Defense Procurement Agreements

On December 31, 2015, the U.S. Department of Defense (DoD) announced that it was considering negotiations of a Reciprocal Defense Procurement Memorandum of Understanding (“defense MOU”) with Japan’s Ministry of Defense (80 FR 81812). DoD is seeking comments (by February 1st) from U.S. firms on their experience in participating in defense procurement in Japan, in particular whether the procurement was “conducted with transparency, integrity, fairness, and due process in accordance with published procedures”. This post considers the similarities and differences in the coverage of defense procurement by defense MOUs and international trade agreements, namely, the WTO Government Procurement Agreement (GPA) and free trade agreements (FTAs).

Defense MOUs are intended to promote standardization and interoperability of conventional defense equipment of the United States and its allies. As a consequence, the defense agreements have much broader coverage than trade agreements. They generally apply to all DoD procurement, including military items, unless the procurement is excluded for national security purposes. By contrast, the GPA and FTAs only cover defense goods that they list. They do not cover military items or certain goods, such as specialty metals, which are reserved for U.S. suppliers by the Berry Amendment. That Amendment, however, includes an exception that allows firms from MOU countries to supply specialty metals.

Defense MOUs generally require defense procurement to be conducted in accordance with certain requirements, which are similar to those found in the GPA and FTAs, but less detailed. Both types of agreements impose requirements to ensure that procurement is conducted in a manner that is transparent, predictable and fair. The DoD’s MOU requirements include publication of procurement notices, the provision of tender documentation, notifications and feedback to unsuccessful offerors, and provision for the hearing and review of bid protests. The GPA and FTA impose similar conditions, but also many others, covering each stage of the procurement process.

Ensuring reciprocity is a key goal of both trade agreements and defense MOUs. Both require national treatment of the defense goods that they cover, which the MOU specifies as the waiver of “buy national” restrictions. In order for the U.S. to provide national treatment, it must waive the application of the Buy American Act of 1933 (BAA) and the Balance of Payments Program for procurement covered by the agreements, albeit relying on different legal authority for its defense and trade agreement waivers.

The U.S. Trade Representative waives the application of the BAA for goods covered under the GPA and FTAs, based on authority provided by the Trade Agreements Act of 1979. But, that authority does not apply to defense MOUs since they are not considered trade agreements. For its waiver, DoD relies on the “public interest” exception in the BAA. Under that exception, an agency can waive the Buy American Act based on a determination that the domestic purchasing preference is not in the public interest. Accordingly, DoD has determined that it would be inconsistent with the public interest to apply the BAA restrictions to the procurement of products from its MOU partners.

If the Defense Department concludes an MOU with Japan, U.S. products would be exempt from any ‘‘Buy Japan’’ laws or policies applicable to procurement by Japan’s Ministry of Defense or Armed Forces. In addition, both countries would also waive customs, taxes and duties that apply to defense procurement. A defense MOU with Japan would be the first for an Asian country.

The DoD has defense MOUs with 23 “qualifying countries” (DFARS 225.003): Austria, Australia, Belgium, Canada, Czech Republic, Denmark, Egypt, Finland, France, Germany, Greece, Israel, Italy, Luxembourg, Netherlands, Norway, Poland, Portugal, Spain, Sweden, Switzerland, Turkey and the United Kingdom.

Of the MOU countries, only two (Egypt and Turkey) are not covered by the GPA or an FTA with the United States. Countries covered by a defense MOU have access to far more DoD procurement than non-MOU countries covered by the GPA or FTAs.

Jean Heilman Grier

January 19, 2016

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