Buy American Requirement (Contract Management)
As described in a Congress Research Service (CRS) report (March 