Leibowitz on Trade: Buy American Act Requirements for Steel, Other Products

The Buy American Act was signed into law by President Herbert Hoover just before he left office on March 4, 1933. This was the last Inauguration Day on March 4. Under the 20th Amendment to the Constitution, Inauguration Day was moved to January 20.

Buy American is designed to favor American-made goods over foreign goods in government procurement, but it has never prohibited purchasing foreign goods. It exacts a penalty, usually by requiring foreign goods to be significantly cheaper than domestic goods in order for the federal government to buy them. President Trump wants the federal government to consider increasing the advantage for domestic goods, especially steel products, by counting more goods as “foreign” than the current rules require.

The President issued an Executive Order last Monday instructing an interagency group in the Executive Branch (the “Federal Acquisition Regulatory Council”) to consider changes to the federal acquisition regulations (known in acronym-rich environment of Washington as the “FAR”). Under previous Executive Orders, a product is considered “foreign” if the cost of the foreign-origin materials in that product is 50 percent or more of the total material costs. The Executive Order wants the FAR Council to consider whether to propose a change of that 50 percent threshold to 5 percent for an “iron or steel end product”. For non-steel products, the threshold for foreign origin would decrease from 50 percent to 45 percent.

The Buy American Act as amended also requires federal agencies to use domestic products in procurement unless the agency head determines that using domestic products would be against the public interest or impose unreasonable costs. Current regulations call for a “premium” of 6 percent of the foreign goods to give an advantage to domestic competitors. The Executive Order instructs the FAR Council to consider amending the FAR to increase the “premium” to 20 percent for non-small business procurement and 30 percent for small business procurement. This compares with the current regulations between foreign and domestic goods of 6 percent or 12 percent, respectively.

Before any champagne is opened by the steel industry, they need to consider what just happened—and what did not happen. The Executive Order gives the FAR Council 180 days (six months) to consider proposing changes to the FAR regulations. While the FAR Council must consider proposing these changes, they are not required to implement them. Once proposed, the regulations would be subject to standard notice and comment procedures, meaning that any changes would not take effect until after comments had been evaluated and final regulations prepared. This process would probably not result in final rules until late 2020. So nothing at all is happening immediately regarding government procurement.

Second, navigating these changes requires knowledge of a lot of details. In general, a product is an “end product” if it is delivered to a federally-funded job site. Articles combined with other articles before delivery to the job site are generally not considered to be domestic or foreign. Federal contractors, like any businesses, are interested in maximizing profits; they carefully examine how products are delivered to the job site to maximize efficiency and minimize costs.

Third, the Executive Order does not require the FAR Council to amend (or consider amending) regulations granting waivers from Buy American Act requirements (other than the percentages listed above). Any company that is interested in federal contracts needs to analyze the potential changes carefully and make its feelings known during the comment period.

Fourth, the changes that the Executive Order listed must be consistent with law and international agreements. The Executive Order does not change the statutes governing Buy American requirements. Moreover, the United States is a party to the WTO Agreement on Government Procurement (AGP), which treats products from about 40 countries as though they were domestic in many circumstances. Therefore, these changes, even if adopted, might not be applied to products from AGP countries. Those issues will likely be discussed in the proposed regulations and industry comments.

Press reports characterize the Executive Order of last Monday as another effort to boost the domestic steel industry’s fortunes. It may turn out that way—but there is much that needs to happen before it comes to pass. There will also be considerable debate about whether these changes are in the national economic or security interest.

Like the section 232 tariffs, Buy American requirements are complex; companies can “engineer” their products to comply with these requirements. The government agencies purchasing goods generally behave like private customers, seeking to stretch their budget dollars and not waste precious resources. Clearly, purchasing agencies, including the Defense Department, will try to protect their interests.

Lewis Leibowitz

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