Executive Summaries Feb 26, 2021
How Buy America Impacts You
Entrepreneurs seeking to expand their sales into the United States see the vast opportunity of responding to the procurement requests from all levels of the US government. As lucrative as this market may be, it is subject to several local purchasing preferences restricting access to less sophisticated entrepreneurs. Understand the Buy America rules and successfully navigate the obstacles to achieve your goals.
On January 25, 2021, just five days after taking office, President Biden issued an executive order to amend the Buy American regulations. To the dismay of Canadian factory workers forming part of an integrated supply chain for US-based manufacturers, the news of the executive order was received with apprehension and suspicion of further US protectionism.
Here’s some useful information to properly understand the impact of the executive order.
What About the US Procurement Budget?
The United States Federal government annually spends around US$586.2 billion (2019) to acquire goods and services for its operations. Approximately 65% of that spending is for the Department of Defense and the remaining 35% is divided among other civilian federal agencies (the second-highest procurement budget is for the Department of Energy with 5.7% of the total budget). Add to this sum states and local governments expenditures (which some estimate at US$3.1 trillion) to properly understand that the public procurement market impact of the United States through all levels of government.
The Buy American Act, the Buy America Act and the Made in America executive order all limit access to the US public procurement markets for non-US manufacturers of goods and service providers.
How Buy America Blocks Access
Back in 2014, the small town of Morrison, Colorado, with a population of only 430, was awarded a federal subsidy to refurbish a bridge crossing a creek that cuts through the town. It wasn’t until the bridge was built and the town was applying for the disbursement of the Federal subsidy that it was discovered that the bridge’s steel beams had been rolled in Canada from US cast steel. Costing just US$3,270, the beams were not considered US manufactured goods and were consequently subject to the foreign content limitation of the Buy America Act. The beams cost US$770 more than the foreign content allowed under the Buy America regulation and the town faced the dilemma of either forfeiting the subsidy or paying US$30,000 to replace the bridge’s beams.
Buy American Act: US Manufactured Items Only
The Buy American Act was enacted in 1933 under Franklin Delano Roosevelt and applies to all US federal government agency purchases of goods valued over a micro-purchase threshold. All goods for public use (articles, materials and supplies) must be produced in the US and manufactured items must be manufactured in the US from US materials. Originally, to be considered a US manufactured good, the costs of the goods’ components had to exceed 50% of all components in the item and the product needed to be manufactured in the US. This was modified in 2019 by Donald Trump whereby iron and steel end products containing fewer than 95% US iron or steel would not be considered as a US product. Also, for all other products, the required US content was increased to 55%.
Notably excluded from the Buy American Act are service contracts and contracts with state and local governments (although many states and local governments have similar geographic production requirements in their procurement laws).
Because Canada and the United States are signatories to the World Trade Organization Agreement on Government Procurement (WTO-GPA), including sub-federal levels (including 37 of the 50 US states), Canadian manufactured goods beyond the WTO-GPA procurement value threshold (currently set at US$522,000 for goods and services and to US$7.358 million for construction projects), must be treated on an equal footing as US produced goods.
In addition, because of the North American Free Trade Agreement (NAFTA), Canadian manufactured goods beyond the NAFTA value of procurement threshold (currently set to US$25,000 for goods, US$ 77,533 for services and to US$10.1 million for construction services) must be treated on an equal footing as US produced goods when being considered by those government agencies listed in NAFTA.
Buy America Act: Extending Federal Purchasing Restrictions to States and Local Governments
The Buy America Act is part of a legislative package enacted in 1982 under Ronald Reagan and applies only to purchases over $100,000 related to rail or road transportation (construction of roads and highways, railways, transit systems such as buses and light rapid transit). It also extends to purchases by third party agencies using funds granted by US Federal government – meaning state and local governments using federal funds to partially finance road work or transit systems.
Initially, to be considered a US manufactured good, the cost of the good’s components had to exceed 50% of all the components in the item. In 2015, under President Barack Obama, those percentages were changed to 65% (effective 2018) and 70% (effective 2020) – meaning that as of today, when a state or a local government using federal funds purchases a public transit bus, 70% of the components of that bus must be made in the United States.
Since the WTO-GPA and NAFTA do not apply to the Buy America provisions, Canadian businesses in the past have set up cross-border manufacturing facilities while being particularly careful on the non-US foreign component included in their products. This was easier with the 50% US content rule and is, of course, more challenging with the 70% rule.
Last But Not Least: Made in America Executive Order
The Made in America Executive Order directs federal government agencies to close current loopholes in how domestic content is measured and to increase domestic content requirements. The Executive Order directs an increase in both the threshold and the price preferences for domestic goods – the price difference above which the government can buy a product from a non-US supplier. It also updates how the government decides whether a product has been sufficiently manufactured in the US, building a stronger foundation for the enforcement of Buy American laws.
Federal government agencies responsible for procurement have 180 days from the date of the Executive Order to propose and submit for public comments amendments to the regulations in order to implement the Executive Order. Further information regarding these modifications will be available by the end of July 2021.
While there is a narrow path for Canadian businesses to participate in the very lucrative US public procurement market, it is cluttered with obstacles that require attention and creative thinking in order to circumvent.
At BCF, we are uniquely positioned to assist you in developing your plans regarding your participation in the US public procurement market. Should you have any questions on US public procurement market, do not hesitate to contact our International Trade Agreements team.
Subscribe to our communications and benefit from our market knowledge to identify new business opportunities, learn about innovative best practices and receive the latest developments. Discover our exclusive thought leadership and events.