As a result of globalization, increased international economic competition and consumer demands, many countries require that foreign products carry a label stating their country of origin. Countries use these marks as marketing tools, signals of a product’s quality, or as a method of giving domestic products what is thought to be a competitive advantage over foreign ones. In the US, individual states periodically toy with the idea of mimicking this strategy and creating state labels to promote and market products manufactured in their state. In California, for example, recently proposed bill SB 12 seeks to create a “Made in California” label. Its proponents believe such a label will motivate American consumers to seek out Made in California products because of the state’s reputation for style, and making environmentally safe and energy efficient products, all of which would hopefully create more in-state jobs and decrease unemployment.
While SB 12 sounds great in theory, by using the proposed label, manufacturers may unknowingly violate a number of federal laws, some of which carry criminal penalties for noncompliance. The bill’s extremely broad standard for what qualifies as “manufactured in California” is particularly problematic. According to the bill, a California manufacturer would only need to “add value” to foreign materials in order for the final product to qualify for a Made in California label. The bill does not quantify how much value must be added or in what form it must be added (for example in labor, materials or both). In comparison, the Federal Trade Commission’s Made in USA Standard requires that in order to claim a product is Made in USA, “all or virtually all” of the product must be made in the US. Any foreign content must be negligible. If the product contains foreign inputs, the FTC considers how much these inputs contribute to total product costs and the remoteness of their use in the manufacturing process. Because a Made in USA claim is implicit in a Made in California label, California companies using foreign materials could well end up having to meet the FTC’s heightened “all or virtually all” standard, not the lower “adding value” standard outlined in the proposed bill, in order to be compliant. Otherwise, the label will violate the FTC regulations and, as a result, the California company may face federal penalties. This is separate and apart from any unfair competition or other claims competitors could make in the face of the uncertainty of the proposal.
Additionally, use of the Made in California label could seriously interfere with our international trade agreements. Under NAFTA, for example, in order for a product made of foreign materials to receive NAFTA benefits, the foreign input must undergo a “tariff shift.” Like the Made in USA standard, the complex tariff shift rules require that a US manufacture do much more than simply “add value” to foreign materials before the finished product can qualify as a NAFTA product. Thus, while a product may meet the Made in California label requirements, again here, it will likely be improperly marked under NAFTA.
These are only a couple examples of the potential problems companies may face if the Made in California bill is enacted. One can debate whether a Made in California label actually gives companies a competitive advantage in the global marketplace. However, legislators at the state and local level would be wise to resist the temptation to propose the use of an origin label without properly considering all the other regulations that already exist.