What Does “Domestic Content” Mean In Today's Valve Market?

Determining the country of origin of valves in today's market can be compared to determining the pedigree of a mongrel. First, through acquisitions and mergers, large, multi-national corporate “families” own many familiar brand names that used to compete in the marketplace. Internationally owned companies are now producing valves with traditional “domestic” names and in many more cases the companies with traditional “domestic” names are producing valves and/or valve parts in plants that they either completely or partially own in countries outside the borders of the United States.

There are some legal rules that can be applied to make determining the country of origin of valves relatively clear and simple. But what is the significance of knowing the country of origin of valves other than those instances where valves are supplied for specific government projects? There are other factors that are more germane to determining the valve manufacturer's role in ensuring the quality of the products it sells.

Existing Legislation And Regulations

The responsibility for complying with the requirements of country of origin marking falls on the manufacturer. Besides complying with industry standards such as the Manufacturer's Standardization Society (MSS) and the American Petroleum Institute (API), for example, valve products marketed in the United States must comply with regulations of the Federal Trade Commission regarding how they are marked, labeled, marketed, promoted, advertised and sold. Also, if valves or valve parts are imported into the United States, they may also be subjected to inspection and compliance with the regulations - including country of origin labeling requirements - of the U.S. Customs Service, now part of the U.S. Department of Homeland Security. These requirements apply to valves that are imported and sold commercially to any customer in the United States. Furthermore, if the U.S. government (General Services Administration or other federal government entity) is the customer, manufacturers and marketers of valves may have to meet the requirements of the Buy American Act. Another rule applies if the Export-Import Bank of the United States is financing a project in a location outside of the United States. In order to protect U.S. jobs, suppliers of valves may have to prove their products satisfy certain domestic content requirements in order to have their bid considered. Other specification bodies such as individual state procurement offices may assume one of these standards or create their own. In the case of the state of Pennsylvania, for example, valve suppliers bidding on state contracts are required to certify the country of origin of the scrap steel and other raw materials that went into their castings. The need for this degree of compliance is not related to product quality, but serves some political benefits to constituents who are employed by the domestic steel industry.

However, for nongovernmental industrial valve specifiers and users, which, if any, of these regulations are relevant? Often these standards are used as a reference point even when the end-customer is not part of a project funded by governmental or EX-IM Bank financing. There are two reasons for this misapplication. The first is due to a lack of industry standards regarding clear definitions of degrees of domestic content and methodologies for monitoring and compliance. The second reason is the confusion that has developed in our marketplace about brand names, marketing vs. manufacturing and where products are manufactured.

Made In USA

Under 15 U.S.C. Subpart 45 the Federal Trade Commission is provided with the responsibility and authority to ensure that consumers are protected from unfair or deceptive acts and practices of manufacturers and suppliers. The FTC defines what is required to market products that carry a “Made in USA” label. Valve manufacturers are under no obligation to mark their products as “Made in USA” but if they do, they are subject to the regulations set out by the FTC. For a company to market a product that includes a “Made in USA” label, it must have a reasonable basis that the product is “all or virtually all” made in the United States. This means that all significant parts (physical inputs such as subassemblies, components, parts and materials) and processing that go into the product are of U.S. origin. Or, to make an unqualified claim of “Made in USA,” the product should contain only a “de minimis,” or negligible amount of foreign content. Further, final assembly or processing must take place in the United States. Beyond this prerequisite, other factors may be included by the FTC to evaluate a product's origin, such as the portion of total manufacturing costs attributable to U.S. production, or how far removed from the final product the foreign content is. It is the responsibility of the marketer to look far enough back in the manufacturing process of the parts and subassemblies it uses to account for foreign content in its end product. These requirements may seem very restrictive and clearly defined. However, there are several key elements to its application that have been questioned. For example, how much foreign content can be included and still be considered de minimis by the FTC? What labeling is allowable for U.S.-based companies that provide products containing foreign content?

