The Meaning of “Made in U.S.A.”
Released: 2017-05-05T00:00:00

Introduction

Since 1790, when President George Washington told the first session of Congress that the "safety and interest" of a free people "require that they should promote such manufactures as tend to render them independent of others for essential, particularly military supplies," Congress has taken a special interest in the health of the manufacturing sector. In his Report on the Subject of Manufactures , submitted to the House of Representatives the following year, Secretary of the Treasury Alexander Hamilton suggested a variety of measures, including import duties, bounties (subsidies), and patents, intended to strengthen manufacturing in what was then an overwhelmingly agricultural economy. Congress resisted bounties, but it largely accepted Hamilton's recommendations for high import tariffs and strong patent protection.

Defining "manufacturing" and measuring its scope have been challenges from the country's earliest days. When he prepared the first nationwide statistics about manufacturing at the request of the Secretary of the Treasury, Tench Coxe reported the value of manufactured goods produced in 1810 as $127.7 million, but he estimated that including goods "entirely omitted or imperfectly returned" by state and territorial officials would raise the value to $172.8 million—35% more. Additionally, Coxe identified $25.9 million of goods produced in the United States "which are of a doubtful nature in relation to their character as Manufactures." One example was pot ashes. At the time, farmers clearing hardwood forests to plant crops often burned unneeded trees, soaked the ashes in iron pots, and then evaporated the mixture to obtain potash salts to make soap, glass, and textiles. Coxe apparently was unconvinced that this production process was "manufacturing."

The scope and scale of manufacturing have changed considerably in the intervening centuries, but the challenge of determining when a good has been made in the United States has not gone away. If anything, changes in the ways manufactured goods are developed, produced, and sold have made it more difficult to link production to a particular location and to measure the domestic content.

Sources of Value

There are a variety of rationales for special government attention to domestic manufacturing. Historically, Congress has been attentive to the role of manufacturing as a source of employment, especially for workers without higher education. National security considerations may argue for the physical production of a particular product to occur within the United States. Productivity typically rises faster in manufacturing than in other sectors of the economy, making manufacturing an important source of the productivity growth that fuels economic growth.

The manufacturing sector, as defined by the U.S. government, "comprises establishments engaged in the mechanical, physical, or chemical transformation of materials, substances, or components into new products," as well as those engaged in "assembling of component parts of manufactured products" for purposes other than construction.

This definition, however, is of limited usefulness in understanding how manufacturers and workers create economic value. The economic value of a manufactured good, and the employment related to the production of that good, may be derived from a wide variety of specific activities in addition to physical transformation. Two types of nonmanufacturing activities are especially likely to contribute to the value creation and employment in the process of creating manufactured goods and delivering them to end users. One is business services such as research, design, marketing, logistics, and information technology. The other is software development. These nonphysical inputs may be produced within the manufacturing firm itself, or may be purchased from other firms.

Because many manufactured products are unique, understanding of the role of nonmanufactured inputs in manufactured goods has come principally from case studies. These studies seek to disentangle the complex supply chains used to produce many of the final goods that are sold to consumers, firms, and governments.

One such study of Nokia's N95 mobile phone found that the cost of final assembly—that is, the physical manufacture of the product sold to end users—came to only 2% of the final pretax sales price; the value of the physical inputs Nokia purchased to manufacture the phone, such as processors, cameras, and integrated circuits, was estimated to be less than the value of its intellectual property, in-house services, and profit connected with the phone. Another study found the cost of assembling computers and music players to be only 3% to 5% of the selling price. An analysis of an Italian manufacturer's Chinese-made shoes found that design, quality control, logistics, sales, and administration, all of which occurred in Europe, accounted for about half the wholesale cost of the shoes and three-quarters of the value added.

The value of embedded software represents a substantial and growing share of the value of many manufactured products, from pacemakers and washing machines to cars and airplanes. A recent study asserts that semiconductor manufacturers are "shifting their focus from hardware" to software embedded in their products. Similarly, according to a recent article, "a premium class car now ... runs on 100 [million] lines of software code," implying that a significant albeit uncertain share of the car's value is created by coders in offices rather than assembly workers on a factory floor. A 2016 consultant study projects that providers of software and digital services will capture a growing share of the automotive sector's profits as autonomous vehicles come into use.

