[author: Brian Picone, Senior Trade Analyst]

On July 30, the Federal Acquisition Regulatory Council (FAR Council) published a proposed rule that would increase domestic content requirements for federal government procurements that are subject to the Buy American Act (BAA), among other changes designed to strengthen enforcement of the BAA.  The FAR Council is proposing these changes for public comment pursuant to President Biden's Executive Order of January 25, 2021 (EO 14005), which outlined the Biden administration's policy that US government procurement should "maximize the use of goods, products, and materials produced in, and services offered in, the United States."¹ In addition to changing the regulatory definitions of "domestic" goods to require higher levels of US content, the proposed rule would establish more advantageous price preferences for domestic goods that the Federal government deems to be "critical."  In so doing, it expressly seeks to link procurement policy to the Biden administration's ongoing initiative under EO 14017 to mitigate supply chain risks by promoting domestic production in critical sectors.  This alert provides an overview of the Buy American Act and the FAR Council's proposed rule.  

Background

The Buy American Act requires the federal government to buy domestic "articles, materials, and supplies" when they are acquired for public use, subject to exceptions for nonavailability of domestic products, unreasonable cost of domestic products, acquisitions subject to certain trade agreements, and situations where it would not be in the public interest to buy domestic products.² For purposes of the BAA, goods are domestic if they are "such unmanufactured articles, materials, and supplies as have been mined or produced in the United States" or "such manufactured articles, materials, and supplies as have been manufactured in the United States substantially all from articles, materials, or supplies mined, produced, or manufactured, as the case may be, in the United States."³

Domestic content thresholds under the BAA

The implementing regulations for the BAA are set out in the Federal Acquisition Regulation (FAR).⁴  The FAR sets forth rules for determining whether solicited "construction material" or "end products" are "domestic" – that is, whether they were mined, produced, or manufactured in the United States, substantially all from components mined, produced, or manufactured in the United States.  The FAR uses a two-part test to determine whether a manufactured end product or construction material is domestic:⁵  

• The end product or construction material must be manufactured in the United States; and
• A certain percentage of all component parts (determined by the cost of the components) must also be mined, produced, or manufactured in the United States (a requirement known as the "component test" until early 2021, when it was redesignated the "domestic content test").  For an end product that does not consist wholly or predominantly of iron or steel or a combination of both, the cost of domestic components must exceed 55 percent of the cost of all components.⁶  For an end product that consists wholly or predominantly of iron or steel or a combination of both, the cost of foreign iron and steel must constitute less than 5 percent of the cost of all the components.⁷  The domestic content test is waived for acquisitions of commercially available off-the-shelf (COTS) items, but not if they are iron or steel products (unless they are COTS fasteners).⁸ 

Price preferences for domestic goods under the BAA

The BAA does not prohibit the purchase of foreign end products or use of foreign construction material.  Instead, it encourages the use of domestic end products and construction materials by imposing a "price preference" for such goods, applied when the procuring agency assesses the "reasonableness" of the cost of domestic offers.⁹  Where a domestic offer is not the low offer, the price preference is applied by adding a specified percentage to the price of the foreign low offer, inclusive of duty.¹⁰  The price of the domestic bid will be deemed reasonable if the bid price does not exceed the price of the low offer with the addition of the price preference.¹¹ Under the current FAR, large businesses offering domestic supplies receive a 20 percent price preference, and small businesses offering domestic supplies receive a 30 percent price preference.¹² 

Trade agreements

Under the WTO Agreement on Government Procurement (GPA) and certain US free trade agreements, the United States has assumed obligations to afford non-discriminatory treatment to goods from participating foreign countries when it conducts procurements covered by the agreement.  This obligation is implemented in US law through the Trade Agreements Act of 1979, which limits the Buy American Act's applicability by requiring US government procurements to treat as if they were domestic those materials originating in a country with which the United States has a covered trade agreement.¹³

Proposed rule to amend the FAR Buy American Act requirements

Increased domestic content thresholds 

In EO 14005, President Biden directed the FAR Council to consider proposing regulations that would "[i]ncrease the numerical threshold for domestic content requirements for end products and construction materials[.]"  Accordingly, the proposed rule would increase the domestic content threshold to 75 percent, from the current rate of 55 percent.  The higher threshold would be phased in over several years, as follows:

• 60 percent (for items delivered through calendar year 2023)
• 65 percent (for items delivered in calendar years 2024 through 2028)
• 75 percent (for items delivered starting in calendar year 2029)

Under the proposed rule, a supplier holding a contract with a period of performance that spans the schedule of threshold increases will be required to comply with each increased threshold for the items in the year of delivery.  For example, the rule states that a supplier awarded a contract in 2027 will have to comply with the 65 percent domestic content threshold initially, but in 2029 will have to supply products with 75 percent domestic content.

The proposed rule would establish a "fallback" threshold that would apply in instances where goods that meet the new, higher domestic content threshold are not available or are of unacceptable cost.  In these circumstances, the proposed rule would allow for the acceptance of the former, lower domestic content threshold.  For example, the proposed rule states that if a domestic end product exceeds the 60 percent domestic content threshold but is determined to be of unreasonable cost after application of the price preference, the government will treat an end product that is manufactured in the United States and exceeds 55 percent domestic content (but not 60 percent) as a domestic end product for purposes of the BAA.  The fallback threshold would cease to apply one year after the domestic content threshold increases to 75 percent.
The thresholds set forth in the proposed rule would not apply to end products or construction materials that consist wholly or predominantly of iron or steel or a combination of both.  Such items will continue to be classified as domestic only if the cost of foreign iron and steel constitutes "less than 5 percent of the cost of all the components used" in the end product or construction material.  The fallback threshold described above also would not apply to such items.

