President Biden Orders Tightening of Made in America Laws: What Contractors Need to Know

January 28, 2021, Covington Alert

On January 25, 2021, President Biden issued a much-anticipated Executive Order announcing plans to strengthen the U.S. Government’s preference for domestically-sourced goods and services, including a proposal to tighten longstanding exceptions to domestic preference requirements.

Executive Order 14005 on Ensuring the Future Is Made in All of America by All of America’s Workers (“EO”) aims to “maximize” the U.S. Government’s purchasing of goods and services produced in the United States. In its key provisions, the EO:

• Proposes to increase the domestic content threshold for determining whether a product qualifies as domestic, potentially exceeding the 55% threshold, which was increased to that number only last week by the Trump administration.
• Directs the Federal Acquisition Regulatory Council (“FAR Council”) to replace the Buy American Act’s (“BAA”) longstanding domestic cost-of-components test with a domestic value-added test, using as-yet undetermined metrics.
• Calls for new procedures that would increase the level of review required to obtain a waiver of domestic preference laws and the scrutiny that would apply to such waivers.
• Contemplates leveraging trade remedies used to combat unfair trade as a means of enforcing federal procurement policies.
• Establishes a new Made in America Office to oversee and administer domestic preference requirements in federal procurements.

This EO is the latest in a line of recent proclamations from the White House aimed at strengthening domestic preference requirements in federal contracting. Notably, the EO revokes certain earlier Trump administration executive orders, but it leaves in place—at least for now—the Final Rule issued on January 19, 2021 that increased the BAA’s Eisenhower-era domestic content requirements and price preferences in accordance with President Trump’s July 2019 Executive Order. The EO also left untouched the domestic procurement preferences for essential medicines, medical countermeasures, and critical inputs established in a separate order issued by President Trump in August 2020.

Ultimately, the effect of this latest EO will depend on the details of its implementation. While it largely avoids prescriptive details, the EO requires the FAR Council to consider proposing new implementing regulations within 180 days, and the Office of Management and Budget (“OMB”) and General Services Administration (“GSA”) likewise are directed to establish oversight and reporting mechanisms related to BAA compliance. Notably, the EO is unclear about whether and how it applies to the Trade Agreements Act of 1979 (“TAA”), and contractors will need to await guidance from the FAR Council to better understand this issue.

We will continue to closely track these developments as they unfold. For now, however, the EO offers a clear indication that the Biden administration intends to maintain—if not increase—the U.S. Government’s recent emphasis on promoting and enforcing domestic sourcing requirements.

Key Provisions of the EO

The EO calls for an array of changes to existing domestic preference laws and regulations (collectively dubbed “Made in America Laws”)[1] and the procedures for implementing them. At bottom, these contemplated changes generally fall into three principal categories: (1) proposed revisions to substantive BAA standards and requirements; (2) additional procedures for review and approval of waivers from Made in America Laws; and (3) detailed tracking and reporting requirements focused on Made in America compliance and use of waivers.

Substantive Revisions to BAA Regulations

The EO calls for the FAR Council to consider amending Part 25 of the FAR to change the regulatory thresholds and standards that have long-defined the application of the BAA. Historically, an article was considered a “domestic end product” for purposes of the BAA if (1) the article was manufactured in the United States and (2) the cost of domestic components exceeded 50% of the cost of all components for the end product. Further, the BAA historically applied an upward cost adjustment for foreign products of up to 12% when compared to the price of a domestic product.

On the last full day of the Trump administration, the FAR Council issued a Final Rule implementing Executive Order 13881 (Maximizing Use of American-Made Goods, Products, and Materials) that increased the applicable threshold for each aspect of the BAA test. Specifically, the Final Rule increased the domestic content threshold from 50% to 55% (and from 50% to 95% for iron and steel components used in iron and steel end products), and it increased the price adjustment for foreign products from a maximum of 12% to a maximum of 30%.

Building on last week’s Final Rule, the new EO directs the FAR Council to consider a further increase in these numerical thresholds, although it does not set a specific target. In other words, the EO contemplates that the domestic content threshold could be increased to greater than 55% (or greater than 95% for iron and steel components), and that the price adjustment for foreign products could exceed the recently increased 30% figure.

Of potentially greater significance, however, the EO directs the FAR Council to consider replacing the BAA’s “cost of component test” for evaluating domestic content with a test that considers “the value that is added to the product through U.S.-based production or U.S. job-supporting economic activity.” As discussed below, this is a potentially seismic change to the BAA’s regulatory analysis, though substantial questions remain about how the U.S. Government would identify and quantify the “value” of U.S. production or “job-supporting economic activity.”

Waiver Approval Procedures

The EO contemplates additional procedures and requirements related to approving, tracking, and reporting waivers of Made in America Laws.

