Thank you, Chairman Lugar and members of the Committee. I am Steve Anderson, president and chief executive officer of the American Frozen Food Institute, located in McLean, Virginia. AFFI is the national trade association that represents frozen food processors, marketers and suppliers to the industry. AFFI's membership of 586 companies is responsible for approximately 90 percent of the $60 billion worth of frozen food processed annually in the United States. AFFI is a technology-based organization, and its members freeze and market products ranging from juice and branded and private label vegetables, to brand-name pizza, entrees, meals and gourmet desserts. We appreciate the opportunity to appear before the Committee today to discuss country of origin marking requirements for food products.

Overview

The Smoot-Hawley Tariff Act of 1930 requires that imported frozen foods of foreign origin bear a country of origin marking. AFFI members' products have been subject to the Tariff Act's country of origin marking requirements since 1930, and, as a result, AFFI is opposed to any new country of origin labeling schemes that would place the frozen food industry under duplicative, conflicting and/or more burdensome requirements. AFFI believes such new country of origin marking requirements for frozen foods would violate international trade laws; would confuse consumers while providing them no useful, new information; would subject its members to the large and unjustified costs of segregating ingredients and maintaining an impractical variety of label stock; and potentially would limit the ability of its member companies to compete in essential export markets.

Current U.S. Country of Origin Marking Rules Are Sufficient

For nearly 70 years, the Tariff Act of 1930 has been the statute under which the United States has administered country of origin marking requirements for imported goods. Section 304 of this statute requires that imported processed foods and consumer goods display on the label of the product the country of origin of the good itself. Most AFFI members' products are included within the scope of Section 304 and, therefore, frozen food products of foreign origin, as well as certain frozen food products with imported content, are required to be marked with the product's country of origin. AFFI does not, nor has it ever, objected to the Tariff Act's marking requirements for country of origin.

Section 304, however, does not require, and has never required, labeling to disclose the country of origin of the foreign ingredients or materials present in the good. Such a requirement would depart from well-established and long-standing precedent under which a good is not required to be labeled for country of origin if it is transformed in the United States into a new and different article, as determined under applicable origin rules. In other words, United States tariff laws, for good reason, have always applied the country of origin marking rule to the good itself, not its components.

Regulatory authority for Section 304 of the Tariff Act has been delegated to the Secretary of the United States Department of the Treasury. The U.S. Customs Service, which operates within the Treasury Department and has primary responsibility for implementation and enforcement of Section 304, works in cooperation with the U.S. Department of Agriculture (USDA) regarding country of origin marking requirements for meat and poultry products. It is important to note, however, that the Federal Meat Inspection Act (FMIA), which is the primary food safety statute to which both domestic and imported meat processors must adhere, is not the statute under which country of origin marking requirements are mandated. Any amendment to the FMIA to incorporate country of origin labeling requirements, therefore, would be unprecedented and ill-conceived because such requirements would conflict with long-standing country of origin marking practice established under the tariff laws and would impose an unnecessary new product labeling scheme on the food industry. It would be virtually impossible for AFFI members to attempt to satisfy two different, and potentially conflicting, country of origin labeling requirements on a single package.

AFFI believes the Tariff Act, with its nearly 70-year history of marking regulations and the voluminous body of law which has developed through implementation of the statute, should be the Act that continues to govern country of origin marking requirements for food products.

International Trade Law Governs Use of Country of Origin Labeling

Of particular concern to the frozen food industry are proposals that would impose, directly or indirectly, country of origin marking requirements for ingredients of multi-component products. AFFI believes such proposals would violate this country's obligations to its trading partners under international agreements, including obligations under the World Trade Organization (WTO) agreement and the North American Free Trade Agreement (NAFTA). It would interfere with the objectives of the Uruguay Round negotiations of GATT, which in its Agreement on Rules of Origin imposed disciplines on member countries designed to prevent the use of country of origin marking rules as disguised barriers to trade. On this point I want to be very clear. Such a violation of our country's trade obligations would have serious adverse repercussions for U.S. producers.

