Over the past few weeks, there has been a growing movement to promote local production and consumption in Nigeria as a way to address some of the economy’s woes. One of the leading proposals is to amend the domestic Procurement Act along the lines of the US Buy American Act (BAA), the domestic preference law adopted by the US government during the Depression in the 1930s. The US’s experience with the BAA indicates that determining what constitutes a domestic product may be one of the main implementation challenges to this proposal.
Under the BAA and its implementing regulations, the US Federal government must provide a preference for domestic end products in its construction projects and its procurement of goods. A domestic end product is defined simply as one that is “manufactured” in the US. However, the meaning of that definition becomes complex in a modern world where products are often the amalgamation of activities that occur in numerous locations, foreign and domestic.
What if a product is assembled in the country but is made primarily of components from foreign sources? The BAA resolves this question by deciding that a domestically manufactured product that is made up of more than 50% foreign components (measured by cost) is deemed foreign. With the current situation with the naira driving up the cost of imports, Nigeria may seek to increase this percentage in order to reflect the fact that measuring by costs may give a false perception of how “foreign” a product is. On the other hand, Nigeria may seek to decrease this percentage as a way to spur local sourcing. Either approach must also take into account that the BAA provides relief from the preference when the prices and/or quality of domestic end products are unreasonable as compared to foreign end products. With such a nascent manufacturing sector and a high level of dependence on importation, Nigeria may find that such an exception eclipses the rule itself.
What if a domestic company performs the initial steps on a product but then the product is shipped overseas for further work? Under the BAA, manufacturing occurs where labor is applied that changes the product into a final form that is of a different character than its component materials. Consequently, a product begun domestically, transferred overseas for further work and then returned to the originating country for testing, packaging and/or shipment might well be foreign. As Nigeria seeks to develop a robust domestic manufacturing sector and expand its skilled workforce, there may be pressure to take a more restrictive approach to allowing any part of the manufacturing to have been done overseas.
The BAA has proven durable and continues to be viewed as an essential part of the US Federal government’s commitment to promoting labor and business in the US. A comparable domestic preference law has potential to have a similar impact in Nigeria. However, the above questions and other policy considerations demonstrate that implementation will be a complex challenge.
This post can also be found on CovAfrica, the firm’s blog on legal, regulatory, political and economic developments in Africa.