NEW YEAR, NEW DOMESTIC PREFERENCE RESTRICTIONS: TRUMP FINAL RULE AND BIDEN EXECUTIVE ORDER

Federal ProcurementDespite their many differences, Presidents Trump and Biden agree on one thing: that the Government should favor American manufacturers over foreign companies by tightening the protectionist restrictions applicable to many Federal procurements. The outgoing and incoming Administrations each took actions this January that will cheer the hearts of many American manufacturers, while dismaying advocates of free trade and broader competition, as well as those agencies and contractors whose purchasing options the new rules seek to limit.

Last September, we commented on the proposed rule to implement President Trump’s Executive Order 13811, which called for the expansion of the preference for domestic goods, products, and materials – particularly domestic iron and steel – in Federal procurements subject to the Buy American Act (BAA). On the last full day of the Trump Administration, the Federal Acquisition Regulation (FAR) Councils issued the final rule implementing this order. Aside from adding new definitions for greater clarity, the final rule largely reflects the proposed rule from last September and alters the regulatory application of the BAA for certain items and materials in important ways. The final rule will apply to new solicitations issued on or after February 22, 2021.

Less than a week after the Trump preferences were finalized in the FAR, President Biden issued an executive order of his own, also promising to increase the favor shown to American-made goods and services in Federal procurements. Most of the Biden initiatives will require further agency action and rulemaking to take effect. We’ll first address the baseline against which the two executive orders and FAR amendment were issued, and then consider each change in turn.

BAA in a Nutshell

The BAA has been around since the Great Depression. In its current regulatory implementation, found in FAR Part 25 and its associated provisions and clauses, the BAA requires offerors on Federal procurements covered by the BAA (more on that in a moment) to certify whether all of the “end products” they offer are domestic. For many procurements, the BAA is not applicable, and the less onerous (but generally less forgiving) Trade Agreements Act (TAA) applies instead. The BAA does not apply to services. Where domestic goods are not available in sufficient quantities or quality, or at reasonable prices, agencies have authority to waive the BAA restrictions – with some waivers being procurement-specific, and others being blanket waivers. Waivers or exceptions are also currently in place for commercial item information technology, goods destined for resale in commissaries, as well as goods covered by a blanket exception that an agency may negotiate with a foreign government.

But what is a domestic end product? Prior to this month’s changes, the heart of the BAA analysis of whether an end product is domestic was a two-prong test: (1) was the end product mined, produced, or manufactured in the United States; and (2) are more than 50% of the component parts of the end product (calculated as a percentage of cost) also mined, produced, or manufactured in the United States? If the answer to both questions was “yes,” the end product was domestic under the BAA. For Commercial Off-the-Shelf (COTS) end products, the pre‑January 2021 implementation of the BAA required only the first part of the analysis: if a COTS end product was mined, produced, or manufactured in the United States, it was considered a domestic product without the need to calculate component costs.

FAR 25.502(c) establishes a special price evaluation factor (rather than a strict prohibition as under the TAA) for BAA-covered procurements when both domestic and foreign end products are offered and eligible for award, and the domestic offer does not have the lowest price. In those cases, civilian agencies must take the price of the non‑domestic end product and add a certain percentage if the lowest-price domestic offer is from a large business or a higher percentage if the lowest-price domestic offer is from a small business; the Defense Department applies a 50% preference in all covered procurements. The agency then uses this adjusted price for evaluation purposes. FAR 25.502(a)(3). The agency also uses this approach for determining the price reasonableness of domestic end products when an otherwise eligible offer for foreign end products is the lowest price. FAR 25.105.

FAR Final Rule Modifying Implementation of the BAA

The new final rule implementing Trump’s Executive Order 13811 tightens the BAA rules in some important ways, particularly with respect to iron and steel items. These requirements apply only to procurements subject to the BAA and will have no impact on TAA-covered procurements. The final rule largely mirrors the proposed rule from September 2020, with the differences coming mainly from additional clarifications and more precise definitions that the proposed rule lacked.