As provided in Article 2 of the Uruguay Round Agreement on Rules of Origin, the United States pledged that its rules of origin, including those applied for marking purposes, would be administered in a consistent, uniform, impartial and reasonable manner. Article 2 requires further that nonpreferential origin rules not be used as instruments to pursue trade objectives and that they not create restrictive, distorting or disruptive effects on international trade. In addition, member countries, including the United States, expressly have undertaken disciplines under Article 9.1 of the Agreement on Rules of Origin to recognize as the country of origin of a product the country in which the last substantial transformation is carried out.

Defined most generally, the substantial transformation principle provides that a good will have as its country of origin the last country in which it underwent a change in name, character, or use, thereby resulting in a new and different article of commerce. For example, an imported cow is "substantially transformed" into a new and different article of commerce when it is slaughtered and packed in the U.S. Further, a frozen food processor which includes imported meat in its frozen lasagna product again has transformed the meat, as well as all the other ingredients in the lasagna product, into another new and different article of commerce.

It should be noted that the Customs Service has issued, as Part 102 of the Customs Regulations, specific rules of origin applying to the marking of products under NAFTA. These special rules are not based on the substantial transformation principle, but instead create a hierarchy of rules incorporating, in part, a "change in tariff classification" methodology for determining country of origin. This "tariff shift" approach also is under consideration at the World Customs Organization, which is in the process of developing a harmonized tariff-based classification system for WTO member nations. Even under the tariff shift approach, a cow would be listed under a different tariff classification than would ground meat or frozen lasagna.

Finally, Article 2.2 of the Uruguay Round Agreement on Technical Barriers to Trade states that member countries may not adopt technical regulations, including marking and labeling regulations, that are more stringent than necessary to achieve a legitimate objective, or that are applied with a view to, or with the effect of, creating unnecessary obstacles to international trade. Clearly, establishment by the U.S. of new country of origin marking requirements in an effort to eliminate competition from imported goods would be violative of Article 2.2. Similarly, a scheme that requires producers of goods using imported ingredients to mark their products to disclose the country of origin of each such ingredient would discriminate against imported goods and constitute an impermissible nontariff barrier.

Although some might argue that NAFTA and/or GATT provide more harm than good for the citizens of this country, the fact remains that the United States is a party to these agreements and, as such, has pledged to adhere to the requirements thereunder. Congressional action which would violate our country's international trade obligations would result in adverse consequences for the United States, including retaliation against our country's exports. Such a course of action simply is not in this nation's best interest.

New Country of Origin Marking Requirements Could Curtail Exports of U.S. Products

The global food marketplace represents the largest growth market for the domestic frozen food industry. Global U.S. exports of frozen food have increased dramatically, from $600 million in 1990 to $1.3 billion in 1997. (See USDA chart, Attachment 3) Exports in every frozen food category, including vegetables, juice, prepared meals, ice cream, bakery, and fruits, increased during the 1990 to 1997 period. As the cold chain infrastructure improves throughout the world, and the use of freezers and microwaves increases in developing nations, exports represent a virtually untapped market for U.S. frozen food manufacturers.

Despite the urging of some sectors, regulation of food products imported into the U.S. cannot be contemplated without taking into account the increasing dependence of the U.S. economy on global sourcing, as well as export markets. U.S. frozen food manufacturers legitimately are concerned that any new country of origin marking requirements imposed on imported foods or food ingredients, particularly if these requirements are outside internationally-agreed-upon rules of trade, will be detrimental to U.S. exports. Actions taken by the United States to restrict certain imports will result in new retaliatory restrictions hindering the access of U.S. exports to lucrative markets abroad. Because the United States in the past has exercised international leadership striking down or preventing other countries from establishing product labeling standards that function as disguised barriers to international trade, this country has nothing to gain, and much to lose, from resorting to new country of origin marking mandates.