Section 4 creates a novel Made in America Office within OMB and generally requires agencies to obtain approval from the Director of that Office before granting waivers to any Made in America Laws. Under the new waiver approval process envisioned by the EO, agencies will be required to provide a “detailed justification” for any waiver decision, and the Director of the Made in America Office will have up to 15 days to review the waiver request and issue a decision to approve or deny the waiver. The EO recognizes a limited exception to this process where the agency “is obligated by law to act more quickly than the review procedures” of the EO allow, but in those cases the agency must notify the Made in America Director of its decision “as soon as possible” and comply with the procedures of Section 4 of the EO “to the extent practicable.”

Additionally, Section 5 of the EO separately requires any agency considering a cost-based waiver of Made in America Laws to assess whether a foreign product’s price advantage is the result of unfair trade practices. Specifically, an agency considering such a waiver first must consider “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.” The EO notes that agencies may consult the International Trade Administration (“ITA”) for assistance in making such determinations.

Tracking and Reporting Requirements

Finally, several provisions of the EO create substantial tracking and reporting requirements for procuring agencies.

Most notably, Section 6 directs GSA to create a centralized, government-wide database of all proposed waivers of the Made in America Laws. The database would be “designed to enable manufacturers and other interested parties to easily identify proposed waivers and whether those waivers have been granted,” and also would include contact information for the agency granting each waiver.

Additionally, Section 10 directs the FAR Council to “promptly” prepare a report containing recommendations for limiting the existing BAA exception for commercial IT products. And Sections 11 and 12 of the EO require agencies to prepare reports on various aspects of compliance with Made in America Laws, including reliance on waivers and a country-by-country analysis of “spending as a result of waivers issued pursuant to the Trade Agreements Act of 1979,” which implements U.S. procurement commitments under various free trade agreements. The first of these agency reports is due in 180 days, and agencies will be required to file additional reports thereafter on a biannual basis.

Major Takeaways for Industry

Raising the Bar for the BAA

Under the EO, the FAR Council will be empowered to again raise the domestic component threshold, a potential change that could have disruptive effects on government contractors with global supply chains. After decades of managing supply chains to meet the 50% cost-of-components threshold, last week’s seemingly modest increase to a 55% cost-of-components threshold—to say nothing of the 95% requirement for steel and iron products—already has required many contractors to reexamine bills of materials and assess the need to shift sources of supply. The prospect of another increase to this threshold will require further adjustments to sourcing and supply plans and is likely to prompt frustration from some multinationals about a perceived moving target for BAA compliance.

But as noted above, the EO’s direction to consider replacing the “cost-of-components test” with a value-based test would constitute an even more fundamental regulatory shift. For nearly 70 years, the cost-of-components standard has been a foundational element of the BAA’s country of origin test. To state the obvious, the prospect of an alternative standard focusing on the domestic “value that is added to the product” will create uncertainty and complicate planning for global companies that sell into the federal market.

In addition, replacing the cost-of-components test could raise questions about how this new approach might apply to commercially available off-the-shelf (“COTS”) items. At present, federal regulations waive the domestic content test of the BAA for acquisitions of COTS items, but the EO provides no assurance that the value-added test would not apply to COTS items. Such an expansion could raise the regulatory hurdle on a wide range of manufacturers who might otherwise not be tracking the sources of components for COTS items.

In the near term, contractors will be keen to have a clearer understanding as to how the U.S. Government proposes to implement this proposal. Key open questions include: (i) how this value-based standard would be defined and quantified; (ii) whether the same domestic content thresholds would apply under the value-based standard; and (iii) what constitutes “U.S. job-supporting economic activity” within the meaning of the EO. However these questions are ultimately answered, the EO appears poised to usher in a significant shift from the longstanding approach to evaluating BAA compliance.

Increased Scrutiny of Made in America Waivers

The EO’s new waiver procedures and reporting requirements have a combined effect of focusing greater scrutiny on requests for waivers to Made in America Laws. The process for obtaining BAA waivers under the existing law generally requires high-level authorization already, but an agency head could make a waiver determination without consulting an executive office outside their agency or publishing waiver decisions. The EO now requires both public disclosure and the involvement of OMB in the process, thereby exposing waiver decisions to additional scrutiny from interested private parties and potentially the White House.

It is doubtless the U.S. Government intends for the public disclosure of all waiver decisions to increase the uniformity of these determinations. Depending on the level of detail provided to the public, a database of waiver determinations has the potential to provide useful precedents for agencies and contractors that are considering whether to use the waiver process. At present, waiver decisions may not become public unless they are challenged in litigation. But by publicizing waiver determinations, the EO could facilitate more uniform waiver decisions.

