Opinion: Williams-Sonoma and the Country of Origin

By John F. Di Leo, Opinion Contributor

“Trade Compliance” is a subset of regulatory compliance, focused primarily on export controls and the Customs rules concerning importing and duty assessment. Outside of the occasional discovery of illegal Chinese copies of branded gym shoes, or the even rarer news story about a company caught selling technology to the Iranians or North Koreans, this specialty rarely makes the mainstream news.

An exception occurred as April, 2024 came to an end: the Federal Trade Commission announced a record fine against an American retail chain, Williams-Sonoma, and its subsidiaries (including Rejuvenation, Goldtouch, and the Pottery Barn family), for violations of the FTC’s Made in USA Standard.

The company was on probation already, so to speak, for country of origin marking violations settled in 2020, so they can’t claim ignorance of the law. Williams-Sonoma – as a company – had to know that the eyes of the regulators would be on them, so they ought to have been more careful.

But they have been caught selling products that were illegally marked, meaning either that they were making completely false claims (claiming that Chinese goods were American-made) or partially false claims (using the wrong origin statement on goods truly made here, but not rising to the level of the statement they used).

The penalty? A record $3.2 million fine, reportedly the highest ever issued by the FTC, plus an order to file annual reports showing a proper origin-tracking process, and the embarrassment of making the national news for their apparent incompetence (and possibly intentional deceit).

Any patriot ought to be supportive of companies trying to manufacture their goods here in the United States, especially as doing so gets harder and harder every year. And we should all respect patriotic consumers who want to reward domestic manufacturers with their business, so they count on such labeling being honest and accurate.

But it is important to keep in mind, before we lambaste this company too severely, that the American regulatory structure in this area is more complex than one might expect, so it’s easier to fall short of these demands than anyone outside the industry would ever imagine.

Two Competing Agencies

Let’s begin with the basics. Two completely different agencies, with very different goals, regulate the origin marking on products offered for sale in the United States. There is no obligation that American goods (when offered for domestic sale) be marked at all, while there is an obligation that almost all imported goods must be marked with their country of origin. If a company sources its goods both domestically and internationally, the company must learn to master both sets of rules, and build compliant processes into its purchasing, marketing, engineering, and distribution departments.

The U.S. Bureau of Customs and Border Protection (CBP) enforces the origin marking rules on imported goods. Anything made anywhere but the USA is in CBP’s jurisdiction. They can hold up a shipment, shut down a warehouse, even demand product destruction if misleading origin statements are discovered. Their most common penalty for origin marking violations is 10% of the value of the imported goods in question, though the disruption to operations, and the requirement to immediately re-mark the entire stock, is usually penalty enough.

By contrast, the Federal Trade Commission (FTC) enforces the rules covering the marking of USA-made goods. The FTC rarely hunts down violators; usually they are notified by helpful watchdog groups, disgruntled employees, competitors and state attorneys general (especially California) who call the FTC’s “1-800-ITS-FAKE” line with anonymous tips.

Managing a globally-sourced product line would be difficult enough if the rules were the same, and we only had one regulator to deal with, but that’s not the way it is. And when either of the two regulators decides to “make an example” out of somebody, the penalty guidelines are written so that it is very easy for the punishments to quickly become overwhelming.

Two Conflicting Sets of Rules

CBP sees their role as very simple: every American consumer has a right to know the country of origin of a product he’s considering, so most imported goods must be marked with their country of origin, in as clear and permanent a manner as the nature of the product will allow, in a way that enables the consumer to make an informed purchasing decision.

So, for example, if the product is sold in a package, the package must be marked. If it’s sold unpackaged, the product itself must be marked. If it’s sometimes sold packaged, sometimes unpackaged, then both the product and the package must be marked.

It makes sense so far, doesn’t it?

It then gets complicated. Normally – for most products – a single origin statement (Made in Canada, or Product of Italy, or Manufactured in China) is sufficient. But if there’s a potentially misleading statement anywhere on the box (like saying where it was “engineered” or “designed,” or mentioning the company’s corporate headquarters in Chicago or New York, then another rule kicks in: the origin statement must appear in close proximity to every such misleading statement, in at least as large a font, on the same side, every time. (there are plenty of even more specific rules around certain commodities, like wristwatches and clothing and foods.)

The FTC takes a different approach. Back in the 1950s, as American manufacturers stated outsourcing components to vendors in other countries, Congress in its infinite wisdom decided to require that American manufacturers could only say something was “Made in USA” if it really originated “wholly or almost wholly” here in the United States. Congress handed over the obligation to enforce this rule to the FTC, and the FTC had to somehow figure out what Congress meant, in an achievable way.

So the FTC came up with “The Made in USA Standard.” This rule creates two classes of origin statements, called “qualified claims” and “unqualified claims.” A product may indeed be made in the USA, but that doesn’t necessarily mean it can be called “Made in USA.” Only products that are over 95% USA-sourced-and-manufactured can use an “unqualified claim” such as “Made in USA” or “Product of USA.”