It is important to note that retaliation against U.S. exports would not be limited to the establishment of new country of origin marking requirements in other countries. Instead, retaliation could take the form of the imposition of a whole range of non-scientifically-based barriers to trade, such as packaging size restrictions or shelf life restrictions for non-perishable foods. Similarly, retaliation due to new U.S. marking requirements for imported meat would not be limited U.S. meat exports. Any U.S. export could be a target for retaliation.

Ingredient Labeling Needlessly Will Burden Food Manufacturers

Equally as important, a country of origin labeling regime for ingredients of multi-component products would serve only to confuse consumers, while burdening the frozen food industry, as well as other segments of the food industry, with unnecessary costs.

To demonstrate AFFI's concerns, one need only examine a label for a typical, domestically-produced frozen meat lasagna. (Attachment 1) As can be seen by looking at the ingredient statement that appears on this generic lasagna product, which is representative of products being sold in the market today, this product includes 23 individual components. In the real world, in order to maintain consistent supply, quality and taste for its products, the processor must have multiple sources for each of these components. Although most frozen food processors primarily use domestic sources for their ingredients, in some cases, suppliers of particular ingredients may be from other countries. So, for certain ingredients, suppliers may vary throughout the year depending on variations in growing season, weather phenomena, as well as cost and consistent availability, all of which must be factored into corporate procurement decisions.

Getting back to the lasagna package, Attachment 2 contains an ingredient statement that includes the potential countries of origin from which only a portion of the components could be sourced in today's market. The label lists many countries, including the United States and 16 others. AFFI believes that should specific country of origin marking requirements be applied to one ingredient, it likely would have to be applied to all ingredients.

It is unreasonable to assume that consumers have the right to know the country of origin of only one ingredient contained in a 30-plus ingredient product. In fact, the listing of the origin of only one ingredient in a multi-component product would falsely illustrate that the labeled ingredient is more important than other ingredients. In addition, such a label would be misleading in that it would lead a consumer to conclude that all other ingredients are of domestic origin, which might not be the case.

As a result, if a company were required to label each potential source of each of its components, a typical label might look like the one depicted in Attachment 2. Please note that the label in this attachment lists the sources of only some of the ingredients which potentially could be sourced from other countries and therefore is a conservative representation. A more inclusive listing obviously would be even more lengthy.

It also is worth noting that if each package were required to show the specific country of origin of each ingredient in that particular item, as opposed to the potential options, a company would have to maintain thousands of variations of labeling for this one product.

As these mock labels demonstrate clearly, country of origin marking at the ingredient level would complicate significantly the manufacture of a frozen meat lasagna or other frozen food product because companies would be required to segregate ingredients, as well as segregate finished products, in order to ensure compliance with the labeling requirement.

But who would benefit from all this complicated and costly manufacturing process and confusing label? No one.

The frozen food manufacturer would still need to ensure there were multiple suppliers, from numerous countries, available for a wide variety of ingredients. To limit supply of a key ingredient to one U.S. supplier, for example, might mean at that any given time of the year, due to drought, disease or other unexpected act of nature, this key component unexpectedly might become unavailable. Or, due to similar circumstances a particular ingredient could increase dramatically in price, thereby forcing the manufacturer to seek alternative sourcing options or risk being forced to increase the retail price of the finished product.

Maintaining thousands of different labels for a single product in a frozen food plant that processes numerous different products would require a complicated and cumbersome packaging inventory system. In this regard, it is important to be mindful that most of these products are packaged in cardboard boxes, and that maintenance of on-hand inventory of such a large quantity of packages would require significant storage capacity. Many, if not most, facilities simply would not be able to handle this burden.

Ingredient Labeling Will Confuse Consumers

We know from years of market research that the average consumer buys a product because it offers consistent quality and taste, or because it carries a brand they trust, or because it is being sold at a good price. In fact, when asked in a telephone poll conducted by Opinion Research Corporation on behalf of the American Frozen Food Institute, "What are the main things that influence which frozen fruits or frozen vegetables you purchase?" only one respondent out of the 656 polled cited the country of origin of a product as an important factor in his or her purchasing decision.

