, the article so manufactured takes a
different form, or at least subserves a different purpose from the original materials; and usually it
is given a different name.”

2-4


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sesodu eoueydwiod

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40} Sjuawayinbes Bupyew
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penunuog—y-4 e1qeL

F-10


CHAPTER 5
Consumer Perspectives

Existing U.S. country-of-origin marking requirements were enacted for the purpose of
providing information to the consumer. Therefore, it is important to understand consumer
perceptions and associated purchasing behavior related to the origin of products when
considering the benefit of marking regulations. Unfortunately, the psychology of such
perceptions and behavior varies greatly among consumers and does not lend itself to simple
quantification. This chapter contains a review of research and studies conducted with respect
to consumer attitudes toward country-of-origin marking, and identifies some common
themes that emerge from such research.

Review of Research

Since 1965, more than 150 authors’ have contributed to the field of country-of-origin
research as it relates to consumer preference.? Most of this work has been conducted by
academic and industry researchers, with some contributions by government and consumer

groups.

The central hypothesis of most academic research on the subject is that the country of
manufacture of a product can have an effect on consumer purchase decisions. Indeed, most
published studies find that country stereotypes do exist and may have an impact on product
evaluations and purchase decisions. However, the majority of studies are descriptive rather
than quantitative in nature. A number of authors have emphasized the need for empirical
research on the combined effects of country of origin and brand name.* The specific role
that country of origin plays in the consumer decision-making process is not well understood.
Researchers have yet to arrive at any consensus regarding this role; for example, whether it
is a product attribute in and of itself, or a proxy variable which actively influences consumer
decision-making only when other information is lacking.*

As reported in Gerald Hattbl and Dr. Gunter Schweiger, “The Effects of Country of
Origin and Brand Name on Consumers’ Evaluations of a New Automobile: A Structural Model,”
unpublished paper, University of Alberta, Faculty of Business, Edmonton, Canada, Apr. 30, 1996,

. 2.
P ? A list of references is found in appendix G.

> Hatibl and Schweiger, pp. 2-4.

*L. Jean Harrison-Walker, “The Relative Effects of National Stereotype and Advertising
Information on the Selection of a Service Provider: An Empirical Study,” Journal of Services
Marketing, vol. 9, No. 1, 1995, p. 48.

5-1


The U.S. Government has participated actively in this effort to develop uniform rules of
origin. At the request of the United States Trade Representative, the Commission initiated
investigation No. 332-360, International Harmonization of Customs Rules of Origin on
April 6, 1995, to provide the basis for the U.S. proposal to TCRO of the WCO and future
harmonization indicated in the ARO.*

Domestic Articles

The standard for products claiming to be made in the United States and bearing a mark such
as “Made in USA” has been established by the Federal Trade Commission (FTC). Under
section 5 of the Federal Trade Commission Act, the FTC is directed to prevent unfair and
deceptive acts and practices. Claims, including those of origin, must be truthful and
substantiated. Firms have four options for marking domestically produced goods: (1) an
unqualified “Made in USA” label; (2) a qualified label, such as “Made in USA of foreign
and domestic components”; (3) no marking as to the country of origin; and (4) a foreign
country of origin if the good has substantial foreign content. The claims, or markings,
applied to domestically produced goods may be evaluated against the FTC standard if
questions arise about the U.S. origin of a product.

The FTC has developed its standard on a case-by-case basis, as cases regarding origin claims
have been brought before it. The current FTC standard for an unqualified “Made in USA”
label or advertising claim requires that the product be “wholly of domestic origin,” where
the product is composed wholly of domestic parts and assembled with U.S. labor.” Ina
recently proposed consent agreement, the FTC altered the description of this standard, stating
that “all or virtually all” of the parts and labor used in the product must be of domestic
origin. This standard is consistent with FTC case precedent and extrinsic evidence obtained
by the FTC regarding consumer perceptions of “Made in USA” claims. The FTC maintains
that this standard allows for unqualified “Made in USA” claims where there is a de minimis
amount of foreign content.*! Qualified statements, such as “Made in USA of foreign
components” or “Made in USA from US and foreign components,” claiming materials or
labor of either U.S. or foreign origin have not been challenged in cases before the FTC.

* 60 F.R. 19605, Apr. 19, 1995.

* For a discussion of FTC policy regarding “Made in USA” claims, see 60 F.R. 53922-
53930, Oct. 18, 1995.

59 F.R. 54462, Oct. 31, 1994, citing, for example, Windsor Pen Corp., 64 F.T.C. 454
(1964), Joseph H. Meyer Bros., 47 F.T.C. 49 (1950), Vulcan Lamp Works, Inc., 32 F.T.C.7
(1940), and FTC Advisory Opinion No. 215, Misrepresenting Hoist as “Made in U.S.A.,” 73
F.T.C. 1321 (1968).

5! Certain U.S. industry representatives perceive the change in language describing the
FTC’s standard as a weakening of the standard and recommend that the FTC maintain the “wholly
of domestic origin” characterization. See Danaher Corp. and Snap-on, Inc., posthearing
submission to the USITC, Apr. 25, 1996, p. 1. In addition, one manufacturer raises a concern that
both the change in tariff classification rules as defined in 19 CFR 102 and the FTC standard for
unqualified “Made in USA” claims do not take into account what the company believes are
significant value-added machining and finishing operations performed in the United States. See,
Ablondi, Foster, Sobin & Davidow, P.C., on behalf of The Stanley Works, written submission to
the USITC, Apr. 25, 1996, pp. 4-6.

2-11


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penunuod—6-J 1921

F-36


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F-32


Compliance Costs and Benefits

Costs of implementing and maintaining the AALA have been estimated by NHTSA with the
assistance and input of industry sources. In its July 21, 1994 Federal Register notice of the
final rule, NHTSA estimated the cost of a separate label for marking to be $0.06 to $0.11,
and the cost of expanding a fuel economy label to be less than $0.01.'° Therefore, for the
15 million light vehicles sold in the United States in 1994, the total cost for labels would
have ranged from $150,000 to $1,650,000. Based on industry input, NHTSA estimated the
one-time cost of implementing a system to collect and store the necessary information for
the labels to be about $1 million for each of the U.S. Big Three, and $500,000 for each of
the 20 other large vehicle manufacturers.'’® In terms of annual program maintenance costs,
Ford provided NHTSA with an estimate of $150,000 per year; NHTSA affirmed that this
figure is reasonable for the U.S. Big Three. NHTSA estimated that each of the 20 other large
vehicle manufacturers would incur an annual expense of about $75,000.'” Based on these
data, the estimated cost to producers and importers of automobiles of marking under the
AALA for the first year could have been as much as $14.7 million.'* The combined total
net income of the U.S. Big Three alone in 1994 totaled nearly $14 billion.”

Estimates vary greatly for the approximately 15,000 parts suppliers. Large suppliers
manufacturing hundreds of parts could experience costs similar to those of a large vehicle
manufacturer, while many small suppliers procure all of their inputs from the same country
and would experience negligible costs. NHTSA noted that an industry estimation of costs
ranged from $40,000 to $80,000 per company in the first year, with a reduction in successive
years.'® Therefore, the auto parts industry’s costs associated with the AALA in the first year
likely ranged from $600 million to $1.2 billion.

Perceived benefits to automotive manufacturers and consumers of the various applicable
marking regulations vary between traditional U.S. manufacturers and foreign-based
manufacturers. The AALA appears to provide more benefits to the traditional U.S.
automakers - the Big Three - than to foreign-based manufacturers. Firstly, the AALA counts
Canadian-origin parts as domestic content; transplant operations report that this benefits the
Big Three which have extensive parts-making facilities in Canada. Secondly, the AALA
allows actual domestic content calculations to be used for parts coming from an allied
supplier, instead of the 70 percent roll-up/roll-down standard applied to outside suppliers;
transplant operations report that this also benefits the Big Three which own more parts
suppliers than do transplant operations. Finally, the AALA does not count the value of the

5 59 F.R. 37330, July 21, 1994.

"6 Tid.

"7 Ibid.

18 Estimated by USITC staff. This figure includes the cost of labels and one-time
implementation cost estimates. Annual program maintenance costs would be incurred in
subsequent years.

1” Ward’s Auto World, Mar. 1996, p. 20.

18 59 F.R. 37330, July 21, 1994.

6-46


textile fiber products.* Protection of the consumer was deemed necessary because of the
difficulty in determining the fiber content in modern fabrics. Proper identification of fibers
was intended to give the consumer the basic identity of the fabric and increase the
consumer’s confidence in the marketing of textiles.”

Like the Wool Act, the Textile Act requires each textile product to contain a stamp, tag, or
label showing fiber content and the name of the manufacturer or someone in the line of
distribution of the product. Indeed, the Textile Act was enacted because Congress believed
“it is now essential that other natural fibers and the synthetics receive the same
consideration” as wool products under the Wool Act.'® The cotton industry, which allegedly
was suffering as a result of increased competition from manmade fiber manufacturers, was
the chief supporter of the legislation.’ °° However, unlike the Wool Act, the Textile Act
explicitly stated in the statute that the label contain the “name of the country where
processed or manufactured." :

Amendments to the Wool Act and the Textile Act, 1984

In 1984, domestic textile manufacturers and textile unions supported enactment of a bill
introduced by Sen. Strom Thurmond, S. 1816, to amend both the Wool Act and the Textile
Act. These amendments, enacted by Congress, and effective December 24, 1984,’ require
that wool and textile fiber products be labeled with the name of the country where processed
or manufactured. For the first time, domestic wool and textile products either wholly made
in the United States or made in the United States of imported components or materials were
required to be labeled as such. The stated purpose of the Wool and Textile Act amendments
was to clarify and improve existing country-of-origin labeling requirements and increase
consumer awareness at the time of purchase of the products’ country of origin. Interested
parties expressed concern that without a law requiring domestically manufactured products
to be labeled with the country of origin, foreign articles would be easily mistaken for U.S.-
made goods.!°*

% The term “fiber” or “textile fiber” means a unit of matter which is capable of being
spun into a yar or made into a fabric by bonding or by interlacing in a variety of methods
including weaving, knitting, braiding, felting, twisting, or webbing, and which is the basic
structural element of textile products (15 U.S.C. 70).

% U.S. Code Congressional and Administrative News, 85th Cong., 2d sess., 1958,
pp. 5166-5167.

10 Thid., p. 5167.

1 Toid.

1 The inclusion of the country-of-origin marking requirement in the Textile Act was
undertaken despite comments from various agencies, including the FTC, that such a provision
“does not appear to add anything more than is presently required under section 304 of the Tariff
Act of 1930, as amended, and as supplemented by regulations of the Bureau of Customs
concerning the marking of imported articles.” U.S. Code Congressional and Administrative News,
85th Cong., 2d sess., 1958, p. 5181.

18 15 U.S.C. 70b(b)4.

1 Public Law 98-417; 98 Stat. 1585, 1603. This law came from S. 1538, which
incorporated S. 1816.

15 U. §. Code Congressional and Administrative News, 98th Cong., 2d sess., 1984, p.
2722.

3-24


and included requests to modify or eliminate country of origin marking requirements as well as
to harmonize rules for domestic and imported goods.

This investigation will focus on country of origin markings, including certain rule of origin
issues that directly affect country of origin markings. International rules of origin issues are
currently being examined in the ITC’s investigation No. 332-360, International Harmonization
of Customs Rules of Origin, instituted in April 1995 at the request of the United States Trade
Representative. The Commission’s proposed rules and analysis in that investigation will be
published at various intervals in the Federal Register.

The ITC is seeking input for its new investigation from all interested parties and requests that
information focus on the benefits, problems, and costs associated with existing country of
origin marking requirements, on specific concerns regarding the regulations and practices
applicable to country of origin markings, and on specific industries and products.

A public hearing will be held on Wednesday, April 10, 1996, in connection with the
investigation. Requests to appear at the hearing should be filed no later than 5:15 p.m. on
March 20, 1996, with the Secretary, U.S. International Trade Commission, 500 E Street, SW,
Washington, DC 20436. For further information, call 202-205-1816.

The ITC also welcomes written submissions for the record. Written submissions should be
addressed to the Secretary to the Commission at the above address and should be submitted at
the earliest practical date but no later than 5:15 p.m. on April 25, 1996. The hearing will be
canceled if no witnesses are scheduled to appear as of the close of business on March 27,
1996. Any person interested in attending the hearing as an observer or non-participant may
call the Secretary to the Commission (202-205-1816) after March 27, 1996, to determine
whether the hearing will be held.

Further information on the scope of the investigation and appropriate submissions is available
in the ITC’s notice of investigation, dated February 6, 1996, which can be downloaded from
the ITC Internet server (hitp://www.usitc. gov or fip-//fip.usitc. gov) or may be obtained by
contacting the Office of the Secretary at the above address or at 202-205-1802.

D-3


useful lifetime of the die. Also, the additional or incremental cost of buying and maintaining
multiple dies, those with and without a country-of-origin markings, is also reported to be
marginal. Stanley also notes that the cost of complying with country-of-origin marking of
hand tools is not significant.” However, U.S. manufacturers disagree as to whether the
FTC’s standard for “Made in USA” labeling inhibits the development of multi-lingual
packaging and labels for global use, and forces them to maintain separate inventories of
either tools or packaging for the domestic and export markets.'!°

Coalition members, however, reported that any dilution of the “Made in USA” standard
would tangibly weaken their competitive position and could force them offshore “reducing
U.S. jobs and exports.”""! The Danaher Corp. indicated that it would be forced to eliminate
1,000 jobs in its machining and forging operations if Customs rulings are not modified to be
“consistent with the 1992 National Hand Tool decision.”"'? By shifting manufacturing
operations to a low-labor cost country like China, Coalition members could reduce their
labor costs by nearly 98 percent.''? Smaller manufacturers, such as Vaughan & Bushnell,
would also be at a competitive disadvantage and would be forced to lay off workers because
they lack both the “resources and the flexibility to quickly build factories or qualify sources
in foreign countries.”""

Stanley, on the other hand, states that conforming to Customs rules on substantial
transformation with the National Hand Tool decision would cost it millions of dollars.''°
The company would either have to mark all tools made from imported forgings with a
foreign country-of-origin marking or build duplicate production facilities in the United
States. The first alternative would require Stanley to maintain two dedicated inventories of
tools, one for domestic products and the other for tools made from imported forgings. Costs
associated with administration, warehousing, packaging, and bookkeeping would also
increase. Stanley’s other alternative would require a capital outlay of approximately
$56 million. Neither of these alternatives is satisfactory to Stanley. The company reported
that the most sensible option would be to transfer all domestic mechanics tools operations
and investment offshore and lay off its 1,800 production workers in the Dallas and Wichita
Falls, TX plants.""© Stanley’s domestic materials suppliers also report that they will be

19 Statement of Thomas E. Mahoney, vice president, The Stanley Works, transcript of
hearing, p. 175.

N° Danaher Corp., posthearing submission to the USITC, Apr. 25, 1996, p. 11.

" Statement of Dan Craighead, vice president, international, Snap-on, Inc., transcript of
hearing, pp. 165.

"2 Statement of George M. Sherman, president and CEO, Danaher Corp., transcript of
hearing, p. 170.

13 Statement of Dan Craighead, vice president, international, Snap-on, Inc., transcript of
hearing, pp. 160-161.

14 Mayer, Brown & Platt on behalf of Vaughan & Bushnell Manufacturing Co.,
posthearing submission to the USITC, Apr. 25, 1996, p. 2.

15 William Axline, president and general manager, Stanley Mechanics Tools, Inc.,
interview with USITC staff, Apr. 3 and 4, 1996.

46 Ablondi, Foster, Sobin & Davidow, P.C., on behalf of The Stanley Works, posthearing
submission to the USITC, Apr. 25, 1996, pp. 2 and 18.

6-30


percentage of value also be added in the beneficiary country. Under GSP,” CBERA”* and
the Andean Trade Preference Act,” for example, the minimum value requirement is 35
percent, though the value requirement is defined differently in each law. In other words, in
order to qualify for the tariff preference, the imported article must be substantially
transformed in the beneficiary country, and it must include at least 35 percent local value (in
some cases a certain level of U.S. value may be counted). If an article is deemed to be
substantially transformed in a beneficiary country but it does not satisfy the value-added
requirement, then the article would not qualify for the tariff preference. However, for
marking and other purposes, the article would be deemed to originate in the beneficiary
country because it was last substantially transformed there.

NAFTA

By comparison, NAFTA relies on a set of enumerated changes in tariff classification (CTC)
to establish whether an article qualifies for preferential treatment under the agreement. The
first use of the CTC approach by the United States was in the United States-Canada Free-
Trade Agreement (CFTA) implemented in January 1989.5 Subsequently, the CTC rules
that were used in the CFTA were refined and incorporated in the NAFTA. The CTC
approach (but not the same list of tariff shifts) is used by several major U.S. trading
partners,”’ and it is the basis of the ongoing effort to harmonize mules of origin
internationally, which was initiated in the Uruguay Round.”

Under the CTC approach, the concept of substantial transformation is expressed as a change
in tariff classification. In effect, an article is deemed to “originate” in the country where the
imported parts, components, or materials undergo an assembly or manufacturing process that
results in a particular change in tariff classification. The mechanics of the CTC principle are
to be relatively straightforward and objective in application: (1) materials of country A are
classified for tariff purposes as they are imported into country B for processing; (2) the good
processed in country B (which may contain components from country B) is then shipped to
country C; and (3) country C classifies the fabricated good upon its importation. If the tariff
heading applicable thereto differs from the one that had covered the country A materials,
country B is the country of origin. As represented in the NAFTA Marking Rules, these tariff
shifts are frequently written in terms of specified tariff categories, rather than in broad and
general terms (such as "a change to a heading of this chapter from any other heading"). In
part, because the various tariff provisions would seem logically to apply to different classes
of goods, and in part because many countries have either no specific marking

Section 503(b) of the Trade Act of 1974, as amended (19 U.S.C. 2463(b)).

3 Section 213(a) of the Caribbean Basin Economic Recovery Act, as amended (19 U.S.C.
2703(a)).

4 Section 204(a) of the Andean Trade Preference Act, as amended (19 U.S.C. 3203(a)).

5 Chapter 3 and Annex 301.2 of the United States-Canada Free-Trade Agreement.

?6 Chapter 4 of the North American Free Trade Agreement.

27 The European Union and Japan generally base country of origin determinations on a
CTC approach. See USITC, The Impact of Rules of Origin on U.S. Imports and Exports, USITC
publication 1695, pp. 39-67.

?8 Article 9(2)(c)(ii) of the WTO Agreement on Rules of Origin.

2-7


to the extent any person introduces, delivers for introduction, sells, advertises, or
offers for sale in commerce a product with a ‘Made in the USA’ or “Made in
America’ label, or the equivalent thereof, in order to represent that such product was
in whole or substantial part of domestic origin, such label shall be consistent with
such decisions and orders of the Federal Trade Commission issued pursuant to
section 5 of the Federal Trade Commission Act.

The section notes that the FTC may maintain flexibility in its legal standard as circumstances
warrant.!23

In addition, the FTC has issued three industry-specific guides'TM that set out country-of-origin
marking requirements for the jewelry industry as a whole, metallic watches specifically, and
household furniture. These guides state that it is an unfair trade practice to misrepresent the
place of origin, production, or manufacture of industry products or their components.'”°

Administrative Process

The FTC’s Bureau of Consumer Protection is responsible for enforcing consumer protection
laws that fall within the jurisdiction of the FTC and all trade regulation rules issued by the
agency. It is also the unit responsible for conducting individual company and industry wide
investigations when deceptive or fraudulent practices are alleged, including those concerning
domestic country-of-origin markings. However, administration and enforcement of
country-of-origin marking regulations represent only a very small part of the Bureau’s
activities.'””

The two divisions of the FTC’s Bureau of Consumer Protection that are involved with
country-of-origin marking issues are the Advertising Practices Division and the Enforcement
Division.'* The former is responsible for ensuring that advertising is truthful and non-
deceptive through law enforcement and oversight activities in a number of areas.’ The
Enforcement Division monitors compliance with Commission orders and enforces trade
regulations and specific laws, including the Textile Act, Wool Act, and Fur Act, which

3 Ibid.

124 Industry guides are administrative interpretations of laws administered by the FTC to
guide the public in conducting its affairs in conformity with requirements. They provide the basis
for voluntary and simultaneous abandonment of unlawful practices by members of the industry.
16 CFR 17.

25 16 CFR 19.4, 16 CFR 23.3, and 16 CFR 250.7 (a) and (b).

126 Other duties of the Bureau include administrative and federal court litigation,
rulemaking proceedings, and consumer business education.

2” FTC officials, interview with USITC staff, Feb. 13, 1996.

8 The other units within the Bureau are the Divisions of Credit Practices, Marketing
Practices, and Service Industry Practices.

129 Areas of responsibility include food and drug safety, tobacco and alcohol advertising,
environmental performance claims, weight loss claims for dietary products, infomercials and
energy savings claims.

3-27


5802

Federal Register / Vol. 61, No. 31 / Wednesday, February 14, 1996 / Notices

INTERNATIONAL TRADE
COMMISSION

[investigation 332-368)

Country of Origin Marking: Review of
Laws, Regulations, and Practices
AGENCY: International Trade
Commission.

ACTION: Institution of investigation and
scheduling of public hearing.

EFFECTIVE DATE: February 5, 1996.

‘SUMMARY: Following receipt on January
11, 1996, of a request from the
Committee on Ways and Means, U.S.
House of Representatives, the

Commission instituted investigation No.

332-366, Country of Origin Marking:
Review of Laws, Regulations, and
Practices, under section 332(g) of the
Tariff Act of 1930 (19 U.S.C. 1332(g)).
As requested by the Committee, the
Commission will provide a report that
will include the following:

(1) A legislative and administrative
history of U.S. marking rules, including
a comparison of the concepts and
approaches for determining country of
origin for foreign and domestic goods;

(2) An analysis of the administrative
processes in the United States for
determining origin and appealing
decisions on marking issues; and

(3) An evaluation of the
which the country of origin marking
rules create for industry, and the
benefits of these rules to consumers,
including the costs to government and
industry of enforcement and
compliance.

As requested by the Committee, the
Commission in its investigation will

B-2

focus on the industries produci
electronics, stel, pharmaceuticals, hand
tools, and frozen ables; other
industries where ation is
‘available will be studied as well. Staff
will contact U.S. producers and
consumer groups to identify those that
rogerding country of origin marking
country of origin
requirements. Committee staff has
problews, ee dented ty ake
problems, as identified lustry and
iher sources in the course of ta
investigation, with foreign country of
origin marking requirements. The
Commission expects to submit its report
of the investigation to the Committes by
July 11, 1996.
FOR FURTHER INFORMATION CONTACT:
ieee

Office ‘of industries (202-205-3404) or
Mark een ity of Industries (202-
205-3429); an aspects of section
332 investigations, from William
Gearhart, Office of the General Counsel
(202-205-3091). Ther nee should
contact Margaret Office of
Public Affairs (202-205-1819). Hearing
impaired individuals are advised that
information on this matter can be
obtained by contacting the TDD
terminal on (202-205-1810).
BACKGROUND: In its letter, the
Committee noted that it had held
hearings in July 1995, on the issues of
Tules of origin and country of origin
markings for both foreign and domestic
goods. The Committee noted that views
expressed at the hearings ranged widely,
and included requests to modify or
liminate country of origin marking
juirements, amd also Oh also to harmonize
for domestic and imported d goods.
This investigation will 6 On
country of origin markings, ling
ofc county of isin masking,
ef of origin marking.
International rules of origin iseves are
currently being examined in the
Commission's Investigation No. 332~
360, International Harmonization of
Customs Rules of Origin, instituted in
April 1995 at the request of the U.S.
‘Trade Representative. The
Commission's proposed rules and
analysis pertaining to harmonized rules
of origin will be published at various
intervals in the Federal Register.
PUBLIC HEARING: A public hearing in
connection with the investigation will
be held at the U.S. International Trade
Commission Building, 500 E Street SW,
Washington, DC, boginning at 9:30 am.
on April 10, 1996. The Commission
requests that testimony focus on the
issues noted in the SUMMARY section
above. All persons shall have the right


ORGANIZATION AND WITNESS

Schagrin Associates Washington, D.C. on behalf of
Committee on Pipe and Tube Imports (CPTI)
Mark Magno, Vice President of Marketing, Wheatland Tube Company

Roger B. Schagrin, Schagrin Associates, General Counsel to the CPTI

AUTOMOBILES AND ELECTRONICS
Panel 4

American International Automobile Dealers Association (AIADA), Alexandria, VA

Walter Huizenga, President, AIADA

Semiconductor Industry Association (SIA), San Jose, CA

David Rose, Director of Import/Export Affairs, Intel Government Affairs

HAND TOOLS

Panel 5

Ablondi, Foster, Sobin & Davidow, P.C. Washington, D.C. on behalf of
The Stanley Works, New Britain, CT
Thomas E. Mahoney, Vice President, The Stanley Works

Richard H. Abbey—OF COUNSEL

~More-

C-4


Some studies consider country of origin an “extrinsic cue,” a piece of. information that
accompanies, but is not really part of the product, similar to price, warranty, and brand.*
Specifying the country of origin allows the consumer to infer quality, thus simplifying the
consumer’s decision-making process, and often is used when product attributes are not
readily apparent, or because product attributes may be hidden by packaging, design, or other
factors.®

Both country of origin and brand names are associated with numerous product attributes by
most consumers.’ Such information leads to increased confidence in purchasing decisions
and reduces the amount of time spent reaching a decision.* While the product attributes of
country of origin and brand names each have separate effects on consumers’ decision
processes, consumers may use them interactively when making a purchasing decision.° In
almost every situation, the consumer will make inferences based on personal preconceptions.
Research indicates that most U.S. consumers prefer to buy U.S.-made versions of a product
rather than imports, when important features such as price and quality are comparable. In
a widely cited study by the International Mass Retailers Association (IMRA), 84 percent of
respondents within the United States indicated a preference for U.S. products over foreign
products. Indeed, it appears that a significant number of consumers consider country of
origin to some degree when making purchasing decisions. The same study showed that a
total of 78 percent of respondents claimed they always (34 percent) or sometimes (44
percent) try to determine in what country a product was made before purchasing it.'°

However, consumers often believe that certain cues, such as brand name, are indicative of
other product characteristics, such as the country of origin, or vice versa. For example, Ford
may suggest “American-made,” while Honda may suggest “Japanese-made.” A problem
arises in the situation of hybrid or bi-national products (one that is manufactured in one
country and branded by a firm headquartered in another) that are becoming increasingly
prevalent in the global marketplace, because the country of origin can no longer be
accurately inferred from brand name. Research indicates that consumers are likely to
incorrectly ascribe country of origin, based on perceptions associated with brand names."

5 Donald F. Cox, “The Measurement of Information Value: A Study in Consumer
Decision Making,” Emerging Concepts in Marketing, American Marketing Association, Chicago,
1962; Jerry C. Olsen and Jacob Jacoby, “Cue Utilization in the Quality Perception Process,” in
Proceedings of the Third Annual Conference of the Association for Consumer Research,
Association for Consumer Research, Iowa City, 1972.

® Gerald Haitbl, Professor of Marketing, University of Alberta, Faculty of Business,
Edmonton, Canada, telephone interview with USITC staff, May 14, 1996.

7 Brand names are developed through heavy advertising. As such, strong images are built
around them and they are usually product specific. Hatbl, telephone interview with USITC staff,
May 14, 1996.

* Haiibl, telephone interview with USITC staff, May 14, 1996.

° Richard Ettenson and Gary Gaeth. “Consumer Perceptions of Hybrid (Bi-National)
Products,” The Journal of Consumer Marketing, vol. 8, No. 4, Fall 1991), p. 14.

10 International Mass Retail Association and the Gallup Organization, “Consumer
Attitudes Towards Product Sourcing,” May 1994.

" Ettenson and Gaeth, p. 14.

5-2


Textiles and Apparel

Textile mill products are comprised
intermediate goods—such as yarns
and fabrics—and some finished
goods such as knitwear, hosiery,
and carpeting. Apparel and other
finished textile products include
both clothing and home furnishings
cut and sewn from purchased
materials.

Promotion of the “Made in USA”
label became increasingly
important in the 1980s as textile
and apparel imports rose and U.S.
sector employment fell.
Information received by the USITC
as part of this investigation
indicated that the “Made in USA”
label can be a factor in a
consumer’s purchasing decision
involving apparel and home
furnishings, but usually after the
product’s price, quality, style, and
fit meet the consumer’s needs.
Several apparel companies
indicated that the “Made in USA”
label recently has become less
important to ultimate consumers as
they now demand more value,
searching for quality products at
competitive prices.

Specific Marking Requirements

Requirements for marking country
of origin for textiles and apparel
are covered not only by Customs
regulations but also those issued by
the FTC under the Textile Fiber
Products Identification Act, the

Industry Profile
‘Textile Mill Products

‘Trade data 1995 (million dollars):
U.S. shipments 75,000 (e)
U.S. imports .. 7,534
US. exports 5,696
Apparent U.S. consumptio1 76,838 ()
Import share of apparent U.

consumption (percent) 10 (€)

Source: Compiled or estimated by USITC staff based
‘on official statistics of the U.S. Department of
‘Commerce.

Apparel and Other Textile Products

Trade data 1995 (million eles)
US. shipments . 88,000 (e)
US. imports . 46,620
U.S. exports | 7,189
Apparent U.S. Soenn On 127,431 (e)
Import share of apparent U.S.
consumption (percent) 37 (e)

Source: Compiled or estimated by USITC staff based
on official statistics of the U.S. Department of
Commerce.

Trends in Globalization

‘Strong import growth in the last decade has occurred in
apparel, which requires relatively labor-intensive
production methods. In an effort to preserve market
share, U.S. apparel producers have expanded their use
of production-sharing programs in Mexico and the
Central American and Caribbean countries, where the
labor-intensive assembly processes take place. The
firms have retained the designing, cutting, and
marketing activities in the United States. The U.S.
textile mill industry and the U.S. apparel industry are
still heavily dependent on each other for sales and ©
inputs, respectively.

6-49


well as other criteria. The lack of international standardization of rules of origin reportedly
constitutes an "enormous" de facto trade barrier, and standards in this area would help
greatly. Much of the uncertainty related to future market access problems could be
eliminated if U.S. and foreign approaches to country of origin and product marking were
harmonized.

Cost savings could be achieved by harmonizing marking requirements internationally,
according to certain firms. Currently, compliance measures must be taken on a country-by-
country basis. Many companies stated that NAFTA Marking Rules would be a good model
because they are very specific and clear. However, the NAFTA Marking Rules for some
products exported from the United States to Canada or Mexico are not consistent with
marking rules for sales within the United States. If the goods are retumed to the United
States, they must be remarked.

Compliance Costs and Benefits

The costs identified by the electronics industry as relating to marking fall into several
categories. There are the costs actually incurred in marking the product as well as the costs
of using limited space for marking rather than for product information. Administrative costs
are cited by most firms that responded to the survey, as are the costs incurred for delays,
segregated inventory space, and employee training.

Industry-wide estimates are not available and costs per firm vary widely, from negligible to
millions of dollars per year. The following examples were given by survey respondents:

Q A computer manufacturer reported that the total cost of upgrading its
marking-related monitoring systems is expected to be over $100,000 for
1996 alone. Ongoing administrative costs are in addition to this amount.

Qo An office machine producer reported that it is currently modifying one of
its logistic systems to control for multiple country of origin for the same
part number; its expected programming cost is $500,000.

Q A diversified electronics products producer’s costs of marking amount to
$2 million per year for semiconductors alone, and an additional $4 million
including marking of system products containing semiconductors. Costs
were estimated at 0.25 cents per integrated circuit.

QO A telecommunications equipment producer indicated that marking costs
add less than 1 percent to the retail price.

a A consumer electronics company stated that the total cost of labeling adds
4 to 5 percent to the retail price with country of origin representing only a
part.

The Semiconductor Industry Association (SIA) estimated that the annual costs of compliance
to U.S.-based semiconductor companies is approximately of $50 million, roughly equivalent

6-8


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penunuog—6-d 1921

F-37


Section 304 and the U.S. Customs Service

The first U.S. marking statute was enacted in
1890.° It provided that "all articles of foreign
manufacture... shall be plainly marked,
stamped, branded, or labeled in legible
English words, so as to indicate the country
of origin.""° The Congressional intent was to
protect consumers "...from the imposition of
inferior goods...""' The statute was reenacted
in the Tariff Act of 1894.'? The Tariff Act of
1897'3 required that country-of-origin
marking be in a conspicuous place. The
marking statute was reenacted in the Tariff
Act of 1909, '* and authorized the Secretary
of the Treasury to prescribe rules and
regulations for persons convicted of
fraudulently altering or concealing country-
of-origin marks, and impose fines up to a
maximum of $5,000 dollars, or imprisonment
for a maximum of one year. The marking
statute was reenacted in the Tariff Act of
1913.'° A provision for the assessment of
additional duties of 10 percent of the
appraised value for failure to mark was
added when the law was reenacted in section
304 of the Tariff Act of 1922..° The
marking law was reenacted in 1930 as
section 304 of the Tariff Act of 1930, now
codified at 19 U.S.C. 1304. Much of the

The McKinley Report, 1890

“The admitted superiority of certain lines
of American goods has induced the
importation of foreign imitations of inferior
quality, with American brands, to be put on
our market as the superior goods of
American manufacture. Inferior goods, the
manufacture of one country, have also been
imported and sold bearing the marks of
superior manufactures of established
reputation of another country. A practice
‘has also grown up of importing goods
under invoices authenticated in a country
other, and in a currency of less value, than
of the country of manufacture.

“Section 23 {later renumbered as section 6]

forbids entry to merchandise not plainly

marked, stamped, branded, or labeled with

the name of the country in which it is

manufactured, with the purpose of

protecting both our own people from the

imposition of inferior goods and the

revenue from possible loss through

undervaluation.”
Fl

° Tariff Act of 1890, ch. 1244, 26 Stat. 567, 613, enacted Oct. 1, 1890. A precursor of the
marking statute can be found in H.R. 4404, Jan. 10, 1888, a bill “To prohibit the importation of
articles of foreign manufacture bearing a stamp, mark, or imprint conveying the impression that

such articles are of American manufacture.”

2° Section 6 of the Tariff Act of 1890. Section 6 of the Tariff Act of 1890 became
effective on Mar. 1, 1891, and the Treasury Department issued a circular on interpretation and

implementation on Dec. 20, 1890.

1 House Report No. 1466, 51st Cong., 1st sess. ("McKinley Report"), Apr. 16, 1890,

p. 248.

12 Tariff Act of 1894, ch. 349, 28 Stat. 509, 547, Aug. 27, 1894.

® Tariff Act of 1897, ch. 11, 30 Stat. 151, 205, July 24, 1897.

\4 Tariff Act of 1909, ch. 6, 36 Stat. 11, 85, Aug. 5, 1909.

'S Tariff Act of 1913, ch. 16, 38 Stat. 114, 194, Oct. 3, 1913.

16 Tariff Act of 1922, ch. 356, 42 Stat. 858, 936, Sept. 21, 1922. U.S. House of
Representatives, Committee on Ways and Means, Comparison of the Tariff Acts of 1913, 1922,

and 1930 (Washington, DC: GPO, 1931), p. 185.

3-5


chapter). In absolute terms, however, such costs ranged up to several million dollars
annually for some firms.

Companies surveyed that were able to provide information on the general nature of costs
cited physical marking costs and administrative costs of complying with regulations most
often (table 4-3). Of somewhat less importance were warehousing and accounting costs or
added production costs required for multiple production or marking lines, although there was
some variation in responses among industry sectors (the low number of responses within the
chemical and machinery sectors may skew the percentage responses).

Only about one-quarter (109) of the total survey respondents were able to provide qualitative
or quantitative information regarding the level of marking-related compliance costs (table
4-4). An additional 113 companies indicated they did incur some costs, but were unable to
provide a qualitative or quantitative estimate. Companies providing a qualitative estimate
indicated that the cost of complying with country-of-origin marking requirements is
nominal.” One reason for this apparent lack of hard cost information may be that most
companies already mark their products (or could do so) with country-of-origin markings in
conjunction with other markings or product coding, and this marking represents no
additional costs.*° Another reason stated by companies surveyed is that the country-of-origin
marking costs are low and they do not wish to incur additional accounting and overhead
costs in attempting routinely to track compliance costs.

A total of fifty companies surveyed provided quantitative estimates of country-of-origin
marking costs as a percentage of net sales (table 4-4). Of these companies, 23 stated that
their marking costs are zero. The majority of the remaining 27 companies estimated that
their marking-related compliance costs as a percentage of net sales are less than 1 percent
(table 4-5).

Although marking costs appear to represent a relatively small share of net sales, such costs
represent substantial totals when expressed in dollar terms. Estimated marking-related
compliance costs for these 27 domestic manufacturers would exceed $21 million altogether
and range between $5,000 and $9 million per company, based on reported 1995 net sales for
these companies.*? These companies also reported their prospective costs, including startup

?8 Certain companies have stated their belief that the marking-related costs of country-of-
origin requirements are high relative to the perceived benefit to the ultimate consumer.

2° Companies providing a qualitative estimate most often used descriptive words such as
minimal or de minimis, insignificant, negligible, minor additional cost to other required labeling,
not measurable or too small to track, or do not calculate (considered low and a cost of doing
business).

> See, for example, statements of Dan Craighead, vice president, international, Snap-on
Inc., transcript of hearing, p. 174, Thomas Mahoney, vice president, The Stanley Works, transcript
of hearing, p. 175, and George Sherman, president and CEO, Danaher Corp., transcript of hearing,
p. 176; also see, Hale and Dorr, on behalf of Micron Technology, Inc., written submission to the
USITC, Apr. 25, 1996, p. 4.

3! Company estimates of costs below 1 percent of net sales ranged as low as 0.01 percent.

» Compiled by USITC staff based on company annual reports and survey data. The
Commission also received some information on a per-unit basis that could not be projected to an

(continued...)

4-9


Historical and Global Perspective

Qa

The first U.S. marking statute was enacted in 1890. The basic requirement,
which has been in effect for more than one hundred years, is that virtually all
imported products (or their containers) must be marked with a foreign
country of origin. One purpose of the marking statute is to inform
consumers; the statute also operates to “protect” domestic producers. If an
imported product is subject to further, significant manufacturing in the
United States, then the manufacturer is considered to be the “consumer” of
the imported product, and the resulting product does not require a foreign
country-of-origin mark.

Country-of-origin determinations and related markings not only inform
consumers of the origin of imported products but also help to enforce trade
laws that are applied on a country-specific basis (e.g., application of tariff
rates, quotas, antidumping and countervailing duties, embargoes, and
qualification for government procurement programs). These laws generally
require that each imported product be deemed to have one, and only one,
country of origin.

The country of origin is generally deemed to be the country where the
product was last subject to an economically, commercially or technically
significant manufacturing or assembly process (a “substantial
transformation”), although the country of origin for textiles and apparel is
determined under a new set of rules that was enacted in the Uruguay Round
Agreements Act (URAA). While virtually all imported products (or their
containers) must be marked at the time of importation, any imported product
that is substantially transformed in the United States after importation is
considered by Customs to be a domestic product that does not need to be
marked.

Origin determinations are susceptible to varying interpretations that may
differ, depending on the character of the product, the circumstance of its
manufacture, and the purpose for which the origin determination is being
made. As a result, origin rules are being re-examined in a variety of venues.
The Treasury Department is considering the adoption of uniform U.S. rules
of origin that are intended to be more transparent, predictable, and consistent,
but that initiative has not received widespread support in Congress or among
industry groups. In the Uruguay Round, the contracting parties to the World
Trade Organization (WTO) agreed to pursue multilateral harmonization of
rules of origin, an initiative that could lead to the establishment of uniform
international rules of origin. In addition, the FTC is conducting a
comprehensive review of consumer perceptions of “Made in USA” claims in
product advertising and labeling, with a view to determining whether to alter
the current legal standard.

viii


CONTENTS

Page

Contents 220i terrrereeeees I
Executive Summary .....000.00000.00000 o.oo ccccececteeee cence vii
Historical and global perspective ..... 0.2.2. e eee viii

Summary of principle findings ... ix
Compliance costs to industry . . x

Costs to government for administering and enforcing marking ‘laws xii

Industry concerns regarding country-of-origin marking . xiii

Consumer benefits of country of origin xv

Alternative marking approaches suggested by interested parties for further
consideration... 2... e eee xvi

Chapter 1. Introduction

Purpose and scope
Overview of country-of-origin markings .
Global perspective on legal regimes
Approach ................
Organization of the study ...

Chapter 2. Concepts and Approaches i in Determining
Country of Origin

Origin of imported articles Lee eee ene tenn ete ee 2-1
Concepts of origin ....... : a)
The U.S. approach to origin ................ 2-4
Origin for marking and other general purposes 2-4
Statutory rules of origin for textiles and apparel . 2-6
Preferential tariff regimes : . eee 2-6
NAFTA ...........-.0-.555 2-7
Proposed uniform U.S. origin rules 2-9
The WTO agreement on rules of origin... .. 2... 0.2.6. 22 eee eee 2-10

Domestic articles 0.0.0... o oe eeee eens . 2-11


Frozen Vegetables

The US.  vegetable-freezing
industry consists of many small
regional producers and several
large national and multinational
producers. The large firms process
principally under their own labels
for national distribution. In
addition, the large firms compete
directly with regional firms for
market share. The frozen
vegetable processing industry
includes an estimated 310 firms."°
These firms are primarily in
California and Washington, where
large quantities of raw vegetables
for freezing are grown. A
significant number of firms are
also located in the Northeast,
North Central, and South Atlantic
regions. The U.S. market for
frozen vegetables is growing,
especially for frozen potato
products, nontraditional _ style
frozen vegetables, and value-added
vegetables and vegetable
mixtures. '7°

Specific Marking
Requirements

Industry Profile
Trade data 1995 (million dollars):

U.S. production 9.343
US, imports .. 203
US exports 1B
Apparent U.S. consumption ........ 9,433
Import share of apparent U.S.

consumption (percent)... 2

Source: Estimated by the Commission staff based on
data from Quick Frozen Foods International (Fort Lee,
NJ: E.W. Williams Publications Co.), October 1995,
pp. Al8 and Al9.

Trends in Globalization

The principal frozen vegetables produced
domestically are french-fried potatoes and other
frozen potato products (57 percent of U.S.
output), corn (11 percent), green peas, and green
beans (4 percent each). Although relatively
small (imports accounted for 2.2 percent U.S.
consumption in 1995), imports allow for year
round availability of frozen vegetables, and allow
US. processing plants to more fully utilize their
labor and production facilities.

Imports of frozen vegetables are subject to country-of-origin marking requirements under
section 304 of the Tariff Act of 1930,'?' which requires that every article of foreign origin
(or its container) be marked to indicate to the ultimate purchaser the country of origin of the
article. Under section 304, the article is to be marked in a conspicuous place as legibly,
indelibly, and permanently as the nature of the article (or container) will permit. In 1988,

9 Estimated by USITC staff based on data from U.S. Department of Commerce,
“Preserved Fruit and Vegetables,” 1987 Census of Manufactures, Industry Series (MC87-1-20C),
Mar. 1990, pp. 20C-10 and 20C-11. The actual number of individual firms is believed to be
somewhat less since the overall vegetable processing industry has been downsizing in recent years.

2° Toid.
119 U.S.C. 1304(a)(1).

6-32


Table 3-1
Laws and regulations, their statutory and regulatory cites, major administering agency, and product
coverage that either requires marking or addresses origin claims

Regulatory Administering
Statute ‘Statutory cite ‘cite agency ‘Coverage

Marking for the benefit of the ultimate purchaser

Tariff Act of 1930 19 U.S.C. 1304 19 CFR 134 U.S. Customs Imports
Service
(Customs)
Wool Products Labeling 15 U.S.C. 70 16 CFR Federal Trade Imported and domestic
Act of 1939 300.25a and Commission woo! products
300.25b (FTC) and
Customs
Textile Fiber Products 15 U.S.C. 68 16 CFR 303 FTC and Imported and domestic
Identification Act. 33 -.34 Customs textile fiber products
Fur Products Labeling Act 15U.S.C. 69 16 CFR 301 FTC and Imported and domestic
-12-.18 Customs fur products
American Automobile 15 U.S.C. 1950 49 CFR 583 National Automobiles, light
Labeling Act Highway Traffic | trucks, their engines,
Safety and transmissions
Administration
(NHTSA)
Omnibus Trade and Public Law 100- 19 CFR Customs Country-of-origin
Competitiveness Act of 418, Aug. 23, 134.43(c), marking required on
1988 1988, 102 Stat. 134.43(d)(1) imported Native-
1107, 1315? and American style jewelry,
134.43(d)(2) arts, and crafts
Omnibus Trade and Public Law 100- Not applicable Customs Imported containers of
Competitiveness Act of 418, Aug. 23, mushrooms
1988 1988, 102 Stat.
1107, 1315?

Prevention of deception or unfair acts

Federal Trade Commission | 15 U.S.C. 45 16 CFR 2-3 FTC Unfair or deceptive
Act, section 5' acts
Lanham Trademark Act of 15 U.S.C. 1125 Not applicable The courts. Unfair or deceptive
1946" This law allows | acts
private right of
action
Tariff Act of 1930, section 19 U.S.C. 1337 19 CFR 210- US. Unfair or deceptive
3371 213 International acts regarding imports
Trade
Commission

and Customs

Table continued on next page. 3-2


rule, NHTSA granted the petitions to the extent they were accommodated by the following
changes:

a Whenever material or motor vehicle equipment is imported into the United
States or Canada from a third country, the value added in the United States or
Canada is presumed zero unless documentation is available to the supplier
which identifies value added in the United States or Canada for that
equipment, in which case value added in the United States or Canada is
counted; For materials used by suppliers in producing passenger motor
vehicle equipment (other than for materials imported from third countries),
suppliers are to make a good faith estimate of the value added in the United
States or Canada (to the extent necessary to make required determinations
concerning the value added in the United States or Canada of their passenger
motor vehicle equipment);

Suppliers are provided greater flexibility in making estimates;

The number of stages for which suppliers must consider where value was
added is reduced (although not to the degree recommended by AAMA);

Q Manufacturers can petition to use alternative calculation procedures based on
representative or statistical sampling to determine U.S./Canadian parts
content and major sources of foreign parts;

Several other minor clarifying changes were made.'®*

The AAMA petitioned NHTSA’s September 15, 1995 final rule, reasserting its objection to
the regulatory provision which states that the U.S./Canadian content of components must be
defaulted to zero if suppliers fail to respond to a manufacturer’s or allied supplier’s request
for content information. The AAMA stated that NHTSA could not reasonably expect high
supplier compliance, given that the percentage of suppliers reporting under NAFTA ranged
from 60 to 65 percent for General Motors, Ford, and Chrysler.'® | When the AAMA
petitioned the 1994 rule on this issue, it asserted that the content information provided to
consumers would be more accurate if manufacturers and allied suppliers were permitted to
estimate content levels based on information in their records for components supplied
without content information. NHTSA rejected this petition on the following grounds: (1)
the alternate methods likely to be used to estimate a component’s content would be
inconsistent with the AALA’s value-added approach; (2) the most likely instance of supplier
noncompliance would be when the component is less than 70 percent domestic content; and
(3) manufacturers should be able to get outside suppliers to comply through specifications
in purchase contracts and the like.'®

4 60 F.R. 47880-47881, Sept. 15, 1995.
* 61 F.R. 17254, Apr. 19, 1996.
*8 Toid.

6-43


Table 3-5
Marking requirements under the American Automobile Labeling Act

Player Label requirements‘

Manufacturers Required to label passenger motor vehicles with the following:

1) the percentage of U.S/Canadian equipment (parts) content

2) the names of any countries other than the U.S. and Canada which
individually contribute 15 percent or more of the equipment content, and the
percentage content for each such country”

3) the final assembly place by city, state (where appropriate), and country
4) the country of origin of the engine

5) the country of origin of the transmission?

Outside Required to provide the following information to manufacturer or allied supplier
Suppliers‘ upon request:
1) the equipment price
2) whether the equipment has at least-70 percent of its value added in the
United States and/or Canada
3) the country of origin for any equipment with less than 70 percent
U.S./Canadian content
4) the country of origin for engine or transmission equipment.®

Allied Required to provide the following information to manufacturer upon request:
Suppliers® 1) the equipment price
2) the percentage U.S./Canadian content of the equipment
3) the equipment's country of origin
4) the country of origin for engine or transmission equipment (separating the
U.S. and Canadian content).

Dealers Required to maintain the label on each vehicle until the vehicle is sold to the
consumer.

‘The United States and Canada are treated together, unless otherwise noted.

? If there are more than two such countries, only the names of the two countries providing the greatest amount of
content need be listed.

3 Section 32304(b) specifies that the first two items of information, the equipment content percentages for the
U.S./Canada and foreign countries, are calculated on a “carline” basis rather than for each individual vehicle. The
term “carline” refers to a name of a group of vehicles which has a degree of commonality in construction such as body
and chassis.

“An outside supplier is a supplier not wholly owned by the vehicle manufacturer.

51n addition to the above requirements, a supplier of engines and/or transmissions is required to provide, at the
request of the vehicle manufacturer, the country of origin for each engine or transmission it supplies to the
manufacturer. Country of origin is determined as follows: the country in which the greatest percentage, by value
(using the total cost of equipment to the engine or transmission supplier, but excluding the cost of final assembly
labor), was added to the engine or transmission. The country of origin for groups of engines and transmissions is
determined once per model year.

®An allied supplier is a supplier that is wholly owned by the vehicle manufacturer.

Source: Compiled by the staff of the U.S. International Trade Commission.


or multilateral trade agreements, a switch to a different regime of origin rules,” or a change
in Customs’ interpretation of substantial transformation.'° Concerns about applying the CTC
tules developed for NAFTA trade to imports from all countries have been voiced, for
example, by producers of soluble coffee and pharmaceuticals."

Companies have expressed concern about the requirement that products made with imported
inputs must be marked with a foreign country of origin despite what the companies perceive
as extensive processing in the United States. This concer, that a product with considerable
or most of its value added in the United States must be labeled with a foreign origin, results
from the Customs origin rule to which the imported good is subject.'? Some firms also
believe it should not be necessary to label certain imported finished products (e.g., coffee or
certain spices) with a foreign origin if they are not produced in the United States.'*

With respect to voluntary marking, companies manufacturing in the United States state a
preference to mark their products with “Made in USA” labeling. However, some companies
that desire to use “Made in USA” labeling claim that for certain products manufactured in
the United States, it is commercially or technically infeasible for firms to use virtually all
U.S.-origin inputs and labor.'* Many such situations result from the globalization of

° Some importers prefer the part 102 Marking Rules for NAFTA-based products (based
on CTC) because these rules are deemed to be more transparent, precise, and predictable than
determinations on a case-by-case basis under current Customs practice. However, other producers
and importers prefer the traditional regulations or Customs rulings because CTC, as represented in
current NAFTA rules, often does not adequately encompass all processes that companies believe
substantially transform imported inputs.

1 See, for example, statements of Marti Morfitt, vice president, Green Giant Brands, The
Pillsbury Co., transcript of hearing, p. 225, Thomas Mahoney, vice president, The Stanley Works,
transcript of hearing, pp. 154-155, and Tony Helf, production manager, Taylor Made Golf Co.,
transcript of hearing, pp. 274-276.

Customs does not consider the dilution of bulk pharmaceutical active ingredients with
other inert ingredients (converting a bulk pharmaceutical into dosage form) to be a substantial
transformation because no change in the fundamental character of the active ingredient has
occurred. Moreover, a change in tariff classification of the imported bulk pharmaceutical for
example, from Chapter 29 to Chapter 30 of the Harmonized Tariff Schedule of the United States,
also is not considered to lead to a change in country of origin. See discussion in chapter 6.

” Tn this instance the manufacturer must mark the product with the foreign country of
origin because of Customs’ decision on substantial transformation or CTC and the manufacturer’s
status as the “ultimate purchaser.”

® See, for example, letters from Glenn Roberts, director government relations, American
Spice Trade Association, to Philip M. Crane, member of Congress, Aug. 1, 1995, and U.S.
Customs Service, June 30, 1995; letter from Thomas Burns, executive vice president, American
Spice Trade Association to U.S. Customs Service, Aug. 11, 1987; and submission by Vincent
Bowen, attorney at White & Case on behalf of McCormick & Co., Inc. to U.S. Customs Service,
June 30, 1995.

4 Some manufacturers have argued that the FTC rule is outdated, given the globalization
of industry production generally and the multi-country acquisition of components and production
sharing that occurs.

