The Trump Administration’s international trade agenda just keeps chugging along. In April 2017, the “Buy American and Hire American” Executive Order directed the Commerce Department and Office of United States Trade Representative to “assess the impacts of all United States free trade agreements and the World Trade Organization Agreement on Government Procurement on the operation of Buy American Laws, including their impacts on the implementation of domestic procurement preferences.”
Tasked with preparing a report to the President, USTR and Commerce have solicited public comments on the costs and benefits to U.S. industry of U.S. international government procurement obligations. This does not necessarily mean that changes to the current rules are coming, but change may well be a realistic outcome of the exercise. Companies that provide supplies to the U.S. government under the existing rules should consider letting those agencies know what they like or dislike about them.
Buy American and Trade Agreements Rules
The Buy American law appears quite strict, directing that “only such manufactured articles, materials, and supplies as have been manufactured in the United States substantially all from articles, materials, or supplies mined, produced, or manufactured, as the case may be, in the United States, shall be acquired for public use.” 41 U.S.C. §10a.
That blanket statutory requirement is deceptive. The implementing regulations do not, in fact, mandate that the Federal government purchase only American-made articles. Instead, they place non-U.S. items at a disadvantage in the competitive bidding process.
Here’s a simplistic explanation of how the “Buy American” rules work. If a “domestic offer” for a “domestic end product” has the lowest bid price, it wins. On the other hand, if a non-domestic end product has the low bid, an “evaluation factor” of six or twelve percent of the bid price is added to it. This adjusted price is then compared to the lowest domestic offer. If it remains the low bid, it wins; if not, the lowest domestic offer gets the contract award.
To qualify as domestic, an end product must be manufactured in the United States, and more than half of the value of all its components must be attributable to U.S.-origin components. Articles that cannot meet this requirement are not considered “domestic”, even though they may have been manufactured in the United States.
The World Trade Organization Government Procurement Agreement, to which the United States has acceded, mandates a very different approach to procurement preferences. As reflected in U.S. law, Federal government acquisitions valued above a designated threshold amount are limited to “eligible” products that qualify as “U.S.-made” or are produced in “qualifying” or “designated” countries. These include WTO Government Procurement Agreement signatories, countries with which the United States has a bilateral trade agreement, least-developed countries under the Generalized System of Preferences and Caribbean Basin Initiative beneficiary countries.
To qualify as eligible under these Trade Agreements rules, a product must be “wholly the growth, product, or manufacture of” a specific country. Otherwise, any materials made elsewhere must undergo a “substantial transformation” through the manufacturing process in that country, a process we have discussed previously. Thus, a product made in, say, Taiwan using Chinese-origin components is eligible only if a substantial transformation is involved. The same product, if made in China, is barred from Federal government procurement.
The myriad waivers and exceptions from both the Buy American and Trade Agreements procurement rules are beyond the scope of this thumbnail sketch.
“Reform” on the Way? Be Careful What You Wish For . . .
To implement the Executive Order, USTR and Commerce seek to “better understand
how the U.S. government procurement obligations under all U.S. free trade agreements and the GPA affect U.S. manufacturers’ and suppliers’ access to and participation in the domestic government procurement process. . . . the Department and the USTR are also seeking information about the costs and benefits of these obligations to U.S. manufacturers and suppliers competing in U.S. trading partners’ government procurement markets.”
In support of this goal, the agencies solicit responses from contractors and subcontractors to a list of questions, relating to such topics as opportunities provided by foreign governments to U.S. companies, U.S.-origin content percentages in articles sold to the Federal government and the costs and benefits resulting from procurement policies.
Based on the Executive Order’s “Buy American” slant, I expect some kind of tightening of Federal procurement origin rules will be proposed. The comments received by USTR and Commerce will help shape that proposal. For that reason, government contractors that qualify their products under one or both of the rules discussed above – or that are disqualified by those rules – should consider submitting comments to discuss the pros and cons of the current system.