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Rulemaking Offers Rare Chance for Comprehensive Review of Buy American Act Regulations

On July 30, 2021, a notice of proposed rulemaking was published in the Federal Register with changes to two regulations that have the potential to materially affect the supply chains of products where manufacturing in the United States does not rise to the level of “substantial transformation” – by re-introducing a component test to such products.
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What to Know

  • On July 30, 2021, a notice of proposed rulemaking was published in the Federal Register in furtherance of Section 8 of President Biden’s Executive Order 14005, Ensuring the Future Is Made in All of America by All of America's Workers.
  • Notably, the rulemaking goes beyond the topics raised in Executive Order 14005, inviting comments across-the-board on existing Buy American Act regulations. [1]   
  • Most significantly, commenters are invited to weigh in on two existing regulations that blunt the effectiveness of the Buy American Act:  (i) the regulatory suspension of the “component test” for items mined, produced, or manufactured in the US on acquisitions subject to the Trade Agreements Act; and (ii) the regulatory waiver of the “component test” for COTS items.
  • Changes to these two regulations have the potential to materially affect the supply chains of products where manufacturing in the United States does not rise to the level of “substantial transformation” – by re-introducing a component test to such products.
  • The rulemaking also addresses the three topics raised in Executive Order, namely: the replacement of the “component test” with a value-added test; an increase in domestic content requirement thresholds; and an increase in the price preference. For the reasons noted below, relatively few procurements are subject to the “component test,” and thus the domestic content requirement and price preference are likely not primary areas of concern for most contractors.[2]  Nonetheless, changes in these areas could become more material if rule makers change the two regulations noted above that blunt the effectiveness of the Buy American Act.
  • Public comments are due September 28, 2021. A virtual public meeting will be held on August 26, 2021.

Rulemaking Invites Comprehensive Review of Existing Buy American Act Rules

As we wrote about previously in an alert back in February, President Biden, in Section 8 of Executive Order 14005, Ensuring the Future Is Made in All of America by All of America’s Workers, invited regulators to consider promulgating a proposed rule to:

  • Replace the “component test” in Part 25 of the FAR that is used to identify domestic end products and domestic construction materials with a test under which domestic content is measured by the value that is added to the product through US-based production or US job-supporting economic activity;
  • Increase the numerical threshold for domestic content requirements for end products and construction materials; and
  • Increase the price preferences for domestic end products and domestic construction materials.

These three potential regulatory changes are discussed at the end of this alert.

Significantly, the proposed rulemaking is not tethered to these three specific topics.  Rather, public comments are invited across-the-board on existing Buy American Act regulations – and have the potential to facilitate a comprehensive review of the effect of the existing rules. Of arguably greatest importance:

  • The proposed rule invites public comments on the effect of the regulatory suspension of the Buy American Act’s “component test” on purchases subject to the Trade Agreements Act (e.g., contracts for supplies of $182,000 or more). Under current rules, the US Government may, on such orders, purchase an end product manufactured in the United States without regard to domestic content. This allows the purchase of products consisting entirely or almost entirely of components from foreign countries as long as the final manufacturing process occurs in the United States. Reinstating the “component test” for these procurements could materially affect products manufactured in the United States from foreign components where the manufacture does not constitute a “substantial transformation” under the Trade Agreements Act (“TAA”).
  • In 2009, the Office of Federal Procurement Policy waived the component test of the Buy American statute for acquisition of Commercial Off-the-Shelf (“COTS”) items. Public comments are invited on whether:  (i) the COTS waiver benefited domestic firms and their employees; (ii) current market circumstances support narrowing or lifting the waiver; (iii) application of the COTS waiver has been consistent with its purposes; and (iv) the Government should collect domestic content information on COTS items. Commenters are invited to make recommendations to maintain and increase domestic production of COTS items.

The practical effect of these two regulations is to blunt the effectiveness of the Buy American Act by removing any domestic content requirement from the vast majority of Government procurements. All that is required in most instances to satisfy the Buy American Act is “manufacture” in the United States – which has historically been a low bar.

The rulemaking invites comments in additional areas:

  • Commercial IT. Acquisitions of commercial IT are exempt by statute from the Buy American Act. Commenters are invited to describe under what circumstances current marketplace conditions support narrowing or lifting the statutory waiver.
  • Services. Comments are invited in response to the following questions: How can the Federal Government promote the use of Made in America services? What standards or methodologies might be considered that could be easily adapted by commercial sellers? Are there critical services that should be accorded price preferences, and if so, why?
  • Trade Agreements Act. The public is invited to make recommendations as to how to maintain and increase domestic production in critical industries in acquisitions subject to trade obligations.
  • Product-by-product approach. Commenters are invited to make recommendations as to whether and why certain products or categories of products should have more stringent content standards than others.
  • Waivers and exceptions. Comments are invited on the use of waivers and exceptions to the Buy American statute, including proposals to narrow or expand the scope of existing waivers; ensure appropriate interpretation of existing waivers, and policies or practices to ensure that unnecessary waivers are not granted.
  • Improving the Federal Government’s ability to enforce the content standards in the Buy American statute, including by verifying domestic content levels.

Taken together, these topics constitute an across-the-board review of regulations implementing the Buy American Act and have the potential to facilitate a comprehensive review of the existing rules.

Regulatory Changes to Address the Three Topics Raised in Executive Order 14005

The proposed rulemaking also engages each of the issues raised in Executive Order 14005.

With respect to potential replacement of the “component test” with a value-added test, the rulemaking does not include proposed regulatory language. Instead, the rule makers seek additional information regarding the strengths and shortcomings of the component test, and request public comment on how domestic content might be better calculated to achieve the purposes of the Buy American Act.

With respect to the increase in domestic content requirements, the proposed rule would increase domestic content requirements incrementally, from 55 percent to 60 percent, to 65 percent in 2024, and to 75 percent in 2029 – with a “fall back” provision to allow continued use of a lower threshold if domestic industry is unable to keep up with the increases.

On the issue of increasing the price preferences, the proposed rule includes a framework for having a higher price preference for “critical” supplies and construction materials. The proposed rule includes only the framework for this concept – a separate rulemaking will address what products are “critical” and the extent of the price preference.

As alluded to above, the “component test,” and the related domestic content requirement and price preference, are of limited practical relevance in most Government procurements. The proposed rule itself notes that “[b]ecause of the World Trade Organization—Government Procurement Agreement (WTO GPA) and the Trade Agreements Act (TAA), domestic content rules do not currently apply to most non-DoD goods acquisitions over $182,000.” In fact, based on data recorded in the Federal Procurement Database System-Next Generation (FPDS-NG) for 2020, less than 0.1% of Federal Government contracts (by value) were on contracts below the Trade Agreements Act threshold but above the micro-purchase threshold to which the “component test” potentially applies.[3]

Nonetheless, changes in the “component test,” domestic content requirement, and price preference could become important if regulators reconsider and remove the regulatory provisions that blunt the effectiveness of the Buy American Act.

[1] The Buy American Act applies to US government procurement of articles, materials, and supplies, and is distinct from Buy America (no “n”) provisions that apply to state and local infrastructure projects funded by the U.S. government. 
[2]Some vendors, however, may find marketing value in declaring themselves “Buy American Act” compliant regardless of the importance of the qualification to their award prospects.
[3] Although small business set-aside contracts and certain DoD procurements at or above $182,000 are not subject to the Trade Agreements Act, and thus the “component test” sometimes will apply to those contracts as well, when taken in context with other statutory exceptions to the Buy American Act (e.g., non-availability; resale) – the number of contracts where the “component test” applies is relatively small.

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