4-4


Country-of-Origin Marking:
Review of Laws, Regulations,
and Practices

Investigation No. 332-366

Publication 2975 July 1996

U.S. International Trade Commission

USA‘= Assembled:

China = Assembled in’Northern Marianas

Made in Canada = Hecho en Mexico = Fabriq

in Malaysia = Printed’in Canada" Made in USA" Made in New Zealdnd = Made in USA

Washington, DC 20436



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5-6


would prohibit the use of “Made in USA” labeling for footwear made in the United States
with imported uppers or outsoles. In developing the rules for “Made in USA” labeling,
FDRA suggests a functional, rather than a value-based, approach that offers objectivity, a
high degree of certainty and predictability, and is easy to administer. FDRA also contends
that the use of Customs rules as the basis for “Made in USA” labeling, as some have
suggested, would be inappropriate for footwear and would deceive consumers. Under the
NAFTA Marking Rules, for example, footwear assembled in the United States using
imported uppers and outsoles is deemed to be “Made in USA” because the assembly of
these two major components represents a substantial transformation.

Footwear firms also expressed concern over a lack of harmonization of regulations that are
administered by different U.S. government agencies, which has caused labeling difficulties
for firms producing footwear for multiple country markets. One firm stated that some 90
percent of its shoes qualify for “Made in USA” labeling under Customs rules but only about
40 percent qualify under the FTC standard. Some U.S. footwear firms selling to both
domestic and foreign markets indicated that it is difficult to keep track of shoes that are
destined for different country markets and, thus, would be subject to differing marking rules.
U.S.-made shoes that meet NAFTA origin rules can be marketed in Canada or Mexico with
a “Made in USA” label. However, the same shoes probably could not be sold domestically
with a “Made in USA” label because of the FTC wholly domestic standard. Shoes produced
for other export markets can be labeled as “Made in USA” if they undergo substantial
transformation or meet tariff shift rules in the United States.

Only one respondent indicated that the FTC standard are not a problem for the firm. This
firm currently buys over 95 percent of its components in the United States. However, the
firm stated that there is a need to establish a quantitative threshold for qualifying a shoe
under the FTC “Made in USA” standard because wholly domestic or all or virtually all is too
vague. The firm recommended that the FTC establish a quantitative threshold limit such as
90 or 95 percent.

Problems in determining the correct country of origin for marking purposes arise when
products undergo processing in, or are procured from, more than one country, as is often the
case in the global footwear industry today. Some countries adopt tariff shift rules, some use
substantial transformation rules, and others use value-based approaches. For manufacturers
producing for multiple country markets, this proliferation of origin rules results in the burden
of multiple marking practices, increased costs, and added inefficiencies.”

Three firms expressed concern about foreign country-of-origin marking rules, particularly
the lack of harmonization between U.S. and foreign regulations. Two firms indicated
differences between U.S. and Canadian country-of-origin marking rules that require
relabeling to market in the United States footwear returned from Canada marked with a
“Made in USA” label. One firm complained about delays at the border and two firms
indicated market access difficulties especially for footwear exported to Mexico because of
the detailed labeling information required by the Mexican Government and the requirement
that the information be in Spanish. Also,one firm expressed concern about market access

229 Sonnenberg & Anderson, attorneys & counselors at law, written submission to the
USITC, Apr. 25, 1996.

6-64


Within the steel industry, marking practices are not uniform across products nor among
producers, being dictated by both industry-sector custom and technical specifications. The
common industry practice for marking semifinished and finished steel mill products for
shipment, according to the American Society for Testing and Materials (ASTM),” is to
indicate the producer’s name or hallmark, mill designation, product size, product grade
designation, and heat,“ among other information. But imprinting of such information
directly on the article is not uniformly nor universally practiced by U.S. producers except
where specified by product standards or industry practice. For example, steel concrete-
reinforcing bars, to conform with ASTM Standards, are required to be hot-rolled with the
producer’s hallmark, mill designation, size, and grade designation.’ Domestic wire-rope
producers distinguish their products with a dyed strand or colored core.” Likewise, U.S.
manufacturers of link chain stamp their hallmark and a grade designation spaced about every
6" to 8" along the length of the chain. In these cases, country of origin is implied from the
identity of the producer and the mill location marked on the product.

Marking requirements for the country of origin of steel products imported into the United
States are administered by Customs under section 304 of the Tariff Act of 1930. Imported
steel products are generally required to be legibly, indelibly, and permanently marked with
country of origin as the article will allow, but there are also exemptions or more specific
requirements for some products. Numerous steel mill and fabricated steel products are “J-
List excepted’ from country-of-origin marking requirements set forth in 19 CFR 134.33,
but their containers must still be marked. Due to problems in the past, some steel products
(e.g., pipes and pipe fittings,“* and municipal castings “) are singled out for more stringent
marking requirements (e.g., municipal castings must be marked on the top surface with the
English name of the country of origin by permanent methods of marking). Some permanent
marking methods enumerated in section 304 are die stamping, cast-in-mold lettering,
etching, or engraving. Where these marking methods are technically or commercially
infeasible, making the product unfit for intended end uses by threatening its structural or
performance integrity, or by marring surfaces, products can be marked with equally

3° American Society for Testing and Materials, Designation A700-90, “Standard practices
for packaging, marking, and loading methods for steel products for domestic shipment,” 1995
Annual Book of ASTM Standards, v.01.05, pp. 439-475.

“© The furnace batch from which the steel product is poured, rolled, cast, or forged.

“1 American Society for Testing and Materials, Designation ASTM A615, “Standard
specification for deformed and plain billet-steel bars for concrete reinforcement,” 1995 Annual
Book of ASTM Standards, v.01.05, pp. 300-304.

Statement of Jeffery Levin, Harris & Ellsworth, on behalf of the Committee of
Domestic Wire Rope and Specialty Cable Manufacturers, transcript of hearing, p. 124.

* Representatives of a U.S. chain-manufacturing company, telephone interview with
USITC staff, Apr. 24, 1996.

“ Semifinished mill products on the J-List are billets, blocks, blooms, ingots, pigs, and
slabs. Finished mill products are plates and sheets, excluding galvanized sheets; bars, except
concrete rebars; rails; and wire, except barbed wire. Fabricated steel products are steel bands and
hoops; certain ball bearings; metal blanks to be plated; bolts, nuts, washers, and rivets; nails,
spikes, and staples; shafting; joint bars and tie plates; wire rope; certain buckles; and furniture
glides.

4°19 U.S.C. 1304(c). Added to section 304 in 1984.

4 19 U.S.C. 1304(e). Added to section 304 in 1984.

6-13


assembled into an automobile. AALA regulations do not require suppliers to mark the part
or the container; these regulations merely require that the specified information is provided
to the vehicle manufacturers in the form of a certification. Outside suppliers that directly
supply allied suppliers are required to provide the specified information and certification
directly to the allied suppliers. Suppliers are also required to maintain records of the
information used to compile the information provided to the manufacturers and outside
suppliers. These requirements under the AALA apply only to suppliers which supply
directly to the vehicle manufacturer or to an allied supplier. No requirements are imposed
on suppliers earlier in the chain, e.g., a company which supplies an item of equipment to an
outside supplier which then supplies it to a vehicle manufacturer.'**

In October 1993,'*> Customs ruled that various replacement automotive parts individually
wrapped in containers which bear the proper country-of-origin marking and part number and
which will reach the ultimate purchaser in these containers were excepted from individual
marking.'* This ruling applies to situations to achieve Congressional intent where a car
owner orders the part directly from the manufacturer or purchases the part in its box from
an auto parts store. If a mechanic orders the part, it is assumed by Customs that the
consumer can ask to see the box before purchasing the part and requesting the installation.
Because each part is imported in its own sealed box which identifies the part number,
Customs concluded that in most cases the part will remain in the box until installation.
Therefore, marking the country of origin of the imported auto part in a permanent,
conspicuous, and legible manner on the sealed box in which the auto part is contained
satisfies the requirements of section 304.'°’ One exception to this rule is automotive
replacement glass. Customs has ruled that this replacement part is not substantially
transformed by installation; therefore, the car owner is the ultimate customer. Thus, the glass
itself must be marked with the country of origin.'*

Rebuilt auto parts present a unique situation with respect to country-of-origin labeling.
Rebuilt or remanufactured parts are completely disassembled, cleaned, inspected for wear
and breakage, reassembled with new or rebuilt components replacing worn out or
nonfunctioning components, and typically tested for compliance with specifications. Almost
all cores'®® of rebuilt parts are nonfunctional, and most are nontraceable as to country of
origin because they will have been on a vehicle for a significant number of years. However,
while value is given to the core by the rebuilder who makes an effort to salvage it, the
country of origin, under both Customs rules and those of our NAFTA partners, of the rebuilt
part is the country in which the original part was made, not where it was rebuilt.’°

15460 F.R. 47880, Sept. 15, 1995.

155 U.S. Customs ruling HQ 722727, Oct. 21, 1993.

156 19 U.S.C. 1304 (a)(3)(D).

157 U.S. Customs ruling HQ 733241, Aug. 27, 1990.

58.U_S. Customs ruling HQ 734092, Apr. 1, 1991.

159 The core is the platform on which the rebuilt part is produced.

16 Conlon, Frantz, Phelan, Knapp and Pires on behalf of the Automotive Parts and
Rebuilders Association, written submission to the USITC, Apr. 24, 1996.

6-41


Country-of-Origin Marking:
Review of Laws, Regulations, and Practices

Project Staff
Dennis Fravel, Project Leader
Charles Yost, Deputy Project Leader

Cheryl Badra, Scott Baker, Arona Butcher,
Richard Brown, Stephen Burket, William Greene,
Jackie Jones, Sylvia McDonough, David Michels,

Laura Polly, Linda Shelton, Sundar Shetty,
Mary Elizabeth Sweet, Karl Tsuji, Robert Wallace

Office of Tariff Affairs and Trade Agreements

Daniel Shepherdson
Janis Summers

Office of the General Counsel
William Gearhart

Office of Economics
Sandra Rivera

Information and Word Processing

Sharon Greenfield
Zema Tucker

Design, electronic composition, and printing provided by the
Publishing Division

Under the Direction of:

Larry Brookhart, Division Chief
Mark Paulson, Branch Chief

Office of Industries


Federal Register / Vol. 61, No. 31 / Wednesday, February 14, 1996 / Notices
-

5803

* to appear, by counsel or in person, to
present information and to be heard.
‘Requests to appear at the public hearing
should be filed with the Secretary, U.S.
International Trade Commission, 500 E
Street SW, Washington, DC 20436, no
later than 5:15 p.m., March 20, 1996.
Any prehearing briefs (original and 14
copies) should be filed not later than
5:15 p.m., March 27, 1996; the deadline
for filing post-hearing briefs or
statements is 5:15 p.m., April 25, 1996,
In the event that, as of the close of
business on March 27, 1996, no
witnesses are scheduled to appear at the
hearing, the hearing will be canceled.
Any person interested in attending the

as an observer or non-
participant may call the Secretary to the
Commission (202-205-1816) after
March 27, 1996, to determine whether
the hearing will be held.

WAITTEN SUBMISSIONS: In lieu of or in
addition to participating in the hearing,
interested parties are invited to submit
written statements concerning the

matters to be addressed by the
Commission in its report on this
investigation. The Commissicn requests
that written submissions focus on the
issues noted in the SUMMARY section
above. Commercial or financial
information that a submitter desires the
Commission to treat as confidential
must be submitted on separate sheets of
paper, each clearly marked
“Confidential Business Information” at
the top. All submissions requesting
confidential treatment must conform
with the requirements of section 201.6
of the Commission's Rules of Practice
and Procedure (19 C.F.R. 201.6). All
written submissions, except for
confidential business information, will
‘be made available in the Office of the
Secretary of the Commission for
inspection by interested parties. To be
assured of consideration by the
Commission, written statements relating
to the Commission’s report should be
submitted to the Commission at the
earliest practical date and should be
received no later than the close of
business on April 25, 1996. All
submissions should be addressed to the
Secretary, U.S. International Trade
Commission, 500 E Street SW,
Washington, DC 20436. Persons with
mobility impairments who will need

Office of the Secretary at 202-205-2000.
Issued: February 6, 1996.

By order of the Commission.
Donna R. Koaknke,
Secretary.
(FR Doc. 96-3290 Filed 2-13-96; 8:45 am)
BILLING CODE 7020-02-P

B-3


3) What specific problems or concerns does your company have regarding compliance with U.S.
country of origin marking requirements administered by agencies of the Federal government,
including the U.S. Customs Service and the Federal Trade Commission (FTC)?

technical or commercial suitability for marking products

difficulty in tracking origins due to varying sources of supply

increased costs (specify in question #4, below)

difficulty in meeting FTC “Made in USA” labeling requirements (due to necessity of using

foreign-origin inputs)

inconsistent application of marking regulations

lack of transparency in U.S. regulations (FTC, Customs, DOT, etc.)

lack of harmonization among U.S. regulations (FTC, Customs, DOT, etc.)

implications of Customs’ rules of origin proposals (explain below)

other (specify: : )

Comments (including on-going or recently completed efforts to solve problems):

4) Can you identify the major types of costs that comprise your firm’s total cost in complying with
country of origin marking requirements? (DO NOT INCLUDE COSTS THAT YOUR COMPANY
INCURS VOLUNTARILY IN MARKING YOUR PRODUCTS FOR COMPETITIVE
REASONS OR FOR MARKETING STRATEGY):

physical marking costs

administrative costs of complying with regulatory agencies

warehousing, accounting, and costs of tracking the use of foreign components

added production costs required for multiple production or marking lines

added marketing/advertising costs incurred in complying with marking requirements

___ other (please specify):

Can you quantify (or estimate) the total cost (as a percentage of net sales) that your company incurs in
order to comply with country of origin marking requirements?

% (specify percentage amount or range)
__ No response or cannot quantify

Can you estimate how much these costs of complying with marking requirements add to the retail
purchase price of the average product?

_____ (cents/dollars) added per retail price (total cents/dollars) of

(specify product)
no response or cannot quantify

Comments:

E-3


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a foreign country of origin when it is sold in the domestic market. On the other hand, if the
USS. processing is deemed to be substantial, then the processed article becomes a domestic
article for purposes of the marking law and no longer needs to be marked with a foreign
country of origin when it is sold in the domestic market.? However, under the current
standards that govern claims about the origin of domestic articles, such an article could not
be marked with a “Made in USA” label as it would not be wholly of domestic origin. If the
processed article is exported, however, foreign marking laws may require that the article be
marked as a product of the United States.

In recent years, the standards and practices that are used to make country-of-origin
determinations have become more important and in tum more closely scrutinized,
particularly for certain products and sectors, due to an increased level of international trade,
an increase in the number of different duty rates under which an article may enter (i.e., most-
favored-nation rates and preferential rates under GSP, NAFTA), and the globalization of
production (goods made in more than one country). At the same time, new origin regimes
have been created, both in the United States and abroad, in conjunction with trade preference
programs and regional trade agreements. The general standards used by countries may be
comparable or similar, but the interpretation or application of the standard may differ
depending on the product and the circumstances.

While there is considerable support for the current U.S. standards and practices that govern
country of origin for domestic and imported articles, there is also considerable support for
simplification and harmonization®> Some companies and industry groups suggest that the
United States should adopt a single standard of origin that could be applied to all imported
articles for all customs, statistical, and health and safety purposes. In addition, many
companies and associations indicate support for the ongoing effort to harmonize rules of
origin internationally.‘ Finally, some companies and trade associations suggest that
comparable standards and practices should apply to imported, exported, and domestic
articles.°

Any uncertainty about a country-of-origin determination will most likely result in
uncertainty about marking. Moreover, changes to the rules of origin may have an
unintended or unanticipated effect on how an imported article must be marked, and on

? It should be noted that, even if the U.S. processing is deemed to be sufficiently
substantial, at the time of importation the container of the imported foreign article must be marked
with the country of origin. See 19 CFR 134.35.

3. U.S. House of Representatives, Committee on Ways and Means, Subcommittee on
Trade, Rules of Origin: Hearing Before the Committee on Ways and Means, Subcommittee on
Trade, 104th Cong,, 1st sess., July 11, 1995, Serial 104-27 and submissions to the Federal Trade
Commission (FTC) “Made in USA Policy Comment,” FTC File No. P894219 and to the U.S.
International Trade Commission with respect to investigation Nos. 332-360, International
Harmonization of Customs Rules of Origin, and 332-366, Country-of-Origin Marking: Review of
Laws, Regulations, and Practices.

‘ See, for example, American Frozen Foods Institute and PPG Industries, Inc., written
submissions to the USITC in regard to the ongoing investigation No. 332-360, International
Harmonization of Customs Rules of Origin, instituted Apr. 6, 1995.

5 See, for example, Compaq Computer Corp., written comments to the FTC, “Made in
USA Policy Comment,” FTC File No. P894219, Jan. 9, 1996.

2-2


6) Does your company mark its products with “Made in USA”-type labeling?
__ “yes”, then what benefits do you perceive in doing so?

__. preference by wholesale customers

__ preference by retail customers
easier to meet “Buy America” preferences of government agencies
brand loyalty (for domestic products)
designates superior quality of materials, workmanship, or service
__ other benefits
(specify: )
___ increased unit sales due to competitive preference
___ increased unit price, and if so, how much are your customers willing to pay for products

bearing a “Made in USA’-type label?
% (specify percentage amount or range)

none
no response or cannot quantify

__ “no” response (unable to specify benefits)
__ ifno, then what might be the reasons?

7) What effect does country of origin marking requirements have on your company’s ability to use
“made in USA” type labeling?

E-5


Table 4-4

Number of companies responding with cost information, indicating marking costs are not
quantifiable, and providing qualitative and quantitative data on compliance costs as a percentage of
company net sales, by industry sectors

Number of companies
Providing compliance costs as a percent of
net sales
Indicating some Unable to provide
Sector* cost is incurred an estimate Qualitative data Quantitative data
Agriculture 50 29 10 1
Chemicals 8 7 1 ie)
Metals and metal 80 39 25 16
products
Machinery 11 4 4 3
Electronics 37 21 6 10
Textiles 36 13 13 10
Total 222? 113 59 50

See footnote 1 in table 4-2 for a description of sector products.

2 Although 435 companies responded to the Commission survey, and 298 companies responded to the
Commission’s survey question to characterize types of marking-related costs, only 222 companies responded
to this survey question and indicated that there were costs associated with country-of-origin marking.

Source: Compiled from telephone surveys conducted by Commission staff.

$20 million to $22 million with start-up costs ranging from $15 million to $26 million (table
4-6).

Written submissions also indicated that small shares of costs relative to net sales can translate
into millions of dollars, which some company officials believe could be better spent on
capital or other investments. For example, the Semiconductor Industry Association (SIA)
estimated that total compliance costs for the industry manufacturing semiconductors are on
the order of $50 million per year, representing approximately 0.01 percent of total net
industry sales of $55 billion.>* One SIA member, Intel, claims to spend $4 million per year
marking its products, a figure which represented 0.02 percent of the company’s net revenues

%(,. continued)
equivalent to about 0.6 percent of net sales).

34 Semiconductor Industry Association, posthearing submission to the USITC, Apr. 25,
1996, p. 5.

4-11


ORGANIZATION AND WITNESS

SPORTING GOODS AND COLLECTIBLES

Panel 8

Stein Shostak Shostak & O'Hara Washington, D.C. on behalf of

Ajay Sports, Inc., Delavan, WI

Daiwa Corporation, Garden Grove, CA

Coastcast Corporation, Rancho Dominguez, CA
Lynx Golf, Inc., City of Industry, CA

Lamkin Leather & Rubber Company, San Diego, CA
Taylor Made Golf Company, Inc., Carlsbad, CA

Tony Helf, Production Manager, Taylor Made Golf Company
Mark King, Vice President of Sales, Taylor Made Golf Company

Thomas D. Dixon, Vice President of Marketing, Coastcast Corporation

Bruce N. Shulman )
J) OF COUNSEL
Scott E. Rosenow )

BGE, Ltd., Niles, IL

Joel R. Platt, General Counsel, BGE, Ltd.

C-7


According to responses to the Commission’s survey, U.S. companies were most concerned
with the difficulty of tracking the origin of goods because of varying sources of supply and
the increased cost of marking goods with a country of origin. These two concerns accounted
for 17 percent and 16 percent, respectively, of the 354 responses to the question asking
companies to list their concerns by type (table 4-2). Regulations that require a country-of-
origin mark on products that use inputs or components from various countries, such as
electronic devices or mixed/commingled products (soluble coffee,’° spices, frozen
vegetables, and golf club sets, for example) often pose administrative burdens and add to
overhead costs for producers that must maintain extensive tracking or inventory systems.
Concerns were expressed over the real or potential additional costs incurred because of
marking rulings by Customs, although some of these companies reported concerns about
uncertainty over country-of-origin determinations that may be unrelated to marking.
Increased costs can derive from a number of other sources and are examined in greater detail
below.

Areas of somewhat lesser concern were the lack of harmonized marking regulations among
Federal agencies, inconsistent application of marking regulations, and the technical or
commercial difficulty of marking goods with a country of origin. Differing goals for origin
marking lead to disparities between marking regulations and requirements of various Federal
agencies. For example, regulations of the FDA and Customs may cause certain drugs to be
marked with two different geographical origins.” Examples of problems that may result
from technical or commercial difficulties of marking a product include marking very small
items such as semiconductors, locating country-of-origin information on the front of frozen
food packages,” and complying with proposed rules on the use of tags and labels that may
impose new marking costs on certain industries.” Overall, few companies surveyed cited
the difficulty of meeting the FTC “Made in USA” labeling standard and the implications

1° The makers of instant coffee generally combine bulk instant coffee powders from
several countries in one package. Because Customs does not find the agglomeration process to
represent substantial transformation, each production run could potentially be marked with a
different country or countries of origin. Producers claim that these administrative and logistics
costs may lead to higher capital and variable costs, and could limit their competitiveness in the
United States.

20 As dispensed in blister packs, pharmaceuticals are generally marked with the country of
origin of the active ingredient (Customs ruling) and the name and address of the U.S. manufacturer
(FDA niling). Also see discussion in chapter 6.

21 A particular concern of the frozen vegetables industry is the decision by the Court of
International Trade that marking should be located on the front panel in order to be “conspicuous,”
and with Customs’ interpretation of that decision to specify font sizes, boldness, and other
graphics related to country-of-origin marking. The industry’s position is that specific rules on
marking are unnecessary and inconsistent with section 304 of the Tariff Act of 1930.

® For example, in a recent change, Customs proposed that carbon steel wire rod (from
which steel wire is drawn) now be marked on the strapping used to secure the bundle; however,
most of the strapping is itself composed of wire rod and not suitable to marking. This new
Customs requirement represents a change from the prior practice of allowing bundles of wire rod
to be tagged with the country of origin.

4-6


AALA labeling for 15,000 auto parts companies are estimated by NHTSA to
range from $600 million to $1.2 billion, averaging $40,000 to $80,000 per
firm.

Q According to some companies, there are indirect costs associated with the
uncertainty of marking requirements. For example, compliance with
Customs regulations or decisions that involve “subjective” interpretations, or
changes in interpretations of substantial transformation, may cause
companies to consider a shift in investment or production to foreign
operations. Companies would prefer, for commercial reasons, not to mark a
foreign country of origin on certain finished products. Companies believe
such markings are misleading to consumers when substantial value-added by
their U.S. operations is deemed by Customs as not resulting in a substantial
transformation, thus requiring a foreign origin mark. Such rulings, they
assert, may diminish the value of existing investments and potentially cause a
loss of production and employment for affected companies.

Costs to Government for Administering and Enforcing Marking Laws

a The cost to the U.S. Government to administer and enforce the major laws
and regulations requiring country-of-origin marking, and preventing
deceptive or unfair claims of origin, varied between an estimated $3.3
million to $3.6 million during fiscal years (FY) 1993-95. Administration
includes activities such as issuing regulations and rulings. Enforcement
includes investigation and court proceedings.

Q Customs estimated certain expenditures for administering and enforcing
marking requirements at between $1.6 million and $1.8 million during FY
1993-95.!! These expenditures are primarily salary costs for issuing ruling
letters, rulemaking, other legal costs, and investigations of country-of-origin
marking violations. However, Customs was unable to provide an estimate of
salary costs incurred in reviewing imports for marking sufficiency by
personnel at the ports-of-entry, although Customs indicates that such costs
are considerable. Based on consultations with Customs personnel costs for
issuing marking violations and certifying proper remarking at ports-of-entry
would add $850,000 to $1.2 million annually to Customs marking-related
costs during FY 1993-95. In addition, Commission estimates of benefits
associated with the salary costs related to ruling letters, rulemaking, other
legal costs, and investigations of marking violations would add $319,000 to
$377,000 to such costs during FY 1993-95.

a The FTC estimated an increase in annual costs from $156,000 to $416,000
during FY 1993-95 for administering and enforcing laws and regulations
under the Wool Products Labeling Act of 1939, Textile Fiber Products

1 Includes a small share of cost data provided by Customs to the Commission on a
calendar year basis.


Page 2

Enclosed is a copy of the Committee’s letter requesting the investigation.
Also enclosed is a copy of the Commission’s notice of investigation that includes
instructions for providing testimony at the public hearing and written submissions.
Please note the deadlines for submitting a request to appear at the April 10 hearing
(March 20), for filing prehearing briefs (March 27), and for providing post hearing
briefs or written statements (April 25).

If you have any questions regarding the investigation or the upcoming
hearing, please contact Dennis Fravel, the project leader, at (202) 205-3404.

Enclosures


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3-14


ropes and safety cords. Cordage is on the “J-list” of goods that are excepted from the
marking requirements other than on the container in which the product is imported.”
Without mandatory tagging, U.S. producers cannot distinguish their ropes from imported
ones. When accidents occur, U.S. producers are often faced with liability suits and may have
difficulty establishing that they did not produce the faulty goods.

U.S. producers in this segment generally do not use “Made in USA” labeling directly,
because virtually all goods of this segment are for commercial use rather than for use by
ultimate consumers. However, most of the firms contacted said that the ability of their
customers to use the “Made in USA” label is important. The “Made in USA” label enables
their customers to compete against imported goods for certain market segments in which the
country of origin is important to the final consumer.

One producer of industrial textiles expressed concern over the wholly domestic FTC
standard for labeling a good as U.S.-made and the NAFTA provision that allows a good to
contain no more than 7 percent of nonqualifying content and still be labeled as U.S.-made.
This necessitates different origin marking for certain goods sold domestically and for those
exported to Mexico or Canada. The goods for the Canadian or Mexican markets can be
labeled as “Made in USA,” whereas those for the U.S. market would be labeled “Made in
the USA of Imported Materials.”

Home furnishings

The URAA-mandated change in country-of-origin rules affects the country-of-origin
marking of many home furnishings. The pre-URAA rules for home furnishings generally
conferred origin to the country in which the goods were cut to size from fabric rolls,
hemmed, and otherwise sewn. The URAA rules confer origin on the country in which the
fabric was formed.

Thus a U.S. manufacturer of pillows, for example, that uses domestic and imported fabrics
is required to maintain records indicating the origin of each piece of fabric and to maintain
an inventory of labels to show origin for each country from which it uses fabrics.
Additionally, contractors that dye, print, or otherwise finish greige fabrics, commonly called
converters, must maintain such records and inventories. U.S. industry sources indicate that
these new requirements not only add to their production costs, but also put them at a
marketing disadvantage.

200 Cordage can be tagged by having a strand of an identifying color to aid in
distinguishing goods of a particular manufacturer.

201 19 CFR 134.33, J-List Exceptions contains a list of articles excepted from the
country-of-origin marking requirements in accordance with the provisions of section 304(a)(3)(J)
of the Tariff Act of 1930, as amended.

22 Gates Rubber Co. contends that a good labeled “Made in USA” should have the same
requirements as a good labeled “Made in Germany” or “Made in Japan,” contending that it is
deceptive to have different standards apply to goods from different countries. Gates contends that
for a good made in the United States using some imported raw materials, the “Made in USA” label
accurately discloses that the product was made in the United States using domestic labor in a U.S.
facility. Gates Rubber Co., written submission to the FTC, “Made in USA Policy Comment,” FTC
File No. P894219, Jan. 16, 1996.

6-53


developed over time in conjunction with standards testing bodies; the specifications and
designated end-use are more important as indicators of quality than a country-of-origin
marking. Other companies have developed longstanding relationships with their foreign
suppliers, including “just-in-time” supply relationships. In this instance, the customer comes
to rely on the supplier’s quality assurance program and the supplier’s ability of timely
delivery at the agreed price, and country-of-origin markings may impart little or no useful
information to such an industrial consumer. One company has: also stated that the United
States has implemented consumer protection measures that are more efficient than country-
of-origin marking requirements.”

Respondents to the Commission’s survey were fairly evenly split in their opinions as to
whether a good’s origin had any influence on the purchasing decisions of their customers.
Of the 410 responses to this question in the Commission telephone survey, 54 percent stated
that the country of origin is “not important” in their customers purchasing decisions. This
includes products for which there is limited or no U.S. production, or for which the price,
company name, brand name, or trademark may be considered more important than the
country of origin.” The share of respondents indicating that the country of origin did have
some influence on customer behavior was equally split in their responses, with 23 percent
stating that country-of-origin marks are “very important” and another 23 percent
categorizing country-of-origin markings as “somewhat important.”

Customers, including domestic manufacturers, note that country-of-origin marking conveys
useful information about the product regarding product liability issues or conditions of the
product’s production. In general, marking also allows consumers to choose whether or not
to purchase the product because they may disagree with the policies of the foreign
government, or they may wish to support U.S. production and/or domestic labor.

U.S. manufacturers perceiving benefits indicated that most of the value they derive from
country-of-origin markings flows from the ability of their consumers to choose between the
USS. products and imported products,** and that markings provide a basis for determining
the quality of materials, workmanship, or service (table 4-8).

Most companies who mark their goods “Made in USA” do so because of customer perceived
preferences for domestic products, although such value cannot be readily measured (see

5! Neville Peterson & Williams and International Business-Government Counsellors, Inc.,
on behalf of Xerox Corp., written submission to the USITC, Mar. 27, 1996, p. 9.

* These product attributes are cited by about three-quarters of the companies responding
that customer purchasing preferences are not influenced by the origin of the good.

% For a discussion of company reliance on country-of-origin marking rules to enable its
customers to distinguish between its products and imported products, see Mayer, Brown & Platt on
behalf of Vaughan & Bushnell, posthearing submission to the USITC, Apr. 25, 1996, pp. 2-3. For
a discussion of brand loyalty, see, for example, Hitchiner Manufacturing Co., Inc., posthearing
submission to the USITC, Apr. 22, 1996, pp. 2-3.

4-18


APPENDIX A

Request Letter from
the Honorable Bill Archer,
Chairman of the Committee on
Ways and Means,
U.S. House of Representatives


Reference List on Consumer Perceptions

. “‘Buy American’ Emotional Appeal No Match For Bargains,” Discount Store News, Vol.
33, No. 12 (Jun. 20, 1994), p. 23.

Ahmed, Sadrudin A. And Alain d’Astous. “Cross-national Evaluations of Made-in Concept Using
Multiple Cues,” European Journal of Marketing, Vol. 27, No. 7, (1993), pp. 39-52.

Ahmed, Sadrudin A. Alain d’Astous, Mostafa El Adraoui. “Country of Origin Effects on Purchasing
Managers’ Product Perceptions,” Industrial Marketing Management, Vol. 23, No. 4, (Oct. 1994),
pp. 323-332.

Ahmed, Sadrudin A. And Alain d’Astous. “Comparison of Country of Origin Effects on Household
and Organizational Buyers’ Product Perceptions,” European Journal of Marketing, Vol. 29, No.3
(1995) pp. 35-51.

Alba, Joseph W. And J. Wesley Hutchinson. “Dimensions of Consumer Expertise,” Journal of
Consumer Research, Vol. 13 (March 1987), pp. 411-454.

Aldersey-Williams, Hugh. “Cities Bid To Make Their Marque, Management Today, (Aug. 1994), pp.
30-33. .

Baughn, C. Christopher and Attila Yaprak. “Mapping Country of Origin Research: Recent
Developments and Emerging Avenues,” in Product-Country Images: Impact and Role in International
Marketing, Nicholas and Louise A. Heslop, eds., Binghamton, NY: International Business Press,
1993, pp. 89-115.

Boze, Betsy V. and Charles R. Patton. “The Future of Consumer Branding As Seen From the Picture
Today,” Journal of Consumer Marketing, Vol. 12, No. 4 (1995), pp. 20-41.

Bilkey, Warren J. and Erik Nes. “Country of Origin Effects on Product Evaluation,” Journal of
International Business Studies, (Spring/Summer 1982), pp. 89-99.

Brown, Jacqueline J., C. David Light, and Gregory M. Gazda. “Attitudes Towards European,
Japanese and U.S. Cars,” European Journal of Marketing, Vol. 21, No. 5, (1987) pp. 90-100.

Cedrone, Lisa. “Does It Matter If It Matters?” Bobbin, Vol. 32, No.12 (Aug. 1991) pp 44-52.
Chang, Dae Ryun and Ik-Tae Kim. “A Study on the Rating of Import Sources for Industrial Products
in a Newly Industrializing Country: The Case of South Korea,” Journal of Business Research, Vol.
32, (1995), pp. 31-39.

Chao, Paul. “Partitioning Country of Origin Effects: Consumer Evaluations of a Hybrid Product,”
Journal of International Business Studies, Vol. 24, No. 2, (1993), pp. 291-306.

G3


telephone survey.’ Responses from these firms are segregated below into major industry
segments.

Yarn, fabric, and industrial textiles segments

Country-of-origin marking rules do not appear to significantly affect producers of
intermediate textile goods such as yarn or fabric. For such goods, the country-of-origin
marking can be placed on the container or, for U.S.-made goods, the origin information can
be on packing slips or other manifests that accompany a shipment of goods.

The most important issue concerning rules of origin for this segment is the treatment of
finishing under the URAA-mandated rules. Under these rules, a fabric is deemed to
originate in the country where it was made, no matter how much it may have been
transformed in a second country. Thus, an imported greige fabric'®” that is dyed, printed, or
otherwise finished in the United States must be labeled as made in the foreign country.
Further, U.S. firms that import greige fabrics and finish them domestically need to maintain
records to keep track of the country of origin for each piece of cloth, thereby adding to their
operating costs.’ Consumers of the finished good will not know how much U.S. labor and
technology went into the goods. Another issue somewhat related to country-of-origin
marking is the incorrect marking of goods that are transshipped, which is generally done to
avoid quotas and has been a problem for several years.

U.S. producers of industrial textile products such as bags, shipping containers, and cordage
interviewed by USITC staff expressed concern regarding imported goods that are not marked
with the country of origin. According to domestic producers of bags and shipping
containers, USDA regulations require that certain agricultural goods be transported only in
domestically made containers. These domestic producers claim that, as domestic containers
generally cost more than imported ones, a bag supplier often sends its customers imported
ones or a mix of domestic and imported goods.'” U.S. producers of cordage expressed
concern over the absence of identifying “tags” on imported cordage, particularly climbing

196 Staff contacted 12 textile firms producing yarns, fabrics, and carpets, of which 5
responded to the survey. Staff also contacted 22 producers of industrial textiles, of which 10
responded. Of the 4 firms producing home furnishings that were contacted, 3 responded. The
president of Pillowtex Corp., a producer of home furnishings, appeared at the Commission hearing
and subsequently submitted further information. Approximately 30 members of the apparel trade
community were contacted regarding this investigation, including 24 apparel companies, 4
retailers or buying groups, and 2 apparel trade associations. Of these, 16 apparel companies and 2
large retailers responded to the telephone survey, and a representative of the American Apparel
Manufacturers Association testified at the hearing.

187 “Greige” fabric is the term used for unfinished fabric just off the loom or knitting
machine.

198 For instance, Cranston Print Works Co. converts greige fabrics to finished fabrics.
Cranston states that the finishing processes, all done in the United States, contribute well in excess
of 50 percent of the value-added of the final goods. Cranston Print Works Co., written submission
to the FTC, “Made in USA Policy Comment,” FTC File No. P894219, Jan. 11, 1996.

19° One producer of containers said that since these products are “low-end goods” and are
often imported in bales, the absence of the labels is not easily detected.

6-52


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penuguog—g-J 1qeL

F-27


Table 3-6

NHTSA costs ' related to administering and enforcing the AALA

FY 1993 FY 1994 FY 1995

Item {Oct. 92-Sept 93) (Oct. 93-Sept 94) (Oct. 94-Sept. 95)
Enforcement activities (?) (?) $40,000
Rulemaking for AALA $91,725 $136,713 $91,900
Total $91,725 $136,713 $131,900

"These primarily include salary, overhead, and benefits.
2 Not applicable.

Source: Compiled by the staff of the U.S. International Trade Commission from data provided by

the Federal Trade Commission.

domestically produced.'® In Alto Products Inc. v. Tri Component Corp.(1994 WL 689418
(S.D.N.Y., Dec. 8, 1994)), a U.S. manufacturer of brake shoes sued a competitor who

allegedly neglected to mark its products with the country of origin, which was Israel.

Pending litigation in Massachusetts specifically involves the “Made in USA” debate. In a
complaint filed in November 1995,’ Dynacraft Industries, Inc., which sells bicycles at
wholesale to mass merchandisers and discount retailers throughout the United States,'®
alleges that three of its competitors, Huffy Bicycle Corp., Murray Ohio Manufacturing Co.,
and Roadmaster Corp., have falsely represented the origin of their bicycles that have been
advertised, promoted, and sold in the U.S. market and therefore violated section 43(a) of the
Lanham Act, 15 U.S.C. 1125 (a)(1)(B).’® Dynacraft alleges that while certain components
of the bicycles sold by the three defendants may be made in the United States, significant
components are produced abroad. The complaint notes the FTC standard that requires a
manufacturer can only make an unqualified “Made in USA” claim if the product is

composed wholly of domestic parts.’  Dynacraft is asking for damage liability of

$100 million.

' Tn this case, the plaintiff also argued the defendant falsely certified that its product

satisfied the Buy American Act.

14 Dynacraft Industries, Inc., v. Huffy Bicycle Company, A Division of Huffy
Corporation, the Murray Ohio Manufacturing Company, and Roadmaster Corporation, Civil

Action No. 95-12532 (D.C. Mass. 1995).

+65 Dynacraft has been in the bicycle business since 1984. The majority of Dynacraft’s
bicycles are produced in China and imported into the United States by Dynacraft. They are sold
under the trademark MAGNA. Dynacraft sells principally from its Ashland, Massachusetts

location.

166 Dynacraft also brought action against the three defendants under Massachusetts law,

Mass. Gen. L. Ch. 93A Section 1 et seq.
‘7 Complaint at 6.

3-35



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F-23


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panuyuog— 1-4 1921

F-4


requirement”or generally limit marking to goods for retail sale,*° using a CTC approach may
not generate the concem in other countries that has been expressed by U.S. industry
representatives in the course of this investigation.

The NAFTA rules of origin generally provide for which articles “originate” in North
America, and therefore qualify for NAFTA preferences. NAFTA origin articles are those
where the article (1) is wholly obtained or produced entirely in North America; (2) is made
exclusively from North American inputs or material; or (3) incorporates imported parts,
components, or materials (i.., inputs that are not made in North America) that undergo a
specified change in tariff classification."' The specific CTC rules are set forth in Annex 401
of the Agreement.” The NAFTA rules of origin are used to determine only whether North
American trade qualifies for preferential NAFTA treatment.

In addition to the NAFTA rules of origin, NAFTA requires the parties to establish so-called
“Marking Rules” for determining whether a good is a product of Canada, Mexico, or the
United States. Marking Rules were established because goods that qualify for NAFTA
treatment under chapter 4 of NAFTA must be deemed to come from either Canada, Mexico,
or the United States because of differences in the preferential tariff rates for NAFTA goods
in trade between the parties.** In January 1994, Customs implemented the NAFTA Marking
Rules, which also rely on a CTC approach,”* as interim regulations set forth at 19 CFR 102.
On June 6, 1996, Customs published in the Federal Register its final NAFTA Marking
Rules, which will become effective on August 22, 1996. The hundreds of CTC-based

2° Certain U.S. industry representatives have recommended that the universal marking
requirement of section 304 of the Tariff Act of 1930 be repealed. See, for example, statement of
James B. Clawson, executive vice president and treasurer, International Business-Government
Counsellors, Inc., transcript of hearing, p. 85, and Marti Morfitt, vice president, Green Giant
Brands, The Pillsbury Co., transcript of hearing, pp. 230-231.

*° Certain U.S. industry representatives have recommended that section 304 of the Tariff
Act be amended only to require marking of imported goods for retail sale (also noting
impracticalities for some industries that may warrant exemption). See, for example, statements of
Evelyn Suarez, chairperson, rules of origin committee, Joint Industry Group, transcript of hearing,
p. 73; John Ryan, chairman, customs committee, National Council on International Trade
Development, transcript of hearing, p. 84; David Rose, director of import/export affairs, Intel
Corp., on behalf of the Semiconductor Industry Association, transcript of hearing, pp. 136-137 and
139. In contrast, suppliers of certain industrial consumers that face liability concerns emphasized
the need to strengthen and enforce special marking provisions, see statement of Jeffrey Levin,
Harris & Ellsworth, on behalf of the Committee of Domestic Steel Wire Rope and Specialty Cable
Manufacturers, transcript of hearing, pp. 106-107 and 120-121, and Squire, Sanders & Dempsey,
on behalf of the United States Cutting Tool Institute, written submission to the USITC, Apr. 25,
1996, p.5

3! NAFTA Article 401. See also 19 CFR 102.11(a) and general note 12(b) of the
Harmonized Tariff Schedule of the United States (HTS).

32 The NAFTA CTC rules of origin also are set forth in general note 12(t) of the HTS.

>» The “Marking Rules” are used for Annex 311, Country of Origin Marking; Annex 300-
B, Textiles and Apparel Goods; and Annex 302.2, Tariff Elimination.

Article 311 and Annex 311 of the NAFTA.

3559 F.R. 110, Jan. 3, 1994, and 60 F.R. 22312, May 5, 1995.

366] F.R. 28932-28980, June 6, 1996.

2-8


section 134.46, especially when there is little likelihood of consumer deception.”*
Moreover, while the Customs Service has proposed to amend section 134.46 by requiring
proximity only when a reference to a place other than the country of origin “may mislead or
deceive the ultimate purchaser as to the actual country of origin of the article,” the FDRA
contends that the proposal, if implemented, would not apply to footwear.“ The proposed
amendment had not been adopted as of July 10, 1996.

Recent litigation by New Balance Shoe Company and Hyde Athletic Industries Inc.
concerning FTC standards on country-of-origin marking has led the FTC to examine its rules
and regulations on such marking issues.”* Hyde Athletic Industries is negotiating a consent
agreement with the FTC.”° New Balance contends that the FTC should relax its rules
concerning which footwear products may carry the “Made in USA” label in view of the
globalization of shoe production and, in many cases, the absence of domestic production of
certain shoe parts.” The case against New Balance was withdrawn from adjudication on
May 14, 1996, for FTC Commission consideration of a settlement proposal.

Compliance Concerns

Four of the five footwear firms contacted by USITC staff in connection with this
investigation expressed concem over FTC standard governing the use of “Made in USA”
labeling on goods that are manufactured in the United States with foreign materials.”* They
claimed that, in a global economy and with a shrinking supplier base in the United States,
the FTC wholly domestic standard (frequently referred to as “all or virtually all”) is simply
not a commercial reality. U.S. footwear firms must import components that either are not
made in the United States or are not cost effective to source domestically. FDRA
recommended that footwear firms be allowed to use the “Made in USA” label when all of
the labor to manufacture the component parts and to assemble the footwear occurs in the
United States. According to FDRA, the fact that some or all of the materials are of foreign
origin should have no significance. Thus, footwear made in the United States from imported
leather should be eligible for a “Made in USA” label. However, FDRA’s recommendation

223 Footwear Distributors and Retailers of America, written submission to to the USITC,
Apr. 18, 1996, pp. 1-3.

24 60 F.R. 57559, Nov. 16, 1995.

25The FTC has charged the New Balance Shoe Co. with false advertising for claiming its
products are made in the United States. New Balance, which has appealed the decision, claims
that the majority of its shoes are assembled in the United States with U.S. materials. Some parts
are not available domestically and, thus, must be imported.

236 Hyde Athletic Industries, which produces about 80 percent of its shoes in the United
States, is negotiating the terms of a consent agreement with the FTC, according to David Wolf of
Wolf, Greenfield & Sacks, PC., counsel for Hyde Athletic Industries, telephone interview with
USITC staff, May 14, 1996.

27 James Davis, chairman and chief executive officer, New Balance Shoe Co., telephone
interview with USITC staff, May 1, 1996.

28 FDRA and the law firm of Sonnenburg & Anderson also expressed similar concerns in
written submissions to the USITC. In addition, FDRA, Footwear Industries of America, and the
Rubber and Plastic Footwear Manufacturers Association submitted written statements to the FTC
calling for an overhaul of the FTC standards to make them more practical, equitable, and
objective.

6-63


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F-6


Section 304 also provides for certain
exceptions to the marking requirement and
authorizes the Secretary of Treasury to
exempt imported goods from the marking
requirements under certain specific
circumstances.”” However, whenever an
article is excepted from the marking
requirements, the immediate container still
must be marked with the article's country of
origin. If an imported article that is marked
with the country of origin is packaged when
it is sold to the ultimate purchaser in the
United States, then the package, too, must
be marked with the country of origin of the
contents. If an imported article is exempt
from the marking requirements, but the
article is not in a container when it reaches
the ultimate purchaser (e.g., some bulk
articles such as agricultural commodities),
the article and its container are effectively
exempt from the requirements of the
marking statute. Section 304 provides that
containers are not required to be marked for
certain excepted articles--those imported for
use by the importer, section 304(a)(3)(F);
those to be processed by the importer,
section 304(a)(3)(G); and articles where the
ultimate purchaser must necessarily know
the country of origin, section 304(a)(3)(H).
However, articles excepted in section
304(a)(3)(G) must be marked if the marking
will not obliterated, destroyed, or
permanently concealed by the processing.”*

In addition, section 304 contains specific
marking requirements for certain articles.
For example, it has provided that pipes and
fittings, compressed gas cylinders, and
manhole rings may not be excepted from the

Exceptions in section 304(a)G)
(A) such atticle is capable of being marked,
‘(B) such article cannot be marked prior to shipment to
‘the United States without injury,
(©) such article cannot be marked prior to shipment to
‘the United States, except at an expense economically
‘prohibitive of its importation;
(D) the marking of a container of such asticle will
‘reasonably indicate the origin of such article;
(@) such article is a crude substance:
(QF) such article is imported for use by the importer and
‘not intended for sale in its imported or any other form;
(G) such article is to be processed in the United States
‘by the importer or for his account otherwise than for
the purpose of concealing the origin of such article and
‘in such manner that any mark contemplated by this.
‘section would necessarily be obliterated, destroyed, or.
‘permanently concealed;
‘(an ultimate purchaser, by reason of the character of
such article or by reason ofthe circumstances ofits
‘must ‘know the country of
‘origin of such article even though it is not marked to
indicate its origin:
‘@) such article was produced more than twenty years
‘prior to its i ‘into the United States;
‘(dy such article is ofa class or kind with respect to
‘which the Secretary of the Treasury has given notice by
lication in the weekly Treasury Decisions within
‘two years after July 1, 1937, that articles of such class
‘or kind were imported in substantial quantities during
‘the five-year period immediately preceding January 1,
1937, and were not required during such period to be
marked to indicate their origin: Provided, That this.
subdivision shall not apply after September 1, 1938, to
‘sawed lumber and timbers, telephone, trolley, electric-
Tight, and telegraph poles of wood, and bundles of
‘shingles, but the President is authorized to suspend the
effectiveness of this provision if he finds such action.
‘Tequired to carry out any trade agreement entered into
‘under the authority of sections 1351, 1352, 1393, 1354
‘of this title, as extended; or
-(K) such article cannot be marked after importation
‘except al an expense which is economically.
‘prohibitive, and the failure to mark the article before
‘importation was not due to any purpose of the importer,
‘producer, seller, or shipper to avoid compliance with
‘this section.

marking requirements.” The marking statute also specifies the method by which such
articles must be marked (e.g., die stamping, etching) and, in the case of manhole rings, it
specifies that the mark be on top of the surface.

For NAFTA goods, section 304 refers to rules-of-origin set forth at 19 CFR 102, known as
NAFTA Marking Rules, which rely on a change in tariff classification (see discussion on

7” Section 304(a)(3) of the Tariff Act of 1930 (19 U.S.C. 1304(a)(3)).

8 19 CFR 134.36.

” Section 304(c) of the Tariff Act of 1930 (19 U.S.C. 1304(c)), as added by section
207(2) of the Trade and Tariff Act of 1984 (Public Law 98-573, 98 Stat. 2976).

3-8


When country of origin is considered among other purchasing factors, 40 percent of
respondents in the 1988 Chain Store Age study said that clothing was the product area most
scrutinized for country of origin (often as an indicator of quality), followed by electronics
(12.8 percent), automobiles (9.6 percent), and home furnishings (3.8 percent). However,
22.1 percent of respondents in this survey did not answer this question.*°

The Danaher study asks a similar question. Respondents were asked to rate products on a
scale of 1 to 10, where 10 means country of origin is very important, and one signifies it is
not important. Seventy percent of those surveyed rated hand tools with a “10,” 60 percent
gave cars a “10” rating, 49 percent gave clothing a “10,” and 32 percent rated home
electronics (TVS and stereos) a “10” as well.*© However, when consumers were asked later
for the main reason for buying the brands of hand tools they currently owned, warranty was
mentioned most frequently (44 percent). That factor was followed by high-quality materials
(19 percent), low price/affordable (16 percent), convenience of stores. (16 percent),
strength/durability (11 percent); “Made in USA” labeling was mentioned by only 1 percent
of respondents when asked this question.

Products most consistently identified in all consumer surveys as being scrutinized for
country-of-origin marking are automobiles, clothing, and electronics. Some surveys suggest
that origin may be less important to consumers for products such as shoes, furniture, food,
and toys.

35 Chain Store Age, pp. 13-14.
> Respondents could respond to more than | product.

5-15


marked, exported, or destroyed under Customs supervision. The importer must reimburse
the Government for the cost of supervising the exportation, destruction, or marking of such
articles or their containers. After 30 days, if merchandise that was not legally marked has
not since been marked, destroyed, or exported, Customs will send it to a Customs warehouse.

If, within 30 days of the date of the marking violation notice, the importer fails to redeliver
the improperly marked merchandise to Customs custody or to certify that the merchandise
has been properly marked and is available for Customs inspection, Customs will demand the
payment of “liquidated damages,” or penalties. These penalties will be assessed in the
amount equal to the entered value of the goods not properly marked or redelivered and in
accordance with bond® posted by the importer, plus any estimated duty due at the time of
entry.

Frequently, merchandise will be released from Customs custody fairly quickly and may go
into distribution channels and appear on store shelves, although the process of liquidation®!
of the entry may continue, taking several weeks or months. Once the penalties have been
assessed, the importer may request administrative review and mitigation of the liquidated
damages through Customs administrative review procedures set forth at 19 CFR 172.

Customs may also assess additional duties of 10 percent ad valorem.® This duty is assessed
if the merchandise was not legally marked at the time of importation and the merchandise
was not subsequently exported, destroyed, or marked under Customs supervision prior to
liquidation. Once duties have been assessed, the importer may request an administrative
review (i.e., protest), of the assessment under Customs procedures set forth at 19 CFR 174
assessable for failure to include words or symbols that are required to prevent deception or
mistake.

© Customs generally requires that importers post a bond, which is a contract between
Customs and the importer whereby the importer agrees to pay any and all duties, taxes, charges,
and to make or complete the entry of if the goods are released before liquidation. 19 CFR 113.62.

S' Liquidation is the “final computation or ascertainment of the duties or drawback
accruing on an entry.” 19 CFR 159.1.

® Section 304(f) of the Tariff Act of 1930 (19 U.S.C. 1304(f)).

® U.S. Customs ruling HQ 731775, Nov. 13, 1988.

19 CFR 134.2.

3-13


SIONAL
nN q Po

CHAIRMAN

UNITED STATES INTERNATIONAL TRADE COMMISSION

WASHINGTON, D.C. 20436

February 14, 1996

Name

Title
Company/agency
Street

Room

City, state, zip

Dear [Name]:

On January 11, 1996, the U.S. International Trade Commission received a
request from the Committee on Ways and Means, U.S. House of Representatives
to conduct an investigation into issues applicable to country of origin markings of
imported and domestic merchandise. This investigation is now underway. The
Committee requested that the Commission review the laws, regulations, and
practices of U.S. country of origin marking requirements and evaluate the
problems which such markings create for industry, and the benefits of these rules
to consumers. The Committee also asked that the Commission seek information
on the costs to government and industry of enforcement and compliance with
marking requirements.

As part of the investigation, the Commission will be holding a public hearing
on April 10, 1996, beginning at 9:30 a.m. in the Commission’s main hearing room.
Such hearings are invaluable for both the Commission and its staff, providing the
opportunity to identify new issues as well as to explore existing ones in greater
depth. In addition, specific information identifying costs and/or benefits of
country of origin marking requirements would be most helpful to the Commission
in fullfiling the Committee’s request. Because of your interest in country of origin
marking requirements, I would welcome your views, either at the hearing or ina
written submission.

