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Patriot Games: The Great ‘Made in USA’ Illusion

The federal government has rules about what it takes for consumer goods to carry a “Made in USA” label, but it does little to enforce those rules. As a result, marketers exaggerate the degree to which their products are made in the United States. Unfortunately, deceptive labeling practices appear unlikely to change anytime soon.

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A label that says “Made in USA” appears to carry a lot of influence with consumers in the United States.

According to a 2012 survey by Boston Consulting Group, 81 percent of 1,001 U.S. consumers who were surveyed said they would spend more for products that are made in the United States—and 60 percent said they spent more for a U.S.-made item after they compared it with a made-in-China alternative within 1 month of the survey. Another 2012 study that was performed by Perception Research Services International, which is a market-research company, found that 76 percent of at least 1,400 shoppers who were surveyed said they’re more likely to buy a product when it has a “Made in USA” (or “Made in America”) label. A 2013 Gallup poll found that 45 percent of Americans try to buy U.S. products. Consequently, companies that make products in the United States understand the allure of a label that says so.

“They have a powerful marketing tool,” says Dave Schiff, who is the founder and chief creative officer of Made Movement, which is an advertising agency that specializes in clients that manufacture in the United States. Consumers cite factors such as quality and safety when they choose to buy U.S.-made products, but many also say they want to support a U.S. manufacturing base that’s been battered economically by cheap overseas labor.

“Patriotism sells,” says Bonnie Patten, who is the executive director of Truth in Advertising, which monitors advertising.

Unfortunately, consumers can’t assume that a product that has a “Made in USA” label is all that it says it is. Our examination of labeling laws and practices found that tough-sounding regulations are so vague that it’s easy to skirt them. Couple that with the fact that the regulations are hobbled by weak enforcement, and you get companies that make misleading or outright phony “Made in USA” claims. In addition, groups are pushing to change or water down the government’s labeling standard, which could lead to even more confusion for consumers and less certainty about which products that have a “Made in USA” label really are made in the United States.

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LAX GUIDANCE. Federal Trade Commission, which establishes rules for “Made in USA” labels as well as labels that denote the country in which the product or its components were assembled, doesn’t approve labels or verify their accuracy. According to FTC’s Bureau of Consumer Protection, a product may have a “Made in USA” label if “all or virtually all” of its parts and its manufacturing processes take place in the United States. Labels that read “Made in USA” should have “no—or negligible—foreign content.” However, FTC doesn’t state what percentage of the product must be from the United States. That leaves wiggle room for marketers to determine how much “all or virtually all” constitutes.

The result is that it’s possible that more than half of a product could be made of foreign components but still bear a “Made in USA” label, says Michael Hasler, who is the program director for McCombs School of Business at The University of Texas at Austin. As an example, Hasler says a product that has 100 parts, 99 of which are from outside of the United States and only one of which is U.S. made might qualify for a “Made in USA” label if, say, that one U.S. piece were gold that came from the United States. He says it could be argued that, as a result, more than half of the value of the product in question comes from the United States.

Reading FTC’s literature on the subject provides little clarity. FTC publishes for manufacturers a 44-page booklet on its “Made in USA” labeling standard, but the booklet is rife with seeming contradictions. For example, it notes that a clock radio that has a plastic case that’s made from imported petroleum “likely” would qualify for a “Made in USA” claim as long as all of the other parts of the product were made domestically. By contrast, a computer that has major components from other countries but is assembled in the United States wouldn’t even meet the FTC standard for an “Assembled in USA” label, because FTC defines the major components’ country of origin as the place where the computer’s last “substantial transformation” took place. You read that right: Assembling the final product isn’t necessarily a “substantial transformation” in FTC’s eyes. Instead, “substantial transformation” is “a manufacturing process that results in a new and different product with a new name, character and use that is different from that which existed before the change.” FTC says these judgments are made on a case-by-case basis.

According to the FTC standard, companies that make products in the United States can choose to provide additional details about from where their product parts come or how much of a product is made domestically. Of course, that information won’t be on the label always. You might have to buy the product first to learn that information. For example, at least 90 percent of the toys that K’Nex manufactures are made in Pennsylvania, although the percentage of U.S. materials varies from 10 percent to 100 percent depending on the product, according to K’Nex President Michael Araten. He says K’Nex doesn’t use a “Made in USA” label on its packaging, because the amount of U.S. materials that make up its toys varies. Instead, K’Nex provides a detailed description of the source components on an instruction sheet that’s inside the package.

