The Buy American Act of 1933 (BAA) is the example, most frequently cited by U.S. trading partners, of American protectionism. This major domestic preference law governs the procurement of goods by the federal government. It was enacted during the Great Depression to create and preserve jobs for Americans. It was also intended to protect U.S. industry from foreign competition and to retaliate against countries that applied buy domestic policies.
The BAA does not ban procurement of foreign goods. Rather, it establishes a preference for American products and construction materials. It requires the federal government to purchase only products and construction material that have been mined, produced or manufactured in the U.S. unless an exception applies.
The BAA provides that for a product to be considered as manufactured in the U.S., “substantially all” of the product must be from articles, materials or supplies that have been mined, produced or manufactured in the U.S. According to federal regulations, the product must be manufactured in the United States and the cost of its American components must exceed 50% of the cost of all the components. If more than 50% of the cost is attributable to foreign content, the foreign product can be purchased only if an exception applies.
Exceptions to the Buy American Act: There are five primary exceptions to the Buy American Act: 1) the purchase of domestic products would be inconsistent with the public interest; 2) the cost of the domestic products is unreasonable; 3) domestic products are not reasonably available in the quantity or quality required; 4) the procurement is for use outside of the U.S.; or 5) the procurement is below the micro-purchase threshold of $3000. In addition, the Federal Acquisition Regulation (FAR), which implements the BAA requirement, excludes information technology that is a commercial item.
- Inconsistent with the public interest: The Department of Defense uses the public interest exception to waive the BAA requirement for countries that have entered a Reciprocal Procurement Memorandum of Understanding (defense MOU) with the United States. These MOUs cover defense goods that are excluded from trade agreements that cover government procurement.
- Unreasonable cost of domestic products: To determine whether a domestic price is unreasonable, a price differential (evaluation factor) is added to the price of the lowest acceptable foreign offer. A 6% differential is used for most federal contracts. But, a 12% differential is used if the lowest domestic price is from a small business. The Department of Defense uses a 50% differential for its procurement. The differential is added to the price of the lowest foreign offer and then compared to the domestic offer. If the domestic price exceeds the foreign price with the differential, then it is determined to be unreasonable.
- Insufficient quantity or unsatisfactory quality:The BAA does not apply where products are not produced or manufactured in the United States in sufficient and reasonably available commercial quantities and of satisfactory quality. A non-availability determination has been made with respect to a list of products in the FAR. According to the FAR, that determination does not mean that there are no domestic products. Rather, it means that domestic sources can only meet 50% or less of total federal government and nongovernment demand. Federal agencies may also make individual non-availability determinations.
- Micro-Purchase Threshold: The Federal Acquisition Streamlining Act of 1994 excluded micro-purchases from the application of the BAA. The current micro-purchase threshold is $3000.
- Use Outside of the United States: The Buy American Act only applies to products procured for use in the country. However, the Department of Defense applies restrictions similar to the BAA to its procurement of products and construction materials for use outside of the U.S. under its Balance of Payments Program.
- Information technology that is a commercial item: The federal regulations provide an exemption from the BAA for the procurement of information technology that is a commercial item.
Waiver of Buy American Act: The Buy American Act is waived for federal procurement of goods covered by international trade agreements. The basis for the waiver is the Trade Agreements Act of 1979. That Act authorizes the President to waive discriminatory purchasing provisions for a foreign country that provides the U.S. with reciprocal access to its government procurement. (The President has delegated this waiver authority to the U.S. Trade Representative.) The U.S. has waived the BAA requirement for federal procurement covered under the WTO Government Procurement Agreement (GPA) and free trade agreements (FTAs). Without the waiver authority, the United States would not be able to comply with trade agreement obligations to not discriminate against foreign goods. As a consequence of the waiver, offers of goods from GPA and FTA countries receive equal consideration with domestic offers.
Even though the BAA does not apply to procurement covered under trade agreements, it is still frequently criticized by other countries. However, there is little reason to think that it will be abolished any time soon. According to a 2012 Congressional Research Service report, the BAA has only been substantively amended four times since its enactment. Moreover, it pointed out that “every Congress in the intervening years has seen fit to enact some form of additional domestic preference legislation.”
One such measure is the Berry Amendment, which imposes a higher domestic content requirement on certain procurement covered by the BAA. It requires 100% American origin when the Department of Defense purchases certain goods (food, clothing, textiles, specialty metals, and hand or measuring tools). This domestic restriction is not waived for trade agreement partners; instead, those goods are carved out of U.S. obligations under the GPA and FTAs.
A subsequent posting will consider other domestic purchasing requirements, in particular those that are attached as conditions of federal funding of state and local projects. These measures are often referenced to as little “Buy America” laws.
Jean Heilman Grier
July 21, 2014