D-4


Pharmaceuticals

The pharmaceuticals industry is
comprised of companies that
produce therapeutic products,
including antibiotics, hormones,
therapeutic substances, botanical
products, in vivo and in vitro
diagnostic substances, and other
similar substances, that are used in
the treatment of human and
veterinary diseases. Many of the
companies involved in the
production of these substances are
large multinational companies.
Most of these companies and plants
are located in areas of the world
that maximize cost/benefit
tradeoffs with respect to product
quality, economies of scale, and
overall cost. Other companies are
smaller, local firms that primarily
produce generic drugs or over-the-
counter (OTC) preparations, with
more of a view towards producing
a consumer product using little or
no investment in the development
of new drugs.

Specific Marking
Requirements

The FDA has many requirements
for general and specific labeling of

pharmaceuticals, including one
requirement akin to
country-of-origin marking.

According to 21 CFR 201.1, a
packaged, finished pharmaceutical
must have the name and place of
business of the manufacturer,

Industry Profile
Frade data 1995 (million dollars):

US. shipments .................. 52,000
US. imports 8,655
US. exports oo. 8,091
Apparent U.S. consumption........ 52,564
Import share of apparent U.S.

consumption (percent) .. 16

Source: Compiled by USITC staff based on official
Statistics of the U.S. Department of Commerce.

Trends in Globalization

The U.S. pharmaceuticals industry is highly
globalized, as pharmaceutical companies have

~ taken advantage of economies of scale and

national cost differentials for inputs, such as
labor, land, and operational expenses, while
effectively balancing these considerations with
product quality and other factors. Because of the
global nature of many pharmaceutical companies,
and because of the complexities involved in
formulating active ingredients into finished
products, a finished product may use many
different components that are obtained from a
variety of sources. Active ingredients, excipients,
fillers, diluents, syrup and ointment bases,
flavorings, colorings and the like, may be
obtained from domestic or global sources. In
many instances, a pharmaceutical active
ingredient will be produced to tight quality
control specifications overseas and then shipped
to the United States for formulation into'a dosage-
form finished product.

packer, or distributor. The FDA defines a manufacturer as one who performs mixing,
granulating, milling, molding, lyophilizing, tableting, encapsulating, coating, or sterilizing,
as well as filling dispensing containers with aerosol or gas drugs. The place of business of
the manufacturer, with address or zip code must be included. Additionally, if the

6-20


NAFTA in chapter 2). On June 6, 1996, Customs announced that rules of origin in part 102
will become final rules, effective August 5, 1996.°° With respect to NAFTA goods, section
304 also contains several “exemptions” from marking requirements and sets forth petition
tights of NAFTA exporters and products regarding marking decisions by Customs. NAFTA
goods exempted from marking include original works of art, ceramic tiles classified under
Harmonized System (HS) subheading 6904.10, and semiconductor devices and integrated
circuits classified under HS headings 8541 and 8542. In addition, marking of containers for
these articles is also exempted, as are containers of crude substances,” if from a NAFTA

party.

Section 304 also provides for methods of enforcing country-of-origin marking. A 10 percent
ad valorem duty shall be levied on any article or its container that is not legally marked at
the time of importation unless exported, destroyed, or marked under customs supervision
after importation in accordance with the requirements of the marking statute.*® The importer
must reimburse the Government for the cost of supervising the exportation, destruction, or
marking of such articles or their containers. The additional duty also is assessable for failure
to include words or symbols that are required to prevent deception or mistake. Section 304
also provides that delivery of imported articles not legally marked shall be withheld until
such articles are correctly marked in accordance with the requirements of section 304, or
until the 10 percent ad valorem duty has been deposited. Penalties are provided in section
304 for any person who removes, alters, or covers the country of origin mark with the intent
to conceal. For a first offense, the penalty is a maximum fine of $100,000 and/or
imprisonment for a year and for subsequent offenses, a maximum fine of $250,000 and/or
a year in prison.

Regulations

Customs regulations governing marking under section 304, as well as certain marking
provisions of the Harmonized Tariff Schedule of the United States (19 U.S.C. 1202) are set
forth in the Customs regulations at 19 CFR 134. These regulations specify the language used
to identify the country of origin, methods of marking, location, and words or symbols to
prevent deception or mistake as to origin. Aside from general methods of marking, certain
methods are required for watch and clock movements and parts,** certain other manufactured
products,” and imported Native-American style jewelry, arts, and crafts.**

%°61 F.R. 28932-28980, June 6, 1996.

3119 U.S.C. 1304 uses the term exception, however, 1304(h) uses the term exemption.

219 U.S.C. 1304(h)(C).

3 Section 304(f of the Tariff Act of 1930 (19 U.S.C. 1304(f)).

34 Ibid. See also 19 CFR 134.2.

3519 CFR 11.13(c). Customs regulations at 19 CFR 11.13 set forth the consequences and
procedures to be followed when articles are falsely marked.

36 This includes watch movements, clock movements, watch cases, and clock cases, as
specified in Chapter 91, Additional U.S. Note 4, Harmonized Tariff Schedule of the United States
(19 U.S.C. 1202), and 19 CFR 134.43(b)..

3” These include knives, clippers, shears, safety razors, surgical instruments, scientific and
laboratory instruments, pliers, pincers, vacuum containers, and other articles. 19 CFR 134.43(a).

38 Section 1907, Omnibus Trade and Competitiveness Act of 1988 (Public Law 100-418,
Aug. 23, 1988; 102 Stat. 1107, 1315).

3-9


APPENDIX F
Positions of Interested Parties
(Summarized from Transcript of
Hearing, and from Prehearing and
Posthearing Written Submissions)

F-l


APPENDIX E
Survey Worksheet

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F-2


Legislation

Action'and product coverage

(Sponsor) Title ‘Bill status

S. 1502 To amend the Tariff Act of 1930 to To exempt spice products, Referred to Senate
(Sen. Kay provide that the requirements coffee, or tea (and their Committee on Finance,
Bailey relating to marking imported containers) from marking. Dec. 22, 1995.
Hutchison, articles and containers not apply to

Sen. John spice products, coffee, or tea.

Breaux)

S. 1468 Peanut Program Improvement Act. To require that (1) peanut Referred to Senate
(Sen. Howell products be labeled to indicate Committee on

Heflin) the origin of peanuts in the Agriculture, Nutrition,

product and (2) no peanut
product may contain both
imported and domestically
produced peanuts.

and Forestry, Dec. 12,
1995.

jource: Compiled by the staff of the U.S. International Trade Commission.



Table 4-3

Types of costs companies incur in complying with U.S. country-of-origin marking requirements: U.S.
companies’ identification of costs by major types of costs’ and by industry sectors

Sector
Metals &
metal
Types of costs Agriculture | Chemicals | products Machinery Electronics Textiles Overall
Percent of responses
Physical marking costs 35 30 26 30 38 27 32
Administrative costs of
complying with regulatory 30 40 12 20 24 29 24
agencies
Warehousing,
accounting, and tracking 15 20 14 20 18 22 16
costs for foreign
components
Added production costs
required for multiple 8 10 18 20 12 15 12
production lines or
marking lines
Added marketing or 6 0 8 0 0 5 5
advertising costs
Other 6 ie) 22 10 8 2 10
‘Number of responses.
: 14 10 73 10 50 a 298
“Some companies provided multiple responses. Not all companies who identified types of costs were able

to characterize the level of costs.

2 See footnote 1 in table 4-2 for description of sector products.

3 Within the “other” category, domestic producers, including manufacturers of metals and metal products
and electronics, stated that marking requirements result in added internal compliance procedures, specialized
tooling and design work, increased manufacturing cycle time, inability to place more useful information on the
product or packaging, occasional product damage, delays in inventory turnover, and increased personnel costs.

Source: Compiled from telephone surveys conducted by Commission staff.

costs and other costs that might be incurred based on anticipated marking regulations and
marking-related rulemaking changes.** Such additional annual operating costs range from

(continued)

annual 8 or example, one company that currently does not have to mark its products estimated
its country-of-origin marking start-up costs at between 1 and 2 percent ($2 million to $4 million)
of net sales; another domestic producer estimated it would incur $3 million to $13 million initially
to start-up its packaging line (thereafter incurring $7.5 million in annual operating costs,
equivalent to about 0.6 percent of net sales).

4-10


Regulatory Administering a
‘Statute Statutory cite cite agency. Coverage
Control of foreign assets through import prohibition
Foreign Assets Control 50 U.S.C. 31 CFR U.S. To prohibit entry of
Act" App. 1-44 500.204 and Department of products of North
500.412 the Treasury Korea. This
and Customs prohibition includes
products of this
country that are
processed in other
countries and marked
as originating in the
latter.
Marking for health and safety purposes
Egg Products Inspection 21 U.S.C. 7 CFR 59.905, U.S. Imported eggs or egg
Act 1031-1056 940, 950, .955 Department of products
Agriculture
(USDA)
Food Safety and Inspection | 21 U.S.C. 9 CFR 327.14, USDA Containers of imported
Service (Meat and Poultry), | 601-695 327.15, meat and poultry
USDA 381.205 and products
381.206
Agricultural Marketing 7US.C. 7 CFR 54.5 USDA Requirement by USDA
Service, USDA 1621-1627 to provide USDA meat
inspection service on
retail cuts of meat
Federal Alcohol 27 U.S.C. 205(e) | 27 CFR 4.35a Bureau of Geographical location
Administration Act’ and 27 U.S.C. and 4.38 Alcohol, where wine was
205(f) Tobacco, and bottled or packed
Firearms (ATF)
Federal Alcohol 27 U.S.C. 205(e) | 27 CFR7 ATF Importer address or
Administration Act’ and 27 U.S.C. production site
205(f) required on malt
beverages; deception
26 U.S.C. 5412 regarding geographic
names
Federal Alcohol 27 U.S.C. 205(e) | 27 CFR 5.36 ATF Domestic and
Administration Act! and 27 U.S.C. and 19.650 imported distilled
205(f) spirits—-bottling
location; country or
26 U.S.C. 5201 origin of imported
26 U.S.C. 7805 distilled spirts
Radio Act of 1927, as 47 U.S. C. 154, 47 CFR 68.300 | Federal Telecommunications
amended’ 155, and 303 Communica- equipment defined in
tions 47 CFR 68.2
Commission
Table continued on next page. 3-3



inventory and be in compliance with country-of-origin marking rules on their products. Intel
reports that one customer wanted country-of-origin marking in order to properly handle its
own transnational shipments of inventory.

Another semiconductor manufacturer also reported that some customers desire marking in
order to be able to separate out commingled parts that are reexported, typically going to
overseas facilities of the customer company. In its submission, Micron Technology, Inc.,
stated that its customers "...frequently need to know the origin of the semiconductors they
buy for purposes of declaring the origin of semiconductors exported to third countries.
Without clear markings, purchasers will have a very difficult time determining country of
origin for third country customs' certification purposes. This could create a real hardship for
Micron's customers."®> Other semiconductor manufacturers stated that marking is important
to customers and that customers, including retail end customers of products containing
semiconductors, have a right to know the country of origin.

Although some electronics manufacturers reported that customers care where products come
from, preferring products with U.S. or European origin, the majority stated that industrial
customers do not have an intrinsic interest in country-of-origin or "Made in USA" marking.
Industrial and multinational customers care about origin only to satisfy government
regulations. Such regulations include the American Automobile Labeling Act, Buy-America
laws, and NAFTA tariff rules.

In general, the firms responding to the survey stated that origin may be important but other
factors, such as price, quality, and performance, appear to be more important. One consumer
electronics firm reported that Wal-Mart, a major retailing chain, is very sensitive to the
country of origin and would like to be able to sell "Made in USA" products. Sensitivity
among other retailers is lower. Customers tend to focus first and foremost on brand rather
and make purchase decisions based on criteria other than origin. Within the United States
or Canada, the country of origin reportedly is not of particular importance. Value is placed
on brand name and the quality represented by the brand. For other countries, particularly
those in Asia and the Middle East, the country of origin is considered important because
some countries ban importation of products and components from certain other countries.

Customers will steer away from products made in certain "problem" countries, but, in
general, buyers are said to be becoming less concerned with origin. A maker of blank tape
reported that the feeling among its customers is that products made in the United States or
Japan are of high quality, while products from other countries are not. If the "Made in USA"
label could be used with a majority U.S.-content product, there might be some effect on
consumer choice; however, buyers have become more price-conscious and less concerned
with country of origin.

35 Hale and Dorr, on behalf of Micron Technology, Inc., written submission to the
USITC, Apr. 25, 1996, p. 4.

6-11


Markings Provide Information For Educated Purchasing Decisions

Many groups claim that without clear, precise country-of-origin marking, consumers would
be at a disadvantage because they would be unable to make informed choices. Moral and
nationalistic reasons influence some consumers in their decisions to purchase products from
one country or another. Industry representatives and consumer groups report that consumers
sometimes base their purchase decision partly or wholly on country of origin, depending on
perceptions of the country’s international standing. Some consumers clearly decline to
purchase foreign-made goods; others accept certain countries’ offerings while rejecting
others. Basically, purchasing decisions may correspond to noneconomic values, such as
patriotism, human rights, and environmental preservation.’

Consumers may prefer to buy U.S. products on nationalistic grounds, for example, under the
assumption that buying U.S.-made products helps support the U.S. labor force and in tum,
helps the U.S. economy by keeping money and jobs at home. This argument is widely cited
by unions’ and also by the Made in USA Foundation.’* In a study of hand tool purchasers
conducted for the Danaher Corporation, supporting the U.S. economy and labor force was
the main reason cited for purchasing U.S.-made hand tools (41 percent of respondents),
followed by the belief that U.S.-made tools are better made in terms of materials (25
percent), and strength/durability (16 percent). Vaughan & Bushnell Manufacturing
Company, a hand tools producer, cites the Danaher study in maintaining that country-of-
origin markings play a critical role in hand tool purchasing decisions, because the markings
enable consumers to identify imported products that are considered of lower quality.'? The
company notes that the use of flags or other images that symbolize the United States are
potentially misleading to consumers, who might associate domestic brand names and
American symbolism with domestic manufacturing. Vaughan & Bushnell contend that
benefits of country-of-origin markings far outweigh the minimal costs to consumers and
industry.”°

Consumers reportedly may reject products from countries that are perceived to harbor values
that are contrary to their beliefs. For example, some consumers may choose to boycott
products from countries that host companies that are believed to use child or prison labor,
pay employees unfairly low wages, or permit unsafe working conditions. A study conducted
in November 1995 by Marymount University’s Center for Ethical Concerns and the
University’s Department of Fashion Design and Merchandising, showed that consumers
would avoid stores that sell goods known to be made in “sweatshops” and be more inclined
to shop at stores working actively to prevent garment worker abuses. A majority of

16 For more information, see written submissions to the USITC by Squire, Sanders and
Dempsey on behalf of the United States Cutting Tool Institute, Apr. 25, 1996, pp. 3-4; Hugh
Rushing, executive vice president, Cookware Manufacturers Association, Apr. 29, 1996, p. 1; and
Harris & Ellsworth on behalf of the Committee of Domestic Steel Wire Rope and Specialty Cable
Manufacturers, Apr. 25, 1996, p. 2.

1” Charles Mercer, secretary-treasurer, AFL-CIO Union Label and Services Department,
transcript of hearing, pp. 27-33.

18 Joel D. Joseph, chairman, Made in the USA Foundation, transcript of hearing,
pp. 19-26.

1? Mayer, Brown & Platt, on behalf of Vaughan & Bushnell Manufacturing Co., written
submission to the USITC, Apr. 25, 1996, pp. 7-8.

Ibid.

5-11


encapsulation, results in a substantial transformation of the chips.'? Nearly every country
in the world uses the same standards for determining origin with the exception of the EU and
Japan. In 1989, the EU, then the European Community, changed its rule of origin on
semiconductors to make diffusiori--the process of etching the circuits onto the wafer--the
criterion for determining origin’? Japanese regulations governing country-of-origin'*
determinations are based on whether or not the goods were wholly produced in a country or
have undergone substantial transformation. Substantial transformation is further defined as
having taken place if the product has changed classification from one four-digit HS heading
to another. Given this requirement, the tariff nomenclature dictates that substantial
transformation in Japan, as in the EU, is based on the process of diffusion, not assembly.'*

H.R. 947, currently before Congress, would exempt semiconductors and their containers
from country-of-origin marking requirements.'® The supporters of the bill claim that
marking requirements add significantly to product cost and that the small size of
semiconductors makes marking difficult. In addition, because U.S., Japanese, and EU
marking requirements conflict and create difficulties for manufacturers selling the same
product into more than one market, U.S. semiconductors rules allegedly disadvantage U.S.
producers. Semiconductors marked according to U.S. rules are not in compliance with
Japanese or EU laws, and semiconductors that are marked in accordance with Japanese or
EU mules or that are unmarked are not in compliance with U.S. laws if imported here.

Country-of-origin marking is required to be conspicuous, and Customs considers this to
mean that one must be able to find the marking easily and be able to read it without strain.
Customs has consistently ruled that markings on individual semiconductors must be
sufficiently large, must spell out country names, and must be in an obvious place on the
chip.'’ In the case of semiconductor containers, this is usually not a problem. However,
firms have stated that semiconductor devices are so small that individual marking is a
hardship.

Because semiconductors are a commodity item and may be shipped from many countries to
central processing facilities and then exported to their final destinations, country of origin
for a particular device is difficult, if not impossible, to determine. Customs has ruled that
when semiconductors made in a number of foreign countries are commingled for a bona fide
reason and then repackaged for sale to the ultimate purchaser, marking requirements are met
if the containers are legibly and conspicuously marked to indicate that the devices were made

12 U.S. Customs Service Decision 80-227, Feb. 13, 1980.

® “Commission Regulation (EEC) No. 288/89 of 3 February 1989 on Determining the
Origin of Integrated Circuits,” Official Journal of the European Communities, No. L 33 (Feb. 10,
1989), p. 23.

TM General Circular 68-3-4.

15 Vermulst, Edwin, Paul Waer, and Jacques Bourgeois, eds., Rules of Origin in
International Trade (Ann Arbor: The University of Michigan Press, 1994), pp. 305-306.

‘6 HR. 947 was introduced by Rep. Archer on Feb. 15, 1995 and referred to the
Subcommittee on Trade of the Committee on Ways and Means on Feb. 21, 1995.

17U,S. Customs rulings HQ 734443 June 3, 1992, and HQ 734191, Aug. 8, 1991.

6-4


COUNTRY OF ORIGIN MARKINGS
WORKSHEET

Analyst_ Trade Monitoring Group #
Company.
Main Products
Contact Name and Title

Contact Phone C__)

For Interviewing DOMESTIC AND FOREIGN PRODUCERS, AND IMPORTERS—

1) Does your company have concems or problems about U.S. or foreign country of origin marking

requirements?
United States Foreign
— yes _yes
__ no __nlo

2) How important are U.S. or foreign country of origin markings to your customers (i.e., are your
customers’ purchasing preferences influenced by the country of origin of the good)?
__ very important
___ somewhat important
__ not important

If very or somewhat important, is there any evidence that customers will shift purchases to
products marked with a particular country of origin?

Tf not important, then why not?


to 1,000 entry level engineering jobs in the industry.” At the Commission’s public hearing,
the SIA stated that "...the compliance burden takes a toll in the form of added internal
procedures, specialized tooling and design work, increased manufacturing and cycle time,
inability to place more useful information on semiconductors, given their limited size, delays
in inventory movement, having to deal with foreign country regulations and really the human
resource allocation that is apportioned across all of the foregoing."* A significant cost for
electronics producers in general, and semiconductors manufacturers in particular, is the
inability to best use the limited space available. This issue was also mentioned by the Joint
Industry Group testifying at the Commission hearing.” Another respondent added that it is
required by Customs to check with distributors every 2 years to assure that container
markings are "passed on" through the distribution channel.

Three firms making capacitors and electrical connectors reported that the costs of marking
are not significant because other information is marked on the products anyway. The largest
cost is maintaining tracking systems with information on country of origin. However,
because tracking is done for other inventory and quality-control purposes, there is little
additional cost associated with either marking or compliance with NAFTA or the American
Automobile Labeling Act tracking requirements. A fourth company indicated that it had
incurred substantial marking expenses including retooling costs for molds or dies that
include "Made in USA" labeling as well as administrative costs. The company stated that
it does research and development and initial production runs in the United States before
transferring production lines to overseas plants. To accommodate new marking, the firm
reports it is often necessary to retool at a cost of as much as $100,000 for a single mold or
die. In 1995, retooling for such instances occurred three times, for an estimated cost of
$300,000.%° This company also noted that to meet NAFTA country-of-origin requirements,
its compliance group spent thousands of hours to ensure conformance.

Xerox Corp., a manufacturer of office equipment, stated that there are essentially no foreign
marking rules for most of the parts and components it ships worldwide used for repair and
servicing. The greater portion of its marking expense is incurred upon importation into the
United States for manufacture. In its submission, Xerox Corp. stated that it had to segregate
and mark differently otherwise fungible components based on their intended use in the
United States (¢.g., for equipment manufacture or as replacement parts). The primary types
of costs incurred are (1) packaging and repackaging; (2) labeling; (3) costs to segregate parts
and accessories; (4) tracking parts and packaging; (5) employee costs to perform marking
compliance functions; and (6) staff training costs.

2” Semiconductor Industry Association, written submission to the USITC, Apr. 25, 1996,
p. 5. Intel Corp., alone, claims to spend $4 million per year marking its products. Statement of
David Rose, director of import/export affairs, government affairs, Intel Corp., on behalf of the
Semiconductor Association, transcript of hearing, p. 136. This cost represents 0.02 percent of
Intel’s annual net revenues in 1995 of $16.2 billion (annual 10-K report).

28 Statement of David Rose, director of import/export affairs, government affairs, Intel
Corp., on behalf of the Semiconductor Association, transcript of hearing, p. 135.

?° Statement of Evelyn Suarez, chairperson of the Rules of Origin Committee, Joint
Industry Group, transcript hearing, p. 73.

>° Telephone discussion with company official, June 20, 1996.

3! Neville, Peterson & Williams and International Business-Government Counsellors,
Inc., on behalf of Xerox Corp., written submission to the USITC, Mar. 27, 1996, p. 19.

6-9


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F-8


several California-based frozen food companies'” requested that the existing practice of
marking frozen produce with country-of-origin information on the rear panel of packages
be rescinded, and to require that such markings be placed on the front panel of packages.
Customs ruled in a letter, HQ 731830, November 21, 1988, that country-of-origin markings
of certain packages of frozen produce that appeared on the backside of the packaging next
to the nutritional information were legally marked under section 304. In 1989, Norcal
appealed, and the U.S. Court of International Trade (CIT) held that HQ 731830 was
incorrectly decided and directed Customs to issue a decision requiring front panel
country-of-origin marking.'* Customs successfully appealed to the U.S. Court of Appeals
for the Federal Circuit and the CIT opinion was vacated.’

In January 1993, Norcal/Crosetti Food, Inc., and Patterson Frozen Foods, Inc., petitioned
Customs under section 516 of the Tariff Act of 1930 (19 U.S.C. 1516 and Part 175, Customs
Regulations (19 CFR Part 175)), seeking a ruling that imported frozen produce was not
marked in accordance with the requirement of section 304.

In December 1993, Customs ruled that packages of frozen vegetables must show the
country-of-origin marking on the front side of the package to be considered as marked
conspicuously. In addition, Customs specified the type style, size, color, and other
requirements relating to labeling. In June 1994, the CIT invalidated the Customs ruling'*
on the grounds that Customs did not follow proper rule making procedures. In 1995,
Customs announced! that it had begun a new rule making process, holding the section 516
petition in abeyance until a final rule is made.

In 1993, Customs determined that imported raw or frozen vegetables of different varieties
(broccoli, cauliflower, peas, carrots, etc.), which were cleaned, cut, peeled, frozen, then
combined with different domestic varieties of vegetables, and packaged in the United States
were not substantially transformed in the United States.'”” The individual vegetables were
found to retain their identities after the above mentioned processing and packaging
operation, and therefore, the ultimate purchasers of the imported vegetables are the retail
purchasers of the mixed frozen vegetables. Customs also ruled on whether country-of-origin
marking on the packaging was in a conspicuous place and otherwise satisfied the marking
requirements. Customs determined that-mixed frozen vegetables sold as “American
Mixtures” or “Heartland Style” required country-of-origin marking on the front panel of the

122 Norcal/Crosetti Foods, Inc., Patterson Frozen Foods, Inc., and Richard A. Shaw, Inc.
collectively referred to as “Norcal.” Norcal/Crosetti Foods went out of business in early 1996.

23 Norcal/Crosetti Foods, Inc., v. U.S. Customs Service, 758 F. Supp. 729 (CIT 1991),
Feb. 27, 1991.

124 Rev'd. 963 F.2d 356 (Fed. Cir. 1992), vacated, May 4, 1992.

25 955 F. Supp. 388 (CIT 1994).

26 60 F.R. 6464, Feb. 2, 1995.

7 U.S. Customs ruling HQ 735085, June 4, 1993.

6-33


stages: initial receipt of the vegetable ingredients retrieval of the ingredients, marking of
packages and re-storage of ingredients. The process would need to be organized specifically
to allow retrieval and re-storage of product on the basis of a particular country of origin.'*

Several respondents to the Commission survey noted that U.S. processors who produce for
both the domestic and export markets and use imported and domestic vegetables in their
finished vegetable products may incur higher costs because of differing country-of-origin
marking requirements administered by various U.S. and foreign government agencies.
Finished frozen vegetable packages containing both imported and domestic vegetables
intended for the U.S. market are required to list the country of origin of all imported
vegetables, whereas a frozen vegetable product intended for export would be required to be
labeled as “Made in USA” in some export markets, resulting in higher labeling and inventory
costs.

United Foods stated “that the typical U.S. purchaser of frozen produce prefers not to buy and
consume imported produce, does not know when she is doing so, and would change her
buying patterns if country-of-origin information were brought to her attention.”"“* Another
processor noted that he believes that consumers assume that the product is of U.S. origin if
the label does not state that it is foreign sourced. Other processors surveyed stated that
although consumers may be concerned about the origin of frozen produce they consume,
they are more concerned about the price, quality, and availability of the produce. A survey
conducted by Field Research Corporation’ in February 1995 of California grocery shoppers
found that 54 percent of shoppers’ decisions regarding frozen vegetables purchases were
price-related. The next most important response was the mix of vegetable or ingredients in
the product. Less than 0.5 percent of the respondents mentioned where the vegetables were
grown or processed as a factor. A survey of frozen vegetable shoppers regarding their
attitude towards the country of origin of the frozen vegetables they buy found that about 25
percent of the shoppers recall the country of origin of the frozen vegetables they purchase.
Respondents indicated that the types of vegetables, ingredients, and nutritional information
were more important factors in their purchase decisions.'“°

Firms responding to the Commission survey seemed to corroborate the findings of these
other studies, stating that although country of origin is perceived to be important, purchasers
are more concerned with quality, safety, consistency, and price of food products. Also, none
were able to quantify any instances where its sales were affected as a result of
country-of-origin marking requirements. However, several firms noted that country of origin
was an important factor in some of their customers’ decisions on frozen vegetables
purchases. Some purchasers specify they will only buy frozen vegetables produced from
domestic materials, while other purchasers sometimes prefer products of specific foreign
countries or regions, especially when preparing ethnic cuisine.

'S Tid.

' United Foods, Inc., written submission to the USITC, Apr. 24, 1996, p. 2.

145 Joint Industry Group, posthearing submission to the USITC, Apr. 24, 1996.

146 Frozen Vegetable Attitude Study, Maritz Marketing Research Inc., Nov. 1994,
p.l.

6-37


U.S. International Trade Commission

Washington, DC 20436

Counitry-of-Origin Marking:
Review of Laws, Regulations,
and Practices

Publication 2975 July 1996


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F-35


APPENDIX G
Reference List on Consumer Perceptions


their customers. U.S. producers report that a “Made in USA” label is second only to
warranty for consumers, and as important as price in purchasing decisions.*” Tool buyers,
especially professionals, associate “Made in USA” with reliability, superior quality of
materials, strength/durability, corrosion resistance, warranty, price, craftsmanship, and
value." The preference for domestically manufactured hand tools is most pronounced in the
professional hand tool market. Conversely, buyers of professional hand tools hold that
foreign made hand tools are inferior in quality.

In February of 1996, the Borget Research Group published a hand tool opinion survey on
behalf of Danaher Tool Group.” The market research study results indicate that U.S. hand
tool consumers consider country of origin a very important factor in their purchasing
decisions and prefer U.S.-made hand tools. The survey reported that 75 percent of those
surveyed owned domestically made tools and that 53 percent of the respondents associated
“Made in USA” with tools of 100 percent U.S. origin. The survey also indicated that
country-of-origin markings enable customers to differentiate between imported and domestic
products and “to exercise a preference for or against the product of specific foreign
country.” U.S. producers reported that its customers were willing to pay between 10 to 40
percent more, per piece, for tools labeled “Made in USA.”*?

To obtain the views of the domestic industry regarding proposed changes in Customs rulings
on substantial transformation and a change in the FTC’s wholly of domestic origin standard,
members of the American Hand Tool Coalition (“Coalition”) and The Stanley Works
(“Stanley”) were contacted. Stanley opposes any change in Customs methodology for
measuring substantial transformation and opposes changes in Custom’s rulings to make them
consistent with the National Hand Tool Corp. decision.**

Stanley maintains that the holding in National Hand Tool Corp. is not appropriate in its
case. The decision, according to Stanley, concerns imports of unfinished hand tools
processed to a more advanced stage of production. National Hand Tool was importing
unfinished tools that were fully machined and did not undergo a substantial transformation
from postimportation processing in the United States, according to Stanley. These tools did
not need the extensive machining, heat treating, and finishing that Stanley’s imported
forgings must undergo before they can function and are usable. The multi-step heat
treatment process itself significantly alters the metallurgical and chemical properties of an
imported forging “in terms of strength, durability, and toughness.” Stanley believes that its
extensive U.S. processing creates the “performance and quality attributes” demanded by its

* Statement of George M. Sherman, president and CEO, Danaher Corp., transcript of
hearing, p. 166.

%! Statement of Dan G. Craighead, vice president, international, Snap-on Inc., transcript of
hearing, p. 156.

® Bourget Research Group, "Made in USA” Hand Tool Opinion Survey, West Hartford,
CT, Feb. 1996.

® Snap-on Inc., survey response, Apr. 18, 1996, p. 4, Vaughan & Bushnell, survey
response, Apr. 25, 1996, p. 4.

* The coalition is comprised of 9 members: Danaher Tool Group, Snap-on, Inc., SK
Hand Tool Corp., Pratt, Read Corp., Ajax Tool Works, Inc., Woodings- Verona Tool Works, Inc.,
Cornwell Quality Tools Co., Ridge Tool Co., and Vaughan & Bushnell Manufacturing Co.

%5 Ablondi, Foster, Sobin & Davidow, P.C., on behalf of The Stanley Works, posthearing
submission to the USITC, Apr. 25, 1996, pp. 2-3.

6-27


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to have the required information.''> Customs Service is responsible for enforcing the Wool
Act, Textile Act, and Fur Act with respect to imported wool, textile fiber, and fur products.''

In May 1994, the FTC solicited public comment on its rules for wool, textile fiber, and fur
products, as part of its overall review of FTC rules and guides."'° Much of that comment
focused on trade with NAFTA partners, Canada and Mexico. Suggestions were made to
simplify the procedures, including the use of both abbreviations and symbols (such as flags)
for country-of-origin names.''® In February 1996, the FTC proposed for public comment
amendments to harmonize its textile content and origin labeling rules with NAFTA
countries.'!” The FTC is also seeking comment on how to resolve a potential conflict
between the FTC rules, section 334 of the Uruguay Round Agreements Act, and Customs
implementing regulations that will be effective July 1, 1996, regarding country-of-origin
marking for certain textile goods, such as scarves and handkerchiefs."'* The issue here is
whether the country of origin for these products is defined by where the fabric was produced
or where the textile item was finished (often merely by hemming).'’°

Section 5 of the Federal Trade Commission Act

Section 5 of the Federal Trade Commission Act (15 U.S.C. 45), enacted September 26, 1914,
implicitly provides the authority for FTC regulation of “Made in USA” product labeling and
advertising. While the act authorizes the FTC to take action to prevent “deceptive acts and
practices” that include the advertising and labeling of goods sold in the marketplace, the act
does not require that domestic manufacturers mark domestically produced items with the
country of origin. Although marking goods produced within U.S. borders is strictly
voluntary--except for automobiles; light trucks; and wool, textile fiber, and fur products--any
product that carries the “Made in USA” label must conform to the FTC standard for “Made
in the USA” claims and must be truthful. The FTC considers a deceptive act or practice as
one that is likely to mislead consumers otherwise acting reasonably under the
circumstances.'° A claim is considered deceptive if even a “significant minority” of
consumers are misled.'”"

To bolster the FTC’s mandate, Congress has recently addressed the importance of domestic
country-of-origin labeling requirements by adding a provision to the Violent Crime Control
and Law Enforcement Act of 1994.’ Section 320933 of the act requires that

13 See 15 U.S.C. 68f and 15 U.S.C. 70g.

4419 CFR 11.12, 11.12(a), and 11.12(b).

15 59 F.R. 23645-23646, May 6, 1994.

46 Currently, to comply with NAFTA rules, labeling requirements must be fulfilled in
English, French, or Spanish. 19 CFR 134.45(a)(2). See also 61 F.R. 5340-5348, Feb. 12, 1996.

"1761 F.R. 5340-5348, Feb. 12, 1996. See also, FTC Press Release, “FTC Proposes to
Harmonize Textile Regs With Canada, Mexico: Effort to Reach More Goals of NAFTA,” Feb. 12,
1996 [http://www.fic. gov/opa/9602/textil.htm]).

"8 61 F.R. 5343, Feb. 12, 1996.

"9 Toid.

120 See Cliffdale Associates, Inc., 103 F.T.C. 110 (1984), reprinting as an appendix letter
dated Oct. 14, 1983, from the FTC to the Honorable John D. Dingell, chairman, Committee on
Energy and Commerce, U.S. House of Representatives (“Deception Statement”).

121 See Kraft, Inc. 114 F.T.C. 40, 122 (1991), aff'd 970 F.2d 311 (7th Cir. 1992), cert.
denied, 507 U.S. 909 (1993).

12 Public Law 103-322, 108 Stat. 2135.

3-26


a Treasury Decision is the Customs “major supplier marking” rule, published in T.D. 89-66,
“Country of Origin Marking of Imported Fruit Juice Concentrate.” This rule allows a
product to be labeled on a lot-by-lot basis, identifying on the package received by the
ultimate purchaser those countries (up to 10) accounting for 75 percent of the source of
material in a specified lot.**

Administrative Processes

Customs uses a number of tools and strategies to enforce the marking statute. If merchandise
is excepted from marking, in order to use that exception, the importer must generally apply
for a waiver® from the Customs import specialist at the port, usually prior to importation.
However, an importer may apply for a waiver at the time of importation in certain
circumstances, such as hardship. For example, Customs might grant .a hardship waiver
where an importer would incur an apparent marking violation, but it would be uneconomical
for the importer to mark the goods (e.g., the cost of marking would exceed the value of the
goods), and this was the first importation by this importer. Waivers are kept on file by the
Customs import specialist responsible for that product at the port of entry.

For merchandise and/or containers that do not qualify for exceptions, Customs may examine
merchandise at the port of entry. A typical sequence of events at a port of entry is shown
in figure 3-1. If the merchandise is not legally marked, Customs issues a Notice of
Redelivery/Marking (Customs Form (CF) 4647), that indicates there is a marking violation.
Through the CF 4647, Customs notifies the importer that the merchandise must be either
redelivered to Customs to be properly marked, exported, or destroyed under Customs
supervision, or that the importer must properly mark the merchandise with the country of
origin and that the importer must certify to Customs that the merchandise is in fact properly
marked and available for Customs inspection.

Under the certification procedure, the importer may properly mark the merchandise outside
of Customs supervision and custody.** While Customs may accept certification that the
marking has been accomplished, it may also demand samples of the remarked merchandise,
and/or may conduct a spot check to ensure that the merchandise is properly marked. If an
importer files a certificate but fails to properly mark the merchandise, then Customs may
seize the merchandise and seek monetary penalties.*’ The importer may, however, petition
for the release of the articles so that the false marking may be corrected, or so that the articles
may be exported or destroyed under Customs supervision and at no cost to the U.S.
Government.® In cases of willful deceit, the importer could be subject to a criminal action.*°

Customs also has the discretion to demand redelivery (i.e., Customs recalls merchandise that
previously has been released from Customs custody) so that the merchandise may be

54 F.R. 29540-29543, July 13, 1994.

+5 Waivers take the form of letters that use standard language suggested by Customs.

© 19 CFR 134.52.

57 Monetary penalties may be assessed and seizures may occur under section 592 of the
Tariff Act of 1930 (19 U.S.C. 1592). Seizures of merchandise may also occur under section
595a(c) of the Tariff Act of 1930 (19 U.S.C. 1595a(c)).

%8 19 CFR 11.13(a).

* Section 1001 Title 18.


using the same imported fabric shell and sold in the United States needs to be marked as
originating in the appropriate NAFTA partner.”

Apparel

Most of the apparel producers and retailers contacted voiced concerns about U.S.
country-of-origin marking rules. Many of these concerns focused on the rigidity of both the
FTC and Customs rules and the need for flexibility in view of the ongoing globalization of
the industry and expanding apparel markets.” Many U.S. apparel companies that purchase
inputs and market globally are experiencing difficulty in tracking the origin of their materials
to meet different countries’ marking rules. For example, a company may manufacture an
identical garment in four different countries or perform different stages of garment
production in more than one country (e.g., cutting fabric into garment parts in one country
and sewing the parts together in another). In other production scenarios, inputs such as
fabric, hooks and eyes, lace, zippers, and clasps may come from several different countries
and it may be necessary to substitute inputs from one line to another.

Moreover, because both the FTC and the Customs marking rules require that the
country-of-origin label be permanently affixed to the garment, the global apparel companies
claimed that they cannot readily meet changes in demand that may arise in the different
country markets. To meet both U.S. and foreign marking rules, these companies must either
segregate their production by country markets or apply one label that meets the criteria of
all the countries in which they market their products. These firms claimed that they do not
necessarily know at the time of production whether a garment will be sold in the United
States or abroad.

The URAA-mandated changes in rules of origin affect country-of-origin marking for certain
apparel accessories as well. Paris Accessories, Inc., a U.S. producer of handkerchiefs and
bandannas, uses both domestic and imported fabric in the production of these goods. The
foreign fabric is generally imported in the greige state and then bleached, dyed, printed, cut,
and sewn into bandannas and handkerchiefs in the United States. Under the pre-URAA
tules, the company marked its products of imported fabrics as “Made in USA of Imported
Fabric” for both domestic and export markets. Under the URAA rules, the company must
mark these products that are sold domestically with the name of the foreign country in which

205(__ continued)
$16 per pound. Charles M. Hansen, III, Podesta Associates, Inc., telephone interview with USITC
staff, May 7, 1996.

206 This is a particularly important factor for producers of down-filled comforters and
pillows as virtually no down-proof fabric is produced domestically. Statement of Charles M.
Hansen, Jr., chairman of the board, president, and CEO, Pillowtex Corp., transcript of hearing,
p. 187.

207 The International Mass Retail Association (MRA) believes that the FTC standard for
“Made in USA” labeling is outdated and that it unfairly penalizes U.S. producers. IMRA states
that most manufacturing processes have one or two essential steps that transform raw materials or
component parts into some other kind of good, and suggests that origin rules be adopted on a
sector-by-sector basis. IMRA, written submission to the FTC, “Made in USA Policy Comment,”
FTC File No. P894219, Jan. 16, 1996.

208 Paris Accessories, Inc., written submission to the USITC, Apr. 18, 1996.

6-55


that have developed with country-of-origin marking in the United States may still remain
even after WTO harmonization of rules of origin.® Even if substantial transformation issues
are codified into rules that are predictable and transparent, as long as marking remains a
requirement for many goods, particularly inputs, marking issues will not be eliminated.

Some industries argue that marking issues may be best addressed by exempting their
products from marking. In this regard, some of the proposed legislation before Congress
may alleviate certain industries from marking burdens and aid their international
competitiveness. The disadvantage to such an approach is that such legislation may create
more administrative burdens by expanding the number of Customs regulations. Also,
because companies possess different cost structures, a change in regulations may act to alter
the cost-competitiveness of firms within domestic industries.

(...continued)
Institute, transcript of hearing, pp. 214-221.

® Hogan & Hartson, on behalf of The Pillsbury Corp. posthearing submission to the
USITC, Apr. 25, 1996, p. 16.

4-23


Sharma, Subhash, Terrance A. Shimp and Jeonghsin Shin. “Consumer Ethnocentrism: A Test of
Antecedents and Moderators,” Journal of the Academy of Marketing Science, Vol. 23, No. 1, (Winter
1995), pp. 26-37.

Steere, John. “How Asian-Americans Make Purchase Decisions,” Marketing News, p. 9.

Thorelli, Hans B., Jeen-Su Lim, and Jongsuk Ye. “Relative Importance of Country of Origin,
Warranty and Retail Store Image on Product Evaluations,” International Marketing Review, Vol. 5,
No. 1, (1989), pp. 35-46.

Wagner, Janet, Richard Ettenson, and Jean Parrish. “Vendor Selection Among Retail Buyers: An
Analysis By Merchandise Division,” Journal of Retailing, Vol. 65, No. 1, (Spring 1989), pp. 58-79.

Wall, Marjorie, John Liefeld, Louise A.Heslop. “Impact of Country of Origin Cues on Consumer

Judgements in Multi-Cue Situations: A Covariance Analysis,” Journal of the Academy of Marketing
Science, Vol. 19, No. 2, (Spring 1991), pp. 105-113.

G-7


files and rasps); novelties and sporting goods; certain paper products; and wearing apparel.’
Reportedly, Canadian Customs accepts different forms of marking for goods of North
America Free Trade Agreement (NAFTA) parties, such as “Produced in USA”, “Assembled
in USA,” or “Made in USA with foreign components.”'? Like Canada, Mexico requires
labeling of imported products put up for retail sale.'* Australia, under its Commerce (Retail
Descriptions) Act of 1905, reportedly requires marking on imported goods put up for retail
sale and certain other products.'>

Questions on the value to consumers of country-of-origin information generate diverse
viewpoints among and between researchers, industry, and consumer groups in the United
States. There also appears to be more interest in country-of-origin marking by consumers
in newly industrializing countries than those in developed countries. According to one
study, Chileans rely more on the country-of-origin marking than do Belgians, who rely more
on brand names.'® Another study reported that Koreans attach greater importance to a
product’s country of origin than do European respondents.”

Approach

The Commission took a number of steps in order to provide the information requested by the
Committee. It held a public hearing and solicited written statements; it sought information
from relevant government agencies; and it conducted an extensive telephone survey of
industry and consumer groups.

The Commission identified the various provisions of law that relate to country-of-origin
marking on imported or domestic merchandise, or that directly affect marking or labeling
claims. These include provisions in the Tariff Act of 1930, the North American Free Trade
Agreement Implementation Act, the Federal Trade Commission Act, the Wool Products
Labeling Act of 1939, the Textile Fiber Products Identification Act, the Lanham Trademark
Act of 1946, and the American Automobile Labeling Act. To develop an understanding of

1 Revenue Canada, Customs and Excise, Memorandum D1 1-3-1, as reprinted in
McGoldrick’s Canadian Customs Tariff “Harmonized Tariff”, 101st ed., vol. 1 (Montreal:
McMullin Publishers, Ltd., 1994), pp. 796-800.

3 Stuart P. Seidel, Assistant Commissioner, Office of Regulations and Rulings, U.S.
Customs Service, U.S. Department of the Treasury, written statement to the FTC, “Made in USA
Policy Comment,” FTC File No. P894219, Jan. 16, 1996, p. 5.

TM See Mexico’s Ley Federal Sobre Metrologia Y Normalizacion (Metrology and
Standardization Federal Law), Ley de Comercio Exterior (Foreign Trade Law); and Nueva Ley
Aduanera (New Customs Law), which form the basis for country-of-origin marking. To become
law, country-of-origin marking requirements must be published in the Diario Oficial de la
Federacion.

15 Australia’s Commerce (Retail Descriptions) Act of 1905.

*6 Sadrudin A. Ahmed and Alain d’Astous, “Country-of-Origin Effects in the Context of
NAFTA: The Case of Chile,” Proceedings, American Marketing Association, 1995.

‘7 Johann P. Du Preez, Adamantios Diamantopoulos, and Bodo B.Schlegelmich, “Product
Saliency and Attribute Saliency: A Three-Country Empirical Comparison,” Journal of
International Marketing, Aug. 1995.

1-4


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F-32


Item ‘Suggestions Supports this recommendation, except as noted
Rules of origin | Base all origin determinations on a National Council on International Trade Development
change in tariff classification. (NCITD), Association of International Automobile
Manufacturers, Inc. (AIAM)
Harmonize section 304 of the Tariff Eli Lilly and Co., Pharmaceutical Research and
Act of 1930 to conform with the Food Manufacturers of America (PhRMA)
and Drug Administration's definition of
manufacturing processes for drugs.
Modify, amend, or repeal section 334 Natural Feather & Textiles, Inc.
of the Uruguay Round Agreements
Act.
Harmonize all U.S. Government rules ‘American Association of Exporters and Importers
of origin. (AAEl), Brass Craft Manufacturing Co., The
Federation of the Swiss Watch Industry, W. D.
Outman Il, Baker & McKenzie, The Stanley Works
Harmonization rules of origin through International Mass Retail Association (IMRA),
WTO. Specialty Steel Industry of North America (SSINA),
The Federation of the Swiss Watch Industry, Vaughan
& Bushnell Manufacturing Co.
Customs Streamline rulings procedures under Natural Feather & Textiles, Inc., Pillsbury Co., Xerox
regulations 19 CFR 177. Corp.
and
procedures Do not modify/revoke rulings Customs Rep. Nancy L. Johnson (R-6-CT), Sr. Member, House

previously issued to National Hand
Tool Co.

Ways and Mean Committee, Consolidated Casting
Corp., Lone Star Gas Co., Plymouth Tube Co., Rack
Technology, Inc., The Stanley Works

Review Customs’ process for
determining when a product
undergoes a substantial
transformation.

American Institute for International Steel, Inc., BGE
Ltd., Brown & Williamson Tobacco Corporation

ource: Compiled

by the staff of the U.S. International

rade Commission.

xxii



In addition to the academic research, a number of industry groups have explored consumer
perception and behavior in relation to country-of-origin marking. Most of these studies have
been industry specific, and many were conducted just in advance of the FTC’s “Made in
USA” workshop held in March 1996; therefore, these studies tend to focus on country-of-
origin marking for domestically produced goods. It is difficult to draw firm conclusions
from these studies about the value that country-of-origin markings provide for consumers,
because the goals, questions asked, audiences reached, and survey models used vary greatly.
These surveys often pose similar questions to respondents, but the responses can vary widely
depending on the structure of the question, and whether possible answers are offered.'?

Of the industries focused on in this study, only the frozen vegetables, hand tools, and textiles
and apparel industries have conducted or commissioned formal surveys about country of
origin and consumer preference. Formal research by consumer groups is limited, the sole
exception being the National Consumer League, which conducted its study in response to
the FTC’s plans to review “Made in USA” marking requirements. Many groups, including
Made in USA Foundation, the AFL-CIO, and the Crafted with Pride in U.S.A. Council, use
survey results of other studies such as the IMRA study to support their positions.'? In some
cases, the same study, especially the IMRA survey, has been cited to support opposing views
regarding the importance of country-of-origin marking to consumers.'* A synopsis of the
major surveys conducted by industry trade associations, companies, and consumer groups
to test consumer perception and habits in relation to country of origin is presented in table
5-1.

Commission Survey Results

Commission staff contacted a number of consumer groups for this investigation, including
the Consumer Federation of America (Washington, DC), Public Citizen (Washington, DC),
Consumers Digest (Chicago, IL), and The Consumers Union (Yonkers, NY).'°
Conversations with representatives indicated that country-of-origin marking issues related
to consumer behavior are not followed closely by their organizations. Staff has also
contacted Consumers for World Trade, the Made in USA Foundation, and the National
Consumers League, although little information was obtained beyond testimony and
submissions that are already part of the record. With the exception of the National
Consumers League, the Commission is unaware of any consumer group that has conducted
independent research about country-of-origin marking issues and consumer preferences.
Absent formal survey data, the Commission reviewed the general positions of these
consumer and labor groups on the effects of country-of-origin markings to consumers. A
summary of these groups’ positions is presented in table 5-2.

12 Some argue that the FTC would be ill-advised to alter its current policies on country-of-
origin marking, which have been designed to protect and inform the consumer, because the
existing consumer perception data on this issue are so inconclusive. The Dynacraft bicycle
representative made this point during the “Made in USA” workshop at the FTC, Mar. 26, 1996.

® The Crafted with Pride in the USA Council has also initiated studies of their own.

TM Charles Mercer, Joel D. Joseph, and Robin W. Lanier, transcript of hearing, pp. 29, 35-
37, and 48-51.

15 The Consumers Union (Yonkers, NY) did not reply.

5-3


When the AAMA re-petitioned NHTSA on this issue, it noted that the September 1995 final
tule provided outside suppliers additional flexibility for determining U.S./Canadian content,
and argued that the same flexibility should be provided to vehicle manufacturers. The
petition restated the AAMA’s belief that the “default to zero” provision provides consumers
of automobiles with inaccurate content information. NHTSA again denied this petition,
stating that it believes it is reasonable to require outside suppliers to make good faith
estimates based on the information that is available from their suppliers.’ Other
manufacturer and dealer perspectives on the AALA yield the following concerns: (1) the
label does not distinguish between Canadian content and U.S. content; (2) the act requires
a different methodology for calculating content based on the financial relationship between
the automobile manufacturer and a parts supplier; (3) the methodology employs a 70 percent
roll-up/roll-down rule for parts supplied by outside suppliers, meaning that a part of 69
percent U.S. content is not included as U.S. content;'® (4) the value of parts made in-house
by the automobile manufacturer is excluded; (5) the value of U.S. labor/final assembly,
which may be as high as 20 percent of the vehicle’s value, is excluded; and (6) the content
presented does not necessarily represent the value for the particular car labeled, as the
calculation is made for the entire carline regardless of the country of assembly (ie., if a
carline is produced in more than one country, the content figures on the vehicle label will be
overstated or understated).'°

Auto industry concems with rules of origin and marking include a lack of standardization
among trading partners; ambiguity in, and inconsistent application of, Customs rules to
goods made in whole or in part from materials originating in another country (the
development of a standard international test of substantial transformation is sought); and a
lack of a consistent definition of the ‘ultimate purchaser,’ which is of particular interest to
the replacement parts industry.’”°

The FTC “Made in USA” standard also poses certain problems for the automotive industry.
In general, the industry recommends a case-by-case approach to considering challenges to
“Made in the USA” claims, and rejects the notion of additional content calculation
regulations which different industries have proposed. However, U.S.-based and foreign-
based manufacturers have different views of the proposed changes in the FTC’s standard for
“Made in USA” claims. The traditional U.S. industry (Ford, General Motors, and Chrysler)
has stated that, while transplant production and its domestic content have increased in recent
years (although generally not approximating that of U.S. Big Three vehicles), the increased

'7 61 F.R. 17255-6, Apr. 19, 1996.

168 NHTSA has concluded that the same vehicle with identical parts could have a
U.S./Canadian content as high as 53 percent or as low as 11 percent, based solely on whether the
parts were obtained from an allied or outside supplier.

16 See American International Automobile Dealers Association, written submission to the
USITC, Mar. 27, 1996; Association of International Automobile Manufacturers, Inc., written
submission to the USITC, Apr. 25, 1996; statement of Walter Huizenga, president, American
International Automobile Dealers Association, transcript of hearing, pp. 127-146; industry
officials, information provided to USITC staff, Apr. 15, 1996. Commission staff surveyed nine
automobile and parts producers regarding country-of-origin marking issues; however, only two
responded to the survey.

179 Association of International Automobile Manufacturers, Inc., written submission to the
USITC, Apr. 25, 1996.

6-44


labor used to assemble vehicles, which reportedly discriminates against the transplants by
“unfairly depreciating the job-creating investments they have made in this country.”"*!

