The Buy American provision of the Stimulus bill signed by President Barack Obama on Tuesday, February 17, 2009, restricts the use of federal funds to the purchase and use of U.S.-origin materials. There has been extensive press coverage of these measures and speculation as to whether they violate international obligations. United States law has long provided for the waiver of Buy American restrictions for materials and services coming from countries that are parties to the World Trade Organization Government Procurement Agreement (GPA) or to free trade agreements, and the legislation continues that practice. But the waiver provisions have a limited application and do not solve the problem for many US companies that rely on foreign-origin materials when bidding on projects funded by the Stimulus bill. These companies will have to alter their business operations and make other adjustments to deal with the new political reality.

A. The “Buy American” Provision
The Buy American provision states that “none of the funds appropriated or otherwise made available by this Act may be used for a project for the construction, alteration, maintenance, or repair of a public building or public work unless all of the iron, steel and manufactured goods used in the project are produced in the United States.”1 Public buildings and public works include airports, bridges, schools, railroads, roads, canals, dikes, dams and harbors.

i. Exceptions
The legislation includes three explicit exceptions to Buy American restrictions. The first is a 25 percent price preference for US iron, and steel, and manufactured goods. A contractor may use foreign-origin materials if inclusion of US-origin materials increases the cost of the overall project by 25 percent. 2 The second is a “public interest” exception that can be invoked for “a category of cases” by the agency administering the funds.3 The third is an exception in the case where subject materials are not produced in sufficient quantity in the United States. Also, the law directs that Buy American provisions must be implemented in a manner “consistent with international obligations.”4

ii. Arguments For and Against “Buy American”
Proponents argue that we have implemented Buy American provisions before so there is nothing new about the concept – fears of a Smoot-Hawley disaster are unfounded.5 Also, similar past Buy American provisions have always been implemented in a manner consistent with international law.6

But those versions of Buy American are narrower in scope, confined to federal highway, transit or defense procurement projects. The scope of the Buy American provisions here apply to all manufactured goods for all public building and public works projects-- not just iron, steel, but also textiles, software, or a number of other systems used to upgrade a public school or power plant, for instance. This expansion of Buy American during a global recession could trigger retaliation by trading partners. India, Ecuador, Indonesia, Argentina, Russia, Korea, Sweden, Germany, France, and Australia have already introduced in the last few months tariffs, non tariff barriers, or subsidies targeted to specific industries, including the auto sector.7

B. Presidential Waiver Authority under US Law
United States law provides that the President may waive, in whole or in part, any measure regarding government procurement that if applied would discriminate against foreign-origin goods in favor of US-origin goods.8 The waiver authority is delegated to the US Trade Representative. Products eligible for the waiver include products from a country that is a party to a US free trade agreement (US FTA), or to the GPA.9 The Explanatory Notes to Section 1605 clarify that Buy American will not apply to the Least Developed Countries. Brazil, Russia, India, China, Turkey, Argentina, and other more developed countries, however, do not qualify for the waiver because they are not parties to a US FTA or the WTO GPA.

C. WTO Government Procurement Agreement
Article III of the WTO’s GPA outlines the most relevant international non-discrimination obligations with respect to covered government procurement practices. The GPA structure involves parties that “opt-in” to these GPA’s obligations. Having opted-in to the GPA, a party further defines the extent to which it has agreed to be bound by the agreement. For instance, a US GPA Annex cites the federal entities that are subject to the GPA. Another Annex identifies 37 states subject to the GPA. In the case of New York, for instance, state agencies, the state university system, public authorities and public benefit corporations are all listed as being subject to the GPA.10 But notes to the US Annex specify that the GPA does not apply to NY procurement of construction-grade steel, including requirements on subcontracts, even if federal funds are used.11 Also, in New York, transit cars, buses and related equipment are not covered.12

