Q&A on “Buy American” Policies

Monday, January 25, 2021 - 9:15am

 

Q: How long has the United States had “Buy American” rules for federal procurement?

 

A: “Buy American” rules have been a feature of U.S. government procurement law for decades, and they are extensive. Notably, the Buy American Act of 1933 requires the federal government to prefer U.S.-made products in its purchases. The Buy America Act of 1983 applies to mass-transit-related procurements funded at least in part by federal grants. To illustrate, U.S.-made iron and steel is required in the construction of transportation infrastructure.

 

Q: Do these “Buy American” rules actually result in the government buying American products?

 

A: Yes, 97% of the federal government’s procurements by value go to U.S. firms. As the U.S. Chamber and 19 other business organizations explained in a February 2020 letter, “over the last five years, only about three percent of U.S. federal contracts by value have been awarded to foreign industries… and less than one percent of the contracts were won by foreign industries, with most contracts won by U.S.-based affiliates of foreign countries. Of that small number of contracts won by foreign suppliers, nearly 90 percent of the procurements were Department of Defense contracts that were won and fulfilled by the U.S. affiliates of British or other European firms.” A substantial share of those relate to the operations of the U.S. Armed Forces’ bases overseas.

 

Q: Did the Trump administration extend the reach of “Buy American” rules?

 

A: Yes. The Trump administration issued executive orders in April 2017 to limit exemptions or waivers to “Buy American” rules and in January 2019 to ensure the rules apply to loans, grants, and other federal domestic assistance programs (which, to a large degree, they already did). The Trump administration also issued on January 19, 2021, a final rule to increase the percentage of U.S.-made content that an end product must contain in order to qualify under “Buy American” rules. It also increased the price evaluation preference—the premium allowed a U.S. supplier to win a contract over cheaper non-U.S. competitors—under the Buy American Act (see further details from Wiley Rein LLP here). That rule is now subject to a regulatory freeze.

 

Q: Did these efforts to tighten “Buy American” rules have an impact?

 

A: Perhaps in limited ways, but it is certainly difficult to reduce the already very small share of U.S. federal procurements that go to foreign firms (approximately 3%, by value as cited above). In August 2020, the White House told the Los Angeles Times that direct federal procurement of foreign-made products amounted to $7.8 billion in fiscal year 2019, up from $6 billion in fiscal year 2016. Many of these procurements won by foreign firms appear to relate to goods or services for which U.S. production is limited or cost-prohibitive in the quantity or quality required. For example, U.S. military bases often procure basic goods and services from local providers.

 

Q: Can “Buy American” rules bring about reshoring of industry

A: Generally speaking, no. Strict, longstanding rules in the defense sector do indeed require U.S. production. But introducing new “Buy American” rules is generally an insufficient incentive to move a supply chain. Consider the public policy debate about reshoring production of generic medicines: Constructing a plant to produce, say, an over-the-counter analgesic in the United States may cost as much as $1 billion and take 5-7 years to build. Meanwhile, U.S. government procurement of the same product is just a sliver of the entire U.S. market. As such, “Buy American” rules are highly unlikely to be effective as an incentive to shift supply chains.

 

Q: Do U.S. trade agreements affect U.S. procurement rules?

 

A: Yes, the United States is a party to the World Trade Organization (WTO) Government Procurement Agreement (GPA), which gives American companies the right to bid on foreign government procurement opportunities in the 46 other countries that are parties to the agreement — and do so on a level playing field. The GPA provides U.S. companies with nondiscriminatory access to foreign government procurement markets with an estimated value of more than $4 trillion, a sum much larger than U.S. government procurement, which was valued at $488 billion in 2016 according to the Federal Procurement Data System. In other words, the GPA affords U.S. businesses very substantial opportunities in foreign government procurement markets while—as explained above—foreign companies win U.S. federal contracts at an extremely modest rate. Some U.S. free-trade agreements have provisions similar to the GPA.

 

Q: What U.S. industries benefit from the GPA?