As for the benefits consumers gain from AALA country-of-origin labeling, industry sources
present varying opinions.’ Some manufacturers and dealers assert that the information
presented on the AALA label is not of interest, and that consumers make automotive
purchasing decisions based primarily on price and quality of the product.’®* Other industry
sources report that automotive research indicates that consumers consider information
regarding a vehicle’s country of origin is useful to them.’ One source states that many
consumers want to purchase vehicles manufactured domestically, while others specifically
seek out vehicles manufactured abroad; the source asserts that the information presented on
the AALA label is confusing and misleading.'**

Foreign-based and U.S.-based manufacturers also disagree on the consumer benefits of FTC
“Made in USA” labeling. Foreign-based manufacturers contend that consumers are aware,
through advertising and other types of publicity, that the automotive industry is highly
internationalized, and that consumers are able to apply what they know to the “Made in
USA” claim in the context of a particular advertisement. Specifically, these sources assert
that “consumers understand that, when it comes to automobiles, the terms ‘made,’
‘assembled,’ or ‘built’ in America means that the final assembly takes place in a U.S. plant
with American labor;” and that “automobile consumers know that when a ‘foreign’
automobile manufacturer’s advertising shows a plant in Ohio producing a model of
automobile in conjunction with a statement that the product is ‘assembled’ or ‘made’ in the
United States, this is not a claim that ‘all or virtually all’ the component parts or sub-
components were made in the U.S.”"*° In sum, these foreign-based manufacturers believe
than an FTC regulation not based on the “all or virtually all” standard but on traditional
advertising standards of “false or deceptive” claims would provide consumers with sufficient
information about the manufacturing process of the automobile. Such a rule would also be
considered a competitive benefit to the manufacturers themselves, many of which
manufacture a sizeable percentage of their motor vehicles for the U.S. market in the United
States with U.S. labor.

181 Association of International Automobile Manufacturers, Inc.,written submission to the
USITC, Apr. 25, 1996.

182 Research indicates that brand name is somewhat stronger than country-of-origin
effects for a new automobile. Gerald Haitbl and Dr. Gunter Schweiger, “The Effects of Country of
Origin and Brand Name on Consumers’ Evaluations of a New Automobile: A Structural Model,”
unpublished paper, University of Alberta, Faculty of Business, Edmonton, Canada, Apr. 30, 1996,
p. 30.

18 American International Automobile Dealers Association, submission to the FTC,
“Made in the USA Policy Comment,” FTC File No. P894219, Jan. 22, 1996; information provided
by industry sources to USITC staff.

1 Ibid.

'8 Thid.

18 Tbid.

6-47


of the country in which the cutting occurs. The URAA rules, though, assign origin to the
country of assembly. For home textiles like sheets and pillowcases, the pre-URAA rules
generally conferred origin on the country in which the goods were cut to size from fabric
rolls, hemmed, trimmed, and otherwise sewn. The URAA rules conferr origin on the country
in which the fabric was made. For fabrics woven or knit in one country and dyed, printed,
and otherwise finished in another, the pre-URAA rules generally conferred origin on the
country in which the finishing occurs, whereas the URAA rules confer origin on the country
in which the fabric was formed.

On November 16, 1995, Customs published a notice in the Federal Register stating that it
was considering a change to its practice regarding country-of-origin marking for apparel.’
As noted above, Customs requires that the country-of-origin marking for garments with a
neckline be permanently affixed at the-neckline. Recently, however, Customs had ruled that
the country-of-origin marking need not be at the neck for certain reversible garments such
as jackets and tank tops because removal of the label could damage the garment. Customs
proposed to evaluate the country-of-origin marking for apparel on a case-by-case basis. The
initial 60-day comment period on the proposal was extended for an additional 60 days, or
until May 15, 1996.'

Customs has also provided a 4-month period of adjustment, from July to November 1996,
to allow firms to exhaust their inventory of old country-of-origin labels for certain textile and
apparel products because of the economic hardship of converting to labels that reflect the
new country-of-origin rules implemented under section 334 of the Uruguay Round
Agreement Act.'®? This adjustment period applies to labels stating “Assembled in X country
from U.S. components” or similar phrase for goods that were assembled from components
cut to shape in the United States.

As part of the FTC’s ongoing review of its rules, on May 6, 1994, the FTC published a
notice in the Federal Register seeking comments on the costs and benefits of the regulations
it published to implement the Wool Act, Textile Act, and Fur.’ It also sought comments
on which changes in the rules would increase the benefits of the rules to purchasers and how
the changes would affect the costs of compliance. As a result of that review, the FTC
proposed several changes to the rules and again sought comment on the proposed new
tules.'%° The closing date for these comments was May 13, 1996.

Compliance Concerns

To obtain input from the industry, the Commission staff contacted a number of firms in
different segments of the textile and apparel sector and requested that they participate in the

°! 60 F.R. 57621, Nov. 16, 1995.

'? 61 F.R. 3763, Feb. 1, 1996.

1936] F.R. 32924-32925, June 26, 1996.
194 59 F.R. 23645-23646, May 6, 1994.
15 61 F.R. 5340, Feb. 12, 1996.

6-51


Statutory Rules of Origin for Textiles and Apparel

In section 334 of the Uruguay Round Agreements Act (URAA), Congress enacted specific
country-of-origin standards for most textile and apparel articles that became effective on
July 1, 1996."” For textile and apparel articles, these new statutory standards are used to
determine origin, not the general, case-by-case approach that Customs uses to establish
origin for marking and other purposes. However, the origin framework for textile and
apparel articles is said to “conform in large part to existing Customs Service practice, which
is based on a ‘substantial transformation’ test.”"* Under these rules, if a textile or apparel
article is wholly assembled in a single country, then the article will be deemed to originate
in that country. If a textile or apparel article is assembled in more than one country, then the
article will be deemed to originate in the country where the most important assembly or
manufacturing process occurred. Finally, if the origin of a textile or apparel article cannot
be established under either of these two rules, then the article will be deemed to originate in
the country in which the last important assembly or manufacturing process occurred. The
previously applicable criterion used by Customs to determine origin for many such goods
was instead the country where the fabric or components were cut.'

The statutory textile rules also contain a number of specific-exceptions or special rules for
certain articles or certain circumstances. For example, some articles, such as pillows and
comforters, are effectively exempt from the final assembly mule described above.” These
articles are instead subject to a “fabric forward” rule; that is, the origin of such articles is
based on the origin of the fabric.” Other special exceptions are provided for: (1) articles that
are knit to shape; (2) components that are cut to shape in the United States from U.S. or
foreign fabric, exported for assembly and retumed to the United States; and (3) articles from
Israel.

Preferential Tariff Regimes

The United States has a number of laws that grant preferential tariff treatment to certain
imported articles from certain beneficiary countries. Such laws contain specific, statutory
Tules that are used to establish whether an imported article qualifies for the tariff preference.
In general, the rules require that an imported article originate in the beneficiary country, in
accordance with the general substantial transformation principle, and that.a minimum

17 Section 334 of the Uruguay Round Agreements Act (URAA) (Public Law 103-465,
108 Stat. 4809) (19 U.S.C. 3592) and the Statement of Administrative Action that accompanied the
Uruguay Round bill.

"8 Statement of Administrative Action that accompanied the Uruguay Round bill, p. 113.

1° 60 F.R. 27831, May 23, 1995, and 60 F.R. 46188-46204, Sept. 5, 1995.

2 Section 334(b)(2)A) of the URAA (19 U.S.C. 3592(b)(2)(A)).

21 Representatives of the U.S. textile home furnishings industry allege that the section 334
tules of the URAA (effective July 1, 1996) will confer origin to the country in which the fabric
was formed, despite value added to the product in the United States that is several times greater
than the foreign-content value. See, statements of Charles M. Hansen, Jr., chairman of the board,
president, and CEO, Pillowtex Corp., transcript of hearing, pp. 187-190, and Daniel R. Kral,
president, Natural Feather & Textiles, Inc., transcript of hearing, pp. 196-202.

2-6


uncomfortable to the wearer. For example, some companies use one label printed in English,
French, and Spanish to meet the marking requirements of several countries.*”

Some respondents questioned the necessity and practicality of section 134.46 of the Customs
Regulations. Under this provision, the country of origin must be disclosed in close
proximity to any reference on the imported product or its container to a place other than the
country of origin.””° Thus, if the name “United States,” or “USA,” or “California,” for
example, is part of a company’s brand name and appears on the label of the garment or a
hang tag, the country of origin of the garment must be printed in a comparable size in close
proximity to such words on the label or hang tag. This can be in addition to the
country-of-origin label attached at the neckline or elsewhere on the garment.

In spite of their concerns over the U.S. country-of-origin requirements, only a few of the
companies recommended eliminating the country-of-origin marking requirement altogether.
However, concerns were expressed over the enforcement of country-of-origin marking
requirements. A few companies that supply the apparel producers with inputs, especially
apparel interlinings, shoulder pads, ribbons, braids, and other trimmings, expressed concern
over the level of enforcement of country-of-origin marking rules by both the FTC and
Customs. These companies claimed that some of their competitors import these inputs and
then falsely certify that they are made domestically, or that importers or distributors sell
these imported inputs to U.S. apparel producers without indicating that the inputs are in fact
imported.

All of the apparel companies that expressed concern about country-of-origin marking would
like to see greater flexibility in the application of U.S. marking rules. Many would like to
be able to label the country of origin on hang tags that are attached to the garments. One
company even suggested using a stick-on label to place on to the outside packaging of a
man’s shirt, for example. Other company respondents would like the flexibility to be able
to affix the labels to the side seam or some area other than the neckline to avoid bulk and the
discomfort large labels can cause to the wearer.

Two apparel firms stated that they were concerned with transshipments and that their
competitors misrepresenting imported garments as products made in the United States. Both
of these firms stated that they would like to see better enforcement of the country-of-origin
marking requirements.

Of the three fur apparel companies responding to the Commission survey, two expressed
concerns about U.S. country-of-origin marking rules. One U.S. fur apparel producer stated
that there should be better enforcement of the marking rules to ensure that imported fur
apparel is not labeled as “Made in USA.” Another fur apparel producer expressed concern
that Customs personnel consider it a violation of country-of-origin marking rules to have
labels that are stitched loosely on the garment. This respondent indicated that it is a common

20° For example, some country of origin labels may carry Northern Mariannas Islands in
English, Spanish, and French, resulting in a label at least 2 inches long and more than 1 inch wide.

210 19 CFR 134.46--Marking when name of country or locality other than country of
origin appears.

6-57


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F-17


reputation of a company or store. For example, the IMRA study (table 5-1) found that while
Americans indicate a preference for American products, in practice they often do not pay
much attention (with a few exceptions noted later) to where the article was produced. When
asked to rate the importance of five factors that influence their purchasing decisions, the least
important factor among the five was the country of origin. Eighty-two percent rated the
factor of “quality” as a “5,” or as the most important; 57 percent gave the highest rating to
“product features,” and 53 percent gave that rating to each of the factors of “warranty” and
“price.” Just 27 percent assigned a rating of “5” to country of origin. It should be noted,
however, that for certain products, the country of origin can be the determining factor in a
purchasing decision.

The findings of a 1988 study”® are consistent with the results of the 1994 IMRA study,
concluding that consumers often use the country-of-origin label as an indicator of quality.
Just 10 percent of the 1988 study respondents said they look for the product origin specially
so they can “Buy American.” The research also showed that in virtually every instance,
consumers would prefer to buy American-made products in almost every product category,
if the product meets their other standards, including quality and price.”

The survey by the National Consumers League (table 5-1) also seems to support the idea that
other factors, such as price and quality, are more important considerations than country of
origin. The respondents indicated that country-of-origin considerations come into play only
after other factors are considered. When all other considerations (such as price and quality)
are equal between a domestically produced and an imported product, the study says 87
percent of respondents would be inclined to purchase the product marked “Made in USA.”

The survey conducted by the Crafted with Pride in U.S.A. Council, Inc., found that when
consumers were asked for ratings as to what is important in clothing, factors such as fit,
styling, and price rank at the top whereas country of origin and brand name rank much
lower.?® Nevertheless, the organization’s literature cites research tests by two retailers” as
indicating the positive perception Americans have of U.S.-made apparel; the research
showed sales increases of 26 percent and 50 percent, respectively, for merchandise identified
as U.S.-made over similarly styled and comparably priced imported products. Although
style, fit and quality are the first factors considered when making clothing purchases, if these
elements meet the customers’ requirements, then country of origin may be used to make a
final purchasing decision.

A study by Wind Associates/Data Development Corp. for New Balance concluded that
country of origin (United States or other country) of raw materials and components, such as
the sole or upper, is of no importance in consumers’ decisions to buy any particular athletic

26 Chain Store Age, General Merchandise Trends, “East vs. West: What Americans Really
Think About Imports,” Jan. 1988, pp. 14-15.

7" Ibid.

28 Statement of Frank Schapiro, Demand Factors, on behalf of the Crafted With Pride in
U.S.A. Council, Inc., transcript of hearing, p. 194.

?° McAlpin’s in Cincinnati, OH and Castner Knott in Nashville, TN.

5-13


CALENDAR OF PUBLIC HEARINGS

Those listed below appeared as witnesses at the United States International Trade

Commission's hearing:

Subject : COUNTRY OF ORIGIN MARKING:
REVIEW OF LAWS, REGULATIONS,
AND PRACTICES

Inv. No. : 332-366

Date and Time : April 10, 1996 - 9:30 am.

Sessions were held in connection with the investigation in the Main hearing room 101, 500
E Street, S.W., Washington, D.C.

ORGANIZATION AND WITNESS

GENERAL

Panel 1

Made in the USA Foundation, Washington, D.C.

Joel D. Joseph, Chairman, Made in the USA Foundation

Union Label & Service Trades Department, AFL-CIO, Washington, D.C.

Charles E. Mercer, Secretary-Treasurer, AFL-CIO

-More-

C2


Han, C. Min and Vern Terpstra. “Country of Origin Effects for Uni-National and Bi-National
Products,” Journal of International Business Studies, Vol. 19, No.2, (Summer 1988), pp. 235-255.

Han, C. Min, Byoung-Woo Lee, and Kong-Kyun Ro. “The Choice of a Survey Mode in Country
Image Studies,” Journal of Business Research, Vol. 29, No. 2, (Feb 1994) pp. 151-162.

Harris, Richard Jackson, Bettina Garner-Earl, Sara J. Sprick and Collette Carroll. “Effects of Foreign
Product Names and Country of Origin Attributions on Advertisement Evaluations,” Psychology and
Marketing, Vol. 11 No.2, (March/April 1994), pp. 129-144.

Harrison-Walker, L. Jean. “The Relative Effects of National Stereotype and Advertising Information
on the Selection of a Service Provider: An Empirical Study,” Journal of Services Marketing, Vol. 9,
No. 1 (1995), pp. 47-59.

Head, David. “Advertising Slogans and the ‘Made-In’ Concept,” International Journal of Advertising,
Vol. 7, No.3, (1988), pp. 237-252.

Hooley, Graham J., David Shipley, and Nathalie Krieger. “A Method for Modeling Consumer
Perceptions of Country of Origin,” International Marketing Review, Vol. 5, No. 3 (Autumn 1988),
pp. 67-76.

Hong, Sung-Tai and Robert S. Wyer, Jr. “Effects of Country-of-Origin and Product-Attribute
Information on Product Evaluation: An Information Processing Perspective,” Journal of Consumer
Research, Vol. 16, Sept. 1989, pp. 175-187.

Hong, Sung-Tai and Robert S. Wyer, Jr. “Determinants of Product Evaluation: Effects of the Time
Interval Between Knowledge of a Product’s Country of Origin and Information About Its Specific
Attributes,” Journal of Consumer Research, Vol. 17, Dec. 1990, pp. 277-288.

Johansson, Johny K, Ilkka A. Ronkainen and Michael R. Czinkota. “Negative Country-Of-Origin
Effects: The Case of the New Russia,” Journal of International Business Studies, (1st Quarter 1994),
pp. 157-176.

Johansson, Johny K. “Determinants and Effects of the Use of ‘Made In’ Labels,” International
Marketing Review, Vol. 6, No.1, (1989), pp. 47-58.

Khachaturian, Janet L. and Michelle A. Morganosky. “Quality Perceptions by Country of Origin,”
International Journal of Retail and Distribution Management, Vol. 18, No. 5, (Sept./Oct. 1990), pp.
21-30.

LaBarre, Polly. “Quality’s Silent Partner,” Industry Week, (Apr. 18, 1994), pp. 47-48.

Leclerc, France, Bernd H. Schmitt, and Laurette Dubé, “Foreign Branding and Its Effects on Product
Perceptions and Attitudes, Journal of Marketing Research, Vol. 31 (May 1994) pp. 263-270.

G-5


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F-ll


potential risk to life or property. In many segments of the wire rod industry (e.g., for
automotive parts where components must meet exacting standards), customers work closely
with wire drawers to achieve the desired dimensional, physical, and alloy specifications of
the wire that they purchase.”

Customers may be willing to purchase foreign-origin products imported by an U.S.
manufacturer based upon the U.S. manufacturer’s reputation for providing high-quality
products. However, a chain manufacturer indicated that industrial distributors have very
strong preferences for U.S.-origin products, and some distributors may refuse to accept
products from producers who do not distinguish their domestically manufactured product
lines from their imported lines. Furthermore, as noted by a hot- and cold-rolled steel bar
producer, in a product-quality driven market, customers prefer known suppliers for quality
assurance, and the introduction of alternate sources involves extensive testing and relaying
results to customers to assure them of product quality.

Although most steel products are sold on the basis of price and quality, respondents cite
some evidence that their customers will shift purchases to products marked with a particular
country of origin for a number of reasons. Several U.S. producers of pipe-fittings indicated
that most customers prefer domestic products as long as the price is competitive. However,
acold-rolled steel bar manufacturer that purchases hot-rolled bars from outside sources noted
that its customers are inquiring more frequently than in the past about country of origin with
increased preference for products certifiable as of NAFTA origin. Conversely, according
to a foreign-owned U.S.-based producer of steel mill products, country of origin would also
be a very important consideration for foreign-origin steel-mill products that are perceived
to be of higher quality than comparable domestic products. A crucial impact of
country-of-origin preferences falls on those products where there have been problems
associated with imports from a particular country, specifically for articles with rigid or high-
performance specifications (e.g., chain, wire rope, and pipe fittings). For example, according
to one U.S. producer of pipe-fittings, foreign pipe-fittings are perceived as inferior and some
customers request domestic products.

Among steel manufacturers that mark their products with “Made in USA”-type labeling,
producers of pipe fittings, structural steel, and chain cite all similar benefits. Few
respondents could estimate how much customers are willing to pay for products bearing such
labeling, but those who indicated that their customers have such preferences also noted that
customers were not willing to pay much if any premium. However, according to one
producer of chain, such premiums range from none for original equipment manufacturers to
from 5 to 10 percent for industrial distributors.”

Benefits to the retail consumer, identified by firms surveyed by USITC staff, are also highly
varied across products by individual respondent; again, no clear pattern emerges. By their
nature, few steel mill and fabricated-steel products are purchased by retail customers,
exceptions being small-diameter reinforcing bars, link chain, and wire fencing. But a U.S.
chain manufacturer cautions that the retail consumer really has no basis for comparing

7 American Wire Producers Association, posthearing submission to the USITC, Apr. 25,
1996.

7 Industry representative of a U.S. chain manufacturing company, telephone interview
with USITC staff, Apr. 22, 1996.

6-18


changes to conform with the implementation of the URAA rules of origin will cost it nearly
$1.5 million, or equal to about 8 percent of the firm’s pre-tax 1995 income.”"*

Representatives of this industry segment indicated that brand loyalty and preference for U.S.-
made goods is an important factor for home furnishings.”"* Respondents to the Commission
survey indicated that for goods of this segment, the “Made in USA” label is important to
both retailers and the ultimate consumer. One respondent indicated that in foreign markets,
customers would pay an additional 3 to 5 percent for U.S.-made goods.

Apparel

The majority of respondents did not have specific information on the total costs of
complying with country-of-origin marking rules because of the difficulty involved in
isolating these costs from other business costs. Most did agree, however, that the costs of
complying with these rules are generally high and involve much more than just the physical
costs. Additional costs are the costs of warehousing, accounting, and tracking of foreign
components; the administrative costs of segregating inventory by different country markets;
administrative costs involved with keeping abreast of changing Federal marking regulations;
and the costs of maintaining a center for labeling and relabeling. In addition, the fur apparel
respondents indicated that their firms incur marketing and advertising costs in complying
with the marking requirements under the Fur Act.?!

A few respondents did supply rough estimates of their costs of complying with the marking
tules. The cost per garment for marking at the time of production ranged from 1 cent to 10
cents for apparel of textile materials and to as much as $1 for fur garments. Some of the
larger companies commented that the costs and administrative burden of meeting the
marking rules tend to increase with the extent of globalization in sourcing and marketing by
a company.

All of the respondents that commented on the costs of meeting country-of-origin marking
tules agreed that the costs of relabeling garments is much higher--reportedly 5 to 30 times
as much--than the cost of labeling the garment at the time of production. Rough estimates
of relabeling ranged from 25 cents to $1 per garment for garments made of textile
materials.””” Relabeling can involve removing the garment from the packaging and replacing
the old country-of-origin label with a new one. Many of the respondents stated that the need
to relabel did occur a fair amount of the time. One medium-sized apparel producer stated
that his company has to relabel for country of origin about every other week. The primary
reasons for relabeling were to respond to changing demand in different country markets and

2\4 Pillowtex Corp., posthearing submission to the USITC, Apr. 19, 1996.

215 The domestic industry supplies about 85 percent of domestic consumption of home
furnishings compared with 63 percent for all of Standard Industrial Classification major group 23
that includes home furnishings, apparel, and other made-up textile goods.

216 The Fur Act requires that in general advertising of a group of fur products composed in
whole or in part of imported furs must state the following, “Fur products labeled to show country
of origin of imported furs.”

217 The fur apparel company that responded to this question did not provide costs on
relabeling the country of origin.

6-59


Headquarters ORR. If the protest is denied, the importer is informed of the right of civil
action and may appeal the determination before the CIT. The importer must file for action
within 180 days from the date the protest denial was mailed or the date that the protest was
deemed to have been denied.

At the CIT, the issues in the case are subject to de novo review (the CIT decides all issues
anew and Customs’ previous positions are not given any deference by the Court). It is not
uncommon for either the importer or Customs to appeal adverse decisions to the Court of
Appeals for the Federal Circuit (CAFC), and then to the Supreme Court.

Domestic interested parties’ may challenge a Customs decision regarding the proper
application of the marking statute through a petition under section 516 of the Tariff Act of
1930.’6 If the petitioner is dissatisfied with the decision of the Commissioner of Customs,
the petitioner may protest the decision. In this procedure, the petitioner files notice with the
Commissioner of Customs, and designates the port or ports of entry at which the
merchandise at issue is being imported and at which the petitioner will protest. The port
directors of the designated ports issue notices of liquidation to the petitioner of the
merchandise in question so the petitioner then may present to Customs the marking issues
desired. The petitioner also may seek judicial review of the Customs ruling on the petition
before the CIT. In many rulings, Customs is challenged in the courts by both the importer
and the domestic petitioner on the same issue.

For NAFTA goods, the procedures for obtaining and protesting Customs rulings are similar
to those for non-NAFTA goods and are set forth at 19 CFR subparts I-J, or parts 181.91-
181.122. Importers may seek an advance ruling letter with respect to both prospective, and
(unlike for non-NAFTA trade), current or ongoing NAFTA transactions. Customs will issue
the ruling within 120 days. Under these NAFTA procedures, a marking violation, notice to
redeliver, or assessment of marking duties is known as an “adverse marking decision.”” In
accordance with section 304, Customs must inform the importer of the basis of the adverse
marking decision, if requested by the importer within 30 days of the request. If the importer
protests, the exporter or producer of the merchandise which is subject to the adverse marking
decision may intervene in the importer’s protest on behalf of the importer. If the importer
does not protest the adverse marking decision, the exporter or producer of the subject
merchandise may file a petition with Customs protesting the adverse marking decision.”* If
the petition is denied, the importer may appeal the Customs decision by filing a civil action
before the CIT.

75 A domestic interested party is a manufacturer, producer, wholesaler, union or
recognized labor group, or trade or business association, whose members engage in the
manufacture, production, or wholesale, of like products. 19 CFR 175.21

7619 U.S.C. 1516 and 19 CFR 175 et seq. Petitions under 516 are also used by domestic
parties to clarify tariff classifications. Notice of the petition is published in the Federal Register
and public comment is sought by Customs. If the marking on the entry is found to be incorrect,
Customs publishes notice in the Federal Register.

7” A decision by Customs which an exporter or producer of merchandise believes to be
contrary to NAFTA Annex 311 and which may be protested pursuant to section 514 of the Tariff
Act of 1930 (19 U.S.C. 1514).

7819 CFR 181.116.


Table 5-3

Benefits to retail consumers from U.S. country-of-origin marking requirements: U.S. companies’
assessment, by sector, 1996

Sector’
Metals &
metal
Benefit Agriculture | Chemicals | products | Machinery Electronics | Textiles | Overall
Percent of responses
Allows choice between U.S.
and imported product 29 38 18 23 27 33 24
Demonstrates material
quality, workmanship or 20 13 17 23 12 33 19
service
Basis for price comparison 13 0 13 9 5 0 1
Preserves domestic jobs 9 13 13 11 10 0 10
Supports local economy 7 13 13 11 7 0 10
Provides information on
work conditions 11 13 8 9 5 11 9
Identifies likely source of
product availability and 5 0 1 1 7 22 8
replacement parts
Enhances labor's bargaining
position 41 13 5 3 0 0 3
Other 5 te) 3 te) 27 0 5
‘Number of responses.
174 8 190 35 41 9 457

" See footnote

in table 4-2 for description of sector products.

Source: Data compiled based on telephone interviews conducted by USITC staff.

Research Themes

While quantitative data about the consumer benefits of country-of-origin markings are
limited, several themes do emerge from the existing research: (1) country-of-origin marking
is perceived by many consumer groups and industry representatives as an important tool that
enables consumers to make more educated purchasing decisions in line with their personal
priorities and values; (2) country-of-origin marking is one of many factors, such as price,
quality, and warranty, that consumers consider when making a purchasing decision; and (3)
country-of-origin marking is more important in certain product areas than others.

5-10



Section 337 of the Tariff Act of 1930

Section 337 of the Tariff Act of 1930 (19 U.S.C. 1337), authorizes the U.S. Intemational
Trade Commission to investigate allegations of unfair methods of competition and unfair
acts in the importation of articles into the United States. Most complaints filed under this
statute allege patent infringement and/or trademark violations. However, a small number of
complaints'® have contained allegations that the subject imports either were not marked with
the country of origin or had false designations of origin. In one such investigation, No. 337-
TA-229, Nut Jewelry and Parts, based on a complaint filed by Kukui Nuts of Hawaii, Inc.
in October 1985, the Commission found that the failure to mark the nut jewelry confused
consumers as to whether they were purchasing authentic Hawaiian nut jewelry and thereby
allowed imports to unfairly compete with U.S. product. The Commission issued cease and
desist orders and consent orders.!” Several of the investigations involving marking issues
were settled by agreement between the parties without a Commission finding. Because
marking issues typically represent only a small part of the allegations in these cases, it is not
possible to attribute a cost associated specifically to marking.

Pending Legislative Initiatives

A number of bills or sections of bills that would either exempt or require country-of-origin
marking of various goods have been introduced in the 104th Congress of the United States
(table 3-7). Several of the pending bills or similar versions thereof were introduced in
previous Congresses. Two of these were the subject of hearings in the late 1980s. Bills
similar to H.R. 2833 were the subject of a hearing before the House Committee on
Agriculture in 1987!, and a bill similar to H.R. 2475 on the labeling of meat and meat
products, was, in part, the subject of a hearing in 1988.7"

16 USITC staff estimates up to 32 complaints have allegations of false country of origin
or failure to mark since the first petition was filed under section 337.

1 51 F.R. 40207, Nov. 5, 1986. See also U.S. International Trade Commission, Certain
Nut Jewelry and Parts Thereof (investigation No. 337-TA-229), USITC publication 1929, Nov.
1986.

17 See 100th Cong,, Ist sess., H.R. 692, HR. 1176, and HR. 1246 and U.S. House of
Representatives, Committee on Agriculture, Subcommittee on Domestic Marketing, Consumer
Relations, and Nutrition, Country-of-Origin Labeling on Imported Perishable Agricultural
Commodities: Hearing before the Subcommittee on Domestic Marketing, Consumer Relations, and
Nutrition, Committee on Agriculture, 100th Cong., Ist sess., Mar. 30, 1987, Serial No. 100-14.

17 See 100th Cong,, 2d. sess., H.R. 2920 and U.S. House of Representatives, Committee
on Ways and Means, Subcommittee on Trade, Country-of-Origin Labeling Requirements for
Imported Meat and Other Food Products: Hearing before the Subcommittee on Trade, Committee
on Ways and Means, 100th Cong., 2d. sess., Sept. 27, 1988, Serial No. 100-88.

3-36


the House Committee on Ways and Means had requested. A copy of the survey worksheet,
which includes the questions asked and the framework for compiling responses, is provided
in appendix E. The survey was based on analyst contacts with companies comprising the
Commission’s trade monitoring industry groups (about 250 principal groups based on
product classification of the Harmonized Tariff Schedule of the United States), with some
monitoring groups being aggregated because they encompass very similar products.”

Organization of the study

Chapter 2 describes the concepts and approaches for determining country of origin for
foreign and domestic goods, and identifies certain industry concerns with these measures.
Chapter 3 provides a review of the laws and regulations, and administrative processes for
determining origin and appealing decisions on marking issues. Data and information on
Government-related costs for administering and enforcing country-of-origin marking
Tequirements are presented as well. Chapter 4 provides the general perspectives of U.S.
producers on the problems, costs, and benefits of country-of-origin marking and their
suggestions of possible government action to alleviate the problems and/or costs
encountered. Chapter 5 examines the perspectives of consumers with regard to country-of-
origin marking. Chapter 6 examines specific industry sectors, including the electronics,
steel, pharmaceuticals, hand tools, frozen vegetables, automobiles and parts, textiles and
apparel, and footwear industries.

21 Some monitoring groups covering bulk raw materials that are exempted from marking
requirements were excluded from the survey.

1-6


Table 4-7

Specific problems U.S. companies have encountered with foreign country-of-origin marking, by type

of problems and by sectors

Sector’
Metals &
metal
Problem encountered Agriculture | Chemicals | products | Machinery Electronics | Textiles | Overall
Percent of responses

Lack of harmonization:

Between U.S. and foreign 29 42 14 25 34 30 25

regulations
Among various foreign 13 17 15 17 13 17 15
regulations :
Delays at the border 4 17 18 25 6 26 14
Market access difficulties 13 8 8 8 6 17 10
Lack of transparency in
foreign regulations for 18 17 7 8 3 {0} 9g
products exported from the
United States
Remarking of goods 11 0 10 8 6 4 8
Extra duties 7 ie) 11 8 3 4 7
Other 4 0 17 ie) 28 ie) 12
Number of responses
45 12 84 12 32 23 208

See footnote 1 in table 4-2 for description of sector products.

Source: Based on telephone surveys conducted by Commission staff.

4-16



Qa The primary marking statute, which is administered by Customs, generally
does not apply to products that are made in the United States, although there
are marking requirements that apply specifically to domestic automobiles
(and light trucks), wool products, and textile fiber products. Some U.S.
manufacturers nonetheless choose to mark, label, market, or advertise a
domestic product as “Made in USA.” In order for such a claim to be valid
and acceptable under the federal consumer protection law that is
administered by the FTC, the manufacturer must use wholly domestic parts
and labor.

Qa The standard for marking domestic products differs considerably from the
standard that applies to imported products. As a result, an imported product
may be marked “Made in Japan” as long as it is substantially transformed in
Japan; the product does not have to be of wholly Japanese parts. However,
an identical product that is made in the United States (i.¢., substantially
transformed) and sold in the U.S. market could not be marked “Made in
USA,” unless it is wholly of U.S. origin. On the other hand, if the same
product is exported, then foreign marking laws may require that it be marked
“Made in the United States.”

Q The United States is considered to have one of the more broad and complex
marking regimes among industrialized nations. The European Union and
Japan, by comparison, generally rely on consumer protection laws rather than
marking requirements to prevent fraudulent or misleading claims about
origin. Australia, Canada, and Mexico generally require only that imports
for retail sale be marked. Since many countries have either no specific
marking requirement or generally limit marking to goods for retail sale, using
achange in tariff classification approach! for determining origin may not
generate the concern in other countries that has been expressed by U.S.
industry representatives.

Summary of Principal Findings

The ongoing globalization of production and procurement to achieve competitive advantage
has contributed significantly to the growing concern in many domestic product sectors about
country-of-origin marking. Globalization is creating new challenges for industry,
government, and consumers. These challenges involve, respectively, a need to provide
accurate consumer product information; a need to ensure that laws, regulations, and
procedures reflect commercial and economic realities; and a recognition that more detailed

! The use of CTC in conjunction with the concept of substantial transformation as an
approach to implement NAFTA Marking Rules and to harmonize rules of origin internationally is
discussed in chapter 2.


Table 3-7

Pending legislation in the 104th Congress either requiring or excepting products from country-of-

origin marking

Legislation :
(Sponsor) Title Action and product coverage j Bill status
H.R. 2833 To amend the Perishable To require marking of Referred to the House
(Rep. Nancy | Agricultural Commodities Act, perishable produce (or bins, Committee on
Kaptur, Rep. | 1930, to require that perishable display cases, or other Resources, Dec. 12,
Karen agricultural products be labeled or containers), including similar 1995, and to the House
Thurman) marked as to their country of origin. products now excepted from Committee on
marking on the J-list (19 CFR Agriculture, Dec. 22,
134, part D). 1995.
H.R. 2475 To amend the Federal Meat To require marking or labeling Referred to House
(Rep. Tim Inspection Act to require that of meat and to require Committee on
Johnson) imported meat and meat food advertising to reflect that Agriculture, Oct. 12,
products containing imported meat | imported meat is being used. 1995.
be labeled imported, and to require
that certain eating
establishments...
H.R. 2426 To amend the Tariff Act of 1930 To require marking of metal Referred to House
(Rep. with respect to the marking of door door hinges on the side visible Committee on Ways and
Richard hinges. to the person passing through a | Means, Sept. 9, 1995.
Gephardt, doorway.
Rep. James
Talent)
H.R. 2129 To amend the Tariff Act of 1930 to To exempt spices, as classified Referred to House Ways
(Rep. provide that the requirement of in certain HTS subheadings, and Means Committee,
Benjamin marking of imported articles and and their containers from Subcommittee on Trade,
Cardin) containers not apply to spice country-of-origin marking Aug. 1, 1995.
products. requirements.
H.R. 947 To exempt semiconductors from To exempt semiconductors and | Referred to House
(Rep. Bill the country-of-origin marking their containers from marking. Committee on Ways and
Archer) requirements under the Tariff Act Means, Feb. 15, 1995.
of 1930.
S. 1793 To amend the Tariff Act of 1930 to To require that fresh cut Referred to Senate
(Sen. Judd provide that the requirements flowers, now excepted from Committee on Finance,
Gregg) relating to marking imported marking, are marked with May 22, 1996.
articles and containers apply to country of origin and that such
fresh cut flowers. flowers are clearly identified as
‘such at the retail level.
S. 1747 To correct the marking To except from marking certain Referred to Senate
(Sen. Phil requirements for American-made textile products by codifying into Committee on Finance,
Gramm, feather and down-filled products. a change of tariff classification May 13, 1996.
Sen. Carol that substantial transformation
Moseley- occurs and therefore the
Braun) finished product will not be
required to be marked with the
country of origin of the fabric.
S. 1746 To correct the marking To exempt metal forgings used Referred to Senate
(Sen. Phil requirements for American-made in hand tools from marking. Committee on Finance,
Gramm) hand tools. . May 13, 1996.

Table continued on next page.

3-37



production,’> while others arise because certain products are indigenous to a specific country
or region.

Some domestic manufacturers contacted during the Commission’s survey also indicated a
possible conflict between the FTC standard and foreign customs’ and/or consumer protection
regulations. For example, a domestic manufacturer may be required to mark identical
products differently if the products are to be sold in both domestic market and foreign
markets. In the domestic market, the U.S. manufacturer may be unable to mark the goods
“Made in USA” because they do not meet the FTC standard. In some foreign markets,
however, the U.S. manufacturer/exporter must mark the goods as “Made in USA” in order
to abide by foreign marking requirements. This inconsistency between U.S. and foreign
marking rules, according to U.S. companies, may force U.S. manufacturers to segregate
inputs from multiple sources, or to establish multiple assembly or labeling lines and/or
multiple inventory systems in order to serve these different markets.’

To ascertain the degree of industry concem with marking problems across a broad spectrum
of industry sectors, Commission staff conducting the survey initially asked each company
whether it has concerns or problems with U.S. or foreign country-of-origin marking
requirements, and how important such origin markings are to the company’s customers (i.e.,
are customers’ purchasing preferences influenced by the product’s country of origin, as
indicated by the marking). Companies representing 68 percent of survey respondents stated
they do not have concerns or problems with U.S. country-of-origin marking requirements.
One plausible reason for this apparent lack of concem by many companies about U.S.
marking requirements is that many U.S. imports are bulk commodities that are exempt from
marking, or for which only the container is required to be marked. In addition, Commission
survey responses indicate that many U.S. companies tend to base their purchasing decisions
on quality (including pre-purchase qualification and supplier certification)'” and price, rather
than on country of origin per se.

Companies representing 32 percent of survey respondents indicated that they do have
concerns with U.S. marking requirements.'* Included in this group of companies are
domestic manufacturers that process, further manufacture, or assemble finished products
from imported raw material inputs, components, and subassemblies.

+5 Some components or products are no longer produced in the United States as certain
industries have shifted some, or all production operations offshore. Prior to last year, for example,
there were no U.S. producers of bicycle derailleurs. Examples of this situation can be found in
many other industries.

'6 See, for example, Neville Peterson & Williams and International Business-Government
Counsellors, Inc., on behalf of Xerox Corp., prehearing submission to the USITC, Mar. 27, 1996,
pp. 18-19.

17 Tn instances of supplier certification, most companies that purchase inputs for their
manufacturing operations know the country of origin in any event, and some U.S. processors
purchase intermediate goods from suppliers designated by their customers, in which case the
country of origin is known by both processor and ultimate consumer. For a discussion of
customers specifying the origin of the intermediate product to their U.S. producer or processor, see
American Wire Producers Association, posthearing submission to the USITC, Apr. 25, 1996, p. 2.

18 U_S. company concerns with foreign marking regulations are discussed later in this
chapter.

4-5


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F-13


CONTENTS—Continued

3-5.
3-6.
3-7.

4-1.

422.

4-3,

4-4.

4-5.

4-6.

4-7.

4-8.

F-3.

Page

Marking requirements under American Automobile Labeling Act .................-00005 3-33

NHTSA costs related to administering and enforcing the AALA .... 3-35
Pending legislation in the 104th Congress either requiring or excepting products from

country-of-origin marking... 20.0... 2k 3-37

Country-of-origin marking: major types of problems or concerns reported by U.S. firms ..... 4-3

Specific problems or concerns regarding compliance with U.S. country-of-origin
marking requirements: U.S. companies’ assessment by types of concern and

by Sectors 26... ene teen nett eens 4-7
Types of costs companies incur in complying with U.S. country-of-origin marking

requirements: U.S. companies’ identification of costs by major types and by

industry S€Ctors ©... ence enn eee eens 4-10
Number of companies responding with cost information, indicating marking costs are not

quantifiable, and providing qualitative and quantitative data on compliance costs

as a percentage of company net sales, by industry sectors ............-..-..-.0--5 4-11
Number of companies providing qualitative and quantitative data on country-of-origin

compliance costs as a percentage of company net sales, by level of compliance cost

as a percentage of net sales, and by sectors .......... 2.6.00. cee cee cece e eee 4-12
Country-of-origin marking costs identified during the Commission’s investigation,
No. 332-366 20.00 nent ene eee 4-13

Specific problems U.S. companies have encountered with foreign country-of-origin
marking, by type of problem and by sectors
Types of benefits companies report they receive from country-of-origin marking
requirements: U.S. companies’ identification of benefits, by major type of

benefits and by sectors 4-19
Benefits companies identified they receive from marking with “Made in USA” labeling:

U.S. companies’ identification of benefits, by type of benefits and by sectors . 4-21
Summary of major studies on country of origin and consumer preferences .. . 5-4
Summary of other consumer and union groups’ positions on country-of-origin marking ..... 5-9
Benefits to retail consumers from U.S. country-of-origin marking requirements:

US. companies’ assessment, by sector, 1996.......... 00... c cece cece eee eee eee 5-10
Positions of interested parties--electronics ..... F-2
Positions of interested parties--steel products . F-5
Positions of interested parties--pharmaceuticals . F-8
Positions of interested parties--hand tools ...... F-9
Positions of interested parties--frozen vegetables . . F-15
Positions of interested parties--automobiles and automotive pars F-18
Positions of interested parties--textiles, apparel, and footwear . F-19
Positions of interested parties--other products F-23



Table 5-2
Summary of other consumer and union groups’ positions on country-of-origin marking

Organization Position
‘Consumer Groups
Consumers for World Opposed to domestic-content measurements, country-of-origin rules, and Buy
Trade (CWT) American laws, as they are trade distorting, misleading, and costly to consumers.

Given the complexities in world trade and the globalization of production, it is virtually
impossible for country-of-origin labels to inform consumers accurately about where a
good was produced. Labeling products with a country of origin encourages a “Buy
American” mind-set in consumers that places imports in a negative light, which
contradicts U.S. commitments to trade expansion and liberalization.

Made in USA Claims that American consumers have a strong preference for buying U.S.-made
Foundation products, and is concerned that importers are exploiting this preference through
misleading labeling and advertising; maintains that consumers seek to buy U.S.
products to help the U.S. economy and protect U.S. jobs; says it is in the consumer's
best interest to buy U.S. products for safety reasons and they are a better long-run
value; higher prices may include the costs of consumer protection; environmental
protection; safe, humane working conditions; and decent worker wages. Believes that
the FTC's “all or virtually all” standard for “Made in USA" labeling should be diluted to
allow products with a majority of domestic content to carry the “Made in USA’ label.

Labor Groups
AFL-CIO Believes the “Made in USA" label has great value. In order to preserve the value of
Union Label & Services “Made in USA" labeling there must not be any dilution of the existing “all or virtually all”
Trades Department standard as upheld by the FTC. Buying U.S.-made products preserves U.S. jobs.
International Current standard should be retained. The consumer appeal of the “Made in USA”
Brotherhood of label reflects support for U.S. jobs and industry, and also a belief that such a product
Teamsters is manufactured under domestic health and safety regulations and wage and hour

standards. People avoid purchasing goods that could have been made by slave
labor, child labor, or other types of oppressed labor.

United Auto Workers Globalization of production has not improved the working and living conditions in the
Union (UAW) U.S. or abroad. The UAW seeks to prevent the “Made in USA” claim from being
associated with products that do not uphold the standards for U.S. production or the
standard of living of U.S. workers.

Source: Compiled by the staff of the U.S. International Trade Commission from submissions to the ITC, FTC,
and hearing testimony.

In the Commission’s telephone survey for this investigation, firms, trade associations, and
resellers were queried about their perceptions of the value that country-of-origin markings
provide for consumers. Responses overall and within each broad industry sector (table 5-3),
including agriculture, chemicals, minerals and metals, machinery, technological goods, and
textiles and apparel, indicate that the principal perceived benefit is that country-of-origin
marking allows consumers to choose between a U.S. product and an imported product.
These respondents reported that the second most important benefit to consumers is that
marking provides a basis for determining the quality of materials, workmanship, or service
associated with a product.


(“Made in USA” labeling, for example).’ For those products where marking is required,
problems or concems are related essentially to marking compliance requirements or to
Customs determinations of origin and the use of differing rules of origin (table 4-1).

Required marking can involve tracking of inputs and products,® generating administrative
costs. For some manufacturers, problems may arise when marking rules administered by
different agencies conflict. Marking requirements also pose problems when it is difficult to

mark a product because of its size, composition, or intended use.

Where compliance concerns are origin-related, uncertainty is often caused by changes in how
origin is determined. Such determinations may change because of court decisions, bilateral

Table 4-1
Country —- marking: Major types of —_ or concerns ae by U.S. firms,

F Required ‘Marking Essentially a Marking © Concern:

issued by Customs, FTC, DOT, FDA, and others).
¢ Uncertainty about the marking requirements.
© = Technical or commercial difficulty of marking a product.
Marking Concern Related to U.S. Rules of Origin:

where substantial transformation occurs.

principle embodied by NAFTA rules of origin.

substantial transformation.

*¢ Administrative burdens and overhead costs associated with tracking imported
inputs and products; may include changes in interpretation of who constitutes
ultimate purchaser and required marking as a result of that decision.

* Conflict between required marking laws and regulations (as between regulations

Changing interpretations of what constitutes substantial transformation and
* Changes resulting from universal application of “change of tariff classification”
* Anticipated problems due to changes in origin determination on an MEN basis.

Lack of harmonization between U.S. and foreign regulations, and among foreign
regulations, especially relating to differences in the applied definitions of

Voluntary Marking *  Strictness of the FTC threshold.

* Conflict between the FTC standard and Customs’ marking regulations.
* Conflict between the FTC standard and foreign customs requirements.

Source: Compiled by Commission staff.

7 For most textile and apparel products made in the United States, FTC regulations require

that such products be marked as “Made in USA” if they meet the FTC “wholly domestic”
standard. See section on textiles and apparel in chapter 6 of this report for further detail.

* In this regard, industry representatives stated that it may not be possible to track repairs
or spare parts used on warranty repairs of various machines (and the consumer may have little or
no interest in the country of origin so long as his machine works). See, for example, statement of
John Ryan, chairman, customs committee, National Council on International Trade Development,

transcript of hearing, p. 82.

4-3




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5-5


In addition, costs related to the American Automotive Labeling Act (AALA) have been
estimated® for automakers and auto parts producers. These estimates, made prior to the
implementation of AALA regulations, indicate that the 23 firms producing automobiles and
light trucks in the United States would together incur approximately $13 million in start-up
costs and $2 million in annual recurring costs. Estimated costs per company range from
$500,000 to $1 million for start-up costs and $75,000 to $150,000 for annual costs.
Estimates for auto-parts manufacturers, including both start-up costs and first year (1996)
operating costs, range from $40,000 to $80,000 per company for each of the 15,000 U.S.
manufacturers of auto parts for a total of $600 million to $1.2 billion (table 4-6).

The costs of country-of-origin marking may often include factors that are less tangible than
the physical application of a marking to a finished article. For example, producers of frozen
vegetables have stated that ink-jet printing of country-of-origin markings on plastic bags, as
desired by Customs, is not possible for technical reasons. Companies reportedly must
consider the option of creating an inventory of packaging materials marked with the country
of origin of each of the possible commingled ingredients, and changing the package with
each change in ingredient; such changes reportedly would result in a packaging logistics
dilemma. The variations would ultimately result in such packaging decisions impeding
flexibility in commodity purchasing decisions and possibly resulting in higher costs to the
consumer.*° Also, the inability to obtain preprinted labels may force a producer to inventory
a product (incurring additional storage costs), to purchase new labeling equipment, or to
purchase additional inputs from a particular country simply to meet labeling requirements.”

Intangible costs may also arise in other situations. A company may desire to put a “Made
in USA” label on a product for commercial or marketing reasons but to comply with the
standard may have to refrain from using lower cost imported inputs. Many domestic
manufacturers processing imported inputs prefer not to mark a foreign country of origin on
their product. While a company may add substantial value to the imported inputs in its U.S.
finishing operations, consumer confusion may result from the juxtaposition of a U.S.-union
label with a foreign origin marking.*? Some companies may prefer to not mark a foreign

38 Estimated by the National Highway Traffic Safety Administration, U.S. Department of

Ti ortation.
Tansporty See, for example, statements of Allen Matthys, vice president, technical regulatory

affairs, National Food Processors Association, transcript of hearing, pp. 236-237, and Marti
Morfitt, vice president, Green Giant Brands, The Pillsbury Co., transcript of hearing, pp. 254-255.

4 Several companies stated labels must be ordered in advance of actual processing;
therefore changes in origin for commercial reasons are limited by label inventories. See, for
example, statements of Tom Butler, manager, processing apple division, Michigan Agricultural
Cooperative Marketing Association, transcript of hearing, pp. 207-214, and Marti Morfitt, vice
president, Green Giant Brands, The Pillsbury Co., transcript of hearing, p. 230. Also see
Processed Apples Institute, Inc., written submission to the USITC, Apr. 25, 1996, p. 2.

In this regard, country-of-origin marking also would not reflect the true value of
domestic manufacture. For example, see, statements of Charles Hansen, chairman of the board,
president and CEO, Pillowtex Corp., transcript of hearing, pp. 187-188; Frank Schapiro, senior
partner, Demand Factors, Inc., on behalf of Crafted with Pride in U.S.A. Council, Inc., transcript
of hearing, p. 195; and Daniel Kral, president, Natural Feathers & Textiles, Inc., transcript of

(continued...)

. 4-14


Footwear

The U.S. footwear industry is a
highly fragmented sector of
about 350 to 400 firms, mostly
small in size. The highly labor-
intensive industry has undergone
substantial restructuring in the past
decade, largely owing to intense
competition from low-cost
countries. In general, domestic
firms compete on the basis of
nonprice factors such as product
differentiation, quality, and
service. To remain competitive,
many of these firms have invested
in the latest manufacturing and
marketing technology, increased
their use of global procurement
and marketing, and entered new
channels of distribution.

Specific Marking
Requirements

Footwear is not subject to any

Industry Profile

Trade data 1995 (million pairs):
US, production........ oe 235.6
1399.5
34.5
Apparent U.S. consumption ... + 1,600.6

Import share of apparent US.

consumption (percent) .......... 87

Source: Compiled by USITC staff based on official
statistics of the U.S. Department of Commerce

Trends in Globalization

‘With the diffusion of information technology,
USS. firms have separated manufacturing tasks
from design and marketing functions to take
advantage of individual country strengths in these
areas. Generally, product design and marketing
occur in the United States while manufacturing
takes place in low-cost countries. A number of
US. firms also import footwear components, not
only to improve the relative price competitiveness
‘of their product line but also to obtain those parts

product-specific marking _ that are not made domestically. Moreover,
requirements like textile and — several U.S. firms have entered into joint ventures
apparel goods. However, the or licensing arrangements with producers in
Footwear Distributors and _foreign markets to meet growing demand there
Retailers of America (FDRA) _ for American-styled and branded footwear, such
claims that Customs _ strict

as rugged outdoor boots.

application of section 134.46 Of quasi

the Customs Regulations as it

relates to footwear discriminates against the sector. Under this provision, the country of
origin must be disclosed in close proximity to any reference on the imported product or its
container to a place other than the country of origin. For example, if the outsole of a shoe
contains a marking such as “U.S. patent pending,” the country-of-origin marking must be
in close proximity to this reference. The FDRA contends that, for imported products other
than footwear, Customs, in practice, applies a less stringent rule than that called for under

6-62


difficulties for shoes that are produced overseas and imported into the United States for
export to other markets.

Compliance Costs and Benefits

Almost all firms surveyed claimed that the cost of complying with country-of-origin marking
rules is not available but represents less than 1 percent of production costs (the majority
estimated the cost at less than 0.5 percent of production costs). Compliance costs consist
mostly of administrative costs of complying with regulatory agencies, warehousing,
accounting, and costs of tracking the use of foreign components. In addition, two firms cited
added production costs due to multiple production lines and inventory records, one for
products destined for domestic consumption and the other for those for foreign markets.

Almost all firms surveyed stated that country-of-origin marking plays an important part in
the consumer purchasing decision. For example, consumers would generally prefer to buy
Italian shoes rather than Chinese ones. One firm claimed that demand for its U.S.-made
branded shoes is greater than that for the same brand-name shoes it sources from El
Salvador. Although the majority of firms could not precisely estimate their sales volume
affected by country-of-origin marking, one firm stated that about 20 percent of its sales
volume comes from customers who always buy its U.S.-made products. Some said that the
country of origin may not be the most significant factor in the consumer’s selection of shoes,
but nevertheless it is one of the important selection criteria in the buying decision and their
sales would suffer if they are not allowed to label products with an unfettered “Made in
USA” marking.

The majority of respondents claimed that information exists showing consumer preference
for footwear products with a “Made in USA” label. Letters from consumers, consumer focus
group studies, and retailer feedback all indicate buying patterns of consumers favoring
products with a “Made in USA” label. One company reported that its sales could decline by
as much as 20 percent without the “Made in USA” label on its products. The majority
reported that buying U.S.-made shoes and preserving U.S. jobs are important to a significant
portion of the U.S. population. The majority of respondents who are also importers indicated
that their domestically made shoes offer consumers a competitive product with the special
appeal of being U.S. made.

All five firms agreed that country-of-origin marking provides consumers a basis for
determining quality of materials, workmanship, or service. The firms also contend that the
marking rules help preserve domestic jobs and help the local economy, which are important
issues for both consumers and producers. Because the cost of country-of-origin marking
tules is estimated to be less than 0.5 percent for most firms, elimination or simplification of
these rules will not significantly affect costs. One firm said that the cost savings resulting
from either elimination or simplification of country-of-origin marking rules would likely be
absorbed by the footwear firms, with little or no savings passed on to consumers.

6-65


Customs was unable to estimate the number of violations that resulted in merchandise being
re-exported, destroyed, or marked under Customs supervision. Customs was also unable
to provide information on the number of violations that were subject to the additional 10
percent ad valorem duties provided for under section 304(f). However, Customs cited the
example of one company that was assessed almost $5.2 million in marking duties.”

