Buy American, Again
On January 25, the first Monday following his inauguration, President Joe Biden signed an executive order (EO) to strengthen Buy American provisions. This step, as part of Biden’s Build Back Better economic recovery agenda, aims to ensure the federal government invests its taxpayer dollars in domestic businesses to boost employment rates, increase wages, and support U.S. workers. The order requires tightening the implementation of the Buy American Act of 1933, which requires federal agencies to purchase domestic end products and construction materials.
President Donald Trump also focused on Buy American requirements early in his term, but the impact of his efforts was ultimately muted. He first announced the commitment to “buy American and hire American” 10 minutes into his 2017 inaugural address. In Rust Belt states, where manufacturing jobs have declined, Trump’s populist economic message resonated with communities facing job loss and economic pain. Trump vowed to use federal procurements and assistance to stimulate economic growth, and in August 2020, as a response to the Covid-19 pandemic, he invoked the Defense Production Act, compelled U.S. manufacturers to produce medical supplies, and initiated a process to limit foreign firms’ ability to supply the U.S. government with medical supplies. But despite repeated promises to unveil new initiatives and address economic concerns, not much changed over the past four years.
Biden’s EO pledges to close loopholes left unaddressed by the previous administration. The executive action outlines five commitments to “fit the current realities of the American economy,” including a new “director of made in America” at the Office of Management and Budget and a cross-agency review of domestic preferences. By increasing oversight and defining stricter enforcement measures, the Biden-Harris administration hopes to create a durable approach that will strengthen national security, sustainability, job growth, and global leadership.
Q1: What is in Biden’s Buy American order?
A1: President Biden’s executive order includes five key actions. Specifically, the order:
- Directs three changes to the Federal Acquisition Regulation (FAR), the principal rules for government procurement in the United States:
- The component test, previously used to determine whether solicited products and construction materials can be identified as domestic or foreign according to the value of their domestically manufactured components, will be replaced by a test that measures domestic content by “the value that is added to the product through U.S.-based production or U.S. job-supporting economic activity.” It is not clear how these factors of a new domestic content test would be measured in practice.
- The threshold for domestic content requirements for end products and construction materials will be increased. (President Trump issued an EO in July 2019 that increased the minimum domestic content requirement from 50 percent to 55 percent of total content and created separate, higher requirements for iron and steel end products.)
- Price preferences for domestic end products and construction materials will be increased. Currently, if a domestic end product or construction material is not the lowest offer for a government contract, a factor of 20-30 percent (depending on whether the product is a small business concern or if the construction material is unmanufactured or manufactured) is added to the price of the foreign low offer before evaluating the relative competitiveness of offers.
- Orders the FAR Council to propose these amendments within 180 days of the executive order—July 24. The Buy American statutes in FAR include exemptions for items that are classified as domestically non-available (end items or components that are not mined, produced, or manufactured in the United States in sufficient and reasonably available commercial quantities and of a satisfactory quality) or considered as commercially available off-the-shelf (COTS) items, which must be available to the government in the same form as they are sold in substantial quantities in the common marketplace. The executive order also directs the FAR Council to update the list of domestically non-available articles and review COTS exceptions for information technology. In effect, this would subject some previously exempted items to Buy American regulations. The EO also establishes the Made in America Office and director of made in America to implement the order.
- Centralizes and strengthens oversight of the current agency-led waiver review and approval process under the new Made in America Office:
- Government granting agencies will have to provide descriptions and detailed justifications for proposed waivers to the Made in America director before receiving a waiver for exceptions to Made in America laws.
- These descriptions and justifications for proposed and granted waivers will be made publicly available on a website to be developed by the administrator of the General Services Administration.
- Granting agencies will assess whether the cost advantages of foreign offers are the result of “the use of dumped steel, iron, or manufactured goods or the use of injuriously subsidized steel, iron, or manufactured goods.”
- Orders agencies to use the Manufacturing Extension Partnership to seek out domestic suppliers, including small- and medium-sized companies, to produce goods and materials in the United States for federal procurement.
- Requires agencies to submit biannual reports on the implementation of Buy American laws, including the use of waivers, as well as recommendations for efficiency improvements in the policy to better meet the administration’s objectives. The first report is due in 180 days.
Q2: How much government procurement is from foreign sources?
A2: According to a February 2020 letter from the US Chamber of Commerce and 19 other business organizations, nearly 97 percent of U.S. federal contracts by value were awarded to domestic firms from 2015 to 2019. Out of the remaining 3 percent awarded to foreign firms, most contracts were for overseas consumption, such as Department of Defense purchases to support U.S. military presence abroad.
In August 2020, the White House announced that federal procurement of foreign-made products amounted to $7.8 billion, 3.6 percent of the total procurements, in FY 2019. This represented a 30 percent increase in value from 2016, a trend which President Biden has vowed to reverse. The executive order also seeks to reduce foreign content in domestic procurement contracts.
Q3: What impact could the order have on the U.S. economy and supply chains?
A3: The order’s impact on the U.S. economy and supply chains will depend on what changes are made to rules that determine whether content is “American” or not. In this area, the order’s wording is vague. It calls for an “increase” in the threshold for domestic content requirements and price preferences for domestic products without saying by how much, and recommends replacement of the component test without explaining how.