  1. Iron and Steel: The biggest change is the special treatment given to end products or construction materials that consist wholly or predominantly of iron or steel or a combination of both. “Predominantly” is defined to mean “that the cost of the iron and steel content exceeds 50 percent of the total cost of all its components. The cost of iron and steel is the cost of the iron or steel mill products (such as bar, billet, slab, wire, plate, or sheet), castings, or forgings utilized in the manufacture of the product and a good faith estimate of the cost of iron or steel components excluding COTS fasteners.” Under the new rule, an offeror may certify these particular end products or construction materials to be domestic only if, in the offeror’s good-faith estimate, the cost of the iron and steel content not produced in the United States is no more than 5% of the cost of all components or content of the material or end product. That is, the component prong of the BAA test for these particular end products and construction materials is now a “content test” and requires at least 95% domestic iron/steel content for the item to qualify as domestic (in addition to meeting the domestic manufacture prong of the test).

The allowance for a good-faith estimate at least recognizes the practical difficulty of calculating exact amounts, but it may be difficult even to reach a good-faith estimate of the total cost of foreign iron/steel content with any reasonable accuracy. Note that the good-faith estimate applies only to the cost of the foreign iron/steel content, and not to the origin of the iron/steel: iron/steel of unknown origin is presumed to be foreign. The final rule has also clarified that the allowance for a good-faith estimate does not apply to “the cost of foreign iron or steel mill products (such as bar, billet, slab, wire, plate, or sheet), castings, or forgings utilized in the manufacture of the product,” as the end manufacturer presumably will know exactly what those incorporated products cost.

  1. Partial Revocation of the COTS Waiver for Iron and Steel Products and Construction Materials: Under the new rule, both prongs of the BAA test must be applied even to COTS construction materials and end products that are made wholly or predominantly of iron or steel (except for COTS fasteners). This partially reverses the prior rule that, if an item was a COTS item, one need only determine whether it was mined, produced, or manufactured in the United States, without having to calculate the value of its foreign components or content. The waiver of the component test remains in place for COTS fasteners, including iron and steel fasteners (e.g., nails, screws, rivets, clips, etc.), and for all other COTS end products that are not predominantly composed of iron or steel.
  2. End Products Not Predominantly Composed of Iron or Steel: The new rule slightly increases the domestic content requirement for components of non-COTS end items that are not predominantly composed of iron or steel. The cost of the end product’s domestic components now must exceed 55% for the end product to qualify as domestic (in addition to meeting the domestic manufacture prong of the test). Components of unknown origin are deemed to be foreign.
  3. Increased Price Preferences/Handicaps: The rule also increases the price evaluation factor percentages applied to foreign end products in civilian acquisition: the price preferences are now 20% if the potential awardee with domestic end items is a large business and 30% if it is a small business. The percentage remains 50% for Defense Department acquisitions. The way the price factor would apply to construction materials is less clear, as there generally are not specific line items for these materials. For construction materials, the preface to the proposed rule stated: “The foreign material is evaluated on the basis of market research, not a specific competing offer.  Thus, only the 20 percent factor would be applied to construction material.”

Biden Executive Order “Ensuring the Future Is Made in All of America by All of America’s Workers”

Among the flood of new executive orders released in the first seven days of the new Administration is President Biden’s “Executive Order on Ensuring the Future Is Made in All of America by All of America’s Workers,” which carries through with various domestic preference campaign promises. Although the order rescinds a number of Trump orders, it leaves intact the tightened BAA requirements discussed above and ups the ante. Notably, the Biden order calls for review and tightening not just of the implementation of the BAA, but of all “Made in America Laws,” which are defined as “all statutes, regulations, rules, and Executive Orders relating to Federal financial assistance awards or Federal procurement, including those that refer to ‘Buy America’ or ‘Buy American,’ that require, or provide a preference for, the purchase or acquisition of goods, products, or materials produced in the United States, including iron, steel, and manufactured goods offered in the United States[, including] laws requiring domestic preference for maritime transport, including the Merchant Marine Act of 1920 (Public Law 66‑261), also known as the Jones Act.”

