Buying American in 2021: Local Focus, Global Reality
By Matthew Moriarty
If you’re a government contractor, you know that when you sign your name to an offer, you’re making a series of promises. First and foremost, you’re promising to perform. If hired, you will do the thing you were hired to do. But you’re making so many other promises, like promising to do business in an ethical manner, promising to protect whistleblowers—heck—you’re probably even promising to encourage your employees not to text and drive. And if you’re a certain type of business on a certain type of contract, you’re promising to provide an item from America. What a fraught promise to make in the year 2021!—where the Fourth of July hat at your local big box store is probably made in China.
Who really knows where anything is made these days? That’s where the Buy American Act, its partner the Trade Agreements Act, and various other federal rules and regulations that aim to encourage federal purchasing from domestic sources come in.
This web of rules and regulations can cause lots of heartburn for contractors trying to comply. The rules can be overlapping, use similar terminology that differs in important ways, or just be downright confusing. Meanwhile, politicians can’t stop talking about making more. President Joe Biden has garnering headlines by promising to beef up these rules and make waivers harder to come by. Already some of those promised changes are in the works.
Let’s dig in.
The history of Buy American
If you want to know where you’re going, you have to know where you’ve been. When it comes to the Buy American Act, that’s all the way back at the beginning—colonial times. In the mid-1760s, fed up with high tariffs and other monarchical taxation policies, colonial merchants banded together and agreed to forgo British products. This boycott served to create a proto-Buy American movement—call it “Buy Colonial.” For the next decade, colonial leaders seized on the trend, using nonimportation agreements to try to force the king to provide the colonies certain freedoms. In fact, one of the most famous revolutionary acts in American history had a “Buy American” bent to it. The Boston Tea Party in 1773 had the practical effect of making sure a shipload of British tea wound up in the harbor instead of American cups.
It turns out that Buy American movements and historical events go together like PB&J. The Buy American Act itself passed in 1933 during the Great Depression and was signed on Herbert Hoover’s last day in office, in part to protect the Hoover Dam. The Berry Amendment, which gives preference in defense contracts to certain American products, was passed during World War II. The Buy America Act—a totally different law from the Buy American Act—passed in 1982 and was, like the movie “Gung Ho,” a response to the decline of American manufacturing. Now, in 2021, the country is facing a jobs crisis brought on by population growth, automation, and technological advances. As you might guess, the Buy American Act is politically hot again.
What does the Buy American Act do, and how do contractors comply?
The Buy American Act (BAA) applies to federal contracts for the purchase of supplies that exceed the micro-purchase threshold or construction materials to be used for the construction, alteration, or repair of any public building or work. If the contract is a small business set-aside, the BAA applies regardless of contract value. If it is an unrestricted contract, the BAA applies up to the Trade Agreements Act (TAA) threshold, which is currently $193,000 for supplies contracts and $7,008,000 for construction—more on the TAA later.
The secret to compliance with the BAA is understanding the definitions of its terms. Contractors comply with the BAA by offering a “domestic end product” or “domestic construction material.” We’ll define these terms in turn.
A domestic end product is 1) an unmanufactured product mined or produced in the United States, 2) a manufactured product where at least 55 percent of the cost of the item’s components are from the United States, or 3) a commercial off-the-shelf (COTS) item. You’re thinking, “Wait, that definition needs more definitions.” This is a not uncommon scenario in law, where terms you feel like you know instinctively wind up being surprisingly legally complicated.
A component, for example, is, according to Federal Acquisition Regulator (FAR) 25.003, “an article, material, or supply incorporated directly into an end product or construction material.” Sounds pretty simple, but what about COTS? Well, a COTS item is a type of item usually sold to the general public or non-governmental entities for non-governmental purposes and has either been sold, leased, or licensed to the general public or been offered for sale, lease, or license to the general public. To be a COTS items, it has to be offered to the government in the same form as it is offered commercially. Bulk cargo, however, like crude oil, is not COTS. Think instead of a battery. It’s something the general public uses for non-governmental purposes that the government also uses in the same form as the general public. Basically, it’s a commercial item that you pick up off the shelf.
What about “manufactured”? In the Buy American Act, it doesn’t have a specific definition. Courts will determine whether the item was manufactured on a case-by-case basis. There are a bunch of different definitions, but they all remind one of Justice Potter Stewart’s famous definition of pornography: “I know it when I see it.” There is a specific definition in the TAA called the substantial transformation test, and the BAA has a lower threshold.