The Organisation for Economic Co-operation and Development (OECD), which seeks to harmonize economic data internationally, estimates that services produced in the United States contributed around one-third of the total value added in products sold by the U.S. manufacturing sector in 2011. This share varies considerably among manufacturing industries ( Table 1 ). The OECD figures likely understate the role of nonphysical activities in manufacturing production, as the underlying data generally do not capture services and software produced within manufacturing establishments rather than purchased from external suppliers.

The Production Location

The difficulty of defining manufacturing activity and identifying manufacturing work has direct implications for efforts to encourage manufacturing in the United States as a matter of U.S. government policy.

The national identity of manufactured products has been a matter of congressional concern since at least the 1930s. The Tariff Act of 1930, as amended, requires that "every article of foreign origin ... imported in to the United States shall be marked in a conspicuous place as legibly, indelibly, and permanently as the nature of the article ... will permit in such a manner as to indicate to an ultimate purchaser in the United States the English name of the country of origin." Imported goods that are not so marked may be taken out of the country, destroyed, or assessed a penalty equal to 10% of their value.

In regulations implementing the law, U.S. Customs and Border Protection (CBP) defines a good's "country of origin" as "the country of manufacture, production, or growth." However, if further work in another country results in a "substantial transformation" of the good, that country might then be considered the country of origin. More generally, CBP regulations apply a series of tests to be applied, in order, to determine the country of origin. If the country of origin cannot be determined by any of these tests, the country of origin is the last country in which the good underwent production, which is defined to mean "growing, mining, harvesting, fishing, trapping, hunting, manufacturing, processing or assembling a good."

The Tariff Act definition and the regulations implementing it rest on two implicit assumptions:

Each manufactured product is assumed to have a single country of origin. The determination of whether a product is American-made is binary; either it was made in the United States or it is an import. This assumption fits uneasily with the global value chains now widely used by manufacturers to combine components from multiple countries into a single product. Physical transformation is assumed to be the means by which manufacturing creates economic benefits. The fact that other activities related to making a product are conducted in the United States may not be relevant to the determination of whether the product is "Made in U.S.A."—even if, as noted above, those activities account for a large proportion of the value of the finished good.

FTC Authority

Separately, the Federal Trade Commission (FTC), which has broad general authority to regulate deceptive practices, has asserted authority over claims that products are U.S.-made since 1987. The agency's guidelines assert that "The country in which a product is put together or completed is highly significant to consumers in evaluating where the product is 'made.'" In 2016, it deferred enforcement action against Bedrock Manufacturing Company, owner of the Shinola Brand, after the company agreed to take a number of corrective actions in response to allegations that it overstated the extent to which some of its products were made in the United States.

FTC policy states that a product claimed to be made in the United States must be "all or virtually all made in the United States," and should "ordinarily be one in which all significant parts and processing that go into the product are of U.S. origin," and should also be one that was "last 'substantially transformed'" in the United States. The commission may base its determination of whether a product is U.S.-made in part on the percentage of total manufacturing costs that are attributable to U.S. costs. The FTC does not consider the value of nonphysical inputs, such as services and software, in determining whether a product may legitimately be said to be U.S.-made.

Trump Administration Executive Orders

An executive order signed by President Donald Trump on April 18, 2017, applicable to all federal statutes and regulations related to federal procurement and federal grants, directs all agency heads to "develop and propose policies for their agencies to ensure that, to the extent permitted by law, Federal financial assistance awards and Federal procurements maximize the use of materials produced in the United States, including manufactured products; components of manufactured products; and materials such as steel, iron, aluminum, and cement." However, the executive order defines "produced in the United States" only with respect to iron and steel products, for which all manufacturing processes, from melting through the application of coatings, occurred in the United States.

A separate presidential memorandum, signed by President Trump on January 24, 2017, directs the Secretary of Commerce to develop a plan under which all new pipelines and pipelines being repaired "use materials and equipment produced in the United States, to the maximum extent possible and to the extent permitted by law." The memorandum specifies that steel and iron products manufactured abroad from U.S. steel or iron and products manufactured in the United States from semifinished steel of foreign origin are not to be considered as "produced in the United States."