Convictions have been relatively few, as have been the number of penalty cases (table 3-2).
Seizures of goods for mismarking have declined, however the assessment of monetary
penalties for marking violations has risen. The large difference in the annual figures for FY

Table 3-2
Customs activities related to country-of-origin marking violations, FY 1993-95, except as noted.
Year to date
FY 1993. FY 1994. FY 1995 FY 1996.

item {Oct. 92-Gct. 93) | (Oct. 93-Oct. 94) | (Oct. 94-Oct. 95) | (Oct. 95-May 96)
Marking violations ” 42,111 36,256 29,981 @)
Total number of entries (in 10.5 11.8 13.0 ()
millions)?
Violations as a share of total 0.4 0.31 0.23 ()
entries (in percent) ”
Convictions under section (*) 21 19 1
304(I) of the Tariff Act of 1930
Seizures under section 595a(c) () 437 261 127
of the Tariff Act of 1930
Penalty cases @) 20 25 51
Penalties assessed under (*) $2,948 $6,140,224 $30,059,189
section 592 of the Tariff Act of
1930 for marking violations

"These primarily include salary, overhead, and benefits.
2 Calendar year.

* Not available.

Source: Compiled by the staff of the U.S. International Trade Commission from data from the U.S. Customs

Service.

1993-96 relate to the way Customs maintains its records; however, the increase in assessed
penalties is attributable to greater emphasis by Customs on pursuing violations under section
592 of the Tariff Act of 1930, including those related to marking. Penalty cases are typically
handled by Office of the Chief Counsel at Customs Headquarters; cases involving penalties
over $500,000 are handled by ORR’s Penalties Branch.

Since 1980, there have been approximately 44 cases involving marking issues decided before
the CIT and 16 cases before the CAFC. About 27 of those cases decided by the CIT have

8 Tbid.

89 Pentax Corp. et al., v. United States, Slip No. 96-64 (CIT, Apr. 15, 1996). In order to
obtain the benefits of prior disclosure, Pentax was required to pay almost $5.2 million in marking
duties for mismarking goods imported under approximately 300 entries between July 1987 and
Mar. 1991.

3-20


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3-16


Table A

Suggestions by interested parties concerning marking laws and regulations

Item

Suggestions

Supports this recommendation, except as noted

Section 304 of
the Tariff Act
of 1930

Maintain current marking
requirements, including strong
enforcement of the law.

Agriculture: Burnette Foods, Florists’ Transworld
Delivery (FTD) Association, International Brotherhood
of Teamsters AFL-CIO, Mason Country Fruit Packers
Co-op, Inc., Michigan Agricultural Cooperative
Marking Association, Inc. (MACMA), Morrison
Orchards, United Foods, Inc.

Textiles and apparel: American Apparel
Manufacturers Association (AAMA), American Textile
Manufacturers Institute (ATMI), Crafted With Pride in
U.S.A. Council, Inc.

Cutting tools: Allied Machine & Engineering Corp.,
Cogsdill Tool Products, Inc., Criterion Machine Works,
Jarvis Cutting Tools, Inc., Keo Cutters, Koncor
Industries, Moon Cutter Co., Inc., Precision Twist Drill
Co., SGS Tool Co., Talbot Holdings, Ltd., United
States Cutting Tool Institute (USCT!)

Hand tools: Component Specialty, Inc., Danaher
Corp., Snap-on, Inc., Laclede Steel Co., Vaughan &
Bushnell Manufacturing Co., Wright Tool Co.

Steel products: American Pipe Fittings Association
(APFA), Committee of Domestic Steel Wire Rope and
Specialty Cable Manufacturers, Committee on Pipe
and Tube Imports (CPTI), Diamond Chain Co.,”
Weldbend Corp., Wheatland Tube Co.

Others: AFL-CIO Union Label & Service Trades
Department, Eastman Kodak Co., Made in the USA
Foundation, McPhillips Manufacturing Co., Inc.,
Municipal Castings Fair Trade Council, Oneida, Ltd.,
Torrington Co., United States Tuna Foundation

© Limit marking to imports for
retail sale (i consumer goods);
© Eliminate marking requirements on
industrial products;
o Limit marking to certain products.

American Wire Producers Association (AWPA), Digital
Equipment Co., Eli Lilly and Co., Intel Corp., Joint
Industry Group (JIG), National Council on International
Trade Development (NCITD), Natural Feather &
Textiles, Inc., Pharmaceutical Research and
Manufacturers of America (PhRMA), law firm of
Sonnenberg & Anderson, Kraft Foods, Inc., Xerox
Corp.

Table continued on next page.

xviii



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F-21


Section 304 of the Tariff Act of 1930, 28

amended, provides that all imported articles,
or their containers, unless excepted, must be
marked at the time of importation so that the
“ultimate purchaser” of the imported article
in the United States can know the country
where the imported product was made.
Some consumers may prefer to purchase
products that are manufactured in the United
States, while other consumers may prefer to
buy imported products, in which case they
may prefer to purchase products that are
manufactured in one foreign country rather
than another. The marking requirement
enables consumers to make an informed
choice. The marking statute also operates
to protect domestic producers and to
facilitate the enforcement of some Customs
laws (e.g., quotas and antidumping duties)
by helping to identify subject goods.

Imported articles, or their containers, must
have a country-of-origin marking in a
conspicuous place as legibly, indelibly, and
permanently as possible, and it must be in
English. The Secretary of Treasury is
authorized to create regulations to determine
whether the content, the method, and the
location of the mark are acceptable.* The
Secretary also is authorized to require
additional words or symbols to prevent
deception or mistake as to the origin of the
article or any other article with which such
imported article is combined subsequent to
importation but prior to delivery to the
ultimate purchaser.

‘Ultimate purchaser

"The ‘ultimate purchaser’ is generally the
last person in the United States who will
receive the article in the form in which it
‘was imported” (19 CFR 134 1(d)). Ifthe
imported article is sold at retail in its
imported form, then the purchaser at retail is
‘the ultimate purchaser, and the imported.
article or its contamer must be marked so.
‘that the purchaser at retail can know the
imported article's country of origin.

‘Af the imported article is subjected to a
minor manufacturing process in the United
States after importation that leaves the
identity of the imported article intact, then
the consumer or user of the processed article’
‘will be regarded as the ultimate purchaser,
and the imported article or its container
must be marked so that the consumer or user
of the processed article can know the
imported article's country of origin.

If the imported article is used by a
qmanufacturer in the United States and
‘subjected to a process that results in a so-
called substantial transformation, then the
manufacturer may be the ultimate purchaser.
An such a case, the imported article does not.
need to be marked with the country of origin
(19 CFR 134.35(a)), but the container of the
‘imported article must nevertheless be
marked with the imported article's country
of origin. Once the imported article is
‘substantially transformed in the United
‘States, then neither the resulting product nor
its container needs to be marked to reflect
that it was made from an imported article.

25 “The evident purpose (of the marking statute] is to mark the goods so that at the time of
purchase the ultimate purchaser may, by knowing where the goods were produced, be able to buy
or refuse to buy them, if such marking should influence his will." See United States v.
Friedlaender & Co., Inc., 27 C.C.P.A. 297, at 302 (1940).

26 19 U.S.C. 1304(a)(1). The Customs marking regulations are set forth at 19 CFR 134 et

seq.

3-7


Gibson-Thomsen Co. decision as “requiring a change in the name, character and use of the
articles and has placed more emphasis on a change in the character of the article than on any
change in its name or use.” According to Customs, the substantial transformation test is
most often used for country-of-origin marking determinations.*°

Although Customs recently announced that it would undertake a complete revision of
regulations in 19 CFR 134, this process has no schedule for completion.“* Customs has
already announced proposed rulemaking that would ease the strictness of certain regulations,
such as those covering wearing apparel” and the proximity of a country-of-origin marking
to a mentioned geographic location (19 CFR 134.46). Customs also is proposing
rulemaking with regard to watches,” frozen produce packages, and several other products
to clarify marking issues. On June 6, 1996, Customs published a Federal Register notice,
effective August 5, 1996, that makes final the rules for determining the country of origin of
a good for purposes of NAFTA Annex 311.” This final rule modified the marking
regulation for articles returned to the United States after having been advanced in value or
improved in condition outside the United States, 19 CFR 134.43(e). The modified regulation
will cover only assembled articles, and will allow markings such as “Assembled in (country
of final assembly) from components of (name of country or countries of origin of all
components).” A number of golf club component producers had reported that the prior
version of 19 CFR 134.43(e) required them to mark golf club heads, cast in the United States
and finished in Mexico, as products of Mexico. Prior to NAFTA, such a marking was not
required. However, if the club head was processed outside of a NAFTA partner, the head
would not be required to be marked with a country of origin.” Customs has also provided
a 4-month period of adjustment, from July to November 1996, to allow firms to exhaust
their inventory of old country-of-origin labels for certain textile and apparel products
because of the economic hardship of converting to labels that reflect the new country-of-
origin rules implemented under section 334 of the Uruguay Round Agreement Act.* This
adjustment period applies to labels stating “Assembled in X country from U.S. components”
or to a similar phrase for goods that were assembled from components cut to shape in the
United States.

Customs practices regarding the marking of various products may not necessarily be
published as regulations, but are also found in Treasury Decisions (T.D.s), Customs Service
Decisions, or in binding ruling letters issued by Customs. An example of such a practice in

“ Ibid.

45 60 F.R. 22314, May 5, 1996. In this notice, Customs discusses court decisions on
substantial transformation, and continues this discussion in another notice, 61 F.R. 28938, June 6,
1996.

46 30 Cust. B. & Dec., “Modification of Customs Ruling Relating to Country of Origin
Marking of Wire Rod,”, Apr. 3, 1996, p. 25, and Sandra L. Gethers, chief, Special Classification
and Marking Branch, U.S. Customs Service, telephone interview with USITC staff, May 28, 1996.

“7 60 FR. 57621-57622, Nov. 16, 1995.

48 60 F.R. 57559-57560, Nov. 16, 1995, and 60 F.R. 66952-66953, Dec. 27, 1995.

“60 F.R. 14705-14707, Mar. 20, 1995.

60 F.R. 6464-6466, Feb. 2, 1995.

561 F.R. 28932-28980, June 6, 1996.

Stein, Shostak, Shostak & O’Hara, on behalf of Ajay Sports, Inc., Coastcast Corp.,
Daiwa Corp., Lamkin Leather & Rubber Co., Lynx Golf, and Taylor Made Golf Co., Inc.,
posthearing submission to the USITC, Apr. 24, 1996.

61 FR. 32924-32925, June 26, 1996.

3-11




product cannot always be distinguished as being the manufacture of just one or two
countries, as it may represent an amalgam of inputs and processes performed in many
countries. This trend is especially true for products that are mixed or assembled, with the
implication that the final processing or assembly operation required to impart unique product
attributes (e.g., quality, tolerances, or metallurgical content) may not appear to change the
product’s character, essence, and use, although it adds significant value to the product.
Therefore, origin appears even more difficult to attribute to one country.

The emergence of more widespread global procurement and production creates new
challenges for industry, government, and consumers. These challenges involve, respectively,
a need to provide accurate product information to consumers; to tailor laws, regulations, and
procedures to meet both government objectives and commercial and economic realities; and
to recognize the limitations that more detailed information may have in assisting buying
decisions. For the consumer, the globalization of production and the associated increase of
products within given price and performance ranges may result in increasingly complex
purchasing decisions. In addition to seeking information on quality, reliability, safety, price,
and other product attributes, many consumers will continue to seek products that are made
domestically or by domestic companies to the extent such information is available. In this
context, a company gains a competitive advantage if it can mark its products “Made in
USA,” or if it does not have to mark its products with a foreign country of origin. However,
the growing use of foreign inputs or manufacturing facilities by companies with brand
names perceived by consumers as representing domestic firms increasingly blurs distinctions
based on country of origin.*

U.S. Company Concerns Related to Country-of-Origin
Marking

U.S. companies contacted by, or submitting comments to, the Commission in the course of
this investigation identified a wide range of specific concerns or general problems of
compliance related to country-of-origin marking. Many of these issues transcend the matter
of compliance costs identified by industry in meeting marking requirements. These concerns
can be differentiated by whether marking of the pertinent good is required® or voluntary

5 In this regard, certain U.S. consumer representatives state that place names, such as
Florida Orange Juice or Idaho potatoes help to define essential character for the consumer; they
indicated that the European Commission recently proposed that certain food products were so
closely associated with geographical locations that names would be protected and that no one
outside that nation or region could use the name. See, for example, statement of Joel Joseph,
chairman, Made in the USA Foundation, transcript of hearing, p. 20.

° As has been indicated in earlier chapters, U.S. laws and regulations require that
imported goods or their containers (with certain exceptions, such as commodities in bulk) be
marked conspicuously with the name in English of the country of origin of the article, unless
specifically exempted.

4-2


Hand Tools”

This sector includes non-powered
hand tools (hand tools) for the
home improvement, consumer, and
professional markets. These tools
are employed by a variety of users
such as mechanics, plumbers,
carpenters, masons, construction
and industrial workers,
households, hobbyists, and other
trades persons who rely on hand
tools to make their living. In the
hand tool market, country-
of-origin marking appears to play
a significant role as a marketing
tool for producers and as an
indicator of quality and national
pride with customers.
Country-of-origin marking also is
a significant factor in purchase
decisions of consumers, especially
professionals that use tools for
their livelihood. Professional users
account for over 65 percent of the
U.S. non-powered hand tool
market. Because of customer
perceptions of quality and value,
marking hand tools with “Made in

USA” label is an effective
marketing tool, according to
industry officials.

Industry Profile
Trade data 1995 (million dollars)

U.S. shipments 5,618
U.S. imports .. 1,205
US.exports 687
Apparent U.S. consumption. ........ 6,136
Import share of apparent U.S.

consumption (percent) ........... 20

Source: Compiled by USITC staff based on official
‘statistics of the U.S. Department of Commerce.

Trends in Globalization

‘The United States has traditionally been one of
‘the world’s leading manufacturers of hand tools
and its largest single market. The U.S. hand tool
industry is both mature and highly competitive,
with over 800 manufacturers. Leading US.
producers operate production, distribution, and
sales operations throughout the world. Most
domestic manufacturers produce the
preponderance of their hand tools in the United
States from domestic steel. Some producers,
however, supplement their domestic production
with imported finished hand tools, or with
components, materials, and rough metal forgings
‘that need further processing.

”° The principal hand tools used in the professional, industrial, and consumer markets
include: striking and struck tools (e.g., hammers, malls, sledges, punches, and chisels);
screwdrivers; wrenches and spanners; ratchets, drive socket sets, and extensions; edge tools (axes,
hatchets, machetes, sickles, and shears); hand-operated saws and blades; pliers, snips, and shears;
files and rasps; vices and clamps; and horticultural tools (shovels, hoes, forks, picks, and rakes).

80 "Hand and power tools march forward,” Industrial Distribution, vol. 84, No. 5, May

1995, pp. 56-58.

6-24



system, including the administrative, warehousing, accounting, and tracking origins of hot-
rolled bars would amount to 1 to 2 percent of sales, which would be very difficult to recoup,
if at all.® Once the capital cost for installing a die-stamping or tagging line is met, several
respondents indicated that the per-unit cost of marking is minimal. In prehearing
submissions, the costs and burdens of country-of-origin marking requirements for pipe and
tube, and wire rope and specialty-cable manufacturers” were stated as negligible. The
latter source estimates the cost more specifically at approximately $1 per short ton compared
with an average unit value for all steel wire rope imports in 1995 of approximately $1,462
per short ton, which amounts to less than 0.1 percent of average unit value. Furthermore,
according to a pipe-fittings manufacturer, compliance costs would become burdensome only
when marking rules change and long-standing procurement and production practices must
be adjusted accordingly. None of the respondents could quantify the addition to retail
purchase price; and one producer of hot- and cold-rolled steel bars remarked that marking
costs could not be passed to the firm’s customers, but are rather a cost of the production
process.

Benefits to each company, as identified by the firms surveyed by USITC staff, are also
infrequently and not uniformly cited and no clear pattern emerges. A few respondents
stressed that domestic producers could benefit from country-of-origin markings as long as
the foreign-origin like-product is clearly identified as such. Only then could customers
choose between the U.S.-made and the imported product and have a basis for determining
quality of materials, workmanship, or service. Furthermore, none of the respondents could
indicate to what extent unit sales were increased due to competitive preference.

The extent of customer preference for steel products from any particular country of origin
varies by product and end-use. Generally, country of origin is less important for customer
preferences than price and product quality in the majority of cases (as long as the product
meets specifications for physical performance) and identity and manufacturing process of
the producer. For example, a U.S. manufacturer of link chain indicated that price is the
primary consideration for hot-galvanized chain for marine and fishing applications and for
mine hanger chains in anchoring conveyor belts for coal mining; in such applications,
domestic manufacturers lost market share to cheaper imports. However, product quality and
traceability of origin are overriding factors due to liability concems in lifting or overhead
applications. Customers with such concems (e.g., original equipment manufacturers,
industrial distributors, and automotive warehouse distributors) prefer U.S.-origin chain
products over lesser-known foreign sources. Similarly, as noted by the Committee of
Domestic Steel Wire Rope and Specialty Cable Manufacturers,” customers have marked
allegiance, developed over years of consistent and reliable use, to steel wire rope produced
by U.S. manufacturers, a loyalty which is particularly evident for applications which pose

§ U.S. manufacturer of cold-finished steel bars, written correspondence to USITC staff,
May 7, 1996.

& Schagrin Associates, on behalf of the Committee on Pipe and Tube Imports, prehearing
submission to the USITC, Mar. 27, 1996.

® Harris & Ellsworth, on behalf of the Committee of Domestic Steel Wire Rope and
Specialty Cable Manufacturers, prehearing statement to the USITC, Mar. 27, 1996.

® Mayer, Brown & Platt, on behalf of Weldbend Corp. written submission to the USITC,
Apr. 25, 1996.

© Harris & Ellsworth, on behalf of the Committee of Domestic Steel Wire Rope and
Specialty Cable Manufacturers, posthearing statement to the USITC, Apr. 25, 1996.

6-17


Identification Act, and Fur Products Labeling Act, and preventing deceptive
and unfair acts related to claims of country of origin under section 5 of the
Federal Trade Commission Act. The increase in FY 1995 included
expenditures for processing two cases alleging deceptive claims of U.S.
origin under section 5 of the FTC Act; such cases appear sporadically before
the FTC.

NHTSA estimates that the cost of administering and enforcing the American
Automobile Labeling Act (AALA) increased from $91,725 to $136,713
during FY 1993-95. Almost all of NHTSA costs under the Act have been for
regulatory rulemaking since its enactment by Congress in November 1992;
labeling became effective in August 1994. To date, enforcement has focused
on assuring that automobile producers are generating the information
required under the AALA.

Industry Concerns Regarding Country-of-Origin Marking

a

Sixty-eight percent of the 435 companies responding to the ITC telephone
survey stated they do not have concerns or problems with U.S. country-of-
origin marking requirements. With regard to foreign country-of-origin
marking requirements, 78 percent of 381 survey responses indicated that
they do not have any problems or concerns.

Major issues identified by companies and trade associations that expressed
concerns about marking requirements are:
- Technical or commercial difficulty of marking a product

- Administrative burdens and overhead costs associated with tracking
imported goods that are commingled when producing finished
products

- Uncertainty about the marking requirements

- Conflict between the various marking laws and regulations issued by
Customs, NHTSA, FTC, the Food and Drug Administration, and
other Government agencies

Marking concerns related to origin determinations include:
- Changing interpretations of what constitutes substantial

transformation and where it occurs

- Changes resulting from universal application of the “change of tariff
classification” principle embodied by NAFTA rules of origin

- Anticipated problems due to changes in origin determination on a
most favored nation basis


domestic versus foreign-origin chain because hardware stores generally carry only one
brand. Even if a customer could find several different brands among different retail outlets,
it is difficult to distinguish the country of origin of a chain just by casual observation due to
lack of consistent marking practices. Furthermore, none of the respondents could offer an
estimate as to how much in addition would customers be willing to pay for products bearing
“Made in USA”-type labeling.

6-19


The Administrative Processes for Determining Origin and Appealing
Decisions on Marking Issues

The administrative processes used by Customs for determining origin and appealing
decisions on marking are complex and can be quite lengthy, depending upon circumstances.
Marking determinations usually occur through binding ruling letters issued in response to
an importer’s request prior to importation.*° Customs determinations at the port of entry upon
importation, or through the appeals process are shown in figure 3-2. In response to such a
request from an importer, Customs can issue either an information letter or a binding ruling
letter. An information letter will state either that (1) general information is actually being
sought by the importer and is being provided; (2) the request is incomplete or does not meet
the requirements set forth in subpart A, 19 CFR 177; or (3) the ruling cannot be issued for
some other reason. If the ruling request is straightforward, it will be answered by the
Office of Regulations and Rulings (ORR), National Commodity Specialist Division at the
New York Seaport, usually within 30 days; otherwise it will be answered by ORR’s Tariff
Classification Appeals Division, Special Classification and Marking Branch at Customs
Headquarters, usually within 120 days. However, Customs does not always adhere to such
a schedule.

Binding ruling letters are generally issued for future or prospective Customs transactions.”
These letters represent the official position of Customs and are binding on Customs Service
personnel with “respect to the particular transaction or issue described therein... until
modified or revoked.” The binding ruling letter may be cited as authority in transactions
involving the same circumstances, unless modified or revoked by either a change of
circumstances or change of practice by Customs. Nevertheless, binding rulings are specific
to the party to whom the ruling letter is addressed, and Customs regulations state that other
parties should not rely on rulings addressed to third parties. Binding ruling letters found to
be in error or not in accordance with the current views of the Customs Service may be
modified or revoked. Ruling letters are generally effective on the date they are issued,
including ruling letters that revoke or modify past rulings. However, Customs may delay
the effective date of a ruling letter that modifies or revokes past rulings, so that effected
parties have adequate time to appeal the prospective change.® If an adverse binding ruling

6 « An importer or exporter of merchandise, or otherwise, [that] has a direct and
demonstrable interest in the question or questions presented in the ruling request, or by an
authorized agent of such a person.” 19 CFR 177.1(c). This can be an individual, corporation,
partnership, association, or other entity or group.

® 19 CFR 177.7(b). The issue may be pending before the U.S. Court of International
Trade, the U.S. Court of Appeals for the Federal Circuit, or any court of appeal therefrom.

‘7 “A ‘prospective’ Customs trarisaction is one that is contemplated or is currently being
undertaken and has not yet resulted in any arrival or the filing of any entry or other document, or
in any other act to bring the transaction, or any part of it, under the jurisdiction of any Customs
Service office.” 19 CFR 177.1(d)(3).

19 CFR 177.9(a).

* 19 CFR 177.9.


CONTENTS—Continued

Page

Chapter 3. Review of Applicable U.S. Laws, Regulations,
and Practices Regarding Country-of-Origin Marking

Section 304 and the U.S. Customs Service ....... 22.06.00 c eee eee eee eee 3-5

Regulations .................. . 3-9
Administrative processes 3-12
The administrative process for determining origin and appealing decisions on

marking issues ©... 26.0.0 ect n nnn es

Customs activities

Costs to government
Section 5 of the Federal Trade Commission ‘Act, other acts, and the Federal

Trade Commission ....... 00.6.0 c eee cence ee teen et ee t ee ee

Wool Products Labeling Act of 1939 .

Textile Fiber Products Identification Act . :

Amendments to the Wool Act and Textile Act, 1984 .

Fur Products Labeling Act
Enforcement of the Wool Act, Textile Act, and the Fur Act, and
regulatory review ........0.0 06.0 e cece eee eee eee 3-25
Section 5 of the Federal Trade Commission Act . 3-26
Administrative process . 3-27
Costs to government 3-30
The American Automobile Labeling Act and the Department of Transportation .... 3-31
Administrative process 3-32
Cost to government . . . 3-34
The Lanham Act ..............- . 3-34
Section 337 of the Tariff Act of 1930 . 3-36
Pending legislative initiatives 3-36
Chapter 4. Industry Perspectives
Globalization of production affects country-of-origin marking .................. 4-1
U.S. company concerns related to country-of-origin marking . 4.2
Costs to industry of country-of-origin marking .......... 4-8
Industry concerns regarding foreign country-of-origin marking 4-15
Benefits to industry of country-of-origin marking ................ 4-17

Suggestions by industry and consumers for modifying existing practices .......... 4-20

ii


the fabric is formed, allegedly putting the firm at a competitive disadvantage in the U.S.
market. The firm continues to be able to mark these products for export as “Made in USA
of Imported Fabric.” Paris Accessories exports a substantial portion of its products and does
not always know at the time of production whether a particular product will be sold
domestically or abroad. Because of differences in marking requirements, the company must
keep records on the country of origin of its inputs, label its products for domestic and foreign
markets separately, and maintain separate inventories. According to the firm’s submission,
these activities greatly increase its costs, may reduce its exports, and may force it to consider
shifting its manufacturing to foreign locations. Paris Accessories also stressed that the
URAA rules of origin are not intended to define origin for FTC marking purposes. The firm
suggested that the Customs marking for country of origin only be required for goods that are
sold to the final consumer in the form in which they are imported.

Many respondents to the Commission survey expressed considerable concern over the lack
of harmonization of country-of-origin marking rules between the United States and other
countries, especially Mexico, a potentially big market for U.S.-produced apparel. Frequent
changes in Mexico’s rules of origin and marking requirements are causing many of the
apparel companies and retailers difficulty. These apparel firms and retailers claim that the
Government of Mexico does not allow time for U.S. companies to adapt to the new labeling
requirements. These respondents contend that Mexico’s changing labeling requirements are
nontariff barriers imposed in an attempt to protect Mexico’s ailing textile and apparel sector.
Many of the U.S. apparel firms and retailers that export apparel to Mexico claim that the
amount of information required by the Government of Mexico on apparel labels is growing
and is unreasonable. The most recent change in Mexico’s labeling rules requires that the
country of origin be marked for where the fabric was formed as well as the place of assembly
of the garment. One U.S. apparel producer that recently began exporting shirts to Mexico
indicated that the firm had stopped exporting there because the cost of tracing back the
country of origin of the shirt fabric was prohibitive.

U.S. apparel companies that market globally also expressed concern about the requirement
in U.S. and foreign marking regulations for identification (ID) numbers to be marked on the
country-of-origin labels. Each country has a different system for assigning and recording
these ID numbers. For example, the United States requires a registered number (RN) that
identifies the manufacturer and/or importer of the product, while Mexico requires a
“taxpayer” ID number for the importer. Canada requires yet another ID number similar to
that of the United States, and Chile requires an ID number similar to that of Mexico.
Consequently, U.S. apparel exporters that use one universal label to meet both U.S. and
foreign marking requirements may have to print as many as four different ID numbers on
their country-of-origin labels. Some respondents recommended developing an international
system of ID numbers or standardized WTO label. One company indicated that the
requirement to standardize a country-of-origin label among WTO members is inferred in that
portion of the Uruguay Round Agreement to harmonize the rules of origin.

U.S. apparel companies that use one universal label to meet the marking requirements of

several country markets or are instructed to do so by their retailer customers have found that
these labels have become so large that they affect the appearance of the garment and are

6-56


ORGANIZATION AND WITNESS

Crafted With Pride in USA Council, Inc.,
New York, NY

Frank H. Schapiro, Senior Partner, Demand Factors, Inc.

AGRICULTURE AND PHARMACEUTICALS

Panel 7

Michigan Agricultural Cooperative Marketing Association (MACMA), Lansing, MI
Tom Butler, Manager, Processing Apple Division, MACMA
American Frozen Food Institute, McLean, VA

Leslie G. Sarasin, Executive Vice President and Staff Counsel, American Frozen Food
Institute
National Food Processors Association (NFPA), Washington, D.C.

Dr. Allen W. Matthys, Vice President, Technical Regulatory Affairs, NFPA
The Pillsbury Company, Minneapolis, MN

Marti Morfitt, Vice President, Green Giant Brands

Barnes, Richardson & Colburn Washington, D.C. on behalf of
Pharmaceutical Research and Manufacturers of America (PhRMA)

Matthew T. McGrath—OF COUNSEL

- More -

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use of advertising by transplant manufacturers emphasizing assembly at U.S. plants has
confused consumers about the country of origin of certain automotive products. These
industry officials recommend that an FTC standard not conflict with the
informationconveyed on the AALA label, and thatadvertisers not be permitted to make
“Made in USA” claims that consumers would consider to be conflicting with the AALA
information.’” 1?

Industry sources representing foreign-based manufacturers with manufacturing/assembly
operations in the United States and their dealers indicate that in this era of globalized
automotive production, the wholly domestic standard (recently expressed as “all or virtually
all”) is nearly impossible for any automobile manufacturer to achieve, and that a single
standard cannot be universally applied to the automotive and other, unrelated industries.!”
These sources report that the wholly domestic standard does not reflect current consumer
perceptions and comprehension of the automobile industry, asserting that consumers
understand that the terms “made,” “assembled,” or “built” in the United States means that
the final assembly takes place in a U.S. plant with U.S. labor. This group also notes that the
wholly domestic standard is inconsistent with other governmental origin determination
programs such as CAFE, NAFTA, Customs rules, and the AALA, and that none of these
programs can be adopted by the FTC because each includes as least one foreign country
within the meaning of “domestic” or “U.S.”

As does the traditional U.S. industry, the foreign-based industry in the United States
recommends that FTC focus on prohibiting those claims that are “false or deceptive” to
consumers or that result in unfair competition. However, members of this sector contend.
that consumers are aware that an automobile advertised as assembled or made in the United
States by a foreign-owned automaker is not claiming that all or virtually all of the component
parts are made in the United States.'”

‘7! American Automobile Manufacturers Association, submission to the FTC, “Made in
the USA Policy Comment,” FTC File No. P894219, Jan. 22, 1996.

TMThe United Auto Workers (UAW) supports the retention of a single standard to be met
for a “Made in USA” claim as opposed to a variety of standards for different products, as far as it
is practical. The UAW recognizes that the complexity of products like motor vehicles and the
multinational nature of production of parts could make the wholly domestic single standard
impossible to enforce, and would support the use of cost of production as a base rather than value-
added or broader measures as found under NAFTA, CAFE, and Buy American provisions. United
Auto Workers, submission to the FTC, “Made in the USA Policy Comment,” FTC File No.
P894219, Jan. 22, 1996.

"See Association of International Automobile Manufacturers, Inc., submission to the
FTC “Made in the USA Policy Comment,” FTC File No. P894219, Jan. 22, 1996; Toyota Motor
Sales, U.S.A., Inc., submission to the FTC, “Made in the USA Policy Comment,” FTC File No.
P894219, Jan. 16, 1996; American International Dealers Association, submission to the FTC,
“Made in the USA Policy Comment,” FTC File No. P894219, Jan. 22, 1996.

14 Association of International Automobile Manufacturers, Inc., submission to the FTC
“Made in the USA Policy Comment,” FTC File No. P894219, Jan. 22, 1996.

6-45


was published in the Federal Register, and on August 22, 1994, went into effect to
implement the Labeling Act.’

NHTSA received considerable response from motor vehicle manufacturers, suppliers, and
dealers to its request for public comment about the July 1994 final nile. Much of the
comment sought reevaluation of certain provisions of the final rule. Subsequently, a second
final rule was published on September 15, 1995, taking into account some of the expressed
concerns. The final rule set the specific requirements for motor vehicle manufacturers,
suppliers’ of motor vehicle equipment, and dealers (table 3-5).'** In April 1996, NHTSA
denied a petition by the American Automobile Manufacturers Association to reconsider
provisions regarding situations in which suppliers neglect to provide the necessary
information to manufacturers.'*°

Administrative Process

NHTSA principally administers the AALA from its headquarters in Washington, DC, and
conducts certain activities through DOT’s 10 regional offices. During the first year that the
AALA was in effect, NHTSA’s enforcement effort consisted of monitoring the several kinds
of data required under the AALA that were being generated by vehicle manufacturers and
monitoring that vehicles were being labeled.'** Thus far, officials report that compliance with
the labeling requirements has been adequate as vehicle manufacturers have complied with
the requirements of the AALA.’*’ Currently, the agency is conducting a survey of
dealerships across the country to determine if manufacturers are in compliance with the act.
The survey began in early 1996, and through this survey, NHTSA is attempting to verify that
the automobiles and light trucks at vehicle dealerships are in fact labeled; however, this
effort will not involve an attempt to evaluate the accuracy of the labels affixed to the
vehicles.'®* The agency anticipates a verification procedure will be established in the future
as the statute requires.'°

12 50 F.R. 37294-37336, July 21, 1994.

153 The “supplier” refers to either an “outside supplier” (a supplier not wholly owned by
the vehicle manufacturer), an “allied supplier” (a supplier wholly owned by the vehicle
manufacturer), or a supplier that is wholly owned by one member of a joint venture vehicle
assembly arrangement.

‘5461 F.R. 17253-17256, Apr. 19, 1996.

‘55 NHTSA officials, interview with USITC staff, Mar. 21, 1996.

156 Letter from Ricardo Martinez, M.D., Administrator, NHTSA, June 10, 1996.

87 Toid.

188 The American International Automobile Dealers Association claimed that the AALA
has not been enforced during its two year existence. See statement of Walter Huizenga, president,
American International Automobile Dealers Association, transcript of hearing, p. 130.

18° NHTSA officials, interview with USITC staff, Mar. 21, 1996.

3-32


the laws and regulations applicable to marking, as well as an understanding of the
administrative processes, Commission staff met with officials of the U.S. Customs Service
(Customs), the Federal Trade Commission (FTC), and the U.S. Department of Transportation
(DOT). Commission staff also contacted trade lawyers and industry representatives to obtain
their views of how the administrative processes work. The Commission sent letters to the
relevant agencies formally requesting data on the costs to government of administration and
enforcement of U.S. marking regulations.’* Information was also collected by examining
the public records of these and other U.S. Government agencies, the U.S. Courts, and the
Congress. In addition, staff attended a public workshop sponsored by the FTC on “Made in
USA” labeling on March 26-27, 1996. This workshop was conducted to assist the FTC in
determining (1) whether the FTC should alter its legal standard regarding the use of
unqualified “Made in USA” claims, and (2) how domestic content should be measured under
any future standard.

Early in the investigation, staff of the Committee’s Subcommittee on Trade indicated that
it would be beneficial if the Commission could develop data on the costs to industry of
complying with country-of-origin marking requirements, since such data were not provided
in testimony presented during Committee hearings in July 1995 on rules of origin and
marking issues. The Commission held a public hearing’’ in Washington, DC on April 10,
1996 to hear testimony on marking issues (see appendix C for a list of hearing participants).
The Commission also specifically requested interested parties to provide estimates of the
costs associated with marking requirements (see appendix D for the Commission’s news
release, a sample of the Commission’s letter sent to 239 company and association executives
and trade lawyers, and opening remarks at the Commission’s public hearing). In addition,
the Commission received written statements from 104 interested parties (see appendix E for
a summary of written statements of interested parties). Commission staff also conducted
limited fieldwork within the time constraints of the study, and contacted by telephone
512 companies and trade associations that resulted in 435 responses.

To develop information on the benefits to consumers, the Commission contacted consumer
and labor groups that had interests in country-of-origin marking issues. A review of the
literature on country-of-origin marking issues, including benefits to consumers and related
consumer behavior, yielded a large number of studies, particularly by academicians, but also
by industry and by Government agencies; the Commission contacted the authors of several
studies. Certain major retailers of merchandise were also contacted and their views sought.

As noted, the Commission conducted a telephone survey” of a broad array of industries to
ascertain the extent of problems associated with marking, and to request estimates of costs
and benefits to both industry and consumers. Through this survey, the Commission obtained
added information on the importance of marking to industry and consumers, compliance and
other marking concerns, and some cost estimates associated with marking compliance that

18 Letters were sent to the FTC, Customs, and DOT.

° Copies of the transcript may be purchased from Capital Hill Reporting, Inc., tel. 202-
466-9500.

20 The Commission obtained approval from the Office of Management and Budget under
the Paperwork Reduction Act of 1995 to conduct this telephone survey. See 61 F.R. 11221,
Mar. 19, 1996.

1-5


counsel and New Balance to show cause why the FTC’s complaint and notice orders
(outlining the relief the FTC would seek if the allegations were upheld) should not be
amended or dismissed.’* The case against New Balance was withdrawn from adjudication
on May 14, 1996, for FTC Commission consideration of a settlement proposal.

Much of the public comment in response to the two footwear cases expressed concern that
the current marking standard is too stringent, given the increased globalization of production
and a presumption that most consumers do not assume that “Made in USA” means “all or
virtually all” U.S. parts and labor. In addition, many interested parties contended that the
FTC regulations are inconsistent with Customs regulations for establishing origin, making
compliance difficult. As a result of the expressed public interest in country-of-origin
marking issues, in July 1995, the FTC initiated a comprehensive review of consumers’
perceptions of “Made in USA” advertising claims to determine whether the FTC should alter
its legal standard regarding the use of unqualified “Made in USA” claims, and how domestic
content claims should be measured under any future standard.'“* Accordingly, the FTC held
a public workshop on the issue on March 26 and 27, 1996, and intends to issue a final report
once the inquiry is complete.'*°

Costs to Government

According to FTC staff, the marking issue represents a relatively small part of the FTC’s
total responsibilities and operating budget. FTC expenditures for activities related to
country-of-origin marking for FY 1996 to the present are not available. However, FTC
officials estimate that at least $60,000 was spent on portions of the FTC’s “Made in USA”
policy review, including $45,000 for a recent study on consumer perceptions of the “Made
in USA” labeling standard and $15,000 for conducting the “Made in USA” workshop.'*®
Other costs will likely be incurred because the policy review is still ongoing. However,
these are not costs incurred annually but rather nonrecurring costs unique to activities
occurring in FY 1996.'””

Annually recurring costs include addressing requests for guidance from the public on
marking requirements (as related to the Wool Act, Textile Act, and Fur Act). Marking
questions are only a small part of the total inquiries received. FTC staff estimates that
expenditures on these ongoing activities totaled approximately $78,000 annually in FY
1993-95 (table 3-4).'* In addition, expenditures on separate but related enforcement
activities were estimated to be about $78,000 annually during FY 1992-94. In FY 1995, the
expenditure on enforcement activity increased significantly, largely due to the New Balance

18 FTC Press Release, “FTC Stays Proceedings Against New Balance; Orders Parties to
Show Cause Why Complaint Should Not Be Amended or Dismissed,” July 11, 1995.

144 "ETC to Conduct Comprehensive Review of Consumer Perception of ‘Made in USA’
Claims; FTC Staff to Renegotiate Proposed Settlement with Hyde Athletic Industries,” FTC News,
July 11, 1995.

145 60 F.R. 53923, Oct. 18, 1995.

“6 FTC staff, interview with USITC staff, Feb. 13, 1996.

“7 For FY 1996, the Bureau of Consumer Protection was allocated $55.9 million out of a
total FTC budget of $108.4 million. Office of Management and Budget, Budget of the United
States Government, Appendix, Fiscal Year 1996, p. 998.

148 | etter from Elaine D. Kolish, Associate Director, Division of Enforcement, Bureau of
Consumer Protection, FTC, May 6, 1996.

3-30


customers. Stanley reported that the value added created by postimportation processing
varies by product. In general, Stanley estimates that over 60 percent of the selling price of
its tools can be ascribed to U.S. parts, processing, and labor.

Stanley has built and expanded its international hand tool operations contingent on “long-
standing court decisions and Customs administrative rulings that hold that when imported
forgings undergo significant processing in the United States that changes the name,
character, and use of the article, thereby effecting a substantial transformation, the completed
tools are not deemed to be the product of the country where the forgings were made and need
not be marked as having been made there.”*’ Previously, Stanley had received Customs
rulings, which stated that imported forgings for some of Stanley’s hand tools underwent a
substantial transformation and therefore the finished hand tool was not required to be marked
with a foreign origin. Stanley maintains that Customs should honor those rulings, so that it
may continue this practice.

Stanley also would like the FTC to abandon its strict standard for “Made in USA” marking
because global producers, like Stanley, are put to a “distinct competitive disadvantage with
both foreign and other domestic producers.” The continued use of the FTC’s labeling
standard, according to Stanley, would prohibit the marking of finished products
manufactured in the United States from foreign components even if “all of the physical
qualities and performance characteristics that make it useful were the result of American
labor, technology, and capital equipment.” Stanley would prefer that the FTC adopt the
substantial transformation test established by the Supreme Court in 1907 and used
subsequently by Customs.

The Coalition, on the other hand, does not find the difference between the FTC’s “Made in
USA” standard and Customs’ substantial transformation test to be inconsistent. The
objective of the two is very different, according to the Coalition, as they were designed to
accomplish different tasks.'°° The FTC standard was designed as a consumer protection rule,
while Customs’ substantial transformation rule “evolved from the need to assign an origin
to a product in order to determine the relevant tariff rate and to identify any preferences,
quotas, or trade sanctions that might apply."

Members of the Coalition oppose any changes to the FTC’s or Customs’ standards for
“Made in USA.” It also endorses the use of the substantial transformation standard
established by the Court of International Trade in the National Hand Tool Corp. decision and
favors modifying all past Customs rulings to make them consistent with the court’s decision.
The Coalition believes that FTC standard was intended to protect both domestic
manufacturers and consumers from inferior quality imports. Consequently, it opposes any

% Tbid., p. 6.

° Thid.

%8 Ablondi, Foster, Sobin & Davidow, P.C., on behalf of The Stanley Works, written
submission to FTC, “Made in USA Policy Comment,” FTC File No. P894219, Jan. 18, 1996.

* Tbid.

‘© Danaher Corp., prehearing submission to the USITC, Mar. 27, 1996, exhibit 4,
American Hand Tool Coalition, written submission to the FTC, “Made in USA Policy Comment,”
FTC File No. P894219, Jan. 22, 1996, p. 8.

101 Danaher Corp., prehearing submission to the USITC, Mar. 27, 1996, p. 5.

6-28


Section 5 of the Federal Trade Commission Act, Other Acts,
and the Federal Trade Commission

Laws governing country-of-origin marking of wool, textile fiber, and fur products, as well
as laws regulating domestic country-of-origin marking claims and advertising within the
United States, are administered and enforced by the Federal Trade Commission.” The
principle underlying these laws is that the purchaser should be protected from misbranding
and false advertising, including in specific product areas.” Both the Wool Products
Labeling Act of 1939 and Textile Fiber Products Identification Act were amended in 1984,
changing country-of-origin marking requirements. The various laws and their administration
and enforcement are discussed below.

Wool Products Labeling Act of 1939

The Wool Products Labeling Act of 1939 (Wool Act) (15 U.S.C. 68), enacted on October
14, 1940, was passed by Congress for the express purpose of protecting producers,
manufacturers, distributors, and consumers from the unrevealed presence of substitutes and
mixtures (i.e., wool and man-made fiber blends) in spun, woven, knitted, felted, or other
manufactured wool products.’ The Wool Act requires that each product containing wool
have a stamp, tag, or label showing the fiber content and the name of the manufacturer or the
name of someone in the line of distribution of that product. Country-of-origin marking,
although not explicitly enumerated in the Wool Act at the time of its enactment, was required
by FTC regulation. In 1984, Congress enacted conforming legislation in the Wool Act (see
section below).

Textile Fiber Products Identification Act

The Textile Fiber Products Identification Act (Textile Act) (15 U.S.C. 70),% enacted
September 2, 1958,° was passed by Congress with the express purpose of protecting
producers and consumers against misbranding and false advertising of the fiber content of

°! The FTC is an independent agency which was created in 1915 pursuant to the Federal
Trade Commission Act of 1914 (38 Stat. 717; 15 U.S.C. 41-58).

% U.S. Code Congressional and Administrative News, 85th Cong., 2d sess., 1958,
p. 5165.

® The term “wool” means the fiber from the fleece of the sheep or lamb or hair of the
Angora or Cashmere goat (and may include the so-called specialty fibers from the hair of the
camel, alpaca, llama, and vicuna) which has never been reclaimed from any woven or felted wool
product (15 U.S.C. 68).

% Public Law 850, 76th Cong., 54 Stat. 1128, 15 U.S.C. 66. Regulations under the Wool
Act were first issued effective July 15, 1941, 6 F.R. 3426 (1941). Also see 16 CFR 300.

%5 See 16 CFR 300.25(c) (1984), 50 FR. 15101, Apr. 17, 1985.

56 Public Law 85-897, 72 Stat. 1717 (1958), 15 U.S.C. 70.

57 Regulations under the Textile Act were made effective Mar. 3, 1960, 24 F.R. 4480
(1959). Also see 16 CFR 300.

3-23


Item

Suggestions

Supports this recommendation, except as noted

Section 304 of
the Tariff Act
of 1930—
continued

Modify Customs regulation at 19 CFR
134.46 which is used to discriminate
against footwear. Regulations should
be modified to allow footwear to be
treated in the manner of other
merchandise and not require close
proximity marking and equal size
requirements when U.S. geographic
name is used.

Footwear Distributors and Retailers of America
(FDRA)

Modify section 1304(c) to read “In any
event, no item which is otherwise
required by law or applicable industry
standard or custom to be marked on
the outside with technical or other
product information shall be entitled to
an exemption from marking.”

Committee on Pipe and Tube Imports (CPTI)

For certain pipe and fittings under 19
U.S.C. 1304(c), limit the application of
exceptions under 19 U.S.C. 1304(a)(3)
to only NAFTA parties.

Committee on Pipe and Tube Imports (CPTI)

Reword 19 U.S.C. 1304a(3)(G) and
reverse Customs’ past rulings to
except products that are significantly
processed but not substantially
transformed from marking
requirements.

Cold Finished Steel Bar Institute

Require stricter marking to show
country of manufacture of materials
and country of processing.

Newcomer Products, Inc. (cutting tools)

Section 102
NAFTA
Marking Rules
for NAFTA
goods

These rules are adequate.

Eastman Kodak Co.

Repeal these rules for NAFTA goods.

Fuji Vegetable Oil, Inc.

Modify these rules for NAFTA goods
to conform with section 304 and to
clarify instances where a change in
tariff classification principle does not
consider significant value-added in a
‘substantial transformation by
operations in the United States.

American Frozen Food Institute (AFFI), Kraft Foods,
Inc., Natural Feather & Textiles, Inc.

Reinstate original tariff shift rule for
marking golf clubs as of Jan. 3, 1994.

Hitchiner Manufacturing Co., Inc., Ajay Sports, Inc.,
Coastcast Corp., Daiwa Corp., Lamkin Leather &
Rubber Co., Lynx Golf, Taylor Made Golf Co., Inc.

Eliminate 19 CFR 102.14, regarding
goods returned to the United States
after being processed in other NAFTA
countries. Customs is eliminating this
regulation, effective August 5, 1996
(61 F.R. 28935, June 6, 1996).

Golf clubs and parts: Ajay Sports, Inc., Coastcast
Corp., Daiwa Corp., Lamkin Leather & Rubber Co.,
Lynx Golf, Taylor Made Golf Co., Inc.

Table continued on next page.



marking rules differ from those used to identify NAFTA origin (see HTS general note 12),
because they were negotiated to focus on known trade and production in the three countries.

Similar to the NAFTA origin rules, the NAFTA Marking Rules provide that the country of
origin of an imported article is (1) the country where the article was wholly obtained or
produced; (2) the country where the article was produced exclusively from domestic
materials; or (3) the country where each foreign material undergoes an enumerated change
in tariff classification.*’ If an imported article does not satisfy one of these rules, then the
origin of the article will be that of the single material®* that imparts its essential character.”
Special rules are also provided for mixtures, sets, composites, and commingled fungible
articles.

Proposed Uniform U.S. Origin Rules

As noted, the current U.S. approach to origin is considered by many to lack predictability,
consistency, and transparency. On the other hand, origin determinations under the CTC
approach are often alleged to be more transparent, predictable, and consistent. Therefore,
the Department of the Treasury has been considering the unilateral adoption of uniform U.S.
tules of origin based on the CTC approach.

In this regard, in January 1994, Customs proposed regulations that would provide uniform
tules of origin for all merchandise imported into the United States. These rules are based on
the NAFTA Marking Rules set forth at 19 CFR 102. Under the proposal, the part 102 rules
would be applied to all merchandise imported into the United States“ for customs and other
purposes, including country-of-origin marking, as well as to many duty preference programs
(ie., GSP, CBERA, and so forth). The stated intent of the proposal was to “codify” current
administrative and judicial rulings on country of origin in a set of rules expressed as

3719 CFR 102.11(a).

819 CFR 102.11(b).

» Certain U.S. industry representatives indicate that an essential character analysis is not
applicable to specific products. See, for example, statements of Leslie G. Sarasin, executive vice
president and staff counsel, American Frozen Food Institute, transcript of hearing, pp. 218-220,
and Scott E. Rosenow, Stein Shostak, Shostak, and O’Hara, on behalf of Ajay Sports, Inc., Daiwa
Corp., Coastcast Corp., Lynx Golf, Inc., Lamkin Leather and Rubber Co., and Taylor Made Golf
Co., transcript of hearing, pp. 266-272.

“° Certain U.S. industry representatives have claimed that the proposed part 102 rules do
not, in fact, conform with current practice regarding determinations of substantial transformation.
They claim that the proposed part 102 rules would effectively change the country of origin for
their respective products, resulting in some cases where their products (e.g., vegetable mixtures,
golf clubs, hand tools) would have to be marked with a foreign country of origin. See, for
example, statements of Leslie G. Sarasin, executive vice president and staff counsel, American
Frozen Food Institute, transcript of hearing, p. 218, Marti Morfitt, vice president, Green Giant
Brands, The Pillsbury Co., transcript of hearing, p. 230, Dr. Allen W. Matthys, vice president,
technical regulatory affairs, National Food Processors Association, transcript of hearing, p. 234,
Scott E. Rosenow, Stein, Shostak, Shostak, and O’Hara, on behalf of Ajay Sports, Inc., Daiwa
Corp., Coastcast Corp., Lynx Golf, Inc., Lamkin Leather and Rubber Co., and Taylor Made Golf
Co., transcript of hearing, pp. 267-270, and Bruce Shulman, Stein, Shostak, Shostak, and O’Hara,
transcript of hearing, p. 295.

2-9


burdensome in that it does not follow the same methodologies required under other country-
of-origin regulations, as discussed below.

Specific Marking Requirements

Automobiles, light trucks, and parts are subject to country-of-origin marking rules under the
American Automobile Labeling Act (AALA) and section 304 of the Tariff Act of 1930. U.S.
origin claims may be evaluated under the FTC standard for “Made in USA” labeling. On
July 21, 1994, the National Highway Traffic Safety Administration (NHTSA) published a
final rule establishing a new regulation, 49 CFR Part 583, Automobile Parts Content
Labeling, to implement the AALA. These regulations require passenger motor vehicles'*
manufactured on or after October 1, 1994, to be labeled with information about their
domestic and foreign content.’ The purpose of these provisions is to enable consumers to
take country-of-origin information into account in deciding which vehicle to purchase. Each
new passenger motor vehicle is required to be labeled with the following five items of
information:

a The percentage U.S./Canadian equipment (parts) content

a The names of any countries other than the United States and Canada which
individually contribute 15 percent or more of the equipment content, and the
percentage content for each country (only the two leading country names are
required if more than two countries individually contribute at least 15
percent)

Q The final assembly place by city, state (where appropriate), and country

Q The country of origin of the engine

Qo The country of origin of the transmission

The first two items are calculated on a carline'® basis rather than for each individual vehicle.
The other items are determined for each individual vehicle. However, the country of origin
for groups of engines and transmissions is determined once during a model year.
Manufacturers of passenger motor vehicles are required to establish the required information
annually for each model year, and are responsible for the affixing of the required label to the
vehicle. Dealers are responsible for assuring that the labels remain fixed to the car until it
has been delivered to a customer.

“8 The term “passenger motor vehicle” defined as a motor vehicle with motive power
designed to carry not more than 12 individuals, was amended to include any “multipurpose
vehicle” and “light duty truck” that is rated at not more than 8,500 pounds gross vehicle weight.
Thus, the motor vehicle content labeling requirements apply to passenger cars, light trucks,
multipurpose passenger vehicles, and certain small buses. Motorcycles are excluded.

“° NHTSA developed for a temporary alternative approach which permits manufacturers
and suppliers to use procedures that are expected to yield similar results to the full content
calculation procedures because there was insufficient time to implement the proscribed
methodology before the statutory date. This temporary approach was allowable for the 1995 and
1996 model years.

190 The term “carline” refers to a name of a group of vehicles which has a degree of
commonality in construction such as body and chassis.

6-39


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F-30


is issued, the importer may ask Customs for reconsideration of the ruling, in which case the
ruling will be reviewed by ORR at Customs Headquarters.

