U.S. Senators Propose Trade-Pact Waivers Amidst Focus on Domestic Preference Laws

The American Rescue Plan, signed into law last month, includes $1.9 trillion in economic stimulus, healthcare, and related funding.  And just last week the Biden administration released an infrastructure proposal, the American Jobs Plan, that includes $2.3 trillion in transportation, connectivity, power, and other critical infrastructure investments.Contractors are right to view these plans as massive opportunities — but should be cognizant of the regulatory strings that often attach to government spending.  In general, these can include Federal Acquisition Regulation (FAR) and agency-specific FAR supplements for federal procurements, as well as the nonprocurement uniform requirements (2 C.F.R. Part 200) and related agency-specific regulations that attach to Federal grant funds even when disbursed by state or local entities.Now, some Congressional members are seeking to add new restrictions that would significantly overhaul the existing domestic preference regime for Federal procurements — mere weeks after the promulgation of new Buy American regulations and the release of a new Executive Order to further tighten the application of these rules.

Background

Federal procurements are subject to an array of specialized and often overlapping requirements.  But the provisions of the Buy American Act (BAA) and Trade Agreements Act (TAA) are arguably the two most important sourcing preference regimes.

  • BAA Under the BAA, companies doing business with the U.S. Government must formally certify whether end products they deliver are “domestic end products” within the meaning of the BAA and its implementing regulations. See 41 U.S.C. § 8302 et seq.; see also FAR Subpart 25.1.  In general, a product generally qualifies as a “domestic end product” if it is (1) manufactured in the United States; and (2) the cost of its components mined, produced, or manufactured in the United States exceeds 55% of the cost of all components.  FAR 25.101.  Although this rule is easily stated, there are many exceptions to the BAA, including the TAA exception discussed below.
  • TAA The TAA allows the President to waive laws, regulations, procedures, or practices of Government procurement that would discriminate against eligible products or suppliers from “designated countries” so that the United States may comply with its obligations under various international trade agreements. Under the TAA, the President (through the U.S. Trade Representative (USTR)) has granted a BAA waiver for acquisitions that exceed the thresholds in the relevant trade agreement(s), typically $182,000.  When applicable, the TAA prohibits supplying end products to the U.S. Government from non-designated countries.

Recent Proposal

In the days following the passage of the American Rescue Plan last month, a group of Senators (spearheaded by Senators Tammy Baldwin (D-WI) and Sherrod Brown (D-OH)), petitioned President Biden to “temporarily suspend the trade-pact waivers to Buy American and other domestic procurement preferences that allow foreign firms to bid as American companies.”  The Senators’ letter recommended that President Biden immediately “suspend [the TAA waiver] for all extraordinary COVID-19 relief and recovery-related spending (including recovery-related infrastructure spending)” and tell America’s trade partners that we plan to renegotiate the relevant treaties in the future.

If enacted, the recommendation of Sens. Brown and Baldwin would constitute a significant change to federal domestic preference laws.  For decades, contractors have relied on the well-established TAA waiver of the BAA when planning manufacturing and sourcing processes, and supply chains cannot be reorganized overnight.  While the Senators’ letter notes that “removing [the TAA] waiver would not suspend the other [BAA] exemptions built into our domestic preference laws,” there is no question that many contractors could see their previously TAA-compliant products become subject to significant price evaluation penalties under the BAA.

But while this proposal clearly would alter the existing domestic preference landscape, it is less clear whether it would provide the full “boost [to] domestic industries and unemployed Americans” that the Senators predict.  The Senators’ letter cites a concern that the TAA permits “foreign firms to bid as American companies,” but the TAA actually is concerned with the origin of the products, not the ownership of firms.  Generally speaking, a foreign firm can sell a domestically-produced product to the U.S. Government with no BAA price penalty, and the change envisioned by the Senators would not alter this dynamic.  Additionally, much of the American Rescue Plan spending will be channeled through grants to state, local, and other entities, as opposed to direct federal procurement.  Neither the BAA nor the TAA applies to nonprocurement grants or lower-tier contracts funded by federal grants, and so the Senators’ proposal would not have any direct effect on the presumably significant spending to be supported by federal grants.

Finally, there are questions about the feasibility of the proposal given the United States’ existing treaty obligations to provide even-handed treatment to designated country end products in covered procurements.  A similar proposal last year to carve out certain “essential medicines” and other medical procurement from the World Trade Organization (WTO) Government Procurement Agreement (GPA) prompted at least eight WTO members to invoke the GPA’s arbitration procedures.  Given that the essential medicines withdrawal affects only 0.3% of the approximately $129 billion of America’s covered procurements, it seems likely WTO members would similarly object to the carve-out envisioned by Sens. Baldwin and Brown.

It remains to be seen whether the Senators’ proposal ultimately gains traction, but even if it does not, it still serves as a reminder about the enduring political appeal of domestic preference requirements in federal procurements.  It was not long ago that the American Recovery and Reinvestment Act of 2009 (ARRA) imposed an independent domestic production requirement for iron, steel, and manufactured goods used in ARRA-funded projects.  And with a new infrastructure bill on the horizon, it would not be surprising to see other similar domestic preference requirements layered onto that legislative effort.  Contractors interested in pursuing opportunities under these and other federal programs would be well-advised to continue monitoring the development of these potentially significant changes to domestic preference laws.

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