On January 25, President Biden signed an executive order meant to pull more of the $600bn of annual federal procurement spending into American hands. This “Buy American” order is populist in appearance: American taxpayers' dollars should be spent on American goods made by American workers and with American-made parts and protectionist in spirit: more American manufactured goods mean fewer foreign ones. But America's international commitment, and the devastating consequences of Covid-19 to America's supply chains, also means that Mr. Biden's measures may not have an immediate effect.
Biden's new “Buy American” plan will make it more difficult for federal agencies to contract with companies overseas to purchase foreign products by reducing loopholes and waivers in existing Buy American rules. During the presidential campaign, President Biden shared his commitment to protect America's economy by modifying the Buy America Act calling for a $400 billion, four-year increase in government purchasing of U.S.-made products and services. This Executive Order (“EO”) is the first decision that involves US Trade strategy, and it arrives in a moment where small and mid-size business are in more need than ever as they are facing the consequences of the pandemic.
Under the traditional Buy American Act, at least 50% of the components of a product must come from within the U.S. to qualify as a domestic good. Former President Trump also issued multiple executive orders that affected the act, including one that pushed to raise that threshold to 95% for iron and steel products and 55% for other products. Biden's order does not specify the number the new threshold should be but directs the FAR Council to consider the replacement of the existing “component test” for domestic end products and construction materials, with a new test based on the value that is added to the product through U.S. based production or U.S. job-supporting economic activity. The EO sets a deadline of 180 days for regulators to finalize changes and propositions, something the previous administration failed to do, leaving the changes without any significant practical effect.
Biden's order establishes a website where American businesses can see the contracts awarded to non-U.S. vendors, along with any notice of “Buy American” waivers granted by the General Services Administration, the federal agency charged with the bulk of the government's procurement needs. Also, the current EO directs federal agencies to use the Manufacturing Extension Partnership, a public-private network that supports small and midsize businesses in all 50 states and Puerto Rico, to help agencies connect with new domestic suppliers who can make the products they need while employing U.S. workers. With the combination of these two features, the new administration is trying to increase transparency in a complex and often misunderstood area of federal procurement and contracting.
One of the most significant novelties of the Presidential Orders is the creation of the “Made in America Office” as part of the Office of Management and Budget (OMB). This Office would provide centralized scrutiny over agency proposals to use waivers to Made in America Laws. The current administration is trying to condense all efforts in just one governmental body so they will be able to control the outcome of this EO more precisely. The creation of a government office, at least, for the general public is going to be a commitment to the Buy America policy that, in this uncertain time that we are living, may bring some positive hope to U.S. business owners.
Although the order looks like it is going to have an immediate effect, not everything in the EO is clear. The new Buy America EO does not directly address how the administration intends to treat some of the waivers used as loopholes by Federal Agencies to obtain cheaper products from foreign countries. Under the Trade Agreement Act (“TTA”), some end products originated in countries known as “designated countries”, covered by a free trade agreement with the United States are permitted to compete for federal government procurements on the same basis as U.S.-made end products. Even though this should be used as an exemption of the Buy American rules, the reality is that foreign companies in strategic industries like IT, defense and aviation get better market position by offering more competitive prices, benefiting from this loophole in the Buy American regulation. What is clear is that the EO does not establish a real mechanism to change the current framework that allows for these waivers and it will be something that the new administration will have to address sooner than later.
Although very few of us would argue that U.S. government sales should give preference to U.S. manufacturers, there are times where procuring a component or material, is not possible, due to supply and demand economics, or cost-effectiveness (to either the company or the U.S. government). Many small to medium size companies struggle to implement the controls necessary to meet FAR requirements such as Cost Accounting Standards (CAS), either because of their lack of expertise, or due to the internal costs for monitoring and putting the accounting/finance controls in place to ensure compliance. Many times, it is just not worth their time, as their government business volume simply does not support the additional costs associated with implementing CAS. Similar issues may face these manufacturers when the “component test” is implemented, in that tracking of the U.S. value added to a product may be difficult. Not all companies, especially small business enterprises, may be tracking manufacturing costs the same way large companies do, by direct labor costs, direct material costs, and manufacturing costs.
An example of the above is helium. A few years ago, there was a shortage of this unique gas, which many of us may associate with birthday parties. Yet, helium is used in several critical industries for manufacturing, including biomedical and national strategic and defense applications. We recall one client, several years ago, who was in a situation whereby they had to procure helium outside the U.S., in order to meet their manufacturing demands (they build armored vehicles and other defense products), but doing so, would disqualify their products from meeting Buy America Act (BAA) requirements. In their situation, we were able to convince a U.S. supplier that our client had priority in the supply of helium, given that their orders were “DPAS” rated (Defense Production Act orders take priority over commercial/civilian orders). Yet not all companies will have the option of invoking the DPA when it comes to this situation.
For those who were wondering what the current administration will do with the current international trade situation, this EO reflects an intention in shifting the American politics away from free trade and toward direct government intervention to promote U.S. manufacturers. We do not know yet if this strategy will be temporary or how it will affect, for example, the future of the trade war with China. What we can conclude is this administration is sending a clear message that their intention is to aggressively protect U.S. commercial and trade interests, belying the hopes of U.S. trading partners anticipating a softer touch from the new government. Thus, we recommend all companies who may be impacted perform a thorough analysis of their supply chain and procurement, to ensure alternative suppliers are available in the event their products fail to meet the new BAA standards.
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