Importers can also request that Customs field offices seek advice, known as a request for
“internal advice,” from ORR at Customs Headquarters. This procedure applies to goods that
have been imported, but the entry has not yet been liquidated. Therefore, pending issues can
be addressed, provided they have not previously been the subject of a prior prospective
binding muling. The importer asks Customs at the port to delay liquidating the entry, and the
issue is forwarded to Headquarters. Once internal advice has been issued, Customs
personnel at the port then liquidate the entry in accordance with the internal advice decision.
If the internal advice decision is adverse to the importer, the importer may file for an
administrative review, or protest, with Customs upon liquidation of the entry, and follow the
appeals process outlined below. In some instances, ORR may refuse to consider the request
for internal advice because (1) the time required to give the request adequate consideration
may unduly delay action on a Customs transaction, or (2) the questions posed are more
appropriately answered through response to an administrative review request from the
interested parties. In the event that an importer’s request for internal advice is refused by
Headquarters, the importer may appeal to the Court for International Trade (CIT) if the
importer demonstrates to the Court that irreparable harm” would result unless the importer
were given an opportunity to obtain judicial review prior to the importation of merchandise.”
Inconsistent decisions by Customs officials at different field locations regarding substantially
similar merchandise or repeated decisions to conduct intensified inspections may be brought
to Headquarters attention through a petition filed by the importer.”

Importers may also protest Customs binding ruling letters, but only upon liquidation of the
merchandise at issue at the port of entry.” The Customs port director must make a
determination within 2 years. However, the importer may attempt to limit the process to 120
days by filing for an acceleration of review within 90 days after filing a protest, and Customs
then has 30 days to make a determination.” If the importer believes the protest will be
denied (or if the protest actually is denied), the importer may file an “application for further
review.” The application for further review of a protest is conducted by either the
Commissioner of Customs or the Regional Commissioner of Customs, usually through the

” Irreparable harm within the purview of 28 U.S.C. 1581(h) “is harm that cannot be
redressed in a court of law.” Irreparable harm “may take, among others, the following forms: an
importer’s inability to immediately acquire new labels or packaging that comply with a ruling
effective immediately; due to unavailability of labels or packaging complying with the ruling, the
importer’s inability to timely ship customer orders with consequential damage to customer
confidence and relationships; expenses of redesigning new labels or packaging complying with the
ruling; expenses of affixing new labels; loss and expense incident to storage or destruction of
noncomplying labels and packaging in inventory; costs and expenditures for reengineering
production methods or inventory control and tracking systems.” 29 Cust. B. & Dec. No. 33, (Slip.
Op. 95-132), CPC International, Inc., Plaintiff v. United States, Defendant, pp. 25-26.

7 19 CFR 177.11(b)(8).

19 CFR 177.12.

® The procedures for protests are found in 19 CFR 174.

TM Pursuant to provisions pertaining to Customs Modemization in Title VI of the North
American Free Trade Agreement Implementation Act (Public Law 103-182, 107 Stat. 2057, Dec.
8, 1993), in Jan.1996, Customs began a 6-month test regarding the electronic filing of protests. 61
FR. 3086, Jan. 30, 1996.

3-17


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penupuog—g-J qe.

F-29


CHAPTER 1
Introduction

In July 1995, the Subcommittee on Trade of the House Committee on Ways and Means held
hearings on rules of origin and country-of-origin marking for both foreign and domestic
goods.’ Views expressed at the hearings ranged widely, reflecting the commercial interests
and competitive implications surrounding these issues. In an effort to gain a more thorough
foundation for consideration of legislative initiatives, the House Committee on Ways and
Means requested that the U.S. International Trade Commission initiate an investigation
under section 332 of the Tariff Act of 1930 to review the laws, regulations, and practices
applicable to country-of-origin marking.

Following receipt of the Committee’s request on January 11, 1996 (appendix A), the
Commission instituted investigation No. 332-366, Country-of-Origin Marking: Review of
Laws, Regulations, and Practices, under section 332(g) of the Tariff Act of 1930 (19 U.S.C.
1332(g)) on February 5, 1996. Notice of the investigation was published in the Federal
Register (61 F.R. 5802-5803) on February 14, 1996 (appendix B).

Purpose and Scope

In its letter requesting the investigation, the House Committee on Ways and Means asked
the Commission to review the laws, regulations, and practices applicable to country-of-origin
markings. The Committee specifically requested that the Commission’s report include the
following:

Q A legislative and administrative history of marking rules, including a
comparison of the concepts and approaches for determining country of origin
for foreign and domestic goods.

a An analysis of the administrative processes for determining origin and
appealing decisions on marking issues.

a An evaluation of the problems which country-of-origin marking rules create
for industry, and the benefits of these rules to consumers. Information was

? U.S. House of Representatives, Committee on Ways and Means, Subcommittee on
Trade, Rules of Origin: Hearing before the Subcommittee on Trade of the Committee on Ways and
Means, 104th Cong., Ist sess., Serial 104-27, July 11, 1995.

? Letter from House Committee on Ways and Means to the U.S. International Trade
Commission requesting an investigation under section 332 of the Tariff Act of 1930, Dec. 22,
1995 (see appendix A).

1-1


operations.”*? Consequently, this change would have required U.S. manufacturers making
hand tools from imported rough forgings to mark them with a foreign country of origin
regardless of the extent of postimportation processing or the value added in the United
States, unless there were a change in name, character, and use of the forging.** However,
on April 27, 1995, Customs issued a notice withdrawing the proposed modifications or
revocations of past ruling letters pertaining to substantial transformation of rough imported
forgings into finished hand tools.**

This action occurred because, in January 1994, Customs had announced that it would honor
all existing written rulings issued pursuant to 19 CFR 177 during the proposed application
of the NAFTA Marking Rules to imports from all countries.*° All Customs actions were to
be delayed until a decision was made on the final adoption of the proposed regulations. The
NAFTA Marking Rules will become final rules, effective August 5, 1996, for NAFTA
goods, but have not been extended to cover all imports.*’ In addition, the original requestor
to Customs for the decision on the modification/revocation of the 12 rulings withdrew their
request in early 1995.

Hand tools produced in the United States are not required by law to be marked “Made in
USA.” While a label listing domestic content is not mandated by law on domestically
produced goods, U.S. producers may voluntarily label their qualifying products with “Made
in USA” or claim the extent of domestic content to appeal to consumers who prefer U.S.
origin products.

Compliance Concerns

There are two basic country-of-origin marking issues of concern to the domestic industry.
The first is the apparent lack of consistency between the Federal Trade Commission’s
consumer protection standards and Customs’ substantial transformation test for country of
origin;* the second is how the Court of International Trade’s decision in National Hand Tool
Corp. v. United States should be applied and enforced as a test for substantial transformation
by Customs.”

Members of the U.S. hand tool industry agree that marking qualifying tools with “Made in
USA” gives them a significant marketing edge over imports because of its importance to

® Testimony of Richard H. Ayers, chairman and CEO, The Stanley Works, before the
Subcommittee on Trade, Committee on Ways and Means, Subcommittee on Trade, U.S. House of
Representatives, Rules of Origin: Hearing before the Committee on Ways and Means,
Subcommittee on Trade, 104th Cong,, 1st sess., July 11, 1995, Serial No. 104-27, p. 55.

* William Axline, president and general manager, Stanley Mechanics Tools, Inc.,
interview with USITC staff, Apr. 3 and 4, 1996.

*5 29 Cust. B & Dec., No. 20, May 17, 1995, p. 5.

% Treasury Decision (T.D.) 94-4, 59 F. R. 110, Jan. 3, 1994.

®7 61 F.R. 28932-28980, June 6, 1996.

88 World Trade Organization harmonization of the customs rules of origin (Agreement on
Rules of Origin, Art. 9(2)(c)(ii)), if ever proposed to and approved by Congress, could alter
Customs’ case-by-case approach to substantial transformation to a tariff shift approach that reflects
the concept of substantial transformation.

® In 1986, the National Hand Tool Corp. was acquired by The Stanley Works and
became its Stanley Mechanics Tool Division.

6-26


Table 4-5
Number of companies providing qualitative and quantitative data on country-of-origin compliance costs as a
centage of company net sales, by level of compliance cost as a percentage of net sales, and by sectors

‘Sector’
Metals

Compliance costs as and
a percentage of metal
company net sales Agriculture | Chemicals | products | Machinery | Electronics | Textiles Total
Negligible, minimal, 10 41 25 4 6 13 59
or nominal
Zero 6 0 9 1 5 2 23
Less than 1 percent? 4 to) 2 2 5 8 2
Between 1 percent i?) 0 3 0 ie) ie) 3
and 2 percent
Greater than 2 1 0 2 0 0 0 3
percent

Total 21 1 41 7 16 23 109

’ See note 1 in table 4-2 for a description of sector products.
2 Several responses at the 1-percent level were from company executives who reportedly chose the lowest whole
number in order to provide a quantitative estimate and 1 percent represents an upper bound.

Source: Based on telephone surveys conducted by Commission staff.

during 1995.3> The companies that have expressed the most concern about these costs
(including certain frozen vegetable producers, food processors, and manufacturers of
semiconductors and consumer electronics) also contend that the benefit of origin marking
to consumers is negligible, in part because many products are the result of commingling of
products from many countries. Data taken from written submissions to the Commission
(but not included in the survey), covering 672 companies represented individually or through
trade associations, indicate that estimated marking-related compliance costs range from $60
million to $63 million per year, with start-up costs ranging from $22 million to $23 million.>”

35 Calculated from testimony of David Rose, director of import/export affairs, Intel,
transcript of hearing, p. 136, and Intel form 10-K report for 1995.

% Tn this regard, see Joint Industry Group, prehearing submission to the USITC, Mar. 27,
1996, pp. 6-7; American Frozen Food Institute, posthearing submission to the USITC, Apr. 25,
1996, p. 1; National Food Processors Association, submission to the USITC for investigation No.
332-360, International Harmonization of Customs Rules of Origin, June 15, 1995, p. 2.; and
Processed Apples Institute, Inc., written submission to the USITC, Apr. 25, 1996, p. 2.

3’ The Commission received data from individual companies and trade associations
reporting for their membership.

4-12


A pillow made from imported fabric that is dyed, printed, cut, sewn, and filled in the United
States has to be labeled as made in the foreign country despite the fact that the value added
to the product in the United States is several times greater than the foreign-content value.
These domestic producers that use imported fabric expressed concer that a textile product
made in the United States from imported fabric and then exported can be labeled “Made in
USA” with no mention of the fabric source. Another major concer of producers of certain
types of home furnishings is a lack of harmonization between FTC marking requirements
and the URAA-mandated rules. For example, a pillow made in the United States from fabric
imported from China, under the FTC mules, if sold in the United States should be labeled
“Made in USA of Imported Materials.” Under the URAA-mandated rules, the same pillow
has to be labeled as “Made in China” or “Sewn and stuffed in USA/Made in China.”
Producers affected by this difference attempted to resolve this conflict with Customs and
FTC officials before the effective date of the URAA Customs rules.*”? Consequently, a bill,
S. 1747, was introduced on May 13, 1996, to amend section 304 of the Tariff Act of 1930
to allow an exception to the marking requirements for textile products of HTS subheading
9404.90 that are manufactured in the United States and filled with feathers and/or down,
provided that the products’ shells are of fabric that is no less than 85 percent of cotton. One
U.S. manufacturer of fabric for the home furnishings segment said that the URAA rules will
probably not have any long-term effects on producers of home furnishings, but that there
may be some adjustment problems in the short-term for those producers that use imported
fabrics.

An anomaly exists between the URAA-mandated rules of origin and the NAFTA Marking
Rules that can pose problems to certain manufacturers. The products affected by this
conflict are down- or feather-filled goods such as pillows and comforters. Under the URAA
rules, such goods are deemed to originate in the country where the fabric used for the shell
was formed, whereas under NAFTA Marking Rules they are attributable to the country
where the pillow or comforter is made.” Thus, a comforter made and sold in the United
States with imported shell fabric needs to be marked as originating in the country in which
the shell fabric is formed.” However, the same comforter made in either Mexico or Canada

203 Charles M. Hansen, Jr., chairman of the board, president, and CEO, Pillowtex Corp.,
interview with USITC staff, Washington, DC, May 2, 1996. A representative of one large U.S.
apparel firm stated that, when faced with conflicting FTC and Customs rules, the firm tends to
follow the Customs rules because the Customs Service more frequently enforces its rules than the
FTC and has stricter penalties for noncompliance. This representative also said that he believes
that the FTC does not have the manpower to enforce these regulations.

2* A representative of U.S. manufacturers of feather and down-filled home furnishings
has suggested that this problem could be remedied in several ways. One suggestion is to amend
section 334(b)(2)(A) of the URAA to exclude HTS subheading 9404.90, covering feather and
down-filled comforters. Another is to have the Customs rules of origin apply to imported
products, but to permit FTC marking rules to apply to finished products that are made from
imported goods that are substantially transformed into a different product in the United States.
Charles M. Hansen III, Podesta Associates, Inc., letter to USITC staff, May 6, 1996.

295 The shell reportedly accounts for about 10 percent of the value of a down comforter
made in the United States. The down is generally processed domestically from imported raw
feathers; raw feathers are valued at about $1 per pound while cleaned down is valued at about

(continued...)

6-54


‘Regulatory. Administering
Statute ‘Statutory cite cite agency: Coverage
Federal Food, Drug, and 21 U.S.C. 321, 21 CFR 201.1 Food and Drug Drugs or drug
Cosmetic Act;* 331, 352, 355, Administration products as defined
Public Health Service Act’ 356, 357, 358, and Customs under 21 CFR 320.1
360, 360b, required to be marked
360gg-360ss with the address of the
42 U.S.C. 216, manufacturer, packer,
241, 262, 264 or distributor.
Navigation and Navigation 216 U.S.C. 4302 | 33 CFR 181 U.S. Coast Boat/ship hull
Waters Act Guard identification

’ Statute indicates no specific language to mark product with country of origin.
? Not incorporated in the United States
Source: Compiled by the staff of the U.S. International Trade Commission.

The penalty for violation of the Florida statute is a civil fine of not more than $500.
California has a similar statute that is limited to the labeling of honey.

States also maintain laws similar to section 5 of the Federal Trade Commission Act* to
prevent unfair acts and deception of consumers, and many of these State laws are directly
or indirectly linked to the FTC’s interpretation of section 5 of that Act.’ For example,
section 17533.7 of the Business and Professions Code of the California Code prohibits the
sale of a good in California that has been claimed to be made in the United States when in
fact the good was not domestically produced. States also take actions to prevent deception
of consumers. For example, the State of Missouri concluded a voluntary compliance
agreement with Farberware in 1993, requiring that company to conspicuously reveal foreign
components of products it claimed were made in the United States.

US. laws and regulations with respect to country-of-origin marking are considered to be in
conformance with GATT. Country-of-origin marking is recognized under GATT 1994 as
an exception to the general national treatment obligation, which generally provides that laws
and regulations should apply equally to domestic and imported products.’ GATT Article IX
recognizes “the necessity of protecting consumers against fraudulent or misleading
indications.”* Article IX, which enumerates the disciplines to be applied to marking,
stipulates that country-of-origin marking is subject to the most-favored-nation (MFN)
obligation and may not be applied in a discriminatory manner as between third countries.
The United States required country-of-origin marking for imported goods prior to the
establishment of the GATT and has maintained this policy under the WTO.

3 State of California, Food and Agricultural Code, Division 13, Article 9, “Labeling of

Honey as to Origin and Flavor.”
oY aS Ree gdetalled discussion of this law later in this chapter.

5 Attorneys General of the States of Connecticut, California, Florida, Hawaii, Iowa,
Kansas, Maryland, Michigan, Missouri, Nevada, New Hampshire, New York, Ohio, Rhode Island,
Washington, and West Virginia, written statement to the FTC, “Made in USA Policy Comment,”
FTC File No. P894219, Jan. 16, 1996, p. 2 and footnote 3.

© The GATT rules with regard to country-of-origin marking were not changed by the
Uruguay Round Agreements.

7 GATT 1994, Article IIL, which restates the national treatment obligations of Article III,
GATT 1947.

® GATT 1994, Article IX.

3-4


Table 4-2
Specific problems or concerns regarding compliance with U.S. country-of-origin marking
requirements: U.S. companies’ assessment by types of concern and by sectors

Sector’
Metals &
metal
Concern Agriculture Chemicals | products Machinery Electronics Textiles Overall
Percent of responses
Difficulty in tracking 28 8 13 13 14 14 17
origins due to varying
‘sources of supply
Increased costs 22 17 a 2 21 14 16
Lack of harmonization in 5 17 17 25 14 16 13
U.S. regulations
Technical or commercial 18 17 7 13 13 11 12
suitability for marking
products
Inconsistent application 6 8 17 13 7 14 12
of marking regulations
Lack of transparency in 5 8 40 t) 5 " 8
U.S. regulations
Difficulty in meeting FTC 3 to) 6 ty) 5 6 5
“Made in USA" labeling
standard
Implications of Customs’ 7 8 3 0 4 9 5
rules of origin proposals
Other? 7 17 18 13 16 5 12
Number of responses.
un 88 12 126 8 56 64 354

* Agriculture includes agricultural products (live animals and meat, including fish, shellfish and poultry), live plants, seeds,
fruits and vegetables, edible preparations, hides, skins, lumber, and wood products;

Chemicals includes organic and inorganic chemicals, and their downstream products, and rubber products (including
tires and hose);

Metals and metal products includes ores, concentrates, nonferrous and ferrous metals and products, ceramics and
glass, and miscellaneous manufactures;

Machinery includes pumps and valves, heating and air conditioning machinery, and transportation equipment;

Electronics includes navigation devices, capacitors, semiconductors, watches, measuring and analyzing instruments,
and arms and ammunition;

Textiles includes yarns, fabrics, home furnishings, apparel, and footwear.

2 Concerns that fell within the “other” category include inadequate space on the good to allow marking, the requirement to
mark subassemblies with their individual country of origin, and possible consumer confusion resulting from multiple countries
of origin being listed. Companies also are concerned over the extent to which marking rules for imported products are
enforced. Some companies claim that certain imported products are not being marked, are being mis-marked, are not being
marked in a conspicuous manner, are mis-using “Made in USA" labeling, or that origin markings are being removed prior to
sale to the ultimate consumer.

Source: Compiled from telephone surveys conducted by Commission staff.

4-7




practice in the fur apparel segment to apply country-of-origin labels in a loose manner, often
stitching them to the garment at the comers only.

Compliance Costs and Benefits
Yarn, fabric, and industrial textiles segments

The costs of compliance with marking regulations for these industry segments are largely
connected with keeping inventory records for those firms that source from several countries.
Because records must be kept regarding fiber content, the additional burden of maintaining
records indicating origin is not difficult. None of the survey respondents in these segments
indicated that compliance costs were significant. One said that it was probably less than
1 percent of total costs. The American Textile Manufacturers Institute (ATMI) pointed out
that since the country-of-origin marking is on the label showing fiber content and care
instructions, including this information adds almost no further cost to the product.?"”

According to producers in these segments, the country-of-origin markings provide a
commercial advantage as their apparel industry customers receive preferential duty treatment
when using U.S.-made fabrics in their production-sharing operations offshore. Under
NAFTA, apparel assembled in Mexico from fabric wholly formed and cut in the United
States enters the United States free of duty and quota. The U.S. special access program with
participating Caribbean Basin countries provides for guaranteed access to the U.S. market
for apparel assembled there from fabric formed and cut in the United States. Rather than
being charged to regular quotas, such imports from Caribbean Basin countries enter under
“guaranteed access levels,” or GALs. According to one respondent, most of these
relationships are well established and any further changes are not anticipated.”

ATMI stated that the country-of-origin markings serve as an important control feature in
administering the U.S. textile quota program. It stated that mislabeled or unlabeled goods
are often a sign of transshipment and circumvention of the quota program.”

Home furnishings

Costs to firms in this sector of complying with origin marking are physical marking costs,
administrative costs, added production costs for multiple production lines, and warehousing
and tracking costs for foreign goods. Most of the respondents in this industry segment
indicated that the costs of compliance are nil or negligible. However, one U.S. producer of
home furnishings, such as pillows and down comforters, estimated that making the needed

211 American Textile Manufacturers Institute, written submission to the USITC, Apr. 22,
1996.

212 However, should the Caribbean Basin countries be given NAFTA parity under
proposed legislation, it is likely that firms that have production-sharing operations in that region
will have the incentive to use U.S. rather than foreign fabrics in these operations.

213 American Textile Manufacturers Institute, written submission to the USITC, Apr. 22,
1996.

6-58


5(a) What benefits does your company receive from country of origin marking requirements?

(b)

allows consumers to choose between the U.S. product and the imported product

basis for determining quality of materials, workmanship, or service

basis for establishing information on conditions of production (including labor conditions,
likely kinds of pesticides used, health and safety tests or religious requirements likely
satisfied, etc.)

basis for price comparisons

preserves domestic jobs

supports local economy

other (specify: )

Comments:

What benefits do you believe the retail consumer receives from country of origin marking
requirements?

allows consumers to choose between the U.S. product and the imported product
determining likely place of product availability, including replacement parts

basis for determining quality of materials, workmanship, or service

basis for establishing information on conditions of production (including labor conditions,
likely kinds of pesticides used, health and safety tests or religious requirements likely
satisfied, etc.)

basis for price comparisons

preserves domestic jobs

supports local economy

enhances labor’s bargaining position

other (specify: )

Comments:

E-4


\ NEWS

TTS
‘United States Internationa! Trade Commission :_ Office of Public Affairs ~ Washington, DC 2043€

FOR IMMEDIATE RELEASE. CONTACT: Peg O’Laughlin
February 12, 1996 or
John Greer
202-205-1819
OPA 96-005

ITC LAUNCHES INVESTIGATION OF COUNTRY OF ORIGIN MARKING;
SEEKS INPUT FROM TRADE ASSOCIATIONS, INDUSTRY OFFICIALS,
CONSUMER GROUPS AND OTHER INTERESTED PARTIES

The U.S. International Trade Commission (ITC) has initiated an investigation into country of
origin markings on U.S. imports, exports, and domestic products and is seeking input for the
report from interested parties.

The investigation, Country of Origin Marking: Review of Laws, Regulations, and Practices
(investigation No. 332-366), was requested by the U.S. House of Representatives’ Committee
on Ways and Means. As requested by the Committee, the ITC will provide:

a legislative and administrative history of U.S. marking rules, including a comparison
of the concepts and approaches for determining country of origin for foreign and
domestic goods;

an analysis of the administrative processes in the United States for determining origin
and appealing decisions on marking issues; and

an evaluation of the problems which the country of origin marking rules create for
industry, and the benefits of these tules to consumers, including the costs to
government and industry of enforcement and compliance.

As requested by the Committee, the ITC will focus its investigation on the industries
producing electronics, steel, pharmaceuticals, hand tools, and frozen vegetables. Other
industries where information is available will be studied as well. ITC staff will contact U.S.
producers and consumer groups to identify those that have major concerns or interests
regarding country of origin marking requirements. Committee staff has indicated that this
should include problems, as identified by industry and other sources in the course of the
investigation, with foreign country of origin marking requirements.

The ITC expects to submit its report to the Committee by July 11, 1996.
Inits letter, the Committee on Ways and Means noted that it had held hearings in July 1995 on

both the issues of rules of origin and country of origin markings for both foreign and domestic
goods. The Committee noted that views expressed at the hearings ranged widely

~ more --

D-2


Table 3-3
Customs costs related to administering and enforcing country-of-origin marking requirements

FY 1993. FY 1994 FY 1995
Item {Oct 92-Oct 93) {Oct 93-Oct. 94) (Oct. 94-Oct. 95)
Issuance of country-of-origin
marking rulings, including
protests and rulemaking ‘?* $177,000 $223,000 $188,000
Other legal costs'?** 212,000 320,000 232,000
Investigation of country-of-
origin marking violations '?* 1,257,500° 1,342,000 1,173.000
Subtotal? 1,646,500 1,885,000 1,593,000
Estimated benefits and
overhead for above
activities’ 329,300 377,000 318,600
Marking violations issued and
reviewed at ports of
entry*® 1,180,000 1,043,000 885,000
Subtotal 1,509,300 1,420,000 1,203,600
Total 3,155,800 3,305,000 2,796,600

Estimated salary costs only.

2 Data submitted by Customs, except as noted.

? Calendar year basis.

* Estimated salary costs for affected staff in the Office of Regulations and Rulings, Penalties Branch, and for
attorneys in the Office of the Chief Counsel for reviewing penalty cases and providing legal opinions on marking
issues.

5 Investigations conducted by the Office of Investigations into marking violations and other marking activities.

® Data estimated by USITC staff based as average of data supplied by Customs for FY 1994 and FY1995. 7
Estimated by USITC staff at 20 percent of salary costs.

® Although Customs supplied these data on a calendar year basis, Customs officials stated to USITC staff that
these data would be suitable as estimates for fiscal year data. Estimated by the staff of the USITC based on the
number of marking violations issued, allocations made regarding the number of violations by type of handling
method assuming certain processing times, and a representative hourly salary and benefits cost. Estimate
developed based on data and information from Customs.

Source: Compiled by the staff of the U.S. International Trade Commission from data provided by
the U.S. Customs Service, except as noted.

3-22


of Customs’ proposed uniform rules of origin, although these topics have generated
substantial concern elsewhere.”

Concerns varied somewhat among the six sectors covered by the survey. Producers of
chemicals, metals and metal products, and machinery reported relatively greater concern
about inconsistent application of marking regulations within certain Federal agencies and
whether various Federal agencies administer their marking regulations in a consistent
manner.* Several agricultural processors, including importers of food or other goods not
produced in the United States, and a few companies producing electronics products,
contended that the marking requirement poses a burden on U.S. processors of imported
ingredients and components.”

Costs to Industry of Country-of-Origin Marking

U.S. companies surveyed were asked to identify the major types of costs that they incur in
complying with country-of-origin marking requirements.” These companies also were asked
to estimate the total cost of such compliance in terms of a percentage of company net sales,
as well as to estimate how much marking compliance costs on average add to the retail
purchase price of their typical product.” Only a few of the companies contacted by, or
submitting comments to, the Commission were able to provide qualitative or quantitative
marking-related cost estimates; and, where they did, the majority stated that marking-related
costs represent well less than 1 percent of company net sales (see discussion later in this

3 See, U.S. House of Representatives, Committee on Ways and Means, Subcommittee on
Trade, Rules of Origin: Hearing before the Committee on Ways and Means, Subcommittee on
Trade, 104th Cong. Ist sess., July 11, 1995, Serial 104-27, and FTC, “Made in USA Policy
Comment,” FTC File No. P894219; and, submissions to, and testimony before the U.S.
International Trade Commission with respect to investigation No. 332-366, Country-of-Origin
Marking: Review of Laws, Regulations, and Practices.

4 Tn this regard, several producers of metals and metal products also voiced concern
about consistency of application of marking regulations and enforcement issues. See, for example,
Harris & Ellsworth, on behalf of the Committee of Domestic Stee] Wire Rope and Specialty Cable
Manufacturers, posthearing submission to the USITC, Apr. 25, 1996, pp. 3-6; Diamond Chain Co.,
written submission to the USITC, Mar. 18, 1996, p. 2; American Pipe Fittings Manufacturers,
written submission to the USITC, Apr. 24, 1996, pp. 2-3, Hayes & Ringwood, on behalf of the
Hager Hinge Co., written submission to the USITC, Apr. 25, 1996, pp. 6-7; and, National Council
on International Trade Development, written submission to the USITC, Mar. 25, 1996, p. 3.

?5 In this regard, see Hogan & Hartson, on behalf of the Pillsbury Co., written submission
to the USITC, Apr. 25, 1996, pp. 2-3; Kraft Foods, Inc., written submission to the USITC, Apr.
25, 1996, p. 2; American Frozen Food Institute, written submission to the USITC, Apr. 25, 1996,
pp. 1-2; Digital Equipment Corp., written submission to the USITC, Mar. 20, 1996, p. 2; Neville
Peterson & Williams and International Business-Government Counsellors, Inc., on behalf of Xerox
Corp., prehearing submission to the USITC, Mar. 27, 1996, pp. 8-9; and, Semiconductor Industry
Association, written submission to the USITC, Apr. 25, 1996, p. 5.

26 Domestic producers were requested not to include costs incurred in voluntarily marking
the company’s product(s) for competitive reasons or marketing strategy.

2” Companies indicated that such costs, even if identifiable, could not be directly passed
on to retail consumers for competitive reasons.

4-8


process that no substantial transformation takes place and, as a result, the country of origin
of each component must be identified.” Customs offered three alternatives'® to marking each
of the individual components:

a Marking the container received by the ultimate consumer with the origin of
each of the components;
Q Marking the container received by the ultimate consumer with a legend

which identifies each major component with its respective country of origin
and listing the country or countries of origin of the remaining less
significant components; when grouping together the countries of origin of
the remaining components, the actual countries of origin must be identified
--designating two or more countries in the alternative (either/or) is not
satisfactory;

Q Marking one of the main parts with a single conspicuous country-of-origin
legend that clearly indicates the countries of origin of all the components.

In the modem kit ruling, the principal component was of U.S. origin while the transformer
and cable, which represented less than 3 percent of the retail cost, were imported. The
importer stated that transformer and cable sources were constantly changing and contended
that it would be extremely costly to develop different retail packages to fit all country
combinations. Citing T.D. 91-7, Customs held that because these components represent a
small part of the value of the kit, are of minor significance, and there are difficulties
associated with marking the containers, it is not necessary to label the container with the
origin of the transformer and cable provided that they are marked individually and
conspicuously."

Semiconductors

Country-of-origin markings for semiconductors have been the subject of much debate. Basic
questions have been raised by industry participants concerning the method of determining
country of origin and the differences between the U.S. and the European Union (EU) criteria.
Even though many exceptions to individual marking apply to semiconductors, there are still
many unresolved issues in the United States regarding marking of containers and the size,
location, and spelling (use of abbreviations and contractions) of markings.

Customs has determined that assembly of integrated circuits from imported silicon
semiconductor chips, a process which includes attachment of the die and lead wires, and

° U.S. Customs ruling HQ 559067, Sept. 7, 1995. Customs has proposed a modification
that would exempt the need to separately identify the origin of the telephone line. 30 Cust. B. &
Dec., “Proposed Modification of Customs Ruling Letter Relating to Country of Origin Marking
Requirement for Certain Cordless Telephone Sets,” June 5, 1996, pp.13-21.

U.S. Customs ruling HQ 734560, July 20, 1992.

"U.S. Customs ruling HQ 764363, Feb. 18,1992.

6-3


International Mass Retail Association (MRA), Arlington, VA

Robin W. Lanier, Vice President, International rade & Environment, IMRA

ORGANIZATION AND WITNESS

GENERAL
Panel 2

The Joint Industry Group, (JIG), Washington, D.C.
Evelyn Suarez, Chairperson of the Rules of Origin Committee, JIG and partner with the law
firm, Ross & Hardies
National Council on International Trade Development, (NCITD), Washington, D.C.
John Ryan, Chairman, Customs Committee, NCITD
International Business-Government Counsellors, Inc. (IBC), Washington, D.C.

James B. Clawson, Executive Vice President & Treasurer, IBC

Baker & McKenzie Washington, D.C.

William D. Outman, II—OF COUNSEL

STEEL

Panel 3

Harris & Ellsworth Washington, D.C. on behalf of
Committee of Domestic Steel Wire Rope and Specialty Cable Manufacturers

Jeffrey S. Levin—OF COUNSEL

-More-

C-3


necessity of using foreign-origin inputs; it is very difficult to estimate the parts content by
country accurately and consistently.” Further, the firms report that the complexity of
computer products does not lend itself to easy categorization by Customs officials , thereby
making the system difficult to administer. Other problems arise from the differences
between Customs and FTC marking regulations.

Electronics manufacturers report devoting significant resources to comply with
country-of-origin markings requirements because of worldwide, multi-country procurement
of parts and accessories and their potential reexportation. Most U.S. manufacturers of
electronics incorporate many components of foreign origin in their goods. The sources of
these components may change frequently; this makes tracing, tracking, and then marking
parts and components extremely time consuming, particularly for fungible products from
multiple sources. For many products, it is virtually impossible to keep track of the source
of all inputs to a product. Survey respondents noted that most products are made using a
multi-step manufacturing process with inputs from all parts of the world; the biggest problem
is the tracking of thousand of components that go into each product.

In its submission, the American Association of Exporters and Importers stated that it
opposed Customs rulings requiring that the origin of accessories and components packed
with finished goods be identified on the retail carton, regardless of the fact that the ultimate
purchaser's buying decision is based on the finished good and not low value accessories,
each of which may be supplied by a number of countries. Electronics products including
telephones, VCRs, and TVs are often sold to the retail customer in a carton that contains a
variety of components and accessories, each subject to a marking requirement. The current
marking requirements for components and accessories allegedly create a substantial burden
for the importers of electronics products.”*

Digital Equipment Corp.'s submission contained concerns regarding the technical or
commercial suitability for marking products, notably those imported parts and components
to be further manufactured into salable products and merchandise imported to be used in
field service.* The firm is particularly concerned with the requirement that the origin of all
computer components be tracked and disclosed and that the costs associated with tracking
all parts are too high. Even in the case of service parts that are shipped internally from one
Digital Equipment facility to another around the world, the company finds reporting
requirements are overly burdensome and can greatly slow shipments. Other manufacturers
expressed similar concerns about marking field repair kits with the country of origin of all
the components of the kit. Because the service technician installs the parts without the
owner/lessee ever seeing the repair kit, marking the kit does not appear to provide any
benefit for the firm or the owner/lessee.”*

22 See also Compaq Computer Corp., Okidata, a Div. of Oki America, Inc., Packard Bell
Electronics, Seagate Technology, Inc., and Toshiba America Electronic Components, Inc., written
submissions to the FTC, “Made in USA Policy Comment,” FTC File No. P894219, Jan. 1996.

2 American Association of Exporters and Importers, written submission to the USITC,
Apr. 11, 1996, pp 2-3.

2 Digital Equipment Corp., written submission to the USITC, Mar. 30, 1996, p 2.

25 Neville, Peterson & Williams and International Business-Government Counsellors,
Inc., on behalf of Xerox Corp., written submission to the USITC, Mar. 27, 1996, pp. 9-10.

6-6


whether an imported article that is processed in the United States must be marked. Some
companies and industry groups have expressed particular concern about proposed changes
to the standards and practices that govern country of origin determinations.°

It is necessary, therefore, to understand the concepts and approaches that currently are used
to make country of origin determinations because such determinations underlie marking. As
noted, origin rulings may dictate whether an imported article is marked properly, and
whether an imported article that is further processed in the United States must be marked
with a foreign country of origin when it is sold in the domestic market.

Concepts of Origin

An origin determination must be made for all imported articles whether the article is wholly
obtained or produced in a single country, or whether it is made in more than one country.
When an imported article is wholly obtained or produced in a single country (i.e., no material
or processing is attributable to any other country), then that country is the country of origin.
The concept of “wholly obtained or produced” is generally defined to include natural
products raised, extracted, harvested, and so forth, in a country (¢.g., animals, minerals,
vegetables, and recyclable scrap or waste materials), and articles that are made in that
country exclusively from such natural products, or combining natural products with domestic
manufactured products.’ When an article is made in more than one country--that is, the
article incorporates material from, or is processed in, more than one foreign country--the
country of origin generally is deemed to be the country where the article last underwent a
“substantial transformation.” The substantial transformation test is widely used to make
origin determinations.

There are a number of concepts that can be used to define and interpret substantial
transformation.® These concepts may be based on a single factor or a combination of factors,
depending on the purpose for which the origin determination is being made.? Many
definitions of substantial transformation are based on an evaluation of the nature,
complexity, and commercial significance of the manufacturing or assembly processes and
how that might change the name, character, or use of the imported parts, components, or

® See, for example, statement of Dr. Allen W. Matthys, vice president, technical
regulatory affairs, National Food Processors Association, transcript of hearing, pp. 234-236 and
Ablondi, Foster, Sobin & Davidow, P.C., on behalf of The Stanley Works, written submission to
the USITC, Apr. 25, 1996.

7 NAFTA Article 415, 19 CFR 102.1(g) and Annex D.1 of the International Convention
on the Simplification and Harmonization of Customs Procedures, S. Treaty Doc. No. 23, 97th
Cong., 2d sess. (1982) [Kyoto Convention].

® See generally U.S. International Trade Commission, Standardization of Rules of Origin
(investigation No. 332-239), USITC publication 1976, May 1987, and U.S. International Trade
Commission, The Impact of Rules of Origin on U.S. Imports and Exports (investigation No. 332-
185), USITC publication 1695, May 1985. See also E. Vermulst, P. Waer and J. Bourgeois, Rules
of Origin in International Trade (Ann Arbor: University of Michigan Press, 1994).

° See, for example, National Juice Products Association v. United States, 10 CIT 48, 629
F. Supp. 978, at 988-89, n. 14 (1986), “[T]he results may differ where differences in statutory
language and purpose are pertinent.”

2-3


Automobiles’”’ and Automotive Parts

The U.S. motor vehicle
industry is largely
governed by cyclical
macroeconomic trends in
the U.S. economy that
influence characteristics of
demand of _ individual
consumers of motor
vehicles for private use.
The recently enhanced
competitiveness of U.S.
production facilities,
including those of foreign
based companies, has
increased the export
capability of the industry
as well as supplanted
imports.

Product marking can be
important for automotive
consumers who narrow
their choice of new
vehicles by the country of
origin, either of the car or
the company, particularly
in an era of increasing
globalization of auto
manufacturing when the
country of origin is rarely
apparent. However, some
manufacturers, industry
Officials, and observers
believe that the results of
the methodology behind
current regulations
requiring labeling for the
benefit of the consumer
present misleading results.
Further, they report that
this marking requirement is

Industry Profile
Passenger Automobiles & Light Trucks
‘Trade data 1995 (million dollars):

US production... 170,500 (e)
USumots 73314
USepots 17,283
Apparent U.S. consumption... 226,531 (e)
Import share of apparent U.S.

consumption (percent) ..... 0 32.)

Source: Automotive News, Jan. 8, 1996, p. 63, USITC, The U.S.
Automobile Industry Fourth Quarter 1995 Report on Selected
Economic Indicators, USITC publication 2951, Mar. 1996;
USITC staff estimates,

Automotive Parts
‘Trade data 1995 (million dollars):

US. production 118,650 (e)
US. imports |. 46,400
US. exports ...... 39,200
Apparent U.S. consumption 125,850 (e)
import share of apparent U.S.

consumption (percent) oc. 37.)

Source: U.S. Department of Commerce; and USITC staff
estimates.
Trends in Globalization

‘There has been a significant trend toward the
‘internationalization of motor vehicle production in recent years.
The U.S. Big Three (General Motors, Ford, and Chrysler) have
‘major manufacturing facilities in South America, North
America, Europe, and Australia. Foreign-based manufacturers
continue to increase their U.S. production capabilities.

The U.S. motor-vehicle parts industry has stepped up the pace

of globalization in order to meet the changing international

‘procurement strategies of automakers. The U.S. motor-vehicle

parts industry manufactures and assembles parts overseas, and

foreign based parts manufacturers continue to establish U.S.

facilities.
a

147 Includes light duty trucks.


company stated that country-of-origin marking rules help protect brand-name products from
counterfeiting.

A few of the companies surveyed indicated that the “Made in USA” label is an important
selling factor in markets both here and abroad. A large global apparel company emphasized
the popularity of U.S.-made apparel in foreign markets, particularly in Japan.”° Another
apparel firm that sells to industrial consumers—sometimes union shops that want U.S.-made
goods—stated that the “Made in USA” label is a primary selling factor for its products.
These companies indicated that the “Made in USA” label assures the consumer of high-
quality materials, workmanship, and service; allows consumers to choose between U.S. and
imported products; and provides a basis on which consumers can make price comparisons.””"

A few companies indicated that country-of-origin marking can help in detecting
transshipments, tracking foreign-made apparel for quota purposes, and deterring
counterfeiting of brand-name apparel. Two apparel companies, one of them a large fur
apparel retailer, cited retailer preferences for “Made in USA” labeled products, especially
in the fur apparel market where “Made in USA” connotes superior quality. The American
Apparel Manufacturers Association’s testimony before the USITC pointed out that
consumers continue to use country-of-origin information in making their purchasing
decisions.”

22° Note that goods would not necessarily have to meet FTC standards to be labeled
“Made in USA” when sold in foreign markets.

221 The National Knitwear and Sportswear Association (NKSA), representing designers,
manufacturers, contractors, and marketers of knit products sees little reason to change the
standards currently in place for labeling the country of origin of knit goods. However, its
manufacturing members are split as to whether goods made in the United States of imported yarn
should be labeled “Made in USA” or “Made in USA of Imported Yarn.”

222 See prepared statement of the American Apparel Manufacturers Association, presented
at the Commission’s public hearing, Apr. 10, 1996.

6-61


EXECUTIVE SUMMARY

The House Committee on Ways and Means requested that the U.S. International Trade
Commission review the laws, regulations, and practices applicable to country-of-origin
markings, concentrating on the following:

Q A legislative and administrative history of marking rules, including a
comparison of the concepts and approaches for determining country of origin
for foreign and domestic goods.

Qa An analysis of the administrative processes for determining origin and for
appealing decisions on marking issues.

QO An evaluation of the problems that country-of-origin marking rules create for
industry, and the benefits of these rules to consumers. Information should be
sought on the costs to government and industry of enforcement and
compliance.

The Committee requested that the Commission focus its analysis of country-of-origin
marking on five industries: electronics, steel, pharmaceuticals, hand tools, and frozen
vegetables. In addition, the Commission was requested to provide available information on
concerns of other U.S. industries relating to such marking issues. In this report, the views
and concerns of industry, as well as consumer groups, are reflected in the discussion of
methods for determining origin (chapter 2), industry perspectives (chapter 4), consumer
perspectives (chapter 5), or the position of interested parties (appendix F). In addition to the
five requested industries, the analyses of specific industry sectors (chapter 6) covers
automobiles, light trucks, and automotive parts as well as textiles and apparel, because of the
existence of specific laws pertaining to the marking of these items, and footwear because of
significant “Made in USA” issues that have arisen recently in that industry.

The Commission undertook several efforts to ascertain the problems, costs, and benefits
associated with country-of-origin marking. A public hearing was held on April 10, 1996,
to accept testimony from interested parties, and the Commission also solicited and received
written comments. In addition, the Commission conducted an extensive search of consumer
literature, examined country-of-origin research as it relates to consumer preference, and
contacted a number of consumer and labor groups to obtain information on the benefits of
country-of-origin marking rules to consumers. Further, the Commission conducted a
telephone survey to ascertain the extent of industry concerns with country of origin marking
and to obtain data on the costs of complying with marking requirements. The Commission
contacted 512 companies and received responses from 435 companies and trade associations.
The Commission interviewed officials of the Federal agencies charged with administering
and enforcing the major U.S. laws requiring marking—the U.S. Customs Service (Customs);
the Federal Trade Commission (FTC); and the U.S. Department of Transportation, National
Highway Traffic Safety Administration (NHTSA)—and formally requested data on their
costs related to marking.

vii


QMONAL 7,
Se OR

CHAIRMAN ;
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&

UNITED STATES INTERNATIONAL TRADE COMMISSION

WASHINGTON, D.C. 20436
OPENING STATEMENT
COUNTRY OF ORIGIN MARKING: REVIEW OF LAWS,
REGULATIONS, AND PRACTICES

April 10, 1996
CHAIRMAN WATSON: Good morning. On behalf of the United States
International Trade Commission, | welcome you to this hearing on Investigation
332-366, "Country of Origin Marking: Review of Laws, Regulations, and
Practices." At the request of the House Ways and Means Committee, the
Commission instituted this investigation under section 332(g) of the Tariff Act of

1930.

The Commission is preparing a report for the Ways and Means Committee

that will include the following:

1. A legislative and administrative history of U.S. country of origin marking
rules;

2. An analysis of the administrative process in the United States; and

3. An evaluation of the problems marking rules create for industry and the
benefits they provide to consumers.

The report will also include information on the casts to government of
enforcement, and the costs to industry of compliance.

D-6


manufacturing was performed at a location other than the principal place of business, this
also must be stated. Exact phrases, such as “Manufactured for ” “Distributed
by ” or “Manufactured for by ” are required
when stating the above information. However, the processes used by FDA to define a
manufacturer are not always accepted by Customs as substantial transformation for purposes
of marking.

This FDA requirement tends to invoke a Customs service requirement existing in 19 CFR
134.46 which states that if any location of the United States is mentioned on the imported
article (such as would be the case as a result of the FDA requirement that a company’s place
of-business be displayed on the pharmaceutical label), the name of the country of origin is
to be displayed “in close proximity” to the words referring to the U.S. location. Therefore,
many pharmaceuticals may have multiple geographic locations listed on the labels. In one
instance, for example, Customs recommended a marking to read “Made in China, granulated
in the U.S.A.” to indicate their ruling that the product was made in China, although
according to the FDA, it would be “manufactured” in the United States.

Customs has issued several rulings concerning the marking of pharmaceuticals in the past
7-10 years. These rulings are examples of the somewhat fine divisions that exist in the
marking of pharmaceutical products.

For example, first-aid kits from Canada, assembled from non-Canadian components, were
tuled to be non-Canadian products and the country of origin of each component had to be
identified, either on the product or on the package label.”* In another case, while not a kit,
acertain pharmaceutical packaged in ampules as a 5-pack, intended for hospital or clinic use,
had the country of origin marked on the package label. However, because of FDA labeling
requirements for the manufacturer’s name and location to be prominently displayed on
package labeling (i.e., any part of a package that can be interpreted as a ‘label’), Customs
determined that the country of origin must be marked anywhere there is a reference to a U.S.
location. Thus, in the case of the 5-pack package, the country of origin was required on
more than one side of the box.”*

In other cases, a certain anesthetic cream produced in Sweden bore the FDA requirement for
identifying the manufacturer, using the words “Manufactured by Astra Pharmaceutical
Production, AB Sodertalje, Sweden” near the distributor’s address “Astra Pharmaceutical
Products, Inc., Westborough, MA 01581." Customs rendered the opinion that labeling of
the cream in this manner would satisfy the country marking requirement.”* However, on
another occasion, Customs opined that the marking that satisfied FDA requirements did not
accurately reflect the country of origin.”*

For pharmaceuticals, the ultimate purchaser for the purposes of section 304 of the Tariff Act
of 1930 is usually the individual retail consumer if the pharmaceutical is imported in
individual retail packages. Otherwise, the ultimate purchaser can be a distributor, packager,
dispensing authority, or any other entity that receives the product in the imported form. If

U.S. Customs ruling HQ 555632, Mar. 8, 1991.

U.S. Customs ruling HQ 734232, Nov. 20, 1991.
U.S, Customs ruling HQ 878010, Sept. 9, 1992.
U.S. Customs ruling HQ 558002, Oct. 11, 1994.

6-21


changes that would dilute FTC’s long-standing wholly of domestic origin criteria for what
constitutes “Made in USA.” It especially contests any proposed quantitative test or formula
to measure value added in the United States as a yardstick for the “Made in USA” label.

A Coalition member, the Danaher Tool Group, criticized Customs for not modifying its pre-
existing rulings to make them consistent with National Tool Corp. because of a pending
proposal to extend the NAFTA origin rules to goods of all countries.’ Danaher reported
that the National Tool Corp. decision should be enforced by Customs as a means to enable
USS. consumers to distinguish between tools made from imported or domestic forgings. The
company believes that U.S. producers using foreign forgings and components should not be
allowed to label their products “Made in USA.” Otherwise, companies could reap a double
benefit by enabling them to take advantage of low cost foreign labor and benefiting from the
consumer preferences for tools marked “Made in USA.” The cost of domestic labor,
according to Snap-on, accounts for nearly 55 percent of the cost of producing a finished hand
tool. The differential in labor costs puts substantial economic pressure on other U.S.
producers and would force many of them to relocate production offshore to lower labor cost
countries. Snap-on also reported that domestic producers could lower their labor costs by
as much as 98 percent if they shifted their production to a lower labor cost country like
China.

Vaughan & Bushnell Manufacturing Co. stated that the quality of steel used in a metal
forging and the quality of the forging process itself, not the extensive machining process as
Stanley alleges, is the most important element in the production of hand tools.“ Steel
quality and the forging process can greatly affect the strength and durability of a hand tool.'®
The company believes that the elimination of the FTC standard could disadvantage smaller
manufacturers like itself. It also worries that unmarked tools made from imported forgings
can be advertised by U.S. producers under domestic brand names in such a manner that will
deceive consumers into believing that they are domestically produced.

Compliance Costs and Benefits

Members of the American Hand Tool Coalition reported that the cost of observing
country-of-origin marking requirements is negligible for its members.’ The actual cost of
marking a tool “Made in USA” is de minimis.” According Vaughan & Bushnell, “the cost
of compliance with the marking requirements amount to less than one-quarter of one percent
of net sales,”"°* The marginal cost of adding an extra line to a die informing the consumer
where the product was made is very small, especially when the cost is spread out over the

102 Danaher Corp., posthearing submission to the USITC, Apr. 25, 1996, p. 9.

' Statement of Dan G. Craighead, vice president, international, Snap-on, Inc., transcript
of hearing, p. 164.

1 Mayer, Brown & Platt, on behalf of Vaughan & Bushnell Manufacturing Co.,
posthearing submission, Apr. 25, 1996, pp. 8-9.

15 Wright Tool Company, survey response, May 2, 1996, p. 5.

10 Danaher Corp., posthearing submission to the USITC, Apr. 25, 1996, p. 18.

107 William Axline, president and general manager, Stanley Mechanics Tools, Inc.,
interview with USITC staff, Apr. 3 and 4, 1996.

108 Mayer, Brown & Platt, on behalf of Vaughan & Bushnell Manufacturing Co.,
posthearing submission to the USITC, Apr. 25, 1996, p. 15.

6-29


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F-31


AFFI, along with some processors, contends that regulations requiring front-panel marking
of frozen food products or imposing specific type size, style, and spacing should not be
required for frozen vegetables.'** Furthermore, AFFI feels that Customs must recognize that
substantial transformation occurs when ingredients or materials of foreign origin are
combined in a mixture of composite goods. In addition, AFFI asserts that Customs should
recognize the commingled product as having the origin of the country in which the different
ingredients or materials are last combined.

NFPA believes strongly that mixing imported ingredients substantially transforms the
imported good by changing the name, and very often the use, of the imported food article.!*’
NFPA is opposed to any proposal which assign multiple countries of origin to goods created
in the United States by mixing, blending, or assembling imported ingredients. In fact one
firm points out that other food commodities that are processed in the United States from
imported raw materials are not required to label country of origin, and feels that the frozen
produce industry is being unduly burden with regulation.

Other domestic frozen vegetable processors believe that Customs should require front panel
labeling of frozen vegetable products because the consumer would not need to handle the
product to see if it contained foreign-sourced material; this would give the consumer the
opportunity of making an informed purchase decision, while observing the product in the
freezer case. Other processors believe that back-panel labeling would be more beneficial
since it would be closer to the nutritional labeling information contained on frozen
vegetables.

One company stated that Customs country-of-origin labeling requirements should consider
a de minimis rule that would allow a processed vegetable mix containing only a small
portion of imported material not to be labeled under the country-of-origin marking
requirements. This firm suggested a 10-percent threshold. AFFI in its testimony also
supported the adoption of a de minimis standard for the food industry.’** AFFI believes this
would facilitate compliance with country-of-origin marking requirements and reduce the
burden on the frozen produce industry.

Some firms have developed branded products that have strong U.S. consumer identification
and may be reluctant to label their product as containing some ingredients of foreign origin,
while firms that state they use “Made in USA” labeling believe that using the “Made in
USA” label allows them to expand their sales volume. However, the frozen vegetable
market, except for branded products, is a commodity market and, hence, the firms are not
able to command a premium for the “Made in USA” label.

None of the firms cited specific problems with foreign country-of-origin marking
requirements. In most cases, the purchasing agents in the foreign countries are responsible

36 American Frozen Food Institute, prehearing submission to the USITC, Mar. 27, 1996,
p. 13, and posthearing submission to the USITC, Apr. 25, 1996, p. 2.

137 National Food Processors Association, posthearing submission to the USITC, Apr. 25,
1996, p. 1.

138 Statement of Joel D. Joseph, chairman, Made in the USA Foundation, transcript of
hearing, p. 19.

6-35


current language and structure of the present version of section 304 resulted from
amendments in the Customs Administrative Act of 1938.!’ This amendment also codified
into law many of the exceptions to marking found in Customs regulations.'* The 1938
amendments also established that country-of-origin markings were for the benefit of the
“ultimate purchaser.” In 1953, another general exception to marking was added, section
304(a)(3)(K).'° Amendments in 1984 added specific marking requirements for certain pipe
and fittings, compressed gas cylinders, and certain manhole rings or frames, covers, and
assemblies.” In 1986, amendments added specific language on methods of marking pipe
and fittings, such as paint stenciling.”" Amendments in the Omnibus Trade and
Competitiveness Act of 1988 increased the penalties for violations of country-of-origin
marking requirements from a maximum of $5,000 to $100,000 for the first violation, and
specified penalties for the second and subsequent violations of not more than $250,000, or
not more than one year in prison.” Although not amending section 304, the Omnibus Trade
and Competitiveness Act of 1988 also requires that imported preserved mushrooms be
marked with the country of origin where the mushrooms were grown in order to comply
with section 304.27 Section 304 was last amended in 1993, when provisions were added to
modify the marking methods of imported pipe and fittings, and added a new section, 304(h),
that specifies the treatment of goods of a NAFTA country for marking purposes.” Section
304(h) also specifies the petition rights of NAFTA exporters and producers regarding
marking decisions.