So, if the product is almost 100% USA origin, such as a bushel of soybeans harvested in Illinois, then it can be called “Made in USA.” That’s called an “unqualified claim of US origin.”

But if the product contains foreign components, such as a washing machine made in Iowa or Ohio that includes a lot of American parts, but also some imported parts – such as perhaps a steel cabinet and drum made here, but also Japanese dials, a German motor and a Chinese water pump – then it must have a qualifier, some additional language stating that it’s not 100% domestic. The product can be marked “Made in USA of foreign and domestic materials.” That’s called a “qualified claim of US origin.”

As confusing and challenging as this set of rules is, a number of foreign countries – including Brazil, Canada, Australia, and most of the nations of the Persian Gulf – have adopted versions of the same approach.

Getting this distinction wrong gets you sued by a competitor, or gets you attacked by a state attorney general, or gets you fined by the FTC.

If you make only one product, this is all very easy to learn and implement. But if you make and/or resell a variety of products, with a mixed supply chain of domestic and foreign vendors for both your components and your finished products, it becomes very challenging for any company.

The Trade Compliance Program and a Culture of Compliance

To be in business today, making and selling a variety of products, a company needs to not only understand these rules, but build an approach into the computer and documentation system, the packaging and labeling processes, the design and tooling of the goods themselves, even advertising and the company website (yes, the FTC’s Made in USA Standard regulates commercials, catalogs and print ads too).

Companies hire experts and trainers, system developers and Customs brokers, to build internal rules around these requirements, and to ensure that staffers who have other things on their minds remember to comply with these rules too, along with their main jobs.

You might expect this to be easy. You know where you bought it from, so just declare it, right? Wrong. It’s not that simple.

In most systems, engineers create a part number and enter it into the ERP system before the purchasing department has selected a vendor. Marketing may design the package before production decides whether to make it here or in Mexico. But they still have to be right, which means the business must build in a process for managing changes if they guessed wrong at the beginning – which happens all the time.

When a consumer opens a box that says “assembled in USA” on the outside, and finds an appliance inside that’s marked “made in China,” it’s likely that nobody was trying to cheat; it was just an accident. The company changed sourcing to meet the consumer’s desired price point, and missed the step where they tell marketing to change the design on the box. It happens. But that consumer feels cheated, and understandably so.

This is just one example of a thousand things that can go wrong. It’s more difficult than ever – with today’s truly global supply chain – to comply with complex rules. These may be good rules, valid rules – they meet a real and proper demand, that the consumer know who he’s supporting with his purchase. But they’re not necessarily easy.

Williams-Sonoma and the $3.2 Million Fine

When companies set up their compliance programs, they allocate resources based – at least in part – on the risk they think the issue represents. For most companies, the legal fees involved in dealing with these challenges are higher than the expected fines, so companies usually do take it seriously. But do they take it seriously enough? Does a billion dollar company, employing tens of thousands of people, devote enough energy to this issue? Some do, some don’t.

The regulators think that a $3.2 million fine might help get people’s attention. And sure enough, it might, at that.

But is it fair, from a public policy perspective? Williams-Sonoma – and its many competitors too – is a major retailer, with a chain of storefronts, distribution centers and offices all over the country. Malls and transportation companies depend on their traffic, sales clerks and truck drivers depend on them for employment, and the manufacturers of kitchenware, housewares, and textiles depend on their marketing for their very existence. Retail chains like this are important to the economy.

But over the past few decades, they have been squeezed and squeezed. Not just Williams-Sonoma, everyone in that arena. Rents skyrocket, largely because of property taxes. Salaries have had to be doubled, largely because of inflation, often because of mandated wage hikes. Loss prevention (the industry euphemism for rampant theft) is increasing geometrically because governments keep releasing known criminals right back onto the streets to steal again. The government’s war on petroleum has caused their transportation costs to jump. And in the face of all this, online retailers like Amazon do their best to put the critical brick-and-mortar stores out of business for good.

Considering how many of these problems are caused by government, mightn’t the government give the business sector a break, where fines and penalties regarding their complex regulations is concerned?

No, not likely. Remember the mantra of the modern statist, as famously stated so succinctly by Rahm Emanuel some years ago: Never let a crisis go to waste.

As long as the business sector is suffering – with supply chain challenges, employee shortages and other problems besetting their operations – errors are bound to occur. And the regulators will be there, waiting with their clipboards and their calculators, ready to catch those errors and issue those fines.

The Williams-Sonoma case – which reportedly includes some blatant violations in addition to the more understandable ones – is being used by the government to scare the manufacturing community into paying attention.

That’s a good thing for business – for those of us in the regulatory compliance profession.

But it’s still another burden to place on an already overburdened retail and manufacturing sector.

Be careful out there, folks. Your federal government may say they’re looking out for the consumer, but to some extent, whether they admit it out loud or not, they’re also thinking about the $17 trillion budget deficit in their $82 trillion annual federal budget.

And from the perspective of the exchequer – every little bit helps.

Copyright 2024 John F. Di Leo