As if that weren’t confusing enough, there’s the issue of items made “predominantly” of steel and iron. They have their own standards. Thankfully, “predominantly” means what it sounds like—more than 50 percent. Based on that standard, something as complex as a refrigerator could be predominantly made of steel or iron if the cost of its steel or iron components exceeds the cost of its other components. When an item is predominantly made of steel or iron, it can qualify as a domestic end product when it is 1) manufactured in the United States and 2) the cost of foreign steel or iron is less than 5 percent of the cost of all the components of the item. Note that a COTS item made predominantly of steel or iron is not compliant just because it is COTS. It has to still be 95 percent American. But a COTS fastener is a domestic end item.
Head spinning? Here’s a summation: A domestic end product is either at least 55 percent U.S.A.-sourced or something you can buy off the shelf, unless more than half of it is iron or steel, in which case it is a domestic end product if it is made here and 95 percent of the iron or steel in it is sourced from the U.S.A.
Much of this hinges therefore on the component test—the calculation of the value of the individual parts of an item. The cost of a component can change depending on whether the contractor bought the component or made it. When the component is bought by the contractor, its cost includes the cost of the acquisition, any transportation, and any applicable duty. When a component is made by the contractor, its cost is all the costs associated with the manufacture of the component, including transportation, plus allocable overhead costs but not profit. Interestingly, the cost of assembling the components into the end product is not part of the cost of its components. You just take the cost of the item’s parts and see whether 55 percent or more is American. If so, the item is a domestic end product.
In construction projects, the BAA compliance requirement is to provide a domestic construction material, a similar term but with a different meaning. According to the BAA, a construction material is any article, material, or supply brought to the construction site by the contractor or subcontractor. It qualifies as domestic if mined or produced (think lumber) in the United States or manufactured in the United States and one of the following applies: The cost of the components mined, produced, or manufactured in the United States exceeds 55 percent of the total cost of all components, or it is a COTS construction material. Unless, of course, the item is predominately iron or steel, in which case the iron or steel components must be 95 percent domestic with no COTS exception.
There you have it. Compliance is ultimately as easy as a math problem, presuming that you know the origin of your components.
What happens to non-compliant offerors?
Complying with the BAA is, of course, a good way to lead to award, but it is not essential. Compliance gives the offeror a potential price advantage against the competition.
A non-compliant offer is not eliminated; instead, the contracting officer will give a compliant offer a price preference of either 30 percent, when the compliant offer is from a small business, or 20 percent ,when the complaint offeror is a large business. It sounds complicated, but it’s just a legal fiction. Say a contracting officer gets three offers and one of them will provide a domestic end product for $100. The two non-compliant offerors offer to provide a foreign item at a cost of either $80 or $85. If the compliant offeror is a small business, the contracting officer will evaluate the two non-compliant offers as though they actually cost $104 and $110.50, making the BAA compliant offer officially the cheapest and in pole position for award (on price, anyway). However, if the compliant offeror is a large business, the contracting officer will only add 20 percent, leaving those offers at $96 and $102. In that case, the best value may still be the least expensive non-compliant offer.
Similarly, there are a number of exceptions to the BAA. They include public interest, domestic nonavailability, unreasonable cost, commissary resale, and, for information technology, if it is a commercial item. The last two are self-explanatory. The first two are basically self-explanatory. Public interest usually applies when the agency has an agreement with a foreign government. It requires a determination of public interest from the agency head. Domestic nonavailability is just what it sounds like. The thing, whatever it is the agency is buying, is not available from United States sources in sufficient quantities. Again, this can be determined by the agency head.
The unreasonable cost exception is probably the big one. Contractors can ask for a BAA waiver in the event that the cost of a domestic end product exceeds a foreign product by 20 percent. Again, the BAA relies on a legal fiction. The contracting officer will add 20 percent to the cost of foreign products and see if they are still less expensive than the domestic product.
Being a non-compliant offeror is different, however, from being a non-compliant contractor. The latter is much worse because it is breaking that promise that we talked about at the beginning. That can be a big deal. When a contractor promises to supply BAA-compliant performance and fails to do so, the penalties include termination for default, suspension or debarment, and even criminal investigation.
How does the Trade Agreements Act work in concert with the BAA?
While officially the TAA serves as a method to waive the requirements of the BAA, a good way to think of the TAA is that of an overlapping rule that does not so much as replace the BAA as provide a distinct avenue for compliance.
What the TAA does is allow contractors to provide either U.S. products or materials or products and materials from certain designated countries when the contract is worth greater than a certain value ($193,000 for supplies and $7,008,000 for construction).