1” Customs Administrative Act of 1938, ch. 679, 52 Stat. 1077-1080, June 25, 1938.

18 U.S. Senate, Committee on Finance, Customs Administrative Act: Hearings Before a
Subcommittee of the Committee on Finance, 75th Cong., 3rd sess., Jan. 25, 26, 27, and Feb. 9,
1938, pp. 11-12.

1° Customs Simplification Act of 1953, Aug. 8, 1953, Public Law 243, ch. 397, 67 Stat.
507, 509.

19 U.S.C. 1304(c), 1304(d), and 1304(e). Trade and Tariff Act of 1984, Oct. 30, 1984,
Public Law 98-573, 98 Stat. 2948, 2976.

119 U.S.C. 1304(c)(2). Tax Reform Act of 1986, Oct. 22, 1986, Public Law 99-514, 100
Stat. 2085, 2924.

7 19U.S.C. 1304(h). Omnibus Trade and Competitiveness Act of 1988, Aug. 23, 1988.
Public Law 100-418, 102 Stat. 1107, 1314.

% Public Law 100-418, 102 Stat. 1107, 1315.

24 North American Free Trade Agreement Implementation Act., Dec. 8, 1993. Public
Law 103-182, 107 Stat. 2057, 2096-2097.

3-6


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F-26


Historically, goods that were not labeled with any country of origin were presumed by the
FTC to be perceived by consumers as being produced in the United States. This
presumption was based on the fact that Customs generally required foreign goods to be
marked and that most goods consumed in the United States were produced domestically. A
product that is not wholly of U.S. origin, but with less than 50 percent of foreign content,
may be unmarked. The FTC has required sellers to disclose foreign content when the
content of the product is substantially of foreign origin. The FTC has stated that a failure
to disclose a substantial amount of foreign content would be deceiving consumers.

The standard for domestic articles does not use the standard of substantial transformation.
This disparity may result in different origins for almost identical products. For example, a
computer produced in Germany with parts from third countries may be labeled as made in
Germany assuming the product underwent a substantial transformation in Germany.
However, a computer produced in the United States from third country parts may not be
labeled “Made in the USA” because the parts and labor were not wholly of domestic origin.

*? Manco Watch Strap Co., 60 F.T.C. 495 514-515 (1962).

* The term substantial in this context has been cited as 50 percent or more of the value of
a good in a previous FTC Federal Register notice (60 F.R. 53923, Oct. 18, 1995), however, FTC
officials stated that the Commission has not formally endorsed this percentage and it has not yet
been defined in FTC case law. FTC official, interview with USITC staff, July 1, 1996.

“4 This example was presented in Compaq Computer Corp., written comments to the FTC,
“Made in USA Policy Comment,” FTC File No. P894219, Jan. 9, 1996.

2-12


printed circuit boards imported for assembly into finished computers and communications
systems, products imported to undergo repairs, and items imported specifically for use in
"field service" maintenance operations.’

Marking exceptions

The principal marking exception that applies to electronics firms is for intermediate goods
imported into the United States for processing into finished goods.” If this processing results
in substantial transformation--for example, the process that produces completed television
sets? or the assembly of a large number of fabricated components onto a printed circuit
board‘—the individual imports are excepted from marking.

There are other exemptions from individual unit marking although the outermost container
is still required to be marked with the country of origin of the contents. Under 19 CFR
134.32(q), goods of a NAFTA country classified under HS headings 8541° and 8542,° are
exempted from individual marking.’ Semiconductors are also exempted from individual
marking in accordance with 19 CFR 134.32(d) and Treasury Decisions (T.D.) 75-187.

Examples of marking requirements in electronics

In many instances, electronics components from different countries are packaged together,
unassembled, for delivery to the ultimate consumer, and the final assembly does not
constitute substantial transformation. Examples of such products are cordless telephone sets®
and modem kits containing a modem, transformer, and telephone cable.

Cordless telephone sets consist of a base unit, handset, telephone line, power cord, and
recharge cradle. Customs has determined that final assembly of these parts is such a simple

Digital Equipment Corp., written submission to USITC, Mar. 20, 1996.

? 19 CFR 134.35.

3 U.S. Customs ruling HQ 732170, Jan. 5, 1990.

* Customs Service Decision 85-25, Sept. 24, 1984; U.S. Customs ruling HQ 733159, July
23, 1990; HQ 733690, Feb. 22, 1991.

5 These products include diodes, transistors, and similar semiconductor devices;
photosensitive semiconductor devices, including photovoltaic cells whether or not assembled in
modules or made up into panels; light-emitting diodes, mounted crystals; and parts thereof.

* These products include electronic integrated circuits and micro assemblies, and parts
thereof.

7 NAFTA Annex 311 and 19 CFR 134.32(q).

8 Similar rulings have been issued for residential and business telephone sets. See U.S.
Customs rulings HQ 764046, May 10, 1991 and HQ 734560, July 20, 1992.

6-2


8) Ifyour company exports, what specific problems have you encountered with foreign country of origin
markings?

lack of transparency in foreign regulations for products exported from the U.S.

lack of harmonization between U.S. and foreign regulations

lack of harmonization among various foreign regulations

delays at the border

market access difficulties (specify: )

re-marking of goods

extra duties

__. other (specify: )

Comments:

9) Are you aware of any published studies or information on this issue? If so, could you please tell me
of how the USITC can obtain a copy?

10) Do you have any other comments or concerns about country of origin markings?

E-6


Item:

Suggestions

‘Supports this recommendation, except as noted

Section 304 of
the Tariff Act
of 1930—
continued

Exempt certain products from marking:

© semiconductors

© spare parts for repairs, including
repair kits for photocopiers

© parts, components, and
subassemblies imported for repair
and/or then reexported

© metal forgings for hand tools

0 food products

0 vinyl flooring

0 accessories and components
packed for retail sale with finished
electronics products

© golf clubs and parts thereof

Semiconductor Industry Association (SIA) and Intel
Corp.; In opposition: Micron Technology Corp.

Xerox Corp., Digital Equipment Corp.

Aerospace Industries Association (AIA), Digital
Equipment Corp., Automotive Parts Rebuilders
Association

Rep. Nancy L. Johnson (R-6-CT), Sr. Member, House
Ways and Mean Committee,

The Stanley Works, Fleet Bank

In opposition: Component Specialty, Inc., Danaher
Corp., Snap-on, Inc., Vaughan & Bushnell
Manufacturing Co., Wright Tool Co.

Pillsbury Co., Joint Industry Group (JIG)

House Corp. (Canada, with U.S. subsidiary)
American Association of Exporters and Importers
(AAEl)

Ajay Sports, Inc., Coastcast Corp., Daiwa Corp.,
Lamkin Leather & Rubber Co., Lynx Golf, Taylor Made
Golf Co., Inc., Joint Industry Group (JIG)

Require marking on certain products:

o door hinges

© perishable food items, including cut
flowers

Hager Hinge Co.
Floral Trade Council; In opposition: Florists’
Transworld Delivery (FTD) Association

Eliminate marking altogether.

Customs Advisory Services, Inc., Deloitte & Touche
LLP, International Business-Government Counselors,
Inc. (IBC)

Eliminate marking of products with
commingled ingredients or develop a
workable rule for marking commingled
goods.

American Frozen Food Institute (AFFI), Kraft Foods,
Inc., National Food Processors Association, Pillsbury
Co.

Modify Customs interpretation of
marking requirements under section
334 of the Uruguay Round Agreement
Act with respect to textile home
furnishings.

Paris Accessories, Inc., Pillowtex Corp.

Allow more generic origin labels (e.9.,
“Made in Europe”).

International Mass Retail Association (IRMA)

Table continued on next page.



- Lack of harmonization between U.S. and foreign regulations, and
among various foreign regulations, especially differences in the
applied definitions of substantial transformation

According to many companies, marking issues associated with globalization
of production can include:

- Multiple foreign origin markings on products that may misinform
and perhaps mislead consumers, and do not clarify that the
processing and manufacture of the final product is performed in the
United States

- A product with foreign content that can be sold in foreign markets
(Mexico and Canada, for example) as “Made in USA” but either
cannot be sold domestically as “Made in USA” or must be marked
with a foreign origin

- A disincentive to use North American content and an incentive to
procure inputs on the basis of non-economic factors, in order to limit
the marking burden and to avoid labeling that would mislead the
consumer

Opinions vary widely within and between industries with regard to the FTC
standard for “Made in USA.” The principal concerns expressed were: (1)
both the strictness or the perceived weakening of the FTC threshold for
unqualified marking of “Made in USA”; (2) inconsistency among the FTC
standard, NAFTA or URAA rules of origin regimes, and Customs marking
regulations and underlying origin determinations; and (3) inconsistency
between the FTC standard and foreign customs’ requirements. These
inconsistencies can result in requirements to mark goods for export “Made in
USA,” when these goods cannot be so marked for domestic sale or must be
marked with a foreign origin. Similarly, imports that contain components
procured in multiple countries are marked based on where substantial
transformation occurred; similar products manufactured in the United States
are precluded from being marked “Made in USA.”

The current FTC standard for “Made in USA” claims requires that the
product’s materials and labor be of “wholly domestic” origin. The FTC has
proposed in a recent consent agreement to alter the description of this
standard to “all or virtually all” of domestic origin, but indicates that the
standard itself has not changed; the consent agreement is on hold pending
completion of a review of the standard by FTC. Many companies reportedly
cannot meet this standard because they purchase components or materials
from offshore either to remain cost competitive or because certain inputs are
not produced in the United States. In other instances, some U.S. firms have
expressed concern that products containing all U.S. components but exported
for assembly and then shipped back to the United States cannot meet the
threshold for “Made in USA” claims.


CONTENTS—Continued

Page
Chapter 5. Consumer Perspectives
Review of research .... 20.0... neces 5-1
Commission survey results . . 5-3
Research themes . 5-10
Markings provide information for educated purchasing decisions . . 5-11
Country of origin is one of many factors considered in purchasing decisions .... 5-12
Markings are more important for certain products than other products ......... 5-14
Chapter 6. Industry Sector Analyses
Electronics .............200.0202005 . 6-1
Specific marking requirements . 6-1
Marking exceptions 6-2
Examples of marking requirements in electronics . .. 6-2
Semiconductors
Other electronics products

Compliance concems .........
Compliance costs and benefits ...
Steel products
Specific marking requirements .
Compliance concerns .........
Compliance costs and benefits .
Pharmaceuticals
Specific marking requirements .
Compliance concems .........
Compliance costs and benefits .
Handtools ..................-.
Specific marking requirements .
Compliance concerns .........
Compliance costs and benefits .
Frozen vegetables ..............
Specific marking requirements .
Compliance concerns
Compliance costs and benefits
Automobiles and automotive parts .
Specific marking requirements .
Compliance concerns
Compliance costs and benefits
Textiles and apparel ...........
Specific marking requirements

iii


permanent methods including paint stenciling, affixed tag or sticker, tagging containers, or
tagging bundles.

Only a handful of Customs rulings have been issued that dealt specifically with steel
products, and focus primarily upon whether and how particular steel products or their
containers should be appropriately marked for country of origin. At issue in many of these
disputes is whether prescribed marking methods under section 304 are technically or
commercially infeasible, making the product unfit for intended its end uses by threatening
its structural or performance integrity or by marring surfaces. Marking directives in Customs
rulings reviewed in the next section are indicative of this problem. In a recent modification
of its ruling regarding county of origin marking of wire rod,” Customs recognizes that the
wording of 19 CFR 134.26 on notification requirements for articles that are repackaged in
retail containers after importation may be ambiguous as to who is the ultimate purchaser;
thus a complete revision of Part 134 was proposed.

Finally, issues that directly affect steel products of concern to the industry are alternatives
to the FTC’s current wholly of domestic origin threshold, and lack of harmonization among
Federal regulations, among others. Specific comments from steel producers on these issues
are presented below.

Compliance Concerns

Nearly all product sectors of the U.S. steel industry expressed varying degrees of concerns
and problems in complying with current U.S. country-of-origin marking requirements. Of
primary concern is not only the technical suitability of domestic marking regulations, but
also enforcement of existing regulations, and technical and commercial suitability of criteria
for conferring origin. However, few problems over lack of transparency of U.S. marking
regulations were noted.

Numerous technical- and commercial-suitability problems confront U.S. manufacturers of
steel products in complying with domestic marking requirements. According to Customs
ruling letters and USITC staff interviews of industry officials, technical problems in
physically applying markings are reported across product sectors. For example, any
markings on underground pipes would be obliterated by protective coatings applied after
importation.** Paint stenciling mars specialty surfaces and leaves residues on steel tubing
that may impede a customer’s efforts to apply finishes to surfaces.” A U.S. chain
manufacturer indicated that the ease of marking link chain depends on the size of links, for
those less than 3/16" in diameter are much more difficult to stamp or emboss. Another
technical problem is that origins of inputs are becoming increasingly difficult to track as
supply sources become more numerous and varied. According to another U.S. chain
manufacturer, some domestic manufacturers whose products contain significant amounts of
foreign-origin components experienced difficulty in tracking component origins for their

4730 Cust. B. & Dec., “Modification of Customs Ruling Relating to Country-of-Origin
Marking of Wire Rod,” No.14, Apr. 3, 1996, pp. 22-29.

U.S. Customs ruling, HQ 731047, Feb. 26, 1988.

U.S. Customs rulings HQ 734806, Apr. 22, 1993, and HQ 735278, July 13, 1994.

6-14


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5-8


opinions in response to inquiries about proper marking procedures and requirements. These
advisory opinions consistently stated that a manufacturer could only claim that a product was
“Made in USA” if the subject product was comprised wholly of domestic parts and labor.'**

In the early 1990s, the FTC brought actions against several firms accused of deceiving
consumers by concealing the fact that their products were made in foreign countries. In
Richard B. Pallack, Inc. (No. C-333 (1991)) and Nikki Fashions, Ltd. (No. C-3404 (1992)),
the FTC brought enforcement action against firms which allegedly removed foreign origin
labels. In Manzella Productions, Inc. (No. C-3503 (1994)), the FTC brought action against
the company for allegedly substituting “Made in USA” labels for foreign origin labels.'*”

In the mid-1990s, the FTC, for the first time, brought two cases against firms making “Made
in USA” claims for products assembled in the United States. These cases have sparked a
debate as to the practicality of the “wholly domestic” standard. In its discussion of the case,
the FTC used new language to refer to its standard of earning the “Made in USA” label --
the “all or virtually all” standard. In Hyde Athletic Industries, Inc., the FTC alleged that
Hyde made false advertising claims that all of its Saucony brand footwear was made in the
United States, “that is, that all or virtually all of the component parts of the footwear are
made in the United States, and all or virtually all of the labor in assembling the footwear is
performed in the United States.”"** The FTC alleged that this claim was false and misleading
because a substantial amount of Saucony footwear was assembled in foreign countries of
foreign component parts, and a substantial amount of Saucony footwear assembled in the
United States consisted largely of foreign component parts. A proposed consent agreement
with Hyde was published on September 23, 1994, in the Federal Register, subject to final
approval by the FTC.'?

On the same day the proposed consent agreement with Hyde Athletic Industries, Inc., was
published, the FTC filed a complaint against New Balance Athletic Shoes containing similar
allegations.’ In light of considerable public comment on the cases, the FTC decided to
review the standard for domestic content claims, and rejected a proposed staff settlement
with Hyde Athletic Industries. Instead, FTC staff was directed to renegotiate a modified
consent agreement based on a revised complaint.“’ The revised complaint deletes the
previous FTC allegations that a substantial amount of the Saucony footwear assembled in
the U.S. consists largely of foreign component parts. The revised complaint also deletes
language interpreting “Made in USA” to mean that “all or virtually all” of the parts and labor
are domestic.'*? In July 1995, the FTC issued an order staying the administrative proceeding
that was set to begin against New Balance. The order requires both the FTC complaint

136 60 F.R. 53928, Oct. 18, 1995. For a summary of these rulings, see CFR, Commercial
Practices, Chapter 16, parts 0 to 149, revised as of Jan. 1, 1989, pp. 147-352.

37 60 F.R. 53928, Oct. 18, 1995.

88 59 F.R. 48894, Sept. 23, 1994.

139 59 F.R. 48892-48894, Sept. 23, 1994. A corrected version of the proposed consent
agreement was published in the Federal Register on Oct. 31, 1994. 59 F.R. 54461, Oct. 31, 1994.

140 FTC Press Release, “FTC Stays Proceedings Against New Balance; Orders Parties to
Show Cause Why Complaint Should Not Be Amended or Dismissed,” July 11, 1995.

TM Toid.

2 FTC Press Release, “FTC To Conduct Comprehensive Review of Consumer
Perception of ‘Made in USA’ Claims; FTC Staff to Renegotiate Proposed Settlement with Hyde
Athletic Industries,” July 11, 1995.

3-29


2

Before we begin, let me note that only the Commission and its staff will ask
questions of parties, and that all witnesses must be sworn in before testifying.
Please give copies of prepared statements or other documents to the Secretary as
soon as they are available.

Since all written testimony will be entered fully into the record, it need not
be read to us at this time. Copies of the tentative calendar, as well as Transcript
Order Forms, are available at the Secretary’s desk. Transcript Order Forms are also
located in the wall rack outside of the Secretary’s Office. Finally, any requests for
classification of information as Business Confidential should comply with
Commission Rule 201.6

Madam Secretary, are there any preliminary matters?

Will you call the first witness, please?

Fe HT TE HE EE


also requested on the costs to government and industry of enforcement and
compliance.?

The Committee requested that the Commission provide specific information on five
industries: electronics, steel, pharmaceuticals, hand tools, and frozen vegetables. The
Commission was also requested to provide available information on any other U.S. industry.
The Commission has included specific analyses on the automobile and automotive parts
industries, as well as on the textile and apparel industries because of the existence of specific
laws pertaining to the marking of these items. In addition, the Commission has provided an
analysis of the footwear industry because of significant “Made in USATM issues currently
pending at the Federal Trade Commission regarding athletic footwear.

Overview of Country-of-Origin Marking

Country-of-origin marking is the marking of products with a mark or label, usually spelling
out the name of the country from which a good originated or where a good underwent its last
substantial transformation.° Many justifications are cited for the use of country-of-origin
marks. The one most frequently mentioned is the need to provide information to consumers
to assist them in their purchasing decisions. Governments have required country-of-origin
marks in order to help avoid false commercial designations on products, with the intended
benefit of protecting domestic consumers from fraud and manufacturers from fraudulent
look-alike products. Governments have also used marking as a method to verify certificates
of origin for duty purposes, and to enforce import quotas and antidumping and
countervailing duty laws. Interested parties that testified at the Commission’s public hearing
on April 10, 1996, provided differing perspectives on many of the uses and implications of
country-of-origin marking requirements, as discussed in this report.

In the United States, several government agencies are involved in implementing and
enforcing different laws that affect country-of-origin marking. Domestic businesses have
sometimes complained that the laws and regulations governing such marking can give rise
to problems regarding a variety of issues, including conflicts among these laws; the
administration of the laws and regulations, and the associated burden of compliance; the
tules of origin that underlie the marking of articles; and the value of these laws to consumers.

> Thid

‘In this report, “Made in USA” refers to any message in which the terms, text, phrases,
images, or other depictions refer solely to the United States as the country of origin, without
disclosing the extent or fact of foreign components or labor. “Made in America,” “U.S.-Made,”
and “All American” are examples of equivalent terms.

5 The legal concept of substantial transformation is reviewed in chapter 2.

1-2


Specific Marking Requirements

Manufacturers usually apply multiple markings/labels to their tools. Depending on the
manufacturer, in addition to country of origin the following information may be
marked/labeled on its hand tools: brand name, size characteristic, part number, professional
or consumer series, and the grade of steel used.

Hand tools generally are marked to convey country of origin in three ways. Hand tools that
are imported are marked with the country of origin as required under section 304 of the
Tariff Act of 1930. Hand tools that are made in the United States and that meet the FTC
standard for “Made in USA” claims may be voluntarily marked “Made in USA” or “USA,”
otherwise they may be marked just with a brand name, or not marked at all. Hand tools that
incorporate foreign components may bear a qualified statement of being produced in the
United States with foreign components or may be marked with just the brand name, or not
at all, depending upon whether Customs has deemed that the imported component has
undergone a substantial transformation in the United States after entry.

In January 1995, Customs announced a major policy proposal to modify or revoke 12 prior
country-of-origin marking rulings *' concerning the marking and substantial transformation
of forgings for hand tools so as to be consistent with the findings of the Court of
International Trade (CIT) in its decision on National Hand Tool Corp. v. United States.
Previously, imported forgings for hand tools that were substantially transformed in the
United States ceased to be foreign articles and weré no longer required to be marked with
a foreign country of origin. For substantial transformation of an imported tool forging to
occur, significant machining and finishing with significant value added was required in the
United States to avoid foreign origin markings. Conversely, Customs required all imported
forgings that did not undergo substantial transformation to be marked with a foreign
country-of-origin marking. These proposed modifications/revocations would therefore alter
the way Customs tests or measures substantial transformation. However, the proposed
standard was described as follows: “if the shape of an imported forging establishes its
intended end-use, then no substantial transformation can occur irrespective of the extent of
postimportation operations performed in the United States or of the value added by such

8! 29 Cust. B. & Dec., No. 2, Jan. 11, 1995, pp. 11-36.

®2 See National Hand Tool Corp. v. United States, Slip Op. 92-61 (CIT April 27, 1992),
aff'd F.2d 1201 (Fed. Cir. 1993). In its decision, the Court of International Trade held that
imported hand tool components which were used to produce flex sockets, speeder handles, and
flex handles were not substantially transformed when further processed and assembled in the
United States. The Court stated that the determination of a substantial transformation must be
based on the totality of the evidence, and applied the criteria of whether the tool forging has the
same name as the finished tool (name); whether the tool forging has a predetermined use (use); or
whether the tool forging has the essential character of the finished tool (character); to determine
whether a substantial transformation has occurred. The Court found that the character of the
articles remained substantially unchanged after heat treatment, electroplating and assembly, as this
process did not change the form of the components as imported; that the use of the imported
articles was predetermined at the time of importation; and that the name of the components also
remained the same after entry into the United States. The Court discounted the idea that a
substantial transformation should be found based on the value of the processing performed in the
United States, but decided the issue based solely on the criteria of name, character, and use.

6-25


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F-25


information may serve to confuse consumers rather than to assist purchasing decisions, and
could hinder U.S. competitive ability.

These issues, and the sometimes inconsistent requirements of various U.S. marking regimes,
are some of the principal findings with respect to government and industry costs, and
industry concerns associated with country-of-origin marking. Along with benefits that
consumers attribute to origin markings, this summary also highlights suggestions of
interested parties that may offer alternative approaches for further consideration.

Compliance Costs to Industry

Q Industry officials underscored the difficulty many firms have in providing
hard cost data. Nevertheless, of the 222 companies’ that responded to the ITC
survey with respect to marking-related compliance costs,’ virtually all
indicated that compliance costs associated with country-of-origin marking do
not represent a major share of net sales.‘ However, many companies
presenting testimony or submitting written statements noted that compliance
costs could be a burden.

Q Nearly all of the 109 companies that provided either qualitative or
quantitative estimates of costs reported that such costs were less than 1
percent of total net sales, or were too small to quantify. Companies indicated
that such costs, even if identifiable, could not be passed on to retail
customers for competitive reasons. The remaining 113 companies
addressing marking-related compliance costs indicated they were unable to
provide an estimate, or that costs “are low”® and they do not track
compliance costs because of the additional accounting and overhead costs
that would be required.

? Representing 51 percent of the 435 companies that responded to the Commission’s
survey.

> The major types of costs directly associated with compliance requirements included
physical marking; administrative; warehouse, accounting, tracking, and inventory-carrying costs;
startup costs (systems, machinery, labeling inventory), expenses for multiple production lines; and
marketing/advertising. Also, see appendix F.

‘ There are notable exceptions. For example, see marking-related costs estimated by a
home furnishings producer (Pillowtex Corp.) associated with implementation of the URAA mules
of origin, transcript of hearing, p. 206, and chapter 6 (Textiles and Apparel). See added discussion
on costs in chapter 4 and chapter 6.

5 Although such responses could not be considered for purposes of estimating costs, the
responses suggest that some cost, albeit “low” or unable to be estimated, may be incurred in their
operations. In response to the ITC survey, virtually all of the companies that were unable to
estimate costs nonetheless identified the major types of costs incurred in complying with country-
of-origin marking requirements.


One firm stated that their product line, which is primarily kits used for surgery, often
contains pharmaceuticals and is classified as such.” The firms expressed concem that the
kits, which can consist of up to 100 components, require space for country-of-origin labeling
that in many cases exceeds the space available in the packaging. The firm also stated that
maintaining any current country-of-origin labeling was difficult given the frequent changes
in suppliers and procurement.

One association stated that it was difficult to separate rules on the physical marking of the
imported good from the rules by which the country of origin is determined,”* because the
reason for the rules on marking was the requirement that a product be marked. According
to the submission, the pharmaceutical industry has evaluated the proposed NAFTA Marking
Rules and feels that the proposal to apply the NAFTA Marking Rules to all imports is
premature. As a result, the industry concludes, uniform, multilateral rules should be
developed that would reflect the internationally accepted principle of substantial
transformation.

Compliance Costs and Benefits

The respondents to the Commission survey reported that the major costs of producing a
pharmaceutical are warehousing, accounting, and costs associated with tracking of the use
of foreign-made materials. The reason for this is that foreign materials, if not considered
substantially transformed by Customs, must be tracked into U.S. commerce to the consumer
packaging or labeling that will state the country of origin of the pharmaceutical product.

No pharmaceutical firm or association was able to quantify the additional cost of marking.
Some respondents stated that the additional cost of marking would be minimal, given all of
the FDA labeling requirements currently in place.

Pharmaceutical firms identified few, if any, benefits to the pharmaceutical company as a
result of country-of-origin markings. The only benefits observed were the ability to use the
country-of-origin marking as a basis for price comparison of the raw material among several
potential suppliers and a reliance on country of origin for determining classification and duty
rates. There were no perceived benefits to the retail. consumer of pharmaceutical products
as a result of country-of-origin marking requirements.

7 Baxter Healthcare Corp., written submission to the USITC, May 8, 1996, p. 1.

78 Barnes, Richardson & Colburn, on behalf of the Pharmaceutical Research and
Manufacturers of America, prehearing submission to the USITC, Mar. 27, 1996. See also Eli Lilly
and Co., written submission to the USITC, Apr. 25, 1996, p. 2.

6-23




CHAPTER 2

Concepts and Approaches in Determining
Country of Origin

In general, imported articles or their containers must be marked to show country of origin
unless otherwise excepted. By comparison, most domestic articles generally are not required
to be marked, although some manufacturers and retailers may choose to mark, label, market,
or advertise such articles as made in the United States. This chapter describes the concepts
and approaches that are used to establish the country of origin of imported articles, and
identifies certain industry concerns with these measures. It also describes the standards that
are applied to “Made in USA” claims regarding domestic articles that are sold in the United
States.

Origin of Imported Articles

The U.S. Customs Service (Customs) is principally responsible for administering and
enforcing the tariff, customs, and other laws that apply to imported articles, including many
measures under the jurisdiction of other agencies. Customs must be able to determine the
country of origin of imported articles in order to administer and enforce such laws properly.
Importers must also be able to determine the country of origin in order to comply with such
laws. The origin determination is used to establish whether an article: (1) may enter the
United States, as imports from certain countries may be embargoed; (2) is eligible for a
particular rate of duty, such as most-favored-nation rates of duty, or for tariff preferences,
such as under the North American Free Trade Agreement (NAFTA), the Caribbean Basin
Economic Recovery Act (CBERA), or the Generalized System of Preferences (GSP); (3) is
subject to additional duties, such as antidumping and countervailing duties; (4) is subject to
a quota or other quantitative limitation; and.(5) qualifies for a government procurement
program, such as those defined under the World Trade Organization (WTO) Government
Procurement Code. Most importantly for the purpose of this investigation, the origin
determination is used to establish the name of the country that must be marked on an
imported article. In other words, Customs must determine the country of origin of an
imported article, and then it must determine whether the imported article is properly marked.

In some cases, an imported article is further processed in the United States before being sold
in the domestic market or exported. For such imports, Customs relies on country-of-origin
principles to determine whether the further processing is sufficient to substantially transform
the imported foreign article into a domestic article.’ If the U.S. processing is not deemed to
be substantial, then the processed article remains a foreign article that must be marked with

1 For examples of imported articles that are further processed in the United States, see the
discussion in chapter 6 regarding hand tool forgings and pharmaceuticals.

2-1


U.S.-based manufacturers oppose “Made in USA” proposals that are not consistent with the
information presented on the AALA label, and believe that the increased use of advertising
with “Made in USA” type themes by transplant manufacturers has been confusing to some
consumers. '®’

187 American Automobile Manufacturers Association, submission to the FTC, “Made in
the USA Policy Comment,” FTC File No. P894219, Jan. 22, 1996.

6-48


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Dear Mr. Chairman,

Last July, the House Ways and Means Trade Subcommittee held hearings on the
issue of rules of origin and country of origin markings for both foreign and domestic
goods. Origin markings have been a matter of controversy since they first became
public law in 1930. Views expressed during the hearings ranged widely, including
calls to drastically modify or eliminate country of origin marking requirements, and
requests to harmonize rules for domestic and imported goods.

To provide Congress with a more thorough foundation for consideration of
legislative initiatives, this Committee requests that the Commission initiate an
investigation under Section 332 of the Tariff Act of 1930 to review the laws,
regulations. and practices applicable to country of origin markings. The report should
include the following:

. A legislative and administrative history of marking rules, including a
comparison of the concepts and approaches for determining country of
origin for foreign and domestic goods.

. An analysis of the administrative processes for determining origin and
appealing decisions on marking issues.

. An evaluation of the problems which country of origin marking rules
create for industry, and the benefits of these rules to consumers.
Information should be sought on the costs to government and industry of
enforcement and compliance.

A2


superior quality of materials, workmanship, or service from imported products, and are
Tesponding to customers’ brand loyalty for a company’s product or for domestic products
in general.** Also, some companies indicated that voluntary marking of “Made in USA”
makes it easier to meet “buy domestic” preferences of retailers and governmental bodies;
country-of-origin markings assist in tracking and excluding foreign supplied components
when they participate in these programs (table 4-9).

However, “Made in USA” marking does not always allow the U.S. company to achieve a
greater sales volume or higher prices. Only a small share of companies stated they could
achieve an increase in unit sales (9 percent) and achieve higher unit sales prices (5 percent)
by using “Made in USA” labeling (table 4-9). Several groups pointed out that costs
associated with country-of-origin marking are not always returned to the manufacturer in the
form of higher profits; other factors are more important in setting prices. Similarly,
consumers are not thought to pay a penalty in the form of higher prices®” because of the
small share such costs represent.

Suggestions By Industry and Consumers For Modifying
Existing Practices

Parties that testified or submitted written statements to the Commission expressed a wide
variety of views on marking. The views expressed vary widely among companies and
consumers; however, they may be generalized as follows:

With regard to section 304 of the Tariff Act of 1930 (the principal U.S. statute governing the
marking of country of origin on imports):

G Keep section 304 of the Tariff Act of 1930 as it is.*

QO Repeal section 304 of the Tariff Act of 1930, or limit the scope of section 304 of
the Tariff Act of 1930 to imports put up for retail sale (i.e., consumer goods), or
limit the scope of section 304 of the Tariff Act of 1930 to specific import-
sensitive industries.

5 In this regard, several industry executives stated that domestic purchasers of hand tools
and golf clubs have a preference for the U.S.-made product. For example, see, statements of
Thomas Mahoney, vice president, The Stanley Works, transcript of hearing, p. 158; Dan
Craighead, vice president international, Snap-on Inc., transcript of hearing, p. 161; George
Sherman, president and CEO, Danaher Corp., transcript of hearing, p. 168; and Mark King, vice
president of sales, Taylor Made Golf Co., transcript of hearing, p. 270. For a discussion of why
companies advertise “Made in USA,” see, for example, Mayer, Brown & Platt, on behalf of
Vaughan & Bushnell, posthearing submission to the USITC, Apr. 25, 1996, pp. 12-14.

57 See, for example, Robert Swift, executive director, Crafted with Pride in USA Council,
Inc. “Additional Information for USITC: 4-10-96 Hearings,” submission to the USITC., pp. 1-2.

58 This may result from benefits the company derives from the way in which substantial
transformation affects its imports, the current administration of the program by Customs, or both.

4-20


repackaged, the pharmaceutical’s container must retain some marking as to the country of
origin.

Pharmaceuticals that are dispensed from a pharmacy generally do not carry any
country-of-origin marking, nor is any marking usually required. For dispensed
pharmaceuticals, especially pills, tablets, capsules, or syrups that are dispensed from larger
pharmacy containers, labeling of any retail container, bottle, or jar is governed by state
regulation. State law usually requires the name, address, telephone number, and zip code of
the dispensing pharmacy, along with the name of the licensed practitioner, a statement of
directions given by the practitioner, and other information such as the date of dispensation,
the date of expiration, and any other information considered useful to the patient.

Certain individual pharmaceutical products are specifically excluded from marking, in
subpart D of 19 CFR 134.33 (commonly called “J-List exceptions”). The pharmaceutical
products that need not have country-of-origin markings are “Chemicals, drugs, medicinal
and similar substances, when imported in capsules, pills, tablets, lozenges, or troches.” For
these exceptions, the products must bear the country of origin on the container. Subpart C
provides for the marking of containers or holders for such items. Imports of bulk
pharmaceuticals require marking on the container label, unless the container is reusable or
is a vehicle of transport.

Compliance Concerns”

None of the firms contacted in the Commission survey voiced serious concerns with respect
to U.S. marking requirements administered by Customs, the Federal Trade Commission, or
any other U.S. government agency. The principal reason cited is that the firms adhere to
FDA labeling requirements and that FDA requirements often fulfill other government
labeling or marking requirements.

Pharmaceutical firms, because of their global nature, do not strive to qualify products for
“Made in USA” labeling. FDA requirements already require the name of the firm, as well
as an address, whether domestic or foreign, as well as the name of the company and location
of the manufacturer of the drug. Pharmaceutical firms do not view any additional marking
requirements, such as any wording that may be required by Customs, as being significant.

At least one firm expressed concern over differences between product registration in the
United States and in foreign countries. In some instances, foreign countries are selective in
allowing registration of foreign-marked goods, although for products produced in the United
States there were generally no problems encountered. As nearly all countries require some
sort of registration of pharmaceutical products prior to sale, pharmaceutical firms do not
experience additional costs of re-marking goods, extra duties, or delays at the border.

76 Six individual pharmaceutical firms and two pharmaceutical industry associations were
contacted. Four individual companies and one industry trade association responded.

6-22


Table 4-6
Country-of-origin marking costs identified during the Commission’s investigation, No. 332-366

Item Range of cost estimates Number of
(milion dollars, except as noted) companies’
ITC Survey
Current costs:
‘Annual operating costs 21 to 22 2
Unit cost 2 to 10 cents per garment, 25 cents to $1 per garment, if | 7
remarking or relabeling is required. Marking of
commemorative plates, $3 per plate.
Start-up costs (4) 4
Prospective costs:>
‘Annual operating costs 20 to 22 4
Start-up costs 15 to 26 4
Subtotal estimated costs:
‘Annual operating costs 41 to 44
Start-up costs 15 to 26
Testimony and submissions:®
Current costs:
Annual operating costs 59 to 62 672
Start-up costs 13 to 14 2B
Prospective costs:>
Annual operating costs 4 540
Start-up costs’ 9 540
Subtotal estimated costs
‘Annual operating costs 60 to 63
Start-up costs 22 to 23
All organizations reporting costs:
Total estimated annual
operating costs 101 to 107
Total estimated start-up costs 37 to 49
|
AALA marking costs”
Current costs:
Annual operating costs 2 23
Start-up costs 13 23
Start-up and first year
operating costs 600 to 1,200 15,000

‘The number of companies reporting cost estimates for 1995 (except start-up costs in some instances) includes
responses from individual companies and trade associations reporting for their membership.

? Represents firms reporting costs greater than zero. An additional 23 firms reported zero costs.

3 Several companies provided only unit cost data.

* Estimated at $400,000, representing retooling costs.

5 Prospective costs are those not incurred by the company currently, but may be incurred in the future because of
a change in country-of-origin marking requirements.

6 Includes testimony at the USITC hearing on Apr. 10, 1996, and written submissions to the USITC from
companies and industry associations representing 672 firms; data have been adjusted to eliminate double-counting
with company survey data.

7 AALA marking costs are estimated by the National Highway Traffic Safety Administration for companies
producing automobiles and auto parts.

Source: Compiled by the staff of the U.S. International Trade Commission.

4-13


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F-5


APPENDIX C
List of Witnesses Appearing
at the USITC Hearing

C-1


Q For companies that must begin to track and mark imports,° new computer
systems, inventory and warehouse requirements, new labels, and new
labeling machinery can translate into reported startup costs ranging from
$400,000 to several million dollars or more. Also, for companies with
sizable total sales, costs that are a small percentage of net sales can translate
into millions of dollars.’ Companies expressed the concern that funds
expended in this manner could be invested in other company activities.

a For the companies® and organizations representing about 700 firms that
provided the Commission with estimates of annual operating costs in
complying with country-of-origin marking requirements, an order of
magnitude estimate of current and prospective annual operating costs could
exceed $100 million (table 4-6, chapter 4).° Separate start-up costs to track
and mark imports were estimated in a range totaling $37 million to $49
million.’°

Oo Annual operating costs to comply with the American Automobile Labeling
Act (AALA) are estimated to be $2 million in 1995 for 23 automobile
producers, according to the National Highway Traffic Safety Administration
(NHTSA). Separate start-up costs for these producers were estimated by
NHTSA at $13 million. Combined start-up and first-year operating costs of

* Companies may need to do this because of new origin regimes (e.g., NAFTA, URAA)
or changes in the way Customs interprets substantial transformation or origin determinations. For
example, Pillowtex Corp. estimates that implementation of the URAA rules of origin would cost
nearly $1.5 million, post-hearing submission, Apr. 19, 1996, Taylor Made Golf Co. estimates
marking costs under NAFTA Marking Rules at $1.7 million, with an added $6 million in inventory
costs, post-hearing submission, Apr. 22, 1996; substantial transformation and tariff classification
shift interpretations are estimated to initially cost food processors at least $8.6 million and a hand
tool producer $9 million, see appendix F.

7 For example, Intel Corp. estimates a $4 million annual cost to mark its semiconductors,
circuit board assemblies and other products, transcript of hearing, p. 136; this cost represents 0.02
percent of Intel’s annual net revenues in 1995 of $16.2 billion (annual 10K report).

§ Individual company costs reported as a share of net sales range from an estimated low
value of $5,000 to a high of $9 million, based on 1995 sales derived from company annual reports
and ITC survey data.

° Cost estimates may be somewhat overstated, based on using a 1-percent figure to
calculate costs as a percent of net sales when a response was “less than 1 percent.” Costs may be
understated due to an inability to quantify costs for qualitative assessments (such as minimal,
minor, or low) and the difficulty in acquiring aggregate “industry-wide” cost estimates. The
possible magnitude of such industry-wide costs is illustrated by estimates of compliance costs of
$50 million per annum provided for one entire industry, for example, representing about 0.01
percent of total net industry sales of $55 billion; post-hearing brief of Semiconductor Industry
Association, p. 5.

1°Tt should be noted that, since response was voluntary and this survey was not a random
sample, the survey results may not be representative of particular sectors. Views occasionally
diverged between companies within the same industry. There were a number of cases where one
company provided cost data while others indicated that they could not quantify the data or
believed such costs to be minimal or negligible. Therefore, results from the survey cannot be
extrapolated to generalize about a particular industry or the economy as a whole.

xi


Table 4-8

Types of benefits companies report they receive from country-of-origin marking requirements: U.S.
companies’ identification of benefits, by major type of benefits and by sectors

Sector’
Metals &
metal
Benefit Agriculture Chemicals | products | Machinery | Electronics | Textiles | Overall
Percent of responses

Allows consumers to
choose between the 28 50 22 23 36 30 26
U.S. product and
imported product
Basis for:

Determining quality

of materials, work- 25 ie) 19 23 16 20 21

manship, or service

Establishing informa-

tion on conditions of 12 0 6 10 te) 7 8

production

Price comparisons 15 17 16 17 oO 9 14
Preserves domestic 8 ie) 16 13 4 18 12
jobs
Supports local 5 i?) 15 10 ie) 14 10
economy
Other 6 33 7 3 44 2 8

Number of responses
156 6 174 30 25 56 447

1 See footnote 1 in table 4-2 for description of sector products.

Source: Compiled from data from telephone interviews conducted by Commission staff.

related discussion in chapter 5).5* When asked if they mark their products with “Made in
USA” labeling, 93 percent** of the U.S. companies responding affirmatively: indicated that
they benefited from doing so.
responding to preferences by their retail and wholesale customers to distinguish their goods’

These companies indicated most often that they are

5 Tn response to industry concerns, the FTC is examining its threshold for allowing the
use of “Made in USA” marking to determine whether to alter its current standard. Although

differing views were expressed in the Commission’s public hearing regarding customer awareness
of the origin of a good and associated consumer welfare of such markings, the fact remains that
companies mark “Made in USA” when possible, an implicit signal that it has value.

4-19

55 128 of the 153 companies that responded to this question.


While the Commission should provide available information on any U.S.
industry, we request a focus on electronics, steels, pharmaceuticals, hand tools, and
frozen vegetables.

The administration of U.S. country of origin marking requirements is largely
handled by the U.S. Customs Service and the Federal Trade Commission. Copies of
this letter and requests for full cooperation with the ITC’s study will be sent to these
agencies, the latter of which is currently accepting public written comments for a study

already underway.” The Section 332 study being requested of the ITC in this letter
should involve a similar process of seeking public comment and holding hearings open

to interested parties.
The Commission report should, be submitted within six months of receipt of this
request. :

Sincerely,

A-3




“spiepueys

«WSN Ul PEW, S14 Oud
pue sjusweuinbes Bupyew
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Jo Juawadlojua JOUNS

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pue GBuunjoeynuew
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panuquos - ‘sialjddns
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nq swuy UMO Ul! Sgof
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pue Bululyoew oy)
jo ved s| eweu pueiq
pue azjs 0} uonIppe

ul uiBuo yo Ajunoo
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s|00}

payesodioou]

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“ulBuo yo Ajunoo

Bulujwuayep ul eoueAg|al

“uiBuo Buuiajyuoo ou aaey pinoys BuiBioy yeu)

404 389} UOHEWOJsUe} pue s6ui60j jusuodwioo ey}

-jenueysqns syoddng Woy yuaJayip Ajjeyuewepuny

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yuauoduod jo ulBy0 jo yeu sonyeos Bugayew

Ayunoo ay} YM peyew aq pue uononpoid sesoub)

s]00} puey paysiuy esinba: $[00} puey 10} sjuewerinbel

0} sajnu uBio pue Bupyew Bupyew ulBuo yo Ayjunoo
Buysixe jo uonejeidiajules Bunsixe Jo uojeyeidiajulel “diog Buysed
Aue sasoddg, pasodoid ,swoysnd, sBuyseo j00}-pue}y} payepljosuoD,

“sszonpoid

‘ojsewop |jews Jo Bujuue|d

“sBul610) jeyow yBnol w9}-Buoj yoeduu! Ajasioape

yuauoduiod jo ujBy0 Jo WM ainyoeynuew jo

Ayunoo ey) YM payew oq uey; Jaujes sBulBi0j Jo uBUO

joo} puey paysiuy asinba: uodn paseq aq 0} sjoo} puey

0} sand ujBuo pue Bupyew Jo} sjuawayinba Bupyew
Buysixe jo uogeyeidiequies ulBuo yo Ajunoo Buysixe “oul ‘Ayjeiseds
Aue sasoddo 0} saBueyo onewesp Auy syed |00}-puey yueuodwod
uoyezjuebig
sSuohepuswluiooay sqyjeueg $]s09 SulaauoD puke swla|qold syonpold Jo Auedwos,

sjoo| puey}—sansed paysesazuy Jo SUOI}ISOd
bd aged

F-9


APPENDIX D
USITC News Release,
Chairman’s Letter, and

Chairman’s Opening Statement at
USITC Public Hearing

D-1






In addition, the amendments in Public Law 98-417 codified a requirement not explicitly
stated in the Wool Act that imported wool products be marked with the country of origin.
The amendment ensured the act conformed with the then current FTC country-of-origin
labeling regulations for wool products and provisions of the Textile Act requiring country-
of-origin marking,’ as well as with Customs regulations.’”

The 1984 legislation amended the Wool Act and Textile Act in additional ways. First, it
amended the acts to require that the country-of-origin disclosure must be placed in the neck
of garments, or for those without necks, on a conspicuous spot on the inside or outside of the
product. Second, all products must be separately labeled, except hosiery packaged
individually for retail sale. Third, all product packages must be labeled unless the packaging
is transparent and the individual product label can be seen through the package; and fourth,
mail order catalogs and mail order promotional materials must disclose in the description of
each textile and wool product whether the product is made in the United States, imported,
or both.'

Fur Products Labeling Act

The Fur Products Labeling Act (Fur Act) (15 U.S.C. 69), enacted August 8, 1951, requires
the labeling of furs and fur products with information to protect consumers against false
advertising and invoicing of fur products.’ Furs and fur products are required to show the
name or names of the animal or animals that produced the fur, certain facts about the fur
(whether the fur product contains or is composed of bleached, dyed, or otherwise artificially
colored fur or if waste fur is used), and the name or other identification issued and registered
by the FTC, of the manufacturer, seller, advertiser, or distributor. In addition, the fur or fur
products must be labeled with the country of origin of any imported furs used in the fur

110

product.

Enforcement of the Wool Act, Textile Act, and Fur Act, and
Regulatory Review

The Wool Act, Textile Act, and Fur Act authorize the Federal Trade Commission to enforce
these Acts under the FTC’s mules, regulations, and procedures provided for in the FTC Act,”
which is discussed in the section below. U.S. manufacturers of wool products are required
to maintain proper records, and neglect or refusal to maintain such records is subject to a fine
of $100 per day, and is recoverable by the FTC through civil action."’? Imported wool and
textile fiber products may be excluded from entry if they are mislabeled or their invoices fail

°° Thid, p. 2726-2727.

°" Toid.

108 15 U.S.C. 70b(e), (1), and (j), and Public Law 98-417, sections 301-303. The FTC
regulations on country of origin marking and mail order advertising are found in 16 CFR 300.25
and 300.26, respectively.

15 U.S.C. 69c.

1°15 U.S.C. 69b.

1 See 15 U.S.C. 68d, 15 U.S.C. 70e, and 15 U.S.C. 69f, respectively.

"215 U.S.C. 68d().

3-25


“sjuawauinbes Bupyew
uBuo yo Ajunoo Buysixe
JO Juawaol0jUa JoUN)s

“Buppyew jo soo
Jeuonippe ajqenisouco
Aue yBiamyno Jey (‘938

‘goueuoped ‘Ayenb
‘Ayiqesoey “6'9)
siosnjoeynuew ojsewop
pue siewiojsno

Yjog 0} syauag “Ayjenb
Jovajul Jo syodu

Wwo4} S00} GBunyno
apew-'s'f ysinBuysip

sj00} Bunjno
lew 0} anjsuadxe

“Aysnpul ‘g’f 10) ayea19
sjuawalinbes Bupyew
ulBuo yo Ajunos ‘sn,
Buysixe yeuy suajqoid seyj0
Aue Jo aleme JON ‘Sue0U0d
Ayniqeyjes yNposd oy anp
pue Ayjiqeaoe.; Joy Bupyew
uj60 yo ANuNos ayeunsoe

eynyysul
Joo, Bung

pue uojenuguoo spoddng 0} SI9WO}SNO SMO]|Y ON Jo Juawaolojue panuuod s[00} Buna sayels payun,
“Ayenb “SUI9DU0D
JOUaju! Jo SHodu} Ayiqesjes yonpoid 0} enp
“syuawauinbas Bupyew wody joo} Bunyno pue Ayiqesoes 10} Bupyew
ujBuo yo Anunoo Buysixe epew-'s'f ysinBuys! s]00} Bunyno ysow yew uiBuo yo Ajunoo eyeunooe “pr
jo uoyenunuos syoddns 0} SIBWO}SND SMO} 0} AfJSO9 JO YNOWJIP JON JO JuaWedJOJUe panuQUoD, gj00} Bund sBulpjoy yoqie
“Ayenb
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uiBu0 yo Anunoo Buysixe epew-"s'n ysinBuysip @AnIqiyoid Jou Ss} Sjoo} uBio yo AnuNod eyesnooe Auedwod
Jo uoyenuguoo soddng 0} siewoysno smojfy | Buyyno Bupyew Jo sop Jo juaweaolojue panujuod joo) Bund Jool SOS
“Ayenb “SUI9DU00
JOUasu! JO sHOdwI Ajigetjas yonpoud 0} enp
“syuewaynbai Bupyew woyy sjoo} Bunyno Iqeeoey 10) Bupew
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Jo uojenuguos syoddng 0} SlaWO}SND SMO} Jo juawaoiojua panuyuod pue sjoo} Bunn ySIM_UOIS|Ald
: “syndur
‘yonpoid ayeuyin pue J29}s Jo Bulosnos a10ys-yo 0}
sjeuayew jo ainjoeynuew jo anp aiqiseajut Ajejosaii09
Aqunoo uodn paseq Bupyew ale sain Bupyew pue salosse00e “ou SJONPold
pue ulBuo jo sajni suoddng ul6uo Jo Ajunos Buysixa 00} eulyoe-W) JOWOOMEN,

penujuog—g-4 e1qeL

F-28


and Hyde cases. FTC staff estimates that $234,000 was spent in FY 1995. Also in FY 1995,
an additional $104,000 was spent on the “Made in USA” policy review.

Table 3-4
FTC costs ' related to administering and enforcing country-of-origin marking
FY 1993. _ FY 1994 FY 1995.
item. (Oct, 92-Sept 93) (Oct. 93-Sept 94) (Oct. 94-Sept 95)
Ongoing activities $78,000 $78,000 $78,000
Enforcement activities $78,000 $78,000 $234,000
“Made in USA” policy review . (?) (?) $104,000
Total $156,000 $156,000 $416,000

"These primarily include salary, overhead, and benefits.
? Not applicable.

Source: Compiled by the staff of the U.S. International Trade Commission from data provided by
the Federal Trade Commission.

The American Automobile Labeling Act and the
Department of Transportation

The U.S. Department of Transportation’s National Highway Traffic Safety Administration
(NHTSA) is responsible for administering the country-of-origin law specific to motor
vehicles. This law, the American Automobile Labeling Act (AALA), now codified at 49
U.S.C. 32304, Passenger Motor Vehicle Country of Origin Labeling, was enacted by
Congress as part of the Department of Transportation and Related Agencies Appropriations
Act for Fiscal Year 1993.'4° Before this act, there were no specific country-of-origin
marking requirements for motor vehicles.'*°

The Act requires that passenger cars and other light vehicles'*' manufactured on or after
October 1, 1994, be labeled with their domestic and foreign content. The statute required
the Secretary of Transportation to propose regulations implementing the content labeling
requirements. On July 21, 1994, a final rule, 49 CFR 583, Motor Vehicle Content Labeling,

“9 The AALA (15 U.S.C. 1950) was passed as section 210 of the Motor Vehicle
Information and Cost Savings Act, Oct. 6, 1992, Public Law 102-388, 106 Stat. 1520, 1556.
Public Law 103-272, July 5, 1994, 108 Stat. 745, 1036, repealed 15 U.S.C. 1950, and reenacted
the AALA as 49 U.S.C. 32304.

150 NHTSA officials, interview with USITC staff, Mar. 21, 1996.

151 The term “passenger motor vehicle,”defined in 49 U.S.C. 32101 as a motor vehicle
with motive power designed to carry not more than 12 individuals, is amended for purposes of
section 32304 to include any “multipurpose vehicle” and “light duty truck” that is rated at not
more than 8,500 pounds gross vehicle weight. Thus, the motor vehicle content labeling
requirements apply to passenger cars, light trucks, multipurpose passenger vehicles, and certain
small buses. Motorcycles are excluded.

3-31




The benefits of country-of-origin marking to consumers are not easily
quantifiable. Some industrial consumers underscore the need for stronger
enforcement for liability reasons. Research on whether consumers would
pay to know the origin of products is limited, but several studies show that
consumers are willing to pay more for products made in the United States.

Consumer studies assessing the value of country-of-origin marking have
yielded somewhat inconsistent results, although most domestic consumers
indicate a preference for U.S. products over imported products. Consumers
vary in their general opinions of how much domestic content a product
marked "Made in USA" contains, and expectations of U.S. content vary
based on the type of product in question. It also appears that brand names
can mislead consumers regarding the perceived origin of a product.