A: Beneficiaries include U.S. businesses in sectors including infrastructure, healthcare (including medical devices and equipment), energy (electricity generation including equipment for thermal, nuclear, hydroelectric, and wind), aviation, transportation, cloud and other ICT services, telecommunications, semiconductors, satellites, and select services. In many countries, governments and state-owned or state-operated entities are the principal purchasers of these goods and services, so procurement rules like those in the GPA play a huge role. Health care systems and electrical power are good examples of sectors where governments — and government procurement — play the leading role in most developed countries. Without the GPA, U.S. firms could easily be shut out of these government procurements and the export opportunities they provide.

 

Q: Does the GPA allow Chinese or Russian firms access to U.S. procurement markets?

 

A: No. The GPA’s benefits are not extended to the entire world but only to GPA members, thus denying its benefits to would-be free riders. Further, the GPA is a club of like-minded countries: Its membership is made up of U.S. allies and partners such as Australia, Canada, Israel, Japan, and the EU. China and Russia are not members. WTO members seeking to accede to the GPA must negotiate bilaterally with the United States in order to win U.S. approval and also negotiate separately with all GPA members as a group. As a party to the GPA, the United States has a leadership role in shaping whether and on what terms other countries might join. On the other hand, if the United States withdrew, other countries may well permit non-members such as China and Russia to join with only modest reforms, affording firms from those countries better access to global government procurement opportunities than U.S. firms receive.

 

Q: What would happen if the United States left the GPA

A: Withdrawal from the GPA, coupled with highly likely retaliation overseas, would mean vastly more lost export sales by U.S. firms than new contracts won domestically. Foreign governments would be free to discriminate against U.S. companies in their government procurement or even ban purchases from U.S. firms. To illustrate, U.S. firms win more than 9% of Canadian federal contracts while Canadian suppliers win just 0.15% of U.S. federal contracts, according to Canadian data. The Trump administration debated withdrawing from the GPA for more than a year but in the end chose not to do so, recognizing the costs would outweigh any perceived benefits.

 

Q: Did “Buy American” rules apply in the 2009 Recovery Act?

A: Yes, but the way they were applied to states and local governments receiving federal dollars proved costly, and policymakers today should pay heed. In 2009-2011, many Recovery Act-funded projects were delayed while states and municipalities conferred with their lawyers to figure out how to comply with federal “Buy American” rules to which they have never before been subject. Also, the “Buy American” rules were interpreted in a way that barred many U.S.-based manufacturers from bidding on projects because many firms find it impossible to avoid sourcing at least a portion of their content from abroad. Waiver processes proved difficult, costly, and slow. Ironically, “Buy American” rules meant hardship for many American companies and their employees.

 

Q: Can “Buy American” rules be expanded in the infrastructure sector?

A: Again, the Recovery Act shows the challenges here. Take the water and wastewater infrastructure sector: The vast majority of its inputs are already American-made, including pipe and structural steel. This market, however, also depends on incorporating specialized pieces of equipment produced through global supply chains but the use of which “Buy American” may complicate. The expansion of “Buy American” provisions in the Recovery Act undermined local governments’ ability to fund and start “shovel ready” projects and seriously delayed job creation in the $120 billion water sector.

 

Q: Do “Buy American” rules represent good value for the taxpayer?

 

A: As noted, 97% of tax dollars spent on federal procurement already go to U.S. firms. Doubling down on already rigorous “Buy American” rules could drive up the cost of government projects, undermining their potential to create jobs and spur economic growth. Further, expanding “Buy American” rules may send a negative signal to potential foreign investors in the United States. Foreign companies that have invested more than $4.5 trillion in the United States already employ nearly 8 million American workers. While U.S. subsidiaries of foreign multinationals and the American workers they employ are generally not subject to discriminatory treatment under “Buy American” rules, it would be imprudent to signal to international companies that policy changes in this area may change in ways that could subject them to discrimination if they do add to their investments in the United States.

Staff contact: John Murphy, Senior Vice President for International Policy, U.S. Chamber of Commerce