At the same time, the U.S. Government clearly recognizes that added scrutiny on waiver determinations will have a natural tendency to decrease agency use of such waivers. Before even considering a request, agency personnel will need to decide whether they are ready to defend the request publicly. Likewise, to obtain waivers from their customers, contractors may be required to share information that could become public in subsequent agency reports and disclosures. This risk of public disclosure could chill efforts to secure waivers, as agencies and contractors alike may prefer to avoid publicly airing such information.

Additionally, a public database of waivers could provide the necessary information for filing bid protests to challenge agency waiver decisions. In the past, a prospective bidder might not know that an agency had determined to grant a domestic sourcing waiver, or might have only limited information about why an agency made that decision. The EO’s public database presumably would provide that missing information. Indeed, in one respect the database may affirmatively encourage litigation about agency waivers. Given the stringent timing rules for filing bid protests at the Government Accountability Office, contractors may be forced to protest an agency’s waiver decision posted on the GSA’s centralized waiver website within 10 days of posting, or else risk losing their right to later contest the decision.

Implications for International Trade

Under the BAA, agencies are permitted to utilize a “public interest exception” if the “head of the agency make[s] a determination that domestic preference would be inconsistent with the public interest” for any reason, including where a foreign-sourced product offers a substantial cost advantage. Before relying on a public interest waiver in such cases, Section 5 of the EO provides that an agency must assess and incorporate into its waiver determination a discussion of “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.”

This section appears designed to account for cost advantages arising from trade practices viewed as unfair or anti-competitive. Under U.S. law, trade remedies are available to domestic producers as a means to combat unfair trade. Domestic producers can petition the ITA to impose duties on imported goods that are determined to be either dumped (i.e., sold at less than fair value) or subsidized by a foreign government/public body, so long as the International Trade Commission finds that imports of the unfairly traded products result in injury or threat of injury to the competing domestic industry.

The ITA’s traditional role in calculating margins of dumping or subsidization likely explains why the provision provides for consultation with the ITA. At the same time, it raises questions about how assessments of dumping or subsidization will be made and what might happen if a procuring agency disagrees with the ITA. Furthermore, depending on the extent of the consultation and analysis envisioned under Section 5, implementation of this requirement may place a substantial burden on the ITA or the procuring agency.

Ambiguity Regarding the Trade Agreements Act

The EO does not directly address how the administration intends to treat the TAA, the federal law that implements various bilateral and multilateral trade agreements to which the United States is a party. Where the TAA applies,[2] it imposes a statutory waiver on the requirements of the BAA, meaning that the U.S. Government may accept either a U.S.-made end product or an end product of a “designated country.” Designated countries refer to countries covered by the World Trade Organization (“WTO”) Government Procurement Agreement (“GPA”) or another free trade agreement with the United States, as well as certain countries defined as a “least developed country” or a “Caribbean Basin country.” In short, the TAA ensures that end products from designated countries are permitted to compete for federal government procurements on the same basis as U.S.-made end products. 

As noted above, the TAA constitutes a waiver of the BAA, though this waiver is imposed by statute rather than at the discretion of an agency or official.[3] It is unlikely that the EO actually intends for agencies to obtain approval from the Made in America Office in every instance in which the TAA waives the BAA requirements. Given the TAA’s broad applicability, such a requirement would impose an enormous—and impractical—burden on both procuring agencies and the Made in America Office. If this is not the EO’s intention, it will be important for implementing regulations to clarify which types of BAA waivers are (and are not) required to be approved, tracked, and reported.

Finally, reactions from U.S. trading partners to the EO may also have international trade ramifications. Domestic preferences for U.S. federal procurement is a particularly sensitive bilateral trade issue with Canada, in part due to the advanced level of integration between U.S. and Canadian supply chains. The EU has also long opposed Buy American requirements for U.S. procurements. Though the EO does not explicitly impact any market access that Canadian, EU, or other international producers or suppliers may be guaranteed under U.S. trade agreements, it will likely cause concern among U.S. partners, and potentially, responsive actions in some cases.

Conclusion

As is often the case with Executive Orders, the devil will be in the details, and the ultimate effect of President Biden’s EO will be determined by the substance of the implementing regulations and procedures. In any case, the Biden administration has sent a strong signal that it intends to tighten the enforcement of domestic preference laws, particularly the BAA.

In the near term, the FAR Council will issue a notice of proposed rulemaking to implement the EO, which is sure to draw significant industry interest and which ultimately could rewrite the basic test for BAA compliance. Oversight by the newly established Made in America Office seems likely to introduce unprecedented complexity and publicity to the process of obtaining waivers of domestic preference laws. We will continue to carefully monitor these developments closely and provide additional updates as new information becomes available.

If you have any questions concerning the material discussed in this client alert, please contact the following members of our Government Contracts and International Trade practices.