In order to determine how much foreign content is allowable, the FTC uses two standards. The first is the percentage of total cost to manufacture the product that is represented by foreign and domestic components and processing. The threshold at which a product becomes virtually all made in the United States is determined on a case-by-case basis. Consumer expectations are a significant component in this determination. The FTC also considers how far removed from the final end product the foreign part or processing is, when determining if any action needs to be taken against a marketer claiming its product to be “Made in USA.”

Up until 1997, the FTC used the presumption that goods not labeled with any country of origin were understood by consumers to be made in the United States. At that point, however, it was recognized that with increased globalization of ownership and manufacturing, consumers' expectations had changed regarding the significance of country of origin marking. This meant that the FTC had to also determine if marketers needed to disclose foreign content on products that were not labeled with country of origin marking. In this regard, there have been enforcement actions against companies that have misrepresented their entire product line as domestic, when only some of the products meet the all or virtually all standard. In other cases, companies that use product packaging or other labeling that contain symbols of the United States on products with significant foreign content have been found to be in violation of this standard. However, the FTC has allowed the use of the U.S. address of a marketer's headquarters or factories on products that do not meet the standard. This marking should be no more prominent than necessary and cannot convey a misleading representation to consumers about the country of origin of the product. Also, manufacturers can make “qualified” claims of U.S. origin. If many parts are imported but the majority of components and processing are done in the United States, an appropriate label might be “Made in USA of foreign and domestic parts.” The rule of thumb must be clarity and truth from the consumers' perspective.

Before bringing foreign components into the United States, they must first go through the U.S. Customs Service inspection at the port of entry. The Customs Service has been renamed the Bureau of Customs and Border Protection. Under Section 304 of the Tariff Act of 1930 (19 U.S.C. Section 1304) all products of foreign origin imported into the United States must be marked with the name of the products' country of origin. You might assume that an imported valve body that is cast and machined outside of the United States would be labeled with the name of the country of origin. However, what if that valve body is further machined, finished, and assembled in the United States into a complete valve? In 1990, a U.S. Customs Service decision held that the assembly of a valve in the United States of imported and U.S.-produced components constituted a “substantial transformation” of those parts into a new and different product and therefore the imported components did not have to be labeled with the country of origin. Under Customs' definition, a “substantial transformation” is a manufacturing or other process that results in a new and different article of commerce, having a new name, character and use different from that which existed prior to the processing. In the case of the valve body example, as long as that finished casting is used in making a complete valve, it may not have to be marked with the country of origin. However, if that part is sold into the United States as a replacement part and does not undergo “substantial transformation,” it would have to be labeled with the country of origin just like any other product. In some cases, only minor processing is done in the United States, which does not qualify as “substantial transformation.” In this case, a company should label its products with the country of origin of the major components.

Valves that undergo “substantial transformation” in the United States and are subsequently exported to another country may be labeled as “Product of the U.S.” or “Made in USA” for export purposes. Ironically, using this same label on the same valve sold in the United States could violate FTC regulations. In addition, exported valves must be labeled in compliance with the regulations of the importing country. The products will probably not qualify for duty-free tariff preference under the NAFTA if sold into Canada or Mexico. In addition to labeling requirements, if the products are exported on a U.S. supply contract that is funded by the Export-Import Bank of the U.S., they must be shipped from the United States to a foreign buyer. Manufacturers who supply products are expected to truthfully document the foreign content in their products. Financing is offered at the lesser of 85% of the value of eligible products or 100% of the U.S. content of all the eligible goods and services in the contract.

“Buy American Act”

Due to the lack of clarity regarding the standards applicable to valve products marketed in the United States, it seems the “Buy American Act” (41 U.S.C. 10 subpart 25) is often misapplied as a “threshold” standard in our industry. In reality, the only time “Buy American” standards apply is when the GSA or another agency of the federal government is making the purchase. The definition of “Domestic End Product” as used in this regulation means an end product manufactured in the United States if the cost of its components, mined, produced, or manufactured in the United States exceeds 50 % of the cost of all its components. Only the end product and its components are considered in determining if the product is domestic. “Component” means the articles, materials and supplies incorporated directly into the end product. The cost of transporting the component from its origin to its place of final assembly must be included when determining the cost of the component. When collected and processed in the United States, scrap metals are considered domestic.