Manufacturing in Federal Law

Numerous provisions in federal law create distinctions based on the location at which goods undergo physical transformation. Examples include the following:

Buy American Act

The Buy American Act of 1933, which governs procurement by federal agencies, generally requires that "... only manufactured articles, materials, and supplies that have been manufactured in the United States substantially all from articles, materials, or supplies mined, produced, or manufactured in the United States, shall be purchased for public use," with a number of exceptions. The term "manufacture" is not defined, but courts interpreting the act have generally held that manufacturing involves changes in physical character, and that operations performed after the physical transformation of an item is completed, such as testing and packaging, are not manufacturing. While physical inputs into a manufactured product purchased by the government are subject to the law, service inputs are not. Thus, a product could be deemed to have been "manufactured in the United States" for the purposes of the Buy American Act if all design, engineering, and financial work related to the product and its components was performed outside the United States, so long as physical transformation occurred in the United States.

With respect to iron and steel products, the April 18, 2017, executive order established a more restrictive standard for determining whether iron and steel are produced in the United States for purposes of Buy American Act compliance. Generally, iron and steel products have been deemed U.S.-made under Buy American if they were "substantially transformed" in the United States. This definition allowed firms known as slab converters to import steel slabs, process them in U.S. rolling and galvanizing mills, and sell the resulting finished steel products as U.S.-made. Under the terms of the executive order, iron and steel products would be considered to be "produced in the United States" only if "all manufacturing processes, from the initial melting stage through the application of coatings, occurred in the United States." Thus, steel products made from imported steel slabs would no longer be considered U.S.-made for purposes of the Buy American Act.

Federal Transportation Funding—"Buy America"

Federally funded transportation projects are carried out almost entirely by nonfederal public entities such as state and local governments and transit and airport authorities. These entities' expenditures of federal funds are subject to domestic content rules commonly known as "Buy America." Buy America refers to several similar statutes and regulations that apply to federal funds used for highway, public transportation, intercity passenger rail, and aviation projects. (These restrictions should not be confused with the "Buy American" rules applying to procurement directly by federal agencies.)

In general, Buy America requires the use of U.S.-made iron and steel and the domestic production and assembly of other manufactured goods such as buses and commuter rail cars. The iron and steel must be melted and poured in the United States. In certain situations, the statutes permit the Buy America requirements to be waived. The April 18, 2017, executive order specifies that "waivers from Buy American Laws should be construed to ensure the maximum utilization of goods, products, and materials produced in the United States."

The provisions enforced by particular agencies differ. For example, the Federal Highway Administration does not require that manufactured products used in highways and bridges be U.S.-made, except for those predominantly made of iron and steel. Federal Transit Administration (FTA) rules generally require that all "manufactured end products" used in federally funded public transportation projects must be produced in the United States unless a waiver is granted. For transit vehicles to be considered compliant, more than 60% of components, by cost, must be of domestic origin, and final assembly must take place in the United States.

A manufactured product, according to FTA's definition, involves "the application of processes to alter the form or function of materials or elements of the product in a manner adding value and transforming those materials or elements so that they represent a new end product functionally different from that which would result from mere assembly of elements or materials." FTA has granted a general waiver of Buy America requirements for purchases of microprocessors, computers, and software used solely for the purpose of processing or sorting data. The value of U.S. services incorporated into a manufactured product is not included in FTA's determination of whether the product is manufactured in the United States.

Defense Procurement

A large number of laws and regulations require the Department of Defense (DOD) and its contractors to procure U.S.-made products. A provision of law popularly known as the Berry Amendment prohibits DOD from purchasing food, clothing, tents, fiber products (including ballistic fibers), and hand and measuring tools "if the item is not grown, reprocessed, reused, or produced in the United States." A separate law prohibits DOD from procuring aircraft, missiles, ships, tanks, automotive items, weapons, and ammunition that contain specialty metals that are "not melted or produced" in the United States. Other laws prohibit DOD from purchasing buses and air circuit breakers for naval vessels unless they are "manufactured in the United States or Canada. All such prohibitions are subject to exceptions. In addition, annual bills, like appropriations and authorizations, also contain statutory restrictions. For instance, since FY1996 defense appropriations acts have contained a provision limiting DOD to procuring ball and roller bearings from domestic sources.

In general, DOD uses a two-part test to determine whether a manufactured end product is domestic: the end product itself must be manufactured in the United States, and at least 50% of components, by value, must come from the United States or other qualifying countries. Thus, the value of activities other than physical transformation is generally not considered in determining whether a product is U.S.-made. In some cases, the requirements may not reflect important sources of value. For example, DOD is prohibited from purchasing a supercomputer "unless it is manufactured in the United States," but regulations do not require that the intellectual property used to build supercomputers, such as designs of semiconductors and computer systems, be produced in the United States.

Jones Act

The Merchant Marine Act of 1920, commonly known as the Jones Act, requires that all waterborne shipping between points within the United States be carried by vessels built in the United States. Coast Guard regulations specify that a cargo ship or fishing vessel may be considered to be U.S.-built if "all major components of the hull and superstructure are fabricated in the United States" and if "[t]he vessel is assembled entirely in the United States." The location of other aspects of ship production, such as vessel design and development of information systems, is not relevant in determining whether the vessel is U.S.-made.

Relief of Injury from Imports

The Tariff Act makes it illegal to import articles into the United States if those imports "destroy or substantially injure an industry in the United States" or threaten to do so. The U.S. International Trade Commission (ITC) is responsible for investigating whether imports that allegedly benefit from foreign government subsidies or that are sold below cost (dumped) are causing or threaten to cause material injury to a U.S. industry. The ITC may open an investigation on its own initiative or upon petitions from companies, trade associations, labor unions, or workers. Separately, the U.S. Department of Commerce is responsible for determining whether the imports were traded unfairly. If the protected imports are found both to have been traded unfairly and to threaten or cause material injury, the imports may be subject to higher duties.

The Tariff Act, as amended, provides that in evaluating whether material injury has occurred or may occur, the ITC must consider "the impact of imports of such merchandise on domestic producers of domestic like products, but only in the context of production operations in the United States." This definition severely limits the ITC's ability to consider whether the imports under investigation are contributing to net employment gains or employment losses in the United States. As a hypothetical example, a firm that engages in physical transformation of a product in the United States but employs few U.S. nonproduction workers could conceivably win protection against an import by a firm that does not have a U.S. factory but employs a large number of U.S. nonproduction workers in its manufacturing value chain.

Implications

Labor productivity has been growing far more rapidly in the manufacturing sector than in other parts of the U.S. economy. If future manufacturing output does not increase more rapidly than productivity, fewer employees will be required for manufacturing production.

Although the number of production and nonsupervisory workers in U.S. manufacturing establishments has risen 7% since the most recent trough in early 2010, economists expect that production employment will decline in future years as new production methods, such as additive manufacturing, and more complex machines and information systems, including more flexible robots, displace workers on the factory floor. The U.S. Bureau of Labor Statistics, for example, projects employment declines in many manufacturing production occupations between 2014 and 2024. Similar trends in manufacturing employment are in evidence in many other countries.

As physical production processes become more automated and require fewer production workers, it seems likely that nonphysical inputs into manufactured goods will continue to grow both as a proportion of value added in manufacturing and as a share of employment related to the goods' production. In many cases, the national origins of nonphysical inputs are indistinct. The process of designing a single product, for example, may involve collaboration among workers in multiple countries. The firms concerned may not track the share of the work done in each location, making it difficult to determine the value added to the manufactured good in any single country.

There may be motivations for encouraging domestic production of manufactured goods other than fostering employment and increasing value added. As noted above, for instance, it may be considered important for a good to be transformed within the United States for reasons of national security. But to the extent policymakers are concerned with maximizing domestic employment or domestic value added, it is becoming increasingly challenging to design and enforce effective government policies, as emphasis on the location of physical transformation addresses an aspect of the manufacturing process that is likely to become less important over time. Additionally, to the extent that domestic content requirements such as those described above raise the cost of goods procured under federally funded contracts, they reduce the volume of procurement for any given level of expenditure and thus may adversely affect employment in nonmanufacturing industries such as construction and freight transportation.