On a federal level, the provision may lead to violations of the WTO GPA. Because it directs agencies to apply the provision in a manner “consistent with international obligations,” this language cures the Buy American provision of any violation on its face. But an individual violation may still occur at the agency level, “as applied,” even when the law itself complies with international obligations. The scope of the provision is expansive, leaving room for agency error when applied to all manufactured goods. Also, for many states, it is unclear whether federal funds spent by states on federally-specified and directed projects would be covered.

i. Administration is the Key
Careful administration of the Buy American provisions by the United States (such as limiting the Buy American rule to mass transit projects) could fit them within WTO rules and avoid a violation. To realize this objective, the Obama Administration would likely have to issue Executive Orders to coordinate the federal bureaucracy as well as provide guidance to the states to ensure they administer these measures in a manner consistent with international obligations. It is an open question as to whether this will occur, or how efficient the effort will be.

Conclusion
Any contractor, whether from the United States or another country, planning to use certain foreign-origin materials and wanting to bid for a project covered by those provisions will have to hope for this waiver. Unless USTR issues a waiver, materials originating from around the world will be placed at a competitive disadvantage in comparison to US materials. This will likely increase the cost of doing business for enterprises that rely on foreign-origin materials when making bids for stimulus projects. A potential 25 percent increase in the cost of projects will come at the expense of the American taxpayer.

Although contractors could pursue different paths to deal with the restrictions (such as by submitting dual bids with and without foreign-origin materials), that situation itself will disadvantage foreign-origin materials where contractors using only U.S.-origin materials would not have to submit dual bids. The provision will also complicate business planning because depending on individual agencies at the federal and state level to apply this sweeping measure to an undefined “category of cases” in a manner “consistent with international obligations” raises more questions than answers.

Import-intensive industries will likely be hard hit by the Buy American provisions. Even if a waiver is issued, a range of foreign-origin materials will be subjected to discriminatory treatment in lucrative government-funded projects because the waiver would only apply to materials originating from a limited set of countries subject to the GPA or a US FTA. The impact on business will be significant because the largest infrastructure spending package since the New Deal is a key component of the Democrats’ plan to revive the moribund US economy. Similar packages will likely follow if the economy does not rebound from its tailspin in a quick fashion. Arent Fox has substantial capabilities representing industries that incorporate foreign-origin materials in their supply chain. We will continue to monitor this complex and fluid situation.

Joseph H. Rieras
rieras.joseph@arentfox.com
202.857.6347

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1 Section 1605, H.R. 1, The American Recovery and Reinvestment Act of 2009.

2 Id.

3 Id.

4 Id.

5 The Smoot-Hawley Tariff Act of 1930 raised tariffs on thousands of imported goods. Countries retaliated by raising tariffs on US goods. Many blame Smoot-Hawley for cementing the effects of the Great Depression.

6 See 49 U.S.C. § 5323(j), Buy American provision applying to purchases made with federal highway and transit funds.

7 WTO Secretariat, “Report to the TRPB From the Director-General On The Financial and Economic Crisis And Trade Related Developments,” January 23, 2009.

8 Section 301(a) of the Trade Agreements Act of 1979.

9 GPA signatories in addition to the US include Canada, the European Communities (consisting of 27 member states), Hong Kong, Iceland, Israel, Japan, Korea, Liechtenstein, Norway, Singapore, and Switzerland. Taiwan has been accepted for accession, which should occur in 2009. U.S. FTA parties include Canada, Mexico, Australia, Singapore, Chile, Bahrain, Oman, Israel, Jordan, Peru, Dominican Republic, El Salvador, Guatemala, Honduras, Nicaragua, and Costa Rica.

10 United States, Annex 2, GPA.

11 Id., Note 1. Other states covered by the construction-grade steel exception include Delaware, Florida, Illinois, Iowa, Maine, Maryland, Michigan, New Hampshire, Oklahoma, Pennsylvania, and Wyoming.

12 United States, Annex 2, GPA.