The regulation generally requires that only domestic end products be acquired for public use, but there are many exceptions, including of countries designated under the Trade Agreements Act, articles for use outside of the United States, those with unreasonable cost, those for which the agency head determines a domestic preference would be inconsistent with the public interest, or those products that are not mined or manufactured in sufficient quantity or quality to be commercially viable. This does not mean that the U.S. government does not purchase any foreign-made products. Under this regulation, preference must be given to suppliers of domestic end products when their offer is reasonable. “Domestic” offers are determined to be reasonable if they are less than 6% higher than foreign suppliers after applicable duty is added to their offer. This preference moves to 12% if the domestic supplier qualifies as a small business. There are many products and specific agencies that are excepted from the regulations.

Effect On A “Global” Valve Manufacturer

Let us examine a real valve company selling valves into the United States today. This U.S.-based company is clearly identified by its “domestic” brand name and is part of a large publicly held U.S.-based corporation trading on the New York Stock Exchange. The corporation owns many other businesses, including other fluid handling businesses that are based in Europe, the United Kingdom, Australia and India. The valve company has a 90% ownership of one facility and 70% ownership of a foundry and machine assembly and test facility located in the People's Republic of China. This company produces some of the products it sells in its own factories in China, and exports them complete as finished products to the United States that go through several layers of re-distribution prior to being sold into their final end-use in the United States. In some cases, valve components are brought into the United States and assembled and tested in the company's production facilities in North America. The designs, pattern equipment and production tooling belong to the company. The company pays the Chinese workers. The company purchases the raw materials, owns the foundry, machine and assembly shops as well as test facilities. The procedures, work instructions, and entire quality process are managed and underwritten by the company. Products come out of these plants with the company's brand names that are trademarked through the U.S. Patent & Trademark Office. They are sold through U.S. sales channels. The financial benefits received from these ongoing operations are enjoyed in the United States.

Based on this information, what country of origin label should this company's products carry? Clearly, the finished products that are brought into the United States do not meet the “all or nearly all” standard of the FTC which is required for the products to carry the “Made in USA” label. They are not “substantially transformed” in the United States, so the U.S. Customs Service requires the “Made in China” label on every valve when sold to the ultimate customer in the United States. For “EX-IM” bank financing standards, they would be part of the products in the foreign content category. Under the definitions of the Buy American Act, they would be evaluated as “foreign end products.”

On the other hand, how would these same standards and regulations apply to the components that are imported into the United States and made into finished valves here? The question was put to the U.S. Customs Service along with a detailed description of the manufacturing process to which the parts are subjected. It was ruled that the component parts undergo a “substantial transformation” when made into a valve, so in this particular case, the individual parts do not have to be labeled with the country of origin.

Determining the origin of valve products can be a very complex and time-consuming endeavor. At the end of the day, what is gained from this knowledge? Should we not be using some other criteria more relevant to identifying who is ultimately responsible for the products in our markets? The significance of certain critical elements is more important in determining whose valve it really is.

Critical Elements:

Design Control Ownership - Exclusive ownership or control of the design, patterns, tooling, patents and/or proprietary engineering.

Ownership Of Production - Who owns the foundry, machining, assembly and testing facilities regardless of the country they are in?

Quality Process Control Ownership - Who is responsible for verifying that the end product meets internal and external specifications?

Marketing - Trademark/brand name ownership, approvals, exclusive sales channel, product labeling/identification.

Legal/Financial - Does the company adhere to legislative and financial obligations as required by U.S. regulations? Are profits from ongoing business used in the United States? Are wages and benefits paid to U.S. citizens?

Labor - Whose workers are doing the work? How much are they paid and who manages them?

Many supplier questionnaires that are circulated by valve end-users contain these same elements. However, like compliance with some of these regulations, the onus of truth lies at the doorstep of the manufacturer. So, the most important question of all might be: “How forthcoming is your valve supplier about the origin of its products?” <<