Here is a walk-through of the main features of the order:

  • Made in America Office and Domestic Preference Waivers – Section 4 of the order calls for the Office of Management and Budget to stand up a new Made in America Office. Once the Office is in place, an agency that wants to waive the requirements of the BAA or any other domestic preference program (such as the Jones Act) must first explain itself to the Office. The Office will set up procedures for issuing waivers, including procedures where the Office and procuring agency disagree on the need for a waiver. Although a 2018 study from the GAO found that foreign items benefiting from waivers and exceptions accounted for less than 5% of total Federal obligations for end products potentially subject to the BAA, the President expressed an opinion that Federal agencies have been “waiving Buy American requirements with impunity,” and stated that tightening domestic preferences should start with cracking down on agencies’ use of BAA waivers. The new Made in America Office apparently will be at the forefront of the crackdown and the inquiry into whether agencies have, in fact, been engaged in a widespread flouting of the law.
  • Accounting for Sources of Cost Advantage – Section 5 of the order provides that, when analyzing cost differentials between foreign and domestic items as part of a waiver analysis, agencies should “assess whether a significant portion of the cost advantage of a foreign-sourced product is the result of the use of dumped steel, iron, or manufactured goods or the use of injuriously subsidized steel, iron, or manufactured goods.”
  • Publicizing Waivers and Identifying Domestic Suppliers – Section 6 of the order calls for creation of a public website to provide information on all proposed and granted waivers. This transparency initiative should provide better insight into agency waiver requests and allow capable domestic manufacturers a simple, centralized way to identify opportunities and object if they think a proposed waiver is unjustified. Section 7 calls for proactive steps (including partnering with the Hollings Manufacturing Extension Partnership) to scout out American manufacturers, including small and mid-sized businesses, capable of meeting Federal procurement needs that might otherwise be subject to a waiver.
  • Changes to the FAR’s Implementation of the BAA – Similar to the Trump Executive Order 13811, Section 8 of the new Biden order tasks the FAR Councils with amending the FAR’s implementation of the BAA, including further tightening the domestic content percentage requirements and price preferences. Uniquely, this section also calls for consideration of replacing the BAA’s component 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.” The order directs the FAR Councils to consider publishing a proposed rule on this subject within 180 days of the order.
  • Review of the FAR’s List of Domestically Nonavailable Articles – Under Section 9, the Office of Federal Procurement Policy is tasked with a review of FAR 25.204(a)’s current list of domestically nonavailable articles to analyze whether there is a reasonable basis for concluding that domestic articles are not available and, thus, whether they should continue to be subject to a blanket waiver.
  • Commercial Item Information Technology Waiver – Section 10 of the order tasks the FAR Councils with considering whether to rescind the existing waiver for information technology that is a commercial item, thereby making such products subject to the BAA.
  • Reports – Sections 11-13 of the order require various studies, recommendations, and reports on enforcement and potential tightening of various domestic preference regimes. One of the directives in Section 12 calls for recurring reports from each agency on “spending as a result of waivers issued pursuant to the Trade Agreements Act of 1979, as amended, 19 U.S.C. 2511, separated by country of origin.” This appears to relate to the President’s signing remark that the Administration is committed to “working with our trading partners to modernize international trade rules, including those relating to government procurement, to make sure we can all use our taxpayer dollars to spur investment that promotes growth and resilient supply chains.” This “modernization” may foreshadow an attempt to renegotiate free trade agreements to which the United States is a party, such as the World Trade Organization’s Government Procurement Agreement, to permit participants to engage in more restrictive practices than are currently permitted. If this happens, it would be potentially one of the most wide-ranging changes in the U.S. domestic preference regime in decades, and a potential setback to goals of promoting free trade in public procurement around the globe – including the goal of giving American manufacturers access to foreign countries’ public procurements.

Section 13 of the order requests recommendations from the General Services Administration (GSA) on “ensuring that products offered to the general public on Federal property are procured in accordance with the policy set forth in section 1 of this order.” This appears to be aimed at commissary sales, which the FAR currently exempts from application of the BAA. Depending on what the GSA recommends and what actions the Administration takes, this may result in U.S. servicemembers and others who shop at commissaries finding that Italian olive oil, Swiss chocolate, and Mexican avocados have disappeared from the shelves.

Time will tell what concrete actions the Government will take in response to this executive order, what real-world impact it will have, and when any changes will be implemented. Stay tuned!