Significant changes to the domestic content requirements and price preferences for domestic products could force products purchased by the government to contain more U.S. content, but that, in turn, would require U.S. companies to alter their supply chains in order to meet the higher standards. That would mean increased costs to businesses, both in terms of the cost of changing suppliers and the likelihood that domestically produced parts and components would be more expensive than the foreign ones, which would ultimately undermine the global competitiveness of U.S. companies. In addition, in some industries, the relatively small volume of government purchases—compared to the existing volume of non-government sales—may make companies reluctant to alter their supply chains because the net benefit would be limited.
In remarks prior to signing the order, the president said the current content threshold is not high enough to encourage the additional jobs and other economic activity that should be created by government procurement. Biden also took aim at what he described as loopholes that he claimed allow the most valuable parts of a product to be manufactured abroad. Apparently continuing the Trump administration’s desire to reshore automobile supply chains, Biden said that under current rules, some of the most valuable parts of a vehicle—the engine, steel, and glass—could be manufactured abroad, yet the vehicle could still be considered “American.” While data on both the value and origin of parts of vehicles sold in the United States are generally not publicly available, estimates suggest that powertrains—the engine and transmission—account for roughly 21 percent of a vehicle’s value. Most cars that have over 50 percent U.S. or Canadian content and are assembled in the United States have domestically sourced engines and transmissions.
Implementation of the EO could also take on two other current practices: the COTS exemption and the substantial transformation test. First, the COTS exemption qualifies such items as American so long as they are manufactured in the United States, regardless of the content of their components. There is particular concern that the COTS exemption undermines U.S. manufacturing in the information and communication technology sector.
Second, there is a similar growing concern over so-called “screwdriver operations,” in which a company acquires components from abroad and assembles them into a final product in the United States—satisfying Buy American requirements. The Court of Appeals for the Federal Circuit last February ruled that a drug made by Acetris Health is a U.S.-made end product eligible for government procurement despite the fact its active pharmaceutical ingredient—the building blocks of drugs—is manufactured in India. The court pointed out that the drug is assembled in New Jersey, where the foreign inputs are substantially transformed through measuring, weighing, mixing, and compounding into a consumable pill. It appears the EO is intended to overrule this decision by revising the regulation on which it was based. In addition, legal analysts believe the Acetris decision has implications beyond the pharmaceutical industry.
Q4: How will U.S. trading partners react to the order?
A4: Reactions will likely come more in the form of diplomatic complaining than retaliatory trade action, although that will depend on the changes that are ultimately made as a result of the EO. Trading partners can seek compensation or a renegotiation of market access within trade agreements that include government procurement market openings if the United States opts to change its coverage. But changing requirements for what qualifies as domestic for the purposes of government procurement may not amount, legally speaking, to a change in market access coverage. Without the ability to seek compensation or renegotiate their own market access offerings under agreements, trading partners could respond in kind and tighten their own domestic content rules, which could limit U.S. firms’ access to foreign government procurement markets. A 2016 report from the Government Accountability Office found that the World Trade Organization’s (WTO) Agreement on Government Procurement (GPA) and existing free trade agreements provide more market access for U.S. industries than the United States has been required to provide in exchange. The 61 foreign countries from which U.S. businesses can receive procurement contracts represent a foreign procurement market worth $4 to $6.2 trillion—compared to the U.S. federal procurement market of approximately $600 billion per year.
The changes to Buy American rules, depending on their severity, could create friction with Canada and the European Union, two of the largest beneficiaries of access to the U.S. government procurement market. Canada’s foreign minister has already voiced concern with the order. History suggests disputes with those two trading partners are not easily resolved, and negotiations will be tough.
Changes to Buy American requirements may also set the stage for the Biden administration to embark on a renegotiation of government procurement rules with fellow members of the GPA and U.S. free trade agreement partners. Biden officials have asserted that the EO is fully compatible with existing WTO and bilateral procurement agreements. However, tensions with trading partners could threaten U.S. businesses’ access to a huge market of foreign government contracts.
Biden stated before signing the order that he intends to “modernize” trade rules related to government procurement so governments “can use our taxpayer dollars to spur investment that promotes growth and resilient supply chains.” This would be a tamer approach than Trump’s reported consideration of withdrawing from the GPA entirely; however, former U.S. trade representative Robert Lighthizer in November said the GPA needed to be “rebalanced.” One pressing issue left over from the Trump administration is the proposed withdrawal of “essential medicines and medical countermeasures” from U.S. GPA and free trade agreement coverage. GPA members filed formal objections to the U.S. proposal, triggering consultations aimed at resolving differences over the proposed modification. If the Biden administration decides to follow through with the GPA modification and if consultations do not yield a resolution, any objector can seek arbitration at the WTO to determine the level of compensation they may seek from the United States, either through tariffs or rebalancing their own GPA obligations. Requests for arbitration must be made before March 27.
Jack Caporal is a fellow with the Scholl Chair in International Business at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Jasmine Lim is a program coordinator and research assistant for the CSIS Scholl Chair. William O’Neil and Sean Arrieta-Kenna are interns with the CSIS Scholl Chair.
Critical Questions is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).
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