Those designated countries, it should surprise no one to find out, are countries the United States has trade agreements with. They include World Trade Organization Government Procurement Agreement countries, Free Trade Agreement countries, least developed countries, and Caribbean Basin countries. All together it’s darn near every country in the world, from Afghanistan to Zambia. What’s more interesting is which countries are not included: China, India, Malaysia, Indonesia, and Vietnam. You might recognize a lot of those names from the tags on your clothes.
Remember, to comply with the BAA, you provide a domestic end product or construction material. Similarly, to comply with the TAA, you provide either an American or a designated country end product or construction material. But here’s the rub: While the terms sound similar, their definitions are slightly different.
A designated country end product or construction material is the growth, product, or manufactured item of a TAA country—or an article that has been substantially transformed in a TAA country. Thus, unlike the BAA, there’s no component math to do, but there is a different test: the substantial transformation test. Substantial transformation means changing an article into a new and different thing with a name, character, or use different from the original. Mere assembly or cosmetic changes do not meet the substantial transformation test.
Because there is no component test, however, an item made entirely of components sourced from China, for example, can be TAA compliant so long as it meets the substantial transformation test. An item of raw steel from China, that is annealed to add strength and ductility and galvanized to provide electrochemical protection in a TAA country, would be TAA compliant because that steel is a substantially different item than it was before going through that process.
Like the BAA, there are exceptions, including unreasonable cost, to the TAA. When a contractor claims unreasonable cost of a TAA compliant item, the contracting officer will add 20 percent to the cost of the non-TAA compliant item and see which is more expensive, just like the BAA.
Are there other U.S.-specific rules procurement rules and regulations?
The BAA and—to some extent—the TAA are the main rules that seek to use the procurement process to stimulate the sale and manufacture of American products (or at least American trade partner products). However, there are related laws, rules, and brands that may come in to play.
The confusingly named Buy America Act is closely related to transportation projects in America. It generally requires that steel, iron, or other materials used in transportation projects funded by the U.S. Department of Transportation and its subagencies be sourced and manufactured in America. Unhelpfully, the different subagencies have different rules that impact whether and how the Buy America Act applies. For example, in all projects funded by the Airport Improvement Program funded projects, the Federal Aviation Administration (FAA) requires all steel and manufactured goods to be produced in the United States. But the Federal Railroad Administration requires that steel, iron, and manufactured goods be produced in the United States only when the project is valued at greater than $100,000. And just to throw another monkey wrench in the equation, the Buy America Act also applies to Environmental Protection Agency grants. And much like the BAA and TAA, waivers are available.
Another wrinkle that often gets wrapped up in discussions of the Buy America Act is “Made in the U.S.A.” Despite what people think, “Made in the U.S.A.” is not a federal contracts designation. Even President Joe Biden has made the mistake, saying that he wants to make it harder for contractors to achieve “Made in America” status. But Made in the U.S.A and its sister terms—such as “American Made”—are designations regulated by the Federal Trade Commission (FTC) for use in commercial transactions to mean all or virtually all of the good is of U.S. origin. It can apply to virtually any good that fits the bill, whether or not any federal contract is involved. Just claiming that status, however, is enough to bring perhaps unwanted federal attention. The FTC can, and will, investigate false claims of Made in U.S.A. status. For example, in 2015, Walmart agreed to drop the “Made in U.S.A.” logos from the products offered on the company’s website after an FTC investigation.
Buying American in 2021 and beyond
The issue of buying American goods came up frequently during the last presidential election, with candidate Biden frequently suggesting that the country had never lived up to the promise of the Buy American Act.
Since becoming President, he signed an executive order that asked the FAR Council to consider changing the BAA’s component test to a value-add test, increasing the domestic content requirement to be a domestic end item or domestic construction material (currently 55 percent), and increasing the price preference for domestic products and materials (currently 30 percent when the complaint product is offered by a small business and 20 percent when offered by a large one).
The FAR Council published its proposed rule in response to that executive order in late July. The proposed rule would be a significant change. The president called it one of the most robust changes to the Buy American Act in almost 70 years. That change? Upping the domestic component requirement from 55 percent to 75 percent.
While that is a big change, the FAR Council stopped short of fully adopting the other requests.
According to the proposed rule, there would be a “framework for application of an enhanced price preference for a domestic product that is considered a critical product or made up of critical components[.]” That sounds like a higher price preference, but only in special circumstances.
As for replacing the component test—so far that’s looking unlikely. The FAR Council said it will not seek to replace the test “at this time” but wants public comment “on how domestic content might be better calculated to support America’s workers and businesses[.]” The FAR Council is taking comment on the proposed rule until late September.
As it stands, the component increase to three fourths seems likely. Whether that will have the intended effect of stimulating U.S. manufacturing remains to be seen.