What’s disheartening—yet unsurprising, given the confusion—is that FTC investigations rarely are triggered by consumer complaints, FTC staff attorney Julia Solomon Ensor tells Consumers Digest. “When you and I look at a product, it’s almost impossible for us to tell whether a product is truly made in the USA,” she says. In most cases when FTC gets involved, she says, it’s because a company’s competitor filed a complaint. In other words, the industry essentially polices itself. Although that might be preferable to nothing, more enforcement should exist beyond companies who merely might be on the lookout for a competitive advantage.

CONTROL ISSUES. In theory, violating FTC’s labeling guidelines could lead to a fine of $16,000 per item that’s sold each time that FTC orders a company to do something and the company ignores the order or repeats the behavior—the use of a label that FTC determined to be deceptive, for example. However, even though FTC is charged with protecting consumers from deceptive advertising, Congress didn’t give the agency the legal authority to levy fines immediately if a company violates an administrative order in a labeling case.

If FTC receives a complaint, Solomon Ensor says, the agency likely would contact the company to determine the necessary steps for the company to comply with the rules, which might include changing the wording on the label. (For instance, a company that assembles imported parts in a product in the United States and uses a “Made in USA” label might have to change the label’s wording to make clear that the product was assembled in the United States but has imported parts.) If the company doesn’t agree, then FTC can file a civil contempt order with a federal court to enforce an injunction against the company. If the company violates that court order—and only then—it faces fines. However, Solomon Ensor says cases rarely reach that point. In fact, she says she can’t recall the last time that a company paid a fine over a labeling dispute.

“It doesn’t really make sense to discuss penalties,” Solomon Ensor says. “Most companies are trying to follow the law.”

Patten argues that because FTC can’t levy fines quickly, government regulations provide “minimal” deterrence to companies that make false or exaggerated labeling claims. However, both Patten and Hasler agree that it’s difficult to determine how many companies mislabel products, because no studies investigate the composition of products that are labeled “Made in USA” to the necessary level.

California has its own “Made in USA” standard that ups the ante on the federal standard. California doesn’t allow products that have any foreign parts that are sold in the state to carry a “Made in USA” label.

Richard Holober, who is the executive director of Consumer Federation of California, says FTC’s “Made in USA” labeling rules are “violated with impunity.” Outside of California, he says, “the worst outcome seems to be for violators to say, ‘We won’t do it again.’”

In California, however, consumers can sue a manufacturer over misleading labels. Holober says lawsuits are the main enforcement mechanism in upholding the law, and that the law has sparked “several” lawsuits, although he wasn’t able to say how many. Costco, for one, is the target of a California class-action lawsuit over sales of Simpson power washers that had “Proudly Made in the USA” labels, when in fact they were made of imported parts. Costco declined to comment on the case, which was pending as of press time.

FTC’s biggest cases in the past 5 years support the argument that companies that exaggerate “Made in USA” claims rarely face a serious penalty. As of press time, FTCissued administrative orders to only two companies since 2009 as a result of investigations of “Made in USA” labels. In the first instance, FTCsettled with a California company that makes magnifiers for TVs and computers. The company couldn’t label its products as “Made in USA,” because some had what FTCdescribed as “a significant portion”—the agency didn’t specify the amount—of foreign parts.

In 2013, a marketer of Apple iPhone accessories, dog collars and other items settled FTC charges that it falsely claimed that some products were made in the United States or “Truly Made in the USA.” In fact, what FTC described only as “many”—again, no amount was specified—of its products were imported.

In both cases, FTC required the companies to change their product labels and marketing materials, but neither company admitted any wrongdoing or faced any further FTC penalty.

Most FTC investigations are resolved with “closing letters” that outline corrective actions that a company must take to comply with FTC rules. Between August 2010 and March 2014, FTC issued 28 public closing letters, Solomon Ensor says.

LESS AMERICAN. Some companies, marketing organizations and business groups set their own definitions of what “Made in USA” means. The definitions can be even less stringent than FTC’s definition but just as confusing to consumers who look for products that are made in the United States.

Made in the USA Foundation, which is a pro-business group that notes on its website that it’s funded by corporate donations, says its mission is to “strengthen and uphold labeling laws and standards.” However, it supports changing the California law to permit companies to place a “Made in USA” label on products if they can’t find a U.S. supplier for some parts.

Joel Joseph, who is the group’s founder and chairman, is highly critical of FTC’s efforts to uphold the “Made in USA” labeling standard. He says the agency “does virtually nothing in terms of enforcement.” Notably, Joseph, who also is an attorney, says he helped to write the current FTC standard.

Joseph says his group for years has complained to FTC about false or misleading “Made in USA” claims. In 2012, the group complained to FTC about Chrysler Group’s use of its “Imported from Detroit” ads in connection with some automobiles that it made in Canada, Joseph says. He says FTC did nothing in that case.

