U.S. Senators Propose Trade-Pact Waivers

By Jennifer Plitsch, Sarah Shepson and Carl Wiersum

Photo: iStock

The recently enacted American Rescue Plan includes $1.9 trillion in economic stimulus, health care and related funding, while President Joe Biden’s American Jobs Plan proposal includes $2.3 trillion in critical infrastructure investments. Contractors are right to view these initiatives as massive opportunities, but should be cognizant of the regulatory strings that often attach to government spending.

These strings can include the Federal Acquisition Regulation and agency-specific supplements, as well as the non-procurement uniform requirements and related agency-specific regulations that attach to federal grant funds even when disbursed by state or local entities.

Now, some members of Congress are seeking to add new restrictions that would significantly overhaul the existing domestic preference regime for federal procurements — mere weeks after the promulgation of new Buy American regulations and the release of a new executive order to further tighten the application of these rules.

The provisions of the Buy American Act (BAA) and Trade Agreements Act (TAA) are arguably the two most important sourcing preference regimes for federal procurements.

Under the BAA, companies doing business with the U.S. government must formally certify whether end products they deliver are “domestic end products” within the meaning of the law and its implementing regulations. A product generally qualifies as a “domestic end product” if: it is manufactured in the United States; and the cost of its components mined, produced, or manufactured in the United States exceeds 55 percent of the cost of all components.

However, the Trade Agreements Act allows the president to waive laws, regulations, procedures, or practices of government procurement that would discriminate against eligible products or suppliers from “designated countries” so that the United States may comply with its obligations under various international trade agreements. Waivers to the Buy American Act can be issued for acquisitions that exceed the thresholds in the relevant trade agreements, typically $182,000. When applicable, the Trade Agreements Act prohibits supplying end products to the U.S. government from non-designated countries.

In the days following the passage of the American Rescue Plan, a group of senators petitioned Biden to “temporarily suspend the trade-pact waivers to Buy American and other domestic procurement preferences that allow foreign firms to bid as American companies.” Their letter recommended that he immediately “suspend [the TAA waiver] for all extraordinary COVID-19 relief and recovery-related spending” — including recovery-related infrastructure spending — and tell America’s trade partners that the United States plans to renegotiate the relevant treaties in the future.

If adopted, this would constitute a significant change to federal domestic preference laws. For decades, contractors have relied on the well-established TAA waiver of the Buy American Act when planning manufacturing and sourcing processes, and supply chains cannot be reorganized overnight. While the senators’ letter notes that “removing [the TAA] waiver would not suspend the other [BAA] exemptions built into our domestic preference laws,” there is no question that many contractors could see their previously TAA-compliant products become subject to significant price evaluation penalties under the Buy American Act.

But while this proposal clearly would alter the existing domestic preference landscape, it is less clear whether it would provide the full “boost [to] domestic industries and unemployed Americans” that the senators predict.

Their letter cites a concern that the Trade Agreements Act permits “foreign firms to bid as American companies,” but the law actually is concerned with the origin of the products, not the ownership of firms. Generally speaking, a foreign firm can sell a domestically-produced product to the U.S. government with no Buy American Act price penalty, and the change envisioned by the senators would not alter this dynamic.

Additionally, much of the American Rescue Plan spending will be channeled through grants to state, local and other entities, as opposed to direct federal procurement. Neither the Buy American Act nor the Trade Agreements Act applies to non-procurement grants or lower-tier contracts funded by federal grants, and so the lawmakers’ proposal would not have any direct effect on the presumably significant spending to be supported by federal grants.

There are also questions about the feasibility of the proposal given the United States’ existing treaty obligations to provide even-handed treatment to designated country end products in covered procurements. It seems likely World Trade Organization members would object to the carve-out envisioned by the U.S. senators.

It remains to be seen whether the lawmakers’ proposal ultimately gains traction, but even if it does not, it still serves as a reminder about the enduring political appeal of domestic preference requirements in federal procurements. It was not long ago that the American Recovery and Reinvestment Act of 2009 imposed an independent domestic production requirement for iron, steel and manufactured goods used in ARRA-funded projects. With a new infrastructure bill on the horizon, it would not be surprising to see other similar domestic preference requirements layered onto that legislative effort.

Contractors interested in pursuing opportunities under these and other federal programs would be well-advised to continue monitoring the development of these potentially significant changes to domestic preference laws.

Jennifer Plitsch is a partner, and Sarah Shepson and Carl Wiersum are associates at Covington & Burling LLP.

Topics: International

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