Even if the frozen lasagna manufacturer were able to comply with an ingredient labeling requirement, the average consumer shopping for frozen meat lasagna will be given no additional useful information when examining an ingredient statement containing the country of origin of those ingredients. A consumer who looks at the ingredient statement on the frozen lasagna package on one shopping occasion may not look at it on the next purchasing occasion, although in fact, it may be different. Even if the consumer does study this information with each purchase of the same product, there is little chance he or she will be able to discern a difference if the country of origin of one of the 30 ingredients differs from one purchase to the next.

Consumers may refer to nutritional information, or other information which is included in labeling, to make purchasing decisions based on their dietary needs and goals. Yet, at what point do labels become hyper-inclusive and therefore provide an overabundance of unnecessary information? By requiring the listing of the country of origin of each ingredient, Congress in effect would be saying to consumers that they should look at this information because in some way, it could affect them. That is an unfounded, and therefore confusing, message to consumers. Consequently, mandatory country of origin marking for ingredients would constitute yet another step toward overload of unnecessary information that desensitizes consumers to more relevant label statements.

In addition, it is interesting to note that domestic companies which produce fat-reduced products, such as frozen entrees, generally rely on imported lean meat in order to comply with the maximum fat levels stipulated by the Nutrition Labeling and Education Act (NLEA). If the availability of imported lean meat is restricted or cost-prohibitive, consumers may not have available for purchase these nutritionally beneficial products.

Country of Origin Marking Does Not Enhance Food Safety

Some proponents of new country of origin marking requirements insinuate that there is a connection between the country of origin of a product and its safety. There is no such connection. USDA's Foreign Agriculture Service confirmed this fact in a September 1997 document which stated in the relevant part, "Country of origin labeling does not address the issue of food safety. If a product is not safe, it should be prohibited from entering the United States. Country of origin labels will not help consumers determine if a product is safe."

The General Accounting Office (GAO) in its recently released report, The Consequences of Country of Origin Labeling for Fresh Produce, also came to the same conclusion regarding the lack of connection between food safety and country of origin labeling.

New Country of Origin Marking Requirements Constitute Unfunded Mandates

In addition to tremendous compliance costs to industry throughout the food chain, implementation and enforcement of new country of origin marking mandates also will cost regulating agencies millions of dollars. USDA estimated in 1998 that costs of proposals pending at the time to place new country of origin markings on meat and meat-containing processed foods would cost the Food Safety and Inspection Service (FSIS) $60 million per year, or approximately 10 percent of the annual FSIS budget. GAO has estimated new country of origin labeling requirements for raw produce at retail would cost the Food and Drug Administration (FDA), the federal agency which likely would be given enforcement responsibility for this new mandate, approximately $57 million per year. The GAO study also correctly points out that food inspection at the retail level generally is carried out by state and local inspectors. If federal funds were not appropriated for these new requirements, they would place a significant and unfunded burden on state and local inspectors, a burden they likely could ill-afford.

Conclusion

Proponents of new country of origin marking mandates seek government intervention in a misguided attempt to limit or eliminate competition from imports. AFFI believes this government-mandated market intervention should be avoided. New requirements established ostensibly to assist certain producers in fact may be detrimental to these very industries due to lost domestic production and export opportunities. In addition, undue costs will have to be borne by entities involved in every aspect of the food chain, from producers to processors and retailers. Consumers also will bear some expense as increased costs along the food chain lead to increased costs of food products at the retail level. No corresponding benefit, however, will be gained.

Moreover, country of origin marking schemes, particularly those which would entail ingredient labeling, expressly are prohibited by international law and therefore must not be enacted.

Thank you for this opportunity to present the views of the American Frozen Food Institute. I would be happy to answer any questions you may have.