Nevertheless, Joseph says most consumers understand that few products can be made entirely with U.S. parts. “Virtually nothing is 100 percent made in USA anymore, except something like a candle or a bar of soap,” he says. Still, he adds that it’s reasonable for consumers to expect that products that have a “Made in USA” label predominantly are made in the United States. He says he favors a 75 percent standard in place of the current “all or virtually all” labeling rule.

Another marketing group, American Made Matters, allows its 250-plus member companies to use its copyrighted phrase “American Made Matters” and a red, white and blue logo that includes the phrase “Choose American” on packaging and marketing materials. However, American Made Matters allows its member companies to use the patriotic logo even if their products don’t meet FTC’s “all or virtually all” standard for “Made in USA” labels. According to the organization’s website, it allows members to use the “American Made Matters” logo if at least 50 percent of a product’s manufacturing cost—labor, materials and overhead—are incurred in the United States. FTC declined to comment on the organization.

In response to our questions about the use of its logo on products that contain imported parts, American Made Matters defended its 50 percent threshold by saying it’s “much clearer and easier to understand” than is FTC’s standard. That might be true, but it also means that consumers might be buying products that they believe are made in the United States but that contain 50 percent foreign parts.

The problem for consumers is, as always, that you seemingly never can tell just how much of a product actually is U.S. made. Hasler says companies can manipulate numbers to get “Made in USA” or similar labels, and it gives consumers a false impression that products are more U.S. made than they actually are. “I’m a little cynical about how that all comes together,” he says of manufacturers’ capability to fudge numbers and put “Made in USA” labels on their products.

Even retailers that make an effort to sell 100 percent U.S.-made products run across suppliers that make deceptive claims or simply don’t know that their products contain foreign parts. The Made in America Store, which opened in 2010, requires companies to submit certification that their product is made entirely in the United States. Even so, “we’ll get boxes and find ‘Made in China’ labels inside,” says store employee Dan Andol, who adds that when the store receives such products, it sends them back to the manufacturer. Andol couldn’t say how frequently this occurs but says the problem has declined over time. “We haven’t run into that problem in at least a year.”

WATERED DOWN. Unfortunately for consumers, no clarity appears to be forthcoming.

A proposal was introduced in Congress in summer 2013 to create a voluntary national framework for “Made in USA” product labeling that Department of Commerce would oversee. If enacted, the Made in America Act would create the America Star Program, which would be a voluntary program that would identify the extent to which a product is made in the United States. The bill’s co-author, Rep. Mike Fitzpatrick, R-Pa., says he envisions a self-funded program that would provide tiered labels that indicate the percentage of a product’s domestic content, which the department then would certify. Manufacturers could decide to participate in the program, and, if so, would pay fees that would fund it, although Fitzpatrick says such details haven’t been finalized. Another detail that remains unclear is whether the program would run in tandem with FTC’s “Made in USA” labeling standard or whether all “Made in USA” matters would be governed by Department of Commerce. Consumers could face even greater confusion amid an increase in competing standards.

Like other experts with whom we spoke, Fitzpatrick says FTC’s standard lacks clarity. As a result, Fitzpatrick says, constituents tell him that they aren’t sure that they should trust existing labels. A process that includes certification by the federal government would provide that assurance, he says. Nonetheless, given that participation in the program would be voluntary, consumers still could be left in the dark on “Made in USA” labels from nonparticipating companies. Fitzpatrick says he’ll push forward with the bill in 2014.

If clarity can’t come from the government, then it might come from your local store. Wal-Mart Stores in 2014 became the first high-profile retailer to introduce labels on products that are sold on the store’s website and in its brick-and-mortar locations that tell consumers whether the product is 50 percent, 75 percent, 90 percent or 100 percent made in the United States. Although it’s clearly a marketing campaign that’s meant to appeal to consumers who prefer U.S.-made products, Wal-Mart says companies that want to use the label must provide Wal-Mart with certification that verifies that percentage. A spokesperson for the retailer says Wal-Mart cites California’s “Made in USA” standard to companies as the standard that they should use for labels that say a product is 100 percent made in the United States.

Experts with whom we spoke agree that manufacturers always can provide more truthful information, but without any independent certification, consumers would have to take the manufacturers’ word for it.

The problem is that with no defined universal standard from the government regarding products that are “Made in USA,” we believe that companies have no incentive to be forthright. Consequently, consumers will remain in the dark about whether a product lives up to the label’s claim.

Hasler tells us that no such thing exists as a supply chain that isn’t global. That means that it’s entirely possible if not likely that some portion of any “Made in USA” product comes from outside of the country’s borders. It’d be nice if consumers had some assurance as to just how big that portion really is.

Freelance journalist Sara Bongiorni is a regular contributor to Consumers Digest.

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