Country-of-origin marking is more important in certain product areas than
others. Products most consistently identified in consumer surveys as being
scrutinized for country of origin are automobiles, clothing, and electronics.
Some surveys provide evidence that origin may be less important to
consumers for certain products such as shoes, furniture, food, and toys.

Alternative Marking Approaches Suggested by Interested Parties for
Further Consideration

During the course of the investigation, interested parties made numerous suggestions
regarding alternative marking approaches (table A). Some of the major suggestions are
highlighted below.

Q

While many companies have no concerns with marking requirements, some
firms that do have concerns contend that their marking problems may be best
addressed by exempting their products from current marking regulations, or
by clarifying marking measures to ensure that inaccurate consumer
information does not result from the requirement to label certain finished
products with a foreign origin. In this regard, certain companies or industries
believe that proposed legislation’® in Congress may eliminate marking
burdens that may be inconsistent with commercial realities, while enabling
firms to remain internationally competitive and still provide accurate
consumer information. Such legislation may increase the administrative
burdens of Customs by expanding the number of regulations or exceptions.

Some companies that use imported inputs suggest that limiting marking
requirements to goods for retail sale could potentially remove much of the
controversy arising from inconsistent interpretation of substantial
transformation principles. This is especially true for firms where imported
production inputs for U.S. operations that confer significant value-added to

5 See chapter 3, table 3-7.


There are a number of other regulations under which automakers are required to calculate
the foreign content of their motor vehicles;'“' however, a separate and distinct marking is not
required. NAFTA Marking Rules are invoked to determine on which country the import
duty is to be assessed and do not require a separate origin marking; however, NAFTA
country-of-origin determinations may conflict with Customs regulations for marking
determinations.

Regulations for in-bond processing zones, known as foreign trade zones (FTZs), do not
address marking issues specifically. Auto parts arrive in FTZs under one of two categories:
foreign privileged and nonforeign privileged. Foreign privileged goods arrive in the FTZ
virtually in their finished state, and are eventually imported into the United States. In the
auto parts sector, these are principally aftermarket parts. These parts are marked with their
original country of origin, because they do not undergo a substantial transformation in the
FTZ or in the United States. U.S. auto parts, classified as nonforeign privileged parts,
frequently are used in an FTZ for auto assembly. These parts usually enter the FTZ
unmarked, and leave unmarked as well, because only the finished product, the automobile,
must be marked. In general, if parts imported into the U.S. FTZ are substantially
transformed into an automobile, the automobile is considered a product of the United States,
and would not be required by Customs to bear a country-of-origin marking; AALA marking
requirements would still apply.' Situations vary, however, and case-by-case rulings are
often made.

Compliance Concerns

Industry members and concerned parties'® raised a number of issues in response to the July
1994 final rule on the AALA in petitions filed with NHTSA. In its September 1995 final

161 The Energy Policy and Conservation Act of 1975 led to the creation of Corporate
Average Fuel Economy (CAFE) standards, which requires separate calculations of a
manufacturer’s average fuel economy for automobiles manufactured “domestically” and those
which are not. According to CAFE standards, a carline is considered domestically produced if less
than 25 percent of the components are imported. This percentage is calculated as a ratio: the sum
of the declared value of imported components plus the cost of transportation and insurance for the
components to the U.S. or Canadian port of entry, divided by the cost of production. Under the
North American Free-Trade Agreement (NAFTA), a vehicle must have 50 percent domestic
content, increasing to 62 percent when the agreement takes full effect, to be eligible for NAFTA
duty-free treatment. AALA, CAFE, and NAFTA specify different methods for calculating
domestic content; thus, a particular carline likely has three separate domestic content percentages.

12 U.S. Customs official, telephone interview with USITC staff, May 13, 1996.
According to U.S. Customs ruling HQ 710586, June 25, 1979, Customs determined that the
country-of-origin marking requirements of 19 U.S.C. 1304 were not applicable to the finished
goods (towels, in this case) because the processing constituted a substantial transformation. As
such, at the time of their withdrawal from the FTZ, the product was considered a product of the
United States, within the meaning of 19 CFR 134.1(e), and no foreign country-of-origin marking
requirements applied.

16 Petitioners included the American Automobile Manufacturers Association, General
Motors, the Association of International Automobile Manufacturers, Volkswagen, the American
International Automobile Dealers Association, and the Kentucky Cabinet for Economic
Development.

6-42


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9-d e121

F-18


Table 4-9

Benefits companies identified they receive from marking with “Made in USA” labeling: U.S.
companies’ identification of benefits, by type of benefits and by sectors

Sector’
Metals &
metal
Benefit Agriculture | Chemicals | products | Machinery | Electronics | Textiles | Overall
‘Percent of responses
Preference by retail 21 ie) 17 25 31 25 21
customer
Preference by wholesale 13 0 17 29 25 20 18
customer
Brand loyalty for 13 0 17 17 3 16 14
domestic products
Designates superior 10 33 14 4 14 5 11
quality of material, work-
manship, or service
Increased unit sales 13 0 10 8 6 4 9
Easier to meet “Buy
America” preferences of 2 ie) 14 13 0 7 8
government agencies
Increased unit prices 4 0 6 4 6 4 5
Other benefits 8 67 3 0 6 15 6
None — no benefits 17 0 6 0 0 4 8
‘Number of responses.
48 3 175, 24 36 55 341

1’ See footnote 1 in table 4-2 for description of sector products.

Source: Compiled from data from telephone interviews conducted by Commission staff.

Qa

o o ooo

Modify 19 CFR 102 Marking Rules for NAFTA goods to conform with section
304 and to clarify instances where the change-in-tariff classification (CTC)
principle, as reflected therein, does not consider significant value-added
(substantial transformation) by operations in the United States.

Repeal 19 CFR 102 Marking Rules for NAFTA goods.

Improve Customs regulations and practices.

Strengthen Customs enforcement of marking laws (reflecting the view that there
are too many violations).

Do not implement 19 CFR 102 Marking Rules for all imports before WTO
harmonization of rules of origin exercise is completed.

Harmonize section 304 with FDA marking provisions.

4-21



Item

Suggestions

‘Supports this recommendation, except as noted

Extend section
102 NAFTA

Marking Rules
to all imports

Apply the section 102 NAFTA Marking
Rules to all imports.

Copper & Brass Fabricators Council, Inc., P.B. Feller,
McKenna & Cuneo, Specialty Steel Industry of North
America (SSINA), Vaughan & Bushnell Manufacturing
Co.

Do not extend the section 102 NAFTA
Marking Rules to all imports.

American Frozen Food Institute(AFFI), Eli Lilly and
Co., Pharmaceutical Research and Manufacturers of
America (PhRMA), The Stanley Works, Weldbend
Corp., Xerox Corp.

Golf clubs: Ajay Sports, Inc., Coastcast Corp., Daiwa
Corp., Lamkin Leather & Rubber Co., Lynx Golf,
Taylor Made Golf Co., Inc.

FTC standard
for unqualified
statements of
“Made in USA"
label

Maintain the FTC standard as is.

Hand tools: A distributor for Mac Tools, Component
Specialty, Inc., Danaher Corp., Snap-on, Inc.,
Vaughan & Bushnell Manufacturing Co., Vulcan Forge
and Machine Co. of San Jose, Inc., Wright Tool Co.
Other: AFL-CIO Union Label & Service Trades
Department, American Textile Manufacturers Institute
(ATMI), Crafted with Pride in U.S.A. Council, Inc.,
Diamond Chain, Co., Eastman Kodak Co., National
Association of Hosiery Manufacturers (NAHM),
Welbend Corp.

Harmonize the FTC standard with
section 304, and base the FTC
standard on the last substantial
transformation test.

Digital Equipment Corp.

Change the FTC standard to include
consideration of significant value-
added to products through U.S.
operations.

Hand tools: Fleet Bank, The Stanley Works,

Other: Bicycle Manufacturers Association of America,
Inc., Brown & Williamson Tobacco Corporation,
Electronic Industries Association, Brass Craft
Manufacturing Co., Footwear Distributors and
Retailers of America (FDRA), Made in the USA
Foundation, law firm of Sonnenberg & Anderson

Harmonize the FTC standard for
labeling textile fiber products with
section 334 of the URAA to allow
proper marking of textile home
furnishings.

Paris Accessories, Inc.

Standards Organization standard.

American Repeal, modify, or do not use the American International Automobile Dealers
Automobile AALA. Association (AIADA), Association of International
Labeling Act Automobile Manufacturers, Inc. (AIAM)

(AALA)

Other laws or Harmonize hull identification numbers National Marine Manufacturers Association (NMMA)
regulations (HIN) in 33 CFR 181 with International

Table continued on next page.



Customs regulations also require that if the name of a place other than the country of origin
appears on an imported article or its container, then the actual country of origin must appear
"in close proximity" to such other place, in order to avoid misleading the ultimate consumer
as to the country of origin of the article.* This rule would also apply in cases where the
words "United States," "American," "U.S.A.," the U.S. flag, or the like appear on the article
or its container.

Customs regulations provide further detail on the exceptions to marking listed in section
304(a)(3), particularly those in section 304(a)(3)(J) (19 CFR 134.33). This enumeration of
exceptions of subsection (J) in the regulations is known as the “J-List.” The list includes,
for example, articles such as “natural products, such as vegetables, fruits, nuts, berries, and
live or dead animals, fish and birds; all the foregoing which are in their natural state or not
advanced in any manner further than is necessary for their safe transportation,” many wood
and steel products, and drugs and similar-substances imported in pill or tablet or other similar
forms. Although products on the J-List are excepted from marking, their containers are
generally required to be marked.

Customs regulations in part 134 and part 102 implement the NAFTA Marking Rules found
in NAFTA Annex 311. An example of such a regulation is 19 CFR 134.45, which permits
a good of a NAFTA country to be marked with the name of the country of origin in English,
French, or Spanish. Many of the marking regulations implementing the NAFTA are less
stringent than those for non-NAFTA goods, particularly as they pertain to marking methods
and the marking of containers.

The Customs regulations also provide definitions of both the ultimate purchaser and the
country of origin. In September 1972, Customs adopted and incorporated into its regulations
the appellate court’s decision in United States v. Gibson-Thomsen Co., Inc., 27 C.C.P.A. 267
(C.A.D. 98) (1970) at 19 CFR 134.35. Under this decision, the person “who converts or
combines the imported article into the different article will be considered the “ultimate
purchaser’ of the imported article within the contemplation of section 304(a)...”“° For such
articles, however, the outermost container will still be required to be marked unless
otherwise excepted. In August 1985, Customs began applying its interpretation of the
principles embodied in Uniroyal v. United States, 3 CIT 220 (1982), as required by 19 CFR
152.16(b), to all country-of-origin determinations for all Customs purposes, including
marking.“' In Treasury Decision 90-17, Customs ‘stated its “view that the decision in
Uniroyal requires Customs to look at the significance of manufacturing or processing
operations performed on an article, as well as the change in the article as a result of those
operations.“ Customs states that it has often characterized the substantial transformation
test as requiring a “new name, character or use,” but notes that the courts and Customs have
in fact required a change in “the name, character and use of an imported article for a finding
of substantial transformation into a new and different article of commerce.“ In Customs’
view, the courts have deemphasized the significance of a change in name and use, but have
placed significance on a change in the imported article’s character when determining
whether a substantial transformation occurred. Customs states that it has administered the

39 19 CFR 134.46 and U.S. Customs ruling HQ 729096, Jan. 2, 1986.

19 CFR 134.35(a).

“50 F.R. 31392-31394, Aug. 2, 1985.

#24 Cust. B. & Dec., (T.D. 90-17), “Country of Origin Rules Regarding Imported
Textiles and Textile Products,” Mar. 14, 1990, p. 34.

“61 FR. 28938, June 6, 1996.

3-10


Benefits to Industry of Country-of-Origin Marking

Companies identified a variety of benefits they gain from country-of-origin marking. When
a company purchases goods, country-of-origin markings may enhance its ability to verify
both the imported goods and the paperwork related to supplier accountability and liability
at a relatively insignificant cost. Where there is no direct link between the U.S. purchaser
and the foreign manufacturer, origin markings may provide greater information on quality
and safety to the U.S. buyer and assist in business decision-making.*” About 10 companies
that responded to the survey stated that country-of-origin markings improved their ability
to track imported components and enables them to track foreign content so they may comply
with their customers’ buy-domestic requirements. These companies also claimed that
country-of-origin markings allow Customs to track and report U.S. imports more accurately,
thereby providing more accurate commercial intelligence to the business community,
enabling Customs to better enforce the country’s trade laws.° A few domestic
manufacturers responding to the Commission’s telephone survey indicated that although
country-of-origin markings on inputs are not important for them directly, “Made in USA”
marking may provide indirect benefits by transmitting information to the company’s labor
union that the company is supporting the domestic economy and preserving domestic jobs.

In contrast, certain companies have suggested a marking requirement may be inappropriate
or unnecessary for at least some types of intermediate products.°° Many manufacturing
companies purchase raw material inputs on the basis of industry specifications that were

47 One executive stated that markings help distinguish between high quality and lower
quality products which may be out of tolerance, exhibit variations in tolerances, have a shorter
useful life, and fail more easily; such markings also have product liability implications because
they help a purchaser identify the manufacturer of a defective product, allowing that purchaser to
differentiate among suppliers. In opposing changes to the current marking regulations, some
companies contend that marking is becoming more important given the trends toward globalized
procurement and the liberalization of international trade, because consumers can no longer make
assumptions regarding a product’s origin, and must rely on appropriate non-deceptive origin
disclosure for determining quality of a good. See, for example, Harris & Ellsworth, on behalf of
the Committee of Domestic Steel Wire Rope and Specialty Cable Manufacturers, posthearing
submission to the USITC, Apr. 25, 1996, pp. 2-3, and Squire, Sanders & Dempsey, on behalf of
the United States Cutting Tool Institute, written submission to the USITC, Apr. 25, 1996, pp. 3-5.

“8 “Buy-America” provisions are included in many procurement regulations of agencies
of the Federal and State governments, and local municipalities.

*° Several companies stated that the marking law assists Customs by providing a valuable
tool for inspection purposes and enhancing that agency’s ability to track unfairly-traded imports,
enforcing existing antidumping and countervailing duty orders, and collecting the duties owed.
See for example, Micron Technology Inc., written submission to the USITC, Apr. 25, 1996, p. 3.

5° For example, fungible commodities in bulk, including fertilizers, some bulk chemicals,
and petroleum do not require country-of-origin markings. The Semiconductor Industry
Association and several others stated their consumers (manufacturing companies) generally know
where the devices are manufactured before they purchase and such devices together with the
manufacturer’s production process control systems are pre-qualified. See Semiconductor Industry
Association, posthearing submission to the USITC, Apr. 25, 1996, p. 3.

4-17


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F-24


to make the imported parts, components, or materials used to make the article; (3) the value
that is added by the manufacturing processes (as well as the cost of production, the amount
of capital investment and labor required) as compared to the value reflected by the imported
parts, components, or materials; and (4) the essential character of the finished article,
whether established by the manufacturing processes or by the essential character of the
imported components or materials.'*

Country-of-origin determinations tend to be very fact-specific, but also tend to involve a fair
amount of subjectivity in the interpretation of the facts by Customs and the courts in
applying the substantial transformation test.'* Although Customs makes hundreds of origin
determinations each year, there can be considerable uncertainty about what will be deemed
to be a substantial transformation in a particular case. The general approach that is currently
used to make origin determination for marking and other purposes has been criticized for its
lack of clarity, predictability, and consistency.'* Some U.S. companies and industry groups
complain that specific origin determinations are either too strict or too lenient, depending on
their particular commercial interests.'* These complaints usually concern the results of a
specific Customs determination, rather than the concept of substantial transformation.
Although Customs determinations are subject to judicial review, the appeal process can be
expensive and time-consuming, and there is no certainty about the outcome.’ In order to
respond to these concerns and to improve the standards and practices that are used to make
country of origin determinations, the Treasury Department, which oversees Customs, has
proposed a new approach that relies on changes in tariff classification to determine the
country of origin for imported goods.'®

" For a description of some of the factors that have been considered by the Court of
International Trade in reviewing country of origin determinations, see, for example, Superior Wire
v. United States, 11 CIT 608 (1987); National Hand Tool Corp. v. United States, 16 CIT 308
(1992); National Juice Products Association v. United States, 10 CIT 48 (1986); and Koru North
America v. United States, 12 CIT 1120 (1988).

1 N. David Palmeter, “Rules of Origin in the United States” in E. Vermulst, P. Waer and
J. Bourgeois, Rules of Origin in International Trade (Ann Arbor: University of Michigan Press,
1994), pp. 27-84.

3 See U.S. House of Representatives, Committee on Ways and Means, Subcommittee on
Trade, Rules of Origin: Hearing before the Committee on Ways and Means, Subcommittee on
Trade, 104th Cong., Ist sess., July 11, 1995, Serial 104-27 and testimony before and written
submissions to the U.S. International Trade Commission in investigation No. 332-366, Country-of-
Origin Marking: Review of Laws, Regulations, and Practices.

“ Toid.

'S See, for example, statements of Daniel R. Kral, president, Natural Feather & Textiles,
Inc., transcript of hearing, p. 197 and Thomas E. Mahoney, vice president, The Stanley Works,
transcript of hearing, p. 175.

16 Testimony of John Simpson, Deputy Assistant Secretary of the Treasury for
Regulatory, Tariff and Trade Enforcement, in U.S. House of Representatives, Committee on Ways
and Means, Subcommittee on Trade, Rules of Origin: Hearing Before the Subcommittee on Trade,
Committee on Ways and Means, 104th Cong., Ist sess., July 11, 1995, Serial 104-27, pp. 10-15.
See discussion of Uniform U.S. Origin Rules in this chapter.

2-5


Wool Products Labeling Act of 1939, and the Fur Products Labeling Act.'* The Textile
Fiber Products Identification Act (Textile Act) covers all textile goods not covered by the
Wool Products Labeling Act of 1939 (Wool Act); however, the effects are quite similar.
They both require that most consumer goods be labeled to show the fiber content and set
forth the manner in which the fiber content is to be presented. The Textile and Wool Acts
also require that the name of the manufacturer or importer, or the registered number (RN)
issued by the FTC for the manufacturer or importer, appear on the label. They further
require that the country of origin of imported goods be on the label. Goods made in the
United States must be marked as “Made in USA,” “Made in USA of Imported Materials,”
or similar wording, as appropriate. This requirement differs from that for many other
domestically manufactured products for which such a “Made in USA” label is not
mandatory. For garments with a neckline, regulations issued under the Textile and Wool
Acts specify that the label must be placed at the inside center of the neck or in close
proximity thereto should another label be there. For other garments and textile products, the
label must be placed in a “conspicuous” place. The Textile Act and the Wool Act also
require that mail order advertising or mail order promotional material contain a statement
that indicates whether the product was imported, made in the USA, or could be either.

The Fur Act requires that fur products be labeled to indicate the country of origin of the fur
skin incorporated in the product,'® the name of the animal or animals that produced the fur,
and certain information if the fur was processed using specified methods.'® Unlike the
Textile and Wool Acts, the Fur Act does not require that the finished fur article itself be
marked with the country of origin if imported, or labeled “Made in USA” if domestically
produced. However, section 304 of the Tariff Act of 1930 requires that imported fur
articles, such as coats and jackets, be labeled with the country of origin. The Fur Act also
requires that general advertising of fur products must contain the statement that the goods
are labeled to show country of origin of imported furs and that the information required on
the label be included in catalogs and mail order publications.

Customs rules for country-of-origin marking specify that a good must be labeled with
permanent and conspicuous markings. They further provide that the degree of permanence
should be sufficient to insure that the marking shall remain on the good until it reaches the
ultimate purchaser unless it is deliberately removed and that the ultimate purchaser must be
able to find the marking easily and read it without strain. The Customs regulations, like the
FTC marking rules, require that wearing apparel with a neckline must have the label affixed
at the inside center of the neck.

The Uruguay Round Agreements Act (URAA) mandated changes to the rules of origin for
textiles and apparel that have marking implications. The change in origin rules, effective for
imports on and after July 1, 1996, affect country-of-origin determinations for U.S. imports
of textiles and apparel that are subject to manufacturing and processing operations in, or
contain components from, more than one country. Under the pre-URAA rules, garments
assembled in one country from parts cut in another were generally considered the product

188 These acts became effective, respectively, on Mar. 3, 1960; Oct. 14, 1940; and Aug. 8,
1951; and are described more fully in Chapter 3 of this report.

189 This is the country where the animal producing the fur was raised.

19 These methods include bleaching, tip dyeing, dyeing, shearing, and plucking.

6-50


exports to Mexico under NAFTA. Several wire-rope producers have installed specialized
computer programs to track wire rod from specific coils through the production process.*°

Steel traders note that customers are necessarily aware of country of origin of imported steel
products, for customers develop long-term relationships with particular off-shore suppliers
and that the majority of steel imported into the United States has been pre-sold by the
importer.*' However, inconsistent application of marking requirements is of particular
significance for fabricated steel products where product liability is of concern. Steel-
industry members of the Joint Industry Group support country-of-origin marking
requirements because of the importance of traceability and as a certification of product
compliance with performance specifications. Domestic manufacturers of pipes and tubes,**
pipe-fittings,** wire rope, chain, and municipal castings,” either through their trade
associations or directly to USITC staff, expressed concern about foreign-origin products and
components being sold in the United States without proper country-of-origin markings.
Some foreign-origin products (¢.g., pipe fittings)* are reported to be faulty, and without
proper country-of-origin markings, sources cannot be traced. Based upon the experience of
its members, the Committee of Domestic Steel Wire Rope and Specialty Cable
Manufacturers believes® that as much as 40 percent of steel wire rope imports fail to be
marked with the required country-of-origin markings on their containers. For wire-rope
assemblies manufactured from imported wire rope, the rate of violations is believed to be as
high as 90 percent.

Furthermore, some domestic producers also fail to properly mark imported products or
components. Due to price competition, some U.S. manufacturers purchase off-shore and mix
imports with domestic products (¢.g., pipe fittings)® or assemble their products from
imported as well as domestic components without distinction (e.g., roller chains).' Penalties
do not necessarily provide much of a deterrence to mis-marking. In the case of a pipe-
fittings company alleged to have imported over 7 million pieces, ground-off the country of

® American Wire Producers Association, posthearing submission to the USITC, Apr. 25,

1996. .
5! American Institute for International Steel, Inc., posthearing submission to the USITC,
Apr. 24, 1996.

* Joint Industry Group, prehearing submission to the USITC, Mar. 27, 1996.

5 Schagrin Associates, on behalf of the Committee on Pipe and Tube Imports, prehearing
submission to the USITC, Mar. 27, 1996.

* American Pipe Fittings Manufacturers, Inc., posthearing submission to the USITC, Apr.
24, 1996.

+5 Harris & Ellsworth, on behalf of the Committee of Domestic Steel Wire Rope and
Specialty Cable Manufacturers, posthearing submission to the USITC, Apr. 25, 1996.

56 Diamond Chain Co., written submission to the USITC, Mar. 18, 1996.

5’ Collier, Shannon, Rill & Scott, on behalf of the Municipal Castings Fair Trade Council,
posthearing submission to the USITC, May 2, 1996.

5C. D. Tyeryar, executive director, American Pipe Fittings Manufacturers Association,
telephone interview with USITC staff, Feb. 21, 1996.

* Harris & Ellsworth, on behalf of the Committee of Domestic Steel Wire Rope and
Specialty Cable Manufacturers, posthearing submission to the USITC, Apr. 25, 1996.

American Pipe Fittings Manufacturers, Inc., posthearing submission to the USITC, Apr.
24, 1996.

* Representatives of U.S. chain manufacturing companies, telephone interviews with
USITC staff, Apr. 22 and 29, 1996.

6-15


the final product still require a foreign country-of-origin designation. If
production inputs and containers of industrial inputs were excluded, U.S.
marking requirements would be more or less harmonized with existing
practices of Canada and Mexico as well as the marking requirements of most
other countries. U.S. retail consumers would still be informed as to country
of origin. Some manufacturers, however, stated that country-of-origin
markings provided a relatively inexpensive means of tracking imported
components to differentiate product quality and liability, verifying foreign
content for buy-domestic requirements, and enabling more effective
enforcement by Customs.

Industry officials note that many of the problems and uncertainties they face
regarding substantial transformation determinations could perhaps be
eliminated if procedures were codified into rules that are more predictable,
consistent, and transparent. Many firms urge that Customs adopt measures to
streamline rulings and protest procedures, whereby industry input might be
sought in advance of rulings in order to avoid unnecessary litigation and
administrative burden. This is especially important to firms in cases where a
change in rules or interpretation of origin is envisioned in a pending Customs
decision.

If marking remains a requirement for many goods, particularly production
inputs, U.S. producers of certain goods contend that they may be at a
competitive disadvantage because of consumer preferences regarding
different countries. This occurs under the existing requirement that U.S.
producers label domestically-manufactured products with a foreign origin,
while foreign producers may be able to label essentially the same product
with a country having a more favorable reputation with U.S. consumers.

With regard to international harmonization of rules of origin, many firms
assert that delaying unilateral steps by the United States to establish new U.S.
origin rules could avoid the potential requirement for certain industries to
face multiple changes to comply with new rules. However, it appears that
many of the issues that have developed with respect to country-of-origin
marking in the United States may still remain even after WTO harmonization
of rules of origin.

Companies have noted that it may be possible, in some or many instances, to
rely solely on consumer protection laws that forbid fraudulent or misleading
labeling or that require labeling to inform the consumer of ingredients and
other essential information. Such an approach may help to reduce conflicts
or redundancies with the requirements for marking imports.

As a result of a more globalized economy, many U.S. firms cannot meet the
unqualified “Made in USA” standard and still remain competitive. The
FTC’s current review of the existing standard for “Made in USA” labeling
has stimulated a number of proposals, including recommendations to align
FTC standards with existing Customs rules of origin as a way to address
many of the problems of industry.

xvii


occurred since 1990, but only 3 cases before the CAFC. In several cases the same company
appeared as the plaintiff. Cases before the CIT and CAFC are tried by the International
Trade Litigation Staff of Customs Office of Chief Counsel at the New York Seaport in
conjunction with lawyers from the Commercial Litigation Branch, Civil Division, United
States Department of Justice. Support for these cases is often provided by ORR.

Costs to Government

Customs estimated its expenditures for certain activities related to administering and
enforcing marking requirements at between $1.6 million to $1.8 million during FY 1993-
1995 (table 3-3). These expenditures are primarily salary costs for issuing rulings,
rulemaking, other legal costs, and investigations of country-of-origin marking violations.
However, Customs was unable to provide an estimate of salary costs incurred in reviewing
imports for marking sufficiency, issuing marking violation notices, assessing duties and
penalties, and other day-to-day functions related to administration and enforcement by
personnel at the ports of entry, although Customs indicates that such costs are probably
considerable. Based on consultations with Customs, personnel costs for issuing marking
violation notices and certifying proper remarking at ports of entry would add an estimated
$885,000 to $1.2 million annually to Customs marking-related costs during FY 1993-95.
In addition, Commission estimates for benefits associated with the salary costs related to
tulings, rulemaking, other legal costs, and investigations of marking violations would add
another $319,000 to $377,000 annually to such costs during 1993-95. Total estimated costs
for Customs administration and enforcement of country-of-origin marking were $3.2 million
in FY 1993, $3.3 million in FY 1994, and $2.8 million in FY 1995.

5° Although some cost data were provided on a calendar year basis, Customs stated that
these data could be used as good estimates for fiscal year purposes.

3-21


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F-3


Steel Products

This section examines both steel mill
products and those fabricated steel
products for which concerns are
expressed about the impact of
country-of-origin marking
requirements.*” The U.S. steel industry,
consisting of steel mills and steel-
fabricating facilities, produces
intermediate goods that are among the
most basic inputs for a myriad of
industries across the nation’s economy.
Semifinished mill products (e.g., ingots,
blooms, billets, and slabs) are subject to
further hot-rolling or hot-working into
finished mill products*® such as flat-
rolled sheets, strips, and plates; structural
shapes and rails; long-rolled bars and
rods; pipes and tubes; and rolled and
drawn wire. In addition to being inputs
for other manufacturing sectors, mill
products are also consumed directly by
the steel industry for production of
fabricated steel products such as
stranded-wire products, chain, fasteners,
castings, and forgings.

Specific Marking
Requirements

Steel products are subject to at least three
labeling regimes, including (1) industry

Industry Profile
Trade data 1995 (1,000 short tons):

U.S. production (net shipments).... 96,859.
US. imports 0.0 24,409
US.exports 7,080
Apparent U.S. consumption ......._ 114,188
Import share of apparent U.S.

consumption (percent) 21

Source: Compiled by USITC staff based on data of the
American Iron and Steel Institute and U.S. Department
‘of Commerce.

Trends in Globalization

‘Over the past decade, the U.S. steel industry has
experienced extensive foreign investment by
Japanese, Western European, Korean, and
Canadian steel makers in melting and finishing
operations through buy-outs, joint ventures, and
strategic alliances. To remain competitive, the
USS. industry shifted its product mix towards
stronger, lighter weight, higher value-added
products; directed its investment into rolling and
finishing technologies; and developed extensive
production-sharing arrangements for product
upgrading.

practice and technical specifications, (2) country-of-origin marking rules of Customs, and
(3) requirements by the FTC to substantiate “Made in USA” claims. Of the three, Customs
rules impose the largest number of regulations on whether and how a particular product is

to be marked with country of origin.

36 The relevant fabricated-steel-products sectors are wire rope and cable, roller and link
chain, pipe fittings, and municipal castings (e.g., manhole covers, rings and frames, and

assemblies).

>” To sample across the product range, steel producers, service centers, importers, and
steel trade-associations were contacted by USITC staff for interviews. Of the 31 firms contacted
for telephone interviews, 24 responded with information for this study.

38 Products considered semifinished and finished steel mill products for purposes of this
report are those delineated by the American Iron and Steel Institute.

6-12


consumers (84 percent) said they would be willing to pay up to an extra $1 on a $20 garment
(5 percent) if it were guaranteed to be made in a legitimate shop. In similar fashion, some
consumers boycott products from countries that are reported to have poor human rights
conditions or poor environmental records.”

Another issue that reportedly affects consumer choice is concern over health and safety; for
example, some consumers seek to avoid fruit and vegetables imported from certain countries
that may have been treated with harmful pesticides. The Natural Resources Defense Council
urges U.S. consumers to buy domestically-grown rather than Latin American-grown
produce, on the premise that the latter contains higher levels of pesticide residues.”

Country-of-origin marking issues have occasionally become politicized at the state level.
For example, Florida has its own country-of-origin labeling law for produce” that requires
stores to label produce bins with the country of origin. Representative Sonny Bono (R-44-
CA) recently introduced national legislation called the “Imported Food Labeling Act” (H.R.
2602) that would require the country of origin to be disclosed on the bin or display where
produce is sold. This bill has support among some organized farm groups in Florida, such
as the Florida Fruit and Vegetable Association, who are concerned about the increased
competition local farmers face from imported produce.”

Country of Origin is One of Many Factors Considered In
Purchasing Decisions

Despite evidence suggesting that consumers often attach significant importance to country-
of-origin marking, other studies suggest this factor is of lesser importance,”* and is only one
of many factors consumers consider when making purchasing decisions. Research indicates
there are a wide variety of issues other than country of origin that affect consumer choice in
retail purchases, including price, quality, warranty, product features, brand name, and the

2 A Scottish company decided to begin marking its products with the country of origin in
an attempt to offer environmentally concerned customers a guarantee that certified wood products
come from well-managed forests. Scotland on Sunday, “A Model for Sustainable Forestry,”

Aug. 21, 1994.

” Tests by the U.S. FDA show that residues of U.S. banned pesticides contaminate 5
percent of imported produce. In the early 1980s, 15 percent of beans and 13 percent of peppers
imported from Mexico exceeded FDA thresholds for pesticide residues, roughly half the green
coffee beans imported from Latin America contained residues of U.S. banned pesticides, and meat
imported from Central America frequently contained excessive pesticide residues. Richard R.
Tansey, Michael Hyman, Richard S. Jacobs, and Lynn Merrill, “Eradicating the Pesticide Problem
in Latin America,” Business and Society Review (Jan. 1995), p. 55.

2 State of Florida, Produce Labeling Act of 1979, ss. 504.012.

24 Paul Power, “Produce Labeling Law May Not Change Buyers’ Habits,” Tampa
Tribune, Apr. 7, 1996, p. 6.

25 Some survey results also indicate that country-of-origin marking is more important to
older than to younger Americans. The series of surveys conducted by the Crafted With Pride in
U.S.A. Council showed that 54 percent of Americans 35 years and older actively look for U.S.-
made clothing when shopping, whereas 36 percent of those ages 18-34 reported doing so. The
IMRA study arrived at a similar conclusion. Asked whether country of origin is an important
factor in their purchasing decisions, only 19 percent of younger people (18-30 years old) say they
“always” try to determine a product’s country of origin. Fifty percent of people over 60 years of
age, however, say they are “always” concemed about origin.

5-12




shoe. The tests show that consumers were more concemed about comfort and fit, durability,
design and style, price, and previous experience with the product?

Representatives of the frozen vegetable industry also report that country of origin is one of
the last things customers look for when purchasing frozen vegetables. Manufacturers claim
that consumers are primarily interested in taste, price, nutritional information and ease of
preparation; whether or not the contents match the picture on the label; and the consistency
of the product from purchase to purchase. Consumers reportedly have not expressed an
interest in receiving country-of-origin information on the label detailing the ingredients used
in making frozen vegetable products. Some industry representatives have concluded,
therefore, that the cost and burdens imposed on this industry are not justified by any
appreciable benefit to the consumer.**

While steel producers note that the main benefit of country-of-origin marking for purchasers
is the ability to trace products for safety and quality assessments, other factors often weigh
in as more important. The American Wire Producers Association (AWPA) maintains that
its members have indicated that customers in the wire industry, who are almost entirely
industrial consumers, are more concerned with the identity and manufacturing practices of
the U.S. wire drawer than of the origin of the wire.” The Committee of Domestic Steel Wire
Rope and Specialty Cable Manufacturers reports that country-of-origin marking is essential
for liability reasons, and underscored the need for stronger enforcement.** The American
Pipe Fittings Manufacturers (APFA) notes that as long as producers are competitive on
pricing, customers will greatly favor “Made in USA” products over foreign, and will shift
purchases accordingly.**

Markings Are More Important for Certain Products Than Other
Products

Various studies highlight the fact that consumers frequently look for the country-of-origin
mark on certain products, and not so often for others. For example, the IMRA study notes
that the two product areas receiving the most scrutiny for their country of origin are
automobiles (54 percent of those surveyed) and clothing (51 percent). Thirty-one percent
of those surveyed look for the country of origin when purchasing electronic products, 15
percent when buying small appliances, and 12 percent when buying tools.

3° For more details, see Consumers’ Perceptions and Understanding of “Made in USA”
in the Context of New Balance Athletic Shoes, Wind Associates and Data Development Corp., as
prepared for the FTC’s “Made in USA” Workshop, Mar. 26-27, 1996, “Made in USA Policy
Comment,” FTC File No. P894219. New Balance has been charged by the FTC with inaccurately
labeling its athletic shoes “Made in USA.” The company is fighting for the right to label its
product as such, and the case is currently in litigation.

3! Joint Industry Group, prehearing submission to the USITC, Mar. 28, 1996, p. 6.

32 American Wire Producers Association, posthearing submission, Apr. 25, 1996.

33 The Committee estimates that 40 percent of steel wire rope imports is not marked
properly as required on their containers. For wire rope assemblies, manufactured from imported
wire rope, the Committee believes violations occur on as many as 90 percent of the imports
entering the United States. Statement of Jeffery Levin, Harris & Ellsworth, on behalf of the
Committee of Domestic Wire Rope and Specialty Cable Manufacturers, transcript of hearing, pp.
105-106.

+4 American Pipe Fittings Manufacturers Inc., posthearing submission, Apr. 24, 1996.

5-14


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F-34


CONTENTS—Continued

Page
Compliance concems ... 2.0.2.0... 02. c eect eee eens 6-51
Yarn, fabric, and industrial textiles segments .................0..0.00-. 6-52
Home furnishings
Apparel ..............

Compliance costs and benefits ... .
Yarn, fabric, and industrial textiles segments ...................0.00005 6-58
Home furnishings
Apparel ......
Footwear .........-.-...05.
Specific marking requirements .
Compliance concems .........
Compliance costs and benefits

Appendixes
A Request letter A-1
B. Federal Register notice . . . B-l
Cc. List of witnesses appearing at the USITC hearing .. C-1
D. USITC news release, Chairman’s letter, and Chairman’s opening statement at USITC

public hearing D-1
E. Survey worksheet El
F. Positions of interested parties . F-l
G. Reference list on consumer perceptions .. 0.0.0... 2c cece eee eee G-1
Figures
3-1. Major Customs procedures governing marking at port of entry and importer response . . 3-14
3-2. Primary processes for country of origin and marking determinations and appeals .......... 3-16
Tables
A. Suggestions by interested parties concerning marking laws and regulations ............... xvii
3-1. Laws and regulations, their statutory and regulatory cites, major administering agency,

and product coverage that either requires marking or addresses origin claims .......... 3-2
3-2. Customs activities related to country-of-origin marking violations, FY 1993-95, except

ASNOtEd 22. nnn enn ene ee 3-20
3-3. Customs costs related to administering and enforcing country-of-origin marking

requirements 3-22
3-4. FTC costs related to administering and enforcing country-of-origin marking 3-31



country of origin® as it may diminish the value of a brand name associated with a U.S.
manufacturer by purchasers who prefer domestic products. A few companies cited the
conflict between the need to mark “Made in USA” for export and the inability to do so for
domestic sales, which may force a domestic producer to maintain and incur the cost of
duplicate product inventories and packaging—one for domestic sales and one for export
sales. One company estimated the cost of maintaining separate inventories, packaging
changes, and additional bookkeeping (overhead) at $9 million in the first year and then more
than $4.5 million annually.“ At the same time, the company may be placed at a competitive
disadvantage vis-a-vis foreign producers who do not incur such costs. Finally, several other
companies stated that their marking-related compliance costs increase only when the
marking rules change and longstanding practices have to be adjusted.“°

Industry Concerns Regarding Foreign Country-of-Origin Marking

Companies representing 78 percent“ of survey respondents indicated they have no problems
or concems with country-of-origin marking requirements of other nations. Of the 22 percent
of survey respondents that did indicate problems, the lack of harmonization between U.S.
and foreign regulations, the lack of harmonization among various foreign regulations, and
delays at the border were most often cited as affecting their company’s exporting operations
(table 4-7). Most of the concems regarding lack of harmonization between U.S. and foreign
tules of origin focused on the corresponding need to establish separate production or
marking lines for exports to different countries, or to repackage and relabel goods when
selling in certain foreign markets (e.g., Canada or Mexico). One reason for the lack of
harmonization stems from differences among nations in determinations of substantial
transformation. A U.S. company with offshore manufacturing operations might mark one
way for purposes of importing into the United States, but be forced to mark the same goods
with a different country of origin for shipment to a third country.

(continued)
hearing, p. 200.

* In this regard, see statements of Charles Mercer, secretary-treasurer, Union Label &
Service Trades Department, AFL-CIO, transcript of hearing, pp. 27-28, and Robin Lanier, vice
president, international trade & environment, International Mass Retail Association, transcript of
hearing, pp. 28 and $2. Also see Ablondi, Foster, Sobin & Davidow, P.C. on behalf of The
Stanley Works, posthearing submission to the USITC, Apr. 25, 1996, pp. 5-7.

 Ablondi, Foster, Sobin & Davidow, P.C. on behalf of The Stanley Works, posthearing
brief to the USITC, Apr. 25, 1996, pp. 18. These annual costs of $4.5 million would represent
approximately 0.6 percent of 1995 annual net sales for the company’s consumer tools segment as
calculated from the company’s 1995 annual report.

4 See, for example, Weldbend Corp., written submission to the USITC, Apr. 25, 1996,
p. 2. Also see American Institute for International Steel, written submission to the USITC,
Apr. 24, 1996, p. 2

46 320 of 410 responses to this question.

4-15


specified changes in tariff classification in an effort to provide greater clarity, predictability,
and transparency.“! In May 1995, Customs proposed modifying the part 102 rules for both
NAFTA trade and uniform rules of origin development. Customs initially desired to apply
the part 102 rules before the WTO completed its effort to harmonize rules of origin in the
WTO (see following section). However, subsequent to concerns expressed by Congress and
a number of industry groups,” this effort to apply the part 102 rules to imports from all
countries is being held in abeyance.** On June 6, 1996, Customs announced its decision not
to adopt its proposal to extend part 102 to all trade as a final rule at this time but that the
proposal should remain under “consideration for implementation at a later date.”“*

The WTO Agreement on Rules of Origin

At the international level, origin rules also are considered to lack clarity, consistency,
predictability, and transparency, and the disparity in these rules in some instances has been
an obstacle to trade and foreign investment. Therefore, the Contracting Parties to the WTO
in the Uruguay Round Agreement agreed to pursue the international harmonization of rules
of origin® based on the substantial transformation standard.

The WTO Agreement on Rules of Origin (ARO) established a WTO Committee on Rules
of Origin, and requested the World Customs Organization (WCO) to establish a Technical
Committee on Rules of Origin (TRCO) in order to pursue international harmonization.*®
This initiative is scheduled to take 3 years from the date of its beginning in March 1995. The
ARO expressed a preference for the use of a CTC approach as the basis for determining
when a substantial transformation has occurred.”

4159 F.R. 141, Jan. 3, 1994 and 60 F.R. 22312, May 5, 1995. In 1991, the Department of
the Treasury had proposed replacing the current method for making origin determinations with
uniform rules of origin that were based on the CTC rules contained in the United States-Canada
Free-Trade Agreement. These rules were intended to promote greater objectivity, transparency,
certainty and predictability for the trade community and the Customs Service. See 56 F.R. 48448,
Sept. 25, 1991.

” Certain U.S. industry representatives recommend that the unilateral steps by the United
States to establish new U.S. origin rules be delayed pending the results of the WTO harmonization
process in order to avoid the potential requirement for the industry to change twice to new rules
within a short time frame. See, for example, statements of Matthew T. McGrath, Barnes,
Richardson & Colburn, on behalf of the Pharmaceutical Research and Manufacturers of America,
transcript of hearing, p. 244, and Leslie G. Sarasin, executive vice president, American Frozen
Food Institute, transcript of hearing, p. 220.

© The initiative is “on hold.” See letter from Deputy Treasury Secretary Summers to the
Honorable Philip M. Crane, Chairman of the Subcommittee on Trade, House Ways and Means
Committee (April 1996).

“ 60 F.R. 28933, June 6, 1996.

45 WTO Agreement on Rules of Origin (ARO), sections 101(d)(10) and 132 of the
Uruguay Round Agreements Act (URAA) and the Statement of Administrative Action that
accompanied the URAA.

“ ARO Article 4.

* ARO Article 9(2)(c)(ii).


In order to calculate the information required for the label, the vehicle manufacturer must
know certain information about the origin of each item of passenger motor vehicle
equipment ‘used to assemble its vehicles. For example, in order to calculate the information
for the percentage of the value of the motor equipment installed on passenger motor vehicles
within a carline that originated in the United States/Canada, the manufacturer must know the
U.S./Canadian content of each item of motor vehicle equipment. The statute provides
different procedures depending on whether equipment is received from an allied supplier (a
supplier wholly owned by the manufacturer) or an outside supplier. For equipment received
from outside suppliers, the equipment is considered U.S./Canadian if it contains at least 70
percent value added in the United States/Canada. Thus, any equipment that is at least 70
percent U.S./Canadian is valued at 100 percent U.S./Canadian, and any equipment under 70
percent is valued at zero percent.'*! For equipment received from allied suppliers, the actual
amount of U.S./Canadian content is used.

NHTSA made several changes to the July 1994 final rule in response to petitions filed by
interested parties.’ A revised final rule addressing some of the petitioners’ issues was
published in the September 15, 1995 Federal Register. The remaining outstanding petition,
filed by the American Automobile Manufacturers Association (AAMA) in response to the
September 1995 final rule, was denied in the April 19, 1996 Federal Register.

While the AALA applies to all motor vehicles offered for sale or lease in the United States,
Customs marking regulations apply only to imports. On July 31, 1989, Customs issued a
ruling on certain automobile imports from Malaysia. Specifically, the automobile was
assembled in Malaysia from the following components--the transaxle (i.e., engine and
transmission) was from Japan, plastic parts were from Australia, electrical parts were from
the United Kingdom, textiles and related products were from the United States, lamps and
seat belts were from Korea, and most or all of the remaining parts were of Malaysian origin.
Customs ruled that the country of origin of this automobile is Malaysia, as “the
manufacturing process taking place in Malaysia causes the component automobile parts to
lose their separate identities and emerge from the assembly process as a new article of
commerce with a new name, character, and use.”

Recent Customs rulings on country-of-origin marking issues in the automotive area have
covered a variety of products, including crankshafts, automotive exhaust component parts,
automobile air conditioner kits, repackaged auto parts, automotive replacement glass,
automotive water pump components, forgings for steering linkages, automotive hinge parts,
and automotive wiring hamesses. | Automotive products that are imported for further
assembly or processing and undergo a substantial transformation in the United States do not
have an origin label, and country-of-origin marking of automobile parts differ depending on
the ultimate purchaser of the parts. For parts used in the production of automobiles,
individual parts are not required to be marked if they are substantially transformed by being

151 This statutory provision is sometimes referred to as the “roll-up, roll-down” provision.

152 Petitioners included the American Automobile Manufacturers Association (AAMA),
General Motors, the Association of International Automobile Manufacturers, Volkswagen, the
American Intemational Automobile Dealers Association, and the Kentucky Cabinet for Economic
Development.

153. US. Customs ruling HQ 731568, July 31, 1989.

6-40


The size, location, and acceptable spelling of origin markings were cited by several survey
respondents as a hindrance to their operations. The marking requirements are very specific,
causing administrative burdens and excessive costs for a firm to comply properly. In some
cases, it is very difficult and expensive to find a place on the product where a permanent
marking can be made to reflect the country of origin. Also, depending upon the product, it
is not easy to determine whether the completed good is the product of the identified country
or whether only a component is the product of the identified country.

Firms reported that Customs is unresponsive to requests for reasonable abbreviations of
country names and some firms would greatly prefer the ability to use 2-letter abbreviations
for country names. All such requests have been rejected even though fulfilling marking
requirements has resulted in the elimination of product information in some cases. Customs
has also objected to imports of semiconductors marked with a company name that included
the word "American."

Companies contend that the body of regulations concerning rules of origin marking are not
always consistently applied, particularly in the treatment of imports of finished and
unfinished products and that there is a lack of uniformity in the rules of origin which can
lead to a conflict. For example, marking items for export to meet foreign country
requirements can conflict with the domestic marking standard of the FTC. It is not unusual
for a company to be required to mark its products destined for the U.S. market with "Made
in USA with U.S. and foreign components" while the same products intended for export
must be marked as "Made in USA."

Almost all electronics products are made from components from several countries; therefore,
they cannot bear the "Made in USA" label. A number of companies, especially
semiconductor manufacturers, find that there is no evidence of benefits from or consumer
interest in "Made in USA" labeling, and that their customers do not make purchasing
decisions based on the country of origin of a product. Semiconductors are highly
competitive commodity products, and manufacturers report that customers do not care about
country of origin as much as they do company of origin. Some firms reportedly do not use
"Made in USA" labeling as the costs of assuring compliance are not worth the benefits. A
smaller number of companies stated that quality assurance and support for the U.S. economy
are benefits from "Made in USA" labeling. There is a 2-to 3-percent price premium for U.S.
articles relative to products of perceived low-quality countries, but little or no price premium
relative to European products. These respondents support the reform of "Made in USA"
labeling so that 80-percent content is sufficient and also a "Made in North America" label
to reflect NAFTA integration.

Many companies noted that there is a lack of uniformity and consistency in the rules of
origin between U.S. and foreign practice. Semiconductor firms, in particular, indicated that
the differences in rules of origin for different country markets were a problem.”* For export
markets, rules of origin consider from where a product is shipped, manufacturing origin, as

?6 See also statement of Evelyn Suarez, chairperson of the Rules of Origin Committee,
Joint Industry Group, transcript hearing, pp. 74-75 and 138, and Joint Industry Group, written
submission to the USITC, Mar. 27, 1996, p. 7.

6-7


With regard to the FTC:

Harmonize the FTC standard for “Made in USA” with section 304, and base the
FTC standard on last substantial transformation test.

Maintain the FTC standard for unqualified “Made in USA” claims as is.

Change the FTC standard for “Made in USA” to include consideration of
significant value-added to products through U.S. operations.

Harmonize the FTC standard for “Made in USA” with section 334° of the
URAA.

oO oo oO

Other laws:

Q Repeal the American Automobile Labeling Act or modify the methodology used
to determine origin shares under this law.

Aside from the categories listed above, interested parties have suggested several areas where
changes to country-of-origin laws would affect select industries or require modification of
Customs regulations. At the same time, proposed changes would not appear to adversely
affect the ultimate purchaser. (Areas of recommendation, as well as proposals for
minimizing commercial burdens, are listed in appendix F.) Changing existing laws or
regulations after firms have implemented compliance measures, however, will sometimes
result in some companies being disadvantaged, while others may gain an advantage. For
example, different companies in the hand tool® industry contend that U.S. jobs and
investment could be moved offshore if current Customs decisions are changed and also if
they are not changed. The problems confronting the textile home furnishings industry due
to changes in the rules of origin contained in section 334 of the URAA (effective July 1,
1996)" and issues of concern to various industries regarding 19 CFR 102 Marking Rules for
NAFTA pose similar implications.

With regard to rules of origin, several interested parties argued that delaying unilateral steps
by the United States to establish new U.S. origin rules could avoid the potential requirement
for industries to face multiple near-term changes to new rules pending the results of the
WTO/WCO harmonization effort. Another interested party asserted that many of the issues

* Pursuant to section 334 of the URAA, Customs has determined that the country of
origin of certain textile articles, such as comforters, handkerchiefs, bed linens, scarves, and
bandannas, will be where the fabric was made, not where these articles are assembled. Previously,
assembly (i.e., sewing the pieces together with or without adding trim) of these items in the United
States allowed these items to be marked as made in the United States, but now they must be
marked as a product of the foreign country in which the fabric was formed. See section on
Textiles and Apparel in chapter 6 of this report for further detail.

© See section on Hand Tools in chapter 6.

*! See section on Textiles and Apparel in chapter 6.

® Statement of Matthew McGrath, Barnes, Richardson & Colburn, on behalf of the
Pharmaceutical Research and Manufacturers of America, transcript of hearing, pp. 237-245, and
statement of Lesile G. Sarasin, executive vice president and staff counsel, American Frozen Food

(continued...)

4-22


CHAPTER 3

Review of Applicable U.S. Laws,
Regulations, and Practices Regarding
Country-of-Origin Marking

The principal U.S. statute governing the marking of country of origin on imports, with
certain exceptions, is section 304 of the Tariff Act of 1930 (19 U.S.C. 1304). Other major
laws requiring the marking of imports are the Wool Products Labeling Act of 1939, the
Textile Fiber Products Identification Act, and the American Automobile’ Labeling Act.
These laws also require the marking of domestic products. Section 5 of the FTC Act, which
is an unfair trade statute of broad application, is used to insure that claims related to U.S.
origin, such as products bearing a “Made in USA” label, are accurate. In addition,
administering agencies have issued numerous regulations to implement these laws. These
and other laws and regulations that either require marking or address origin claims are listed
in table 3-1.

These laws or regulations may require marking for the benefit of the consumer or ultimate
purchaser, for maintaining trade sanctions, or for health and safety purposes. Some
regulations clarify the use of geographic place names as related to product origin. For
example, the regulations on labeling wine and distilled spirits require that the country of
origin be clearly stated so as to mitigate possible confusion of the product name with its
place of actual production.’ Regulations administered by the Food and Drug Administration
under 21 CFR 201 are designed to provide the consumer with information about the source
of a drug product, but in some instances, may conflict with a Customs decision as to the
country of origin (see analysis of marking pharmaceuticals in chapter 6).

There are also a number of state laws governing the labeling of imports. Most notable
among these is the State of Florida’s “Produce Labeling Act of 1979,” under sections
504.011-504.014 of Florida’s statutes. The act requires that

any fresh fruit or vegetable, package of bee pollen, or package of honey, including
any package containing foreign honey blended with domestic honey, produced in
any country other than the United States and offered for retail sale in Florida shall
be marked individually in a conspicuous place as legibly, indelibly, and permanently
as the nature of the fruit or vegetable, package of bee pollen, or package of honey
will permit, in such manner as to indicate to an ultimate purchaser the country of
origin. Markings shall be done prior to delivery into Florida.”

' For example, the word “Scotch,” and other similar words indicating association with
Scotland cannot be used to designate any product not wholly produced in Scotland. 27 CFR

5.22(k)(4).
2 State of Florida, “Produce Labeling Act of 1979," ss. 504.012.

3-1