On July 15, President Trump issued his third Buy American executive order (EO), aimed at maximizing purchases by federal agencies of American-made goods, products and materials. The president wants to reduce the amount of foreign content that can be included in a product that is considered American-made under the Buy American Act of 1933 (BAA) and to restrict the ability of federal agencies to purchase foreign products. This post examines how the president’s proposals would change current rules and the implications for U.S. obligations under trade agreements.
This latest order reiterates the administration’s objective of enforcing the Buy American Act “to the greatest extent permitted by law,” building on a 2017 Buy American and Hire American order and a January 2019 order strengthening preferences for infrastructure projects. The BAA generally requires federal agencies to purchase only U.S. materials, products and manufactured goods. It does not constitute an outright ban on the purchase of foreign goods. Rather, it establishes a preference for American-made products and construction materials, provided that the purchase is consistent with the public interest and the items are reasonable in cost. A 1954 executive order and the Federal Acquisition Regulation (FAR) set out the requirements for implementation of the law.
The president wants to change these requirements. He has directed the Federal Acquisition Regulatory Council (FAR Council), comprised of the Defense Department, General Services Administration, NASA and Office of Federal Procurement Policy, to “consider proposing for notice and public comment” changes to federal regulations within 180 days.
First, the EO proposes a change in the FAR relating to determinations of what products are considered to be of foreign origin. Currently, a product is concerned a foreign product if more than 50% of the cost of its components are of foreign origin. It can be purchased only if the cost of the domestic product is unreasonable or purchase of the domestic product would be contrary to the public interest. The president would change the foreign origin requirements and apply different rules for iron and steel products and other products.
Iron and steel end products would be considered of foreign origin if the cost of foreign iron and steel used in those products constitutes 5% or more of the cost of all components of the products. All other end products would be considered of foreign origin if the cost of their foreign components comprises 45% or more of the cost of all the components of the products. (The president has tasked agencies with considering whether the 45% should be reduced to 25%.)
The president’s second proposal would significantly increase the price of a domestic product in order for it to be considered unreasonable or inconsistent with the public interest and allow for the purchase of a foreign product. Currently, the FAR provides that where a domestic product is not the low offer, the agency must determine the reasonableness of the cost of the domestic product by adding to the price of the foreign product, inclusive of duty, 6% if the lowest domestic offer is from a large business concern or 12% if it is from a small business. The price of the domestic product is considered reasonable if it does not exceed the price of the foreign product after the addition of the preference margin. The president’s proposal would increase the margin of preference applied to foreign products to 20% for other than small businesses and 30% for small businesses.
The president further directed the FAR Council to consider and evaluate public comments on any proposed rule “and promptly issue a final rule, if appropriate and consistent with applicable law and the national security interests of the United States.”
While the EO appears to give the FAR Council discretion in proposing revisions to the FAR to accomplish the president’s aims and in issuing a final rule, its intent is clear. The new EO supersedes the 1954 executive order “to the extent that it is inconsistent” with the 2019 order and further provides that upon issuance of a final rule, parts of the earlier order will be revoked.
The executive order also directs that the Secretary of Commerce and Director of the Office of Management and Budget, in consultation with the FAR Council and various White House officials, to report to the president within 180 days on any other changes to the FAR that the Council should consider “in order to better enforce the Buy American Act” and carry out the administration’s Buy American policy. As noted above, the recommendations are to include whether the foreign component element should be reduced to 25% from the proposed 45%, and the feasibility, desirability and timing of such decreases.
If adopted, the proposed changes would make it much more difficult for federal agencies to purchase foreign products. However, they should not affect procurement that the U.S. covers under the WTO Government Procurement Agreement (GPA) or free trade agreements because it waives the application of the Buy American Act for such procurement. They would, however, significantly impact procurement below the GPA or FTA thresholds that is not subject to international obligations. The proposals can be expected to raise the ire of U.S. trading partners.
Jean Heilman Grier
July 22, 2019