GOVERNMENT CONTRACTING INSIGHTS DEFENSE CONTRACTING
Buy American Order: What It Means
Photo: iStockOn the heels of his campaign promises to protect U.S. manufacturers and workers, President Donald Trump on April 18 issued Executive Order 13788, “Buy American and Hire American.”
It focuses on so-called “Buy American Laws,” defined to include all domestic sourcing preferences and restrictions such as the Buy American Act, the Berry Amendment and “Buy America” legislation.
The executive order has five key elements regarding U.S. manufacturing. It requires agencies to “scrupulously monitor, enforce and comply” with Buy American Laws, and to “minimize the use of waivers.”
It requires agencies to assess their “monitoring of, enforcement of, implementation of and compliance” with Buy American Laws and to “develop and propose policies . . . to ensure that . . . federal procurements maximize the use of materials produced in the United States.”
It also mandates that the “determination of public interest waivers shall be made by the head of the agency with authority over . . . procurement,” and requires the consideration of dumping or injurious subsidization.
It directs the secretary of commerce to submit a report to the president by November that will provide “specific recommendations to strengthen implementation of Buy American Laws.”
And finally, it requires the secretary of commerce and the U.S. trade representative to “assess the impacts of all United States free trade agreements and the World Trade Organization Agreement on Government Procurement on the operation of Buy American Laws.”
Although the executive order principally focuses on assessing the effectiveness of current domestic preference regimes and does not change existing law, it signals — in the words of Bob Dylan — that “the times they are a-changin’.”
There are several takeaways to consider.
One is to prepare for increased scrutiny and enforcement. Section 3 of the order mandates that executive agencies shall “scrupulously monitor, enforce and comply with Buy American Laws.” In its background briefing about the order, the Trump administration labeled enforcement regimes as “lax,” and indicated that agencies must crack down “on weak monitoring, enforcement and compliance efforts and at rooting out every single Buy American loophole.”
Contractors should expect increased scrutiny over the coming months, and should not be surprised when an identified — or even self-disclosed — non-compliance leads to a government investigation, threats of a contract termination, or even a suspension or debarment action. Contractors also should be cognizant of potential increases in whistleblower activity, including qui tam False Claims Act actions.
Now is the time for contractors to ensure that compliance programs in this complex area are in place and current.
They should also expect fewer “public interest waivers.” Section 4 of the order requires that agencies judiciously use “public interest waivers from Buy American Laws . . . to ensure the maximum utilization of goods, products and materials produced in the United States.” Although the order does not expound on whether the term “public interest waivers” is meant to encompass all waivers or just those commonly referred to as “public interest” exceptions, agencies presumably will be less likely to approve waivers absent a compelling need.
Contractors must be aware of changes to free trade agreements and “qualifying country sources.” The administration explained that if it determines that any free trade agreement fails “to meet the Trump standard of fairness and reciprocity so that the U.S. is a net loser, these findings will inform the president’s decision to rescind or renegotiate these deals.”
There is no clarity yet on what “the Trump standard of fairness and reciprocity” means, but it would not be surprising to see future limitations on the breadth of the Trade Agreements Act — which, when applicable, acts as a waiver to the Buy American Act and provides flexibility to contractors.
Similarly, contractors should not be surprised at a narrowing of the “qualifying country sources” exception for end products and components. Currently, the Defense Federal Acquisition Regulation Supplement provides a “public interest” exception for “the acquisition of qualifying country end products” and components from countries that have a reciprocal defense procurement memorandum of understanding with the United States that removes certain purchasing barriers.
While Section 8029(a) of the recently enacted Department of Defense Appropriations Act under the Consolidated Appropriations Act of 2017 requires the secretary of defense to “rescind” the waiver if the qualifying country has violated its agreement, further narrowing of this exception is likely.
Contractors should also closely follow how agencies plan to maximize the use of domestic components. Under the Buy American Act, a domestic end product or construction material manufactured in the United States may be comprised of foreign components so long as they represent less than 50 percent of the cost of all components. There is no cost of components test for commercially available off-the-shelf items. Section 3 of the executive order now directs agencies to “develop and propose policies . . . to ensure that . . . federal procurements maximize the use of materials produced in the United States, including . . . components of manufactured products.”
What actions will agencies take in response to this directive? Does this foreshadow a change to the cost of components test? Will the COTS exception be phased out? Changes of these sort may have significant ramifications for sourcing decisions and pricing.
Contractors should monitor these events and consider becoming engaged with their legislators, regulators and customers to inform them of the effects of proposed changes.
Justin Ganderson is special counsel of the government contracts practice group and Frederic Levy a partner at Covington & Burling LLP. Sandy Hoe, senior of counsel and Scott Freling, a partner, contributed to the article.