Increased price preferences for "critical" products and components 

In EO 14005, President Biden directed the FAR Council to consider proposing regulations that would "increase the price preferences for domestic end products and domestic construction materials."  Accordingly, the proposed rule provides for a framework through which higher price preferences will be applied, but only for end products and construction materials deemed to be "critical" or made up of "critical components[.]"  The list of critical products and components, and the level of additional price preference for such products, will be determined through future rulemaking.  

The process for identifying critical items and components that are eligible for elevated price preferences will be informed by the quadrennial critical supply chain review instituted in President Biden's February 24, 2021 Executive Order on America's Supply Chains (EO 14017), as well as the Biden Administration's National COVID Strategy.  EO 14017 directed federal agencies to review supply chain risks in six "critical" sectors (defense, public health, information technology, transportation, energy, and food production) by February 24, 2022.  The Office of Management and Budget (OMB) will then lead a subsequent assessment "to further distill the list of products designated critical to those products for which procurement is likely to make a meaningful difference toward strengthening U.S. supply chains."  The proposed rule states that, in addition to determining the list of critical products, this process will determine the level of enhanced price preference for each critical product – indicating that the levels may vary depending on the product at issue.     

Once the list of critical products is established in the FAR, it will be published in the Federal Register for public comment "no less frequently than once every four years to reflect changes to the list."

Potential replacement of the "component test"

In EO 14005, President Biden directed the FAR Council to consider proposing regulations that would replace the "component test" (described above and now called the "domestic content test") with a test under which domestic content "is measured by the value that is added to the product through U.S.-based production or U.S. job-supporting economic activity," rather than the cost of components.  The proposed rule does not seek to replace the "component test" at this time, and instead seeks public comments regarding "the strengths and shortcomings of the 'component test,' as currently structured," as well as "how domestic content might be better calculated to support America's workers and businesses[.]"

Public comment and hearing process

The FAR Council is seeking written comments on the proposed rule, with a comment deadline of September 28, 2021.  Among other topics, the FAR Council is seeking comments on the following:

• Whether the commenters' products currently meet the higher domestic content thresholds envisioned by the proposed rule, and whether commenters would be willing and able to adjust their supply chains to meet the new thresholds;
• The utility of the proposed fallback threshold, including whether it would help companies adjust to the higher domestic content threshold or, alternatively, "delay the ability to increase Made in America content in Federal procurement;"
• Whether increased price preferences for critical items would be more, less, or equally effective as current preference levels at promoting domestic economic activity and strengthening domestic supply chains;
• Which items, if any, should receive an enhanced price preference, and what process OMB should use to determine such items; 
• Whether and how the Federal government should incentivize vendors to supply products that exceed the minimum domestic content threshold by significant margins; 
• Whether and how the current component test should be replaced by a "value added" calculation; and
•  Whether the 2009 decision not to apply the component test to commercially available off the shelf (COTS) items should continue to apply.

The FAR Council and OMB's Made in America Office will hold a virtual public meeting on August 26, 2021, at which interested parties will have the opportunity to make presentations on these topics.  In addition, the agencies have invited presenters to give feedback on other issues, including the interaction between trade agreements and the Buy American Act.  Specifically, the proposed rule notes that under the Trade Agreements Act: 

"a purchase is treated as U.S.-made if it is mined, produced, or manufactured in the United States or substantially transformed in the United States, even if it is made of 100 percent foreign content.  As a result, a substantially transformed U.S.-made product may have far less domestic content when compared to a domestic end product acquired under the Buy American statute."  
The agencies "are seeking to understand more about the impact of the substantial transformation test and potential lost opportunities for American workers," and thus are inviting interested parties to comment on this topic at the public meeting.  

Outlook

The changes contemplated by the proposed rule are significant, and would likely force some companies to alter their sourcing and manufacturing practices to continue benefiting from domestic preferences under the BAA.  Though the administration is seeking public comments prior to implementing any changes, President Biden pledged when announcing the proposal that his administration will "make the biggest enforcement changes to the Buy American Act in 70 years," because the current domestic content thresholds are "not high enough" and new rules are needed to ensure domestic supply of critical products.¹⁴  This is a strong indication that the rule will be adopted in some form. Companies therefore should begin considering how the proposed rule would impact their commercial interests, particularly if they operate in sectors that may be deemed "critical" for purposes of the rule.  

Importantly, the domestic content thresholds and price preferences contemplated by the proposed rule would not apply to goods that are entitled to non-discriminatory treatment under the GPA and similar trade agreements.  However, President Biden previously has expressed interested in renegotiating such agreements to facilitate further expansions of Buy American preferences, and the proposed rule seeks comments on whether such agreements, as implemented through US law, have resulted in "lost opportunities for American workers."  This is a strong indication that the Biden administration will continue to study this issue and may undertake additional actions to enhance domestic preferences.

The proposed rule can be viewed here.

1 For an overview of EO 14005, please refer to the W&C US Trade Alert dated February 1, 2021.  
2 See generally 41 U.S.C. §§ 10a-10d.
3 41 U.S.C. § 10a.   
4 48 C.F.R. Part 25. 
5 48 C.F.R. §§ 25.003 and 25.101(a).
6 48 C.F.R. § 25.003, 25.101(a)(2)(i), and 25.201(a)(2)(i).
7 48 C.F.R. § 25.105.
8 48 C.F.R. § 25.001(c)(1). 
9 48 C.F.R. § 25.105.
10 48 C.F.R. § 25.105(b).
11 48 C.F.R. § 25.105(c).  
12 48 C.F.R. § 25.105(b)(1) and (2).
1319 U.S.C. § 2511(a).
14 "Remarks by President Biden on the Importance of American Manufacturing."  The White House, July 28, 2021. 

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