How Biden’s Buy American Order Could Impact Contractor Supply Chains

President Biden aims to maximize the portion of federal procurement funds that are spent on American made products. On January 25, 2021, the President signed an Executive Order to “strengthen” Buy American Act (“BAA”) provisions and “ensure the future of America is made in America.” While the Order largely lacks specifics, it generally signals the Biden Administration’s plan to strengthen domestic spending requirements and crack down on foreign sourcing exceptions. Contractors who rely on foreign-made components and materials should closely monitor this development and evaluate their sourcing plans if they want to remain competitive for future federal procurement opportunities.

Background

Federal procurement contracts are generally subject to the requirements under either the BAA or the Trade Agreements Act (“TAA”). While seemingly similar, the BAA and TAA are separate domestic sourcing regulations that apply under different circumstances.

The BAA is a procurement sourcing preference. It applies to supply and construction contracts over the micro-purchasing threshold (i.e., $10,000) but under the TAA threshold (e.g., $182,000 for most supply contracts). If applicable, the BAA requires federal agencies to acquire “domestic end products” unless the cost is unreasonable. An end product is considered domestic if: (1) it is manufactured in the U.S.; and (2) it consists of more than 50% U.S. component parts. If the product offered is not considered “domestic” under the BAA, then it is subject to a price penalty during bid proposal evaluation (e.g., 6%). However, there are waivers and exceptions to the BAA, such as the TAA.

The TAA exempts contractors from BAA requirements to allow the U.S. to comply with international trade agreements. The TAA applies to supply and construction contracts that exceed the relevant TAA threshold. Unlike the BAA, the TAA imposes a sourcing prohibition—that is, the U.S. is prohibited from buying goods from non-trading partners. Instead, the TAA requires the U.S. to purchase products from the U.S. or trading partners called “designated countries.” A product is considered manufactured in the U.S. or a designated country if the product is “substantially transformed” in the U.S. or a designated country.

Impact of Biden’s Executive Order

The January 25 Executive Order reflects the Biden Administration’s goal of increasing the amount of domestically sourced products and services purchased with federal funds. While the Order does not create new requirements under the BAA (it directs the Federal Acquisition Regulation (“FAR”) Council to analyze and propose new rules for public comment), there are several general policy changes for which contractors should begin preparing:
 

1. Establishing New BAA Country of Origin Test: The current test requires that at least 50% of the product components come from the U.S. to constitute a “domestic end product.” Recently, the FAR Council finalized a similar BAA rule change directed by the Trump Administration that increases the domestic content requirement from 50% to 95% for steel and iron and 55% for all other products. This rule, however, has not taken effect as the Biden Administration issued a regulatory freeze on recently published rules. One of the policy changes reflected in President Biden’s new Executive Order is to replace the component country of origin test with a test based on “the value that is added to the product through U.S.-based production or U.S. job-supporting economic activity.” Unfortunately, the Order does not specify what is meant by “value that is added” or provide any information on how this test would apply. Even then, this change signals a fundamental change in the decades-old component test that has provided contractors with a level of predictability.
2. Increasing Price Penalty: The recently finalized Trump rule also increases the price penalty assessed on contractor proposals offering foreign products. Specifically, the rule increased the price penalty from 6% to 20% for large businesses and from 12% to 30% for small businesses, while maintaining the 50% price penalty for military procurements. This is consistent with President Biden’s Executive Order, which generally calls for an increase in the price preferences. Although it is uncertain by how much the price preference will increase, the Trump rule increases appear to be indicative of what the new rule might propose.
3. Cracking Down on Waivers: The Order aims to impose a more rigorous process for contractors who are seeking to obtain waivers to BAA requirements. For example, the Order creates a new office within the Office of Management and Budget called the “Made in America Office.” Once established, the Made in America Office—instead of the contracting agency—will review and approve or deny waiver requests submitted by contractors. Additionally, the Order imposes new limits on the BAA unreasonable cost exception. Currently, agencies can waive BAA requirements if the cost of domestic products is unreasonable. Under the new Order, the agency must also assess whether the cost advantage of the foreign product is the result of the use of dumped steel, iron, or manufactured goods or the of “injuriously subsidized” steel, iron, or manufactured goods.

Notably, the Order is largely silent on the TAA or other international trade agreements (though it does direct agencies to analyze spending as a result of waivers issued pursuant to the TAA). If the resulting proposed rule does not modify TAA requirements, then many of the BAA changes should not affect federal contracts over the TAA threshold.

Conclusion

Government contractors should closely monitor the developments that follow President Biden’s Buy American Order. Ice Miller has extensive experience with trade law and regulations and can assist with BAA and TAA compliance. If you have questions about your company’s product sourcing and regulatory compliance, please contact Ice Miller attorneys Dale Stackhouse, Meghann Supino, or Christian Robertson.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader’s specific circumstances.