MARKING
FEDERAL TRADE COMMISSION BACKS OFF
11/97
For the last several months, the Federal Trade Commission has been evaluating
a change to the existing standard about the Made in USA label. The current law
allows that marking where "all or virtually all" of the materials or components
are American origin, usually taken to mean 90 to 95%. The proposal under review
would change that standard to "substantially all," likely to mean about 75%
American content. Industry has apparently not been vocal enough in supporting
the change. FTC representatives have recently said, in the end, there won't be
much of a change. Nonetheless, the FTC staff is expected to recommend allowance
of the label where there is 89% American content, a move the full Commission is
expected to approve.
MEXICO ISSUES NEW LABEL
RULES
2/96
To the frustration of some American companies, Mexico
has issued yet another set of label rules (call NOMs). These latest rules seek
once again to make clear what has to be on the label (in Spanish) and when. Some
of the rules take effect immediately. Others do not take effect for another six
months. The biggest problem areas for textile goods are the requirement to state
the name of the Mexican importer on the label plus distinguishing fiber origin
from the geographic place of manufacture, if they differ.
SO, JUST EXACTLY WHAT IT IS YOU WANT MY PRODUCT TO
SAY ABOUT ITS ORIGIN?
As the global marketplace has shrunk, one of the
remaining frustrating issues for many companies has been the confusing and often
contradictory rules which apply regarding how origin is to be stated on
individual products. For example, in Europe it is acceptable to designate a
product as of European Union origin. However, in the eyes of the U.S., the
designation of origin must state a country. The European Union is not a country,
hence such a marking is not acceptable. Against this backdrop, as part of the
Uruguay Round of negotiations, all parties agreed to a three year effort aimed
at developing international rules about origin and marking.
In this context, the concern of the U.S. has been to
develop a set of rules which is easy to understand and follow, i.e. transparent.
The U.S. does not want to agree to a set of rules which can be interpreted by
any given country in such a way as to become a barrier to trade. For example, if
marking were limited to certain products, how would you define the list of
exempt products? What would happen if there were new products developed which
were similar but not identical to those listed? What about LCD projectors
(presentation hardware)? Are these items sufficiently similar to computers that
if computers were exempt, LCD projectors would be, too? Would a list of exempt
products include those products in incomplete condition? Suppose the list
included computers. Would computer housing be exempt? What about motherboards?
On the other hand, suppose the exemption was limited to those products sold only
at the wholesale level. How would such an exemption be enforced? Suppose at time
of import wholesale sale was intended but market forces caused a retail sale?
Suppose the exemption was for parts, components and subassemblies imported for
repair. How is repair to be defined? What happens if the items need to be
completely rebuilt? Does such processing still qualify as a repair? Suppose the
overall machine involves several hundred parts. Is the way to measure repair a
percentage of the parts involved or does the definition need to reach the
processes performed?
Right now in the U.S. there are a variety of marking
schemes with which U.S. Customs has experience. The longest standing rule is
substantial transformation. The idea behind it is, for example, raw materials
from Country X are imported into Country Y. From those raw materials, a finished
good results. That finished good is marked Made in Y for origin purposes. Given
the extent of global sourcing which now exists, bringing lumber, for example,
from Malaysia to Mexico to turn it into stereo speakers is quite common and
those speakers are considered to be of Mexican origin.
Another marking scheme is administered by the Federal
Trade Commission (FTC) which has jurisdiction over the Made in USA label.
Acknowledging global sourcing as the norm, the FTC recently undertook a review
of the criteria applicable to claiming USA origin. The questions posed included
the threshold issue of whether American consumers are at all concerned about the
origin of products. If so, do consumers understand that components may come from
a variety of countries or do consumers presume that the country of origin is the
country in which all components originate? For the FTC the issue arose because a
couple of shoe manufacturers were claiming American origin for their finished
shoes but those shoes included a larger than acceptable portion of foreign
origin materials. In the case of the FTC, Made in USA means that 90% or more of
the finished product is of U.S. origin. In the case of one shoe manufacturer,
its American content was approximately 70%. Should that level be sufficient?
Should the level be higher? lower? Public hearings on the issue have concluded
with the FTC still trying to decide how to proceed.
NAFTA provides yet another set of marking criteria.
For any goods which are shipped between Canada, Mexico and the U.S. claiming
NAFTA benefits, the NAFTA rules must be applied. There are a separate set of
rules of origin which determine duty reductions. Those duty preference rules
include a variety of ways to qualify. In the case of the marking rules, the
requirement basically is a change in tariff classification, i.e., if the raw
material is classified in one place in the tariff, the finished good has to be
classified elsewhere. What if a significant amount of value is added during the
manufacturing process but there is no change in tariff classification? How would
one measure the value added? Should it be done by reference to the sale price at
the wholesale level? Should a different measure apply in the context of
intercompany sales?
One product line which is NAFTA eligible but is
governed by yet another set of marking rules is textiles and textile products.
These rules, quite frankly, are geared to protect the U.S. domestic textile
market. Until these rules were enacted, the substantial transformation test
mentioned above applied. The new textile rules took effect on July 1, 1996.
Under the old rules, Chinese handkerchiefs sent to Italy where they were
embroidered exhaustively became Italian products. Under the new rules, these
handkerchiefs remain of Chinese origin. One of the problems with these new rules
is again in the area of multi-country sourcing. Where raw materials come from
two different countries, the decision about origin turns on where the most
important processes were performed. By way of example, suppose a comforter is
made from fabric which is from both China and Pakistan. Equal amounts of the
fabric from each country are used in the manufacturing process performed in
Pakistan plus the down stuffing comes from Pakistan. What is the origin of the
finished comforters? The addition of the stuffing does not affect the origin
determination. Cutting also does not affect origin. U.S. Customs has yet to
elaborate on exactly what constitutes most important processes, so the ultimate
decision turns on exactly what process was performed and where it was performed.
Is that any way to make rules easy to understand and interpret?
Other questions to consider include whether the level
of consumer sophistication in other parts of the world is such that buyers even
care about origin? Should one set of rules be developed which apply to all
products or should separate schemes be developed depending on the product line?
Who is being protected by the marking scheme? Is it the ultimate purchaser? If
so, who is the ultimate purchaser? In the case of give away items or presents,
is the ultimate purchaser the party receiving the item or the one who bought it
to present it as a gift?
If selected processes are designated as determining
origin, how are different processes which are later developed to be treated if
they do not appear on the selected process list? If value added is the criteria,
how should value be measured? Should it be measured using the NAFTA approach of
developing an altogether new definition of value or should the pre-existing GATT
value code be applied?
Bearing in mind that these new marking rules are
being developed by the World Trade Organization and will apply to all member
countries, American industry has been amazingly quiet while the negotiations
have been on-going. The International Trade Commission has published a number of
notices seeking input from American industry regarding selected products. Few
responses have been received. Given that individual companies are the most
knowledgeable about their own products, informing the bureaucrats should be a
high priority since we will all have to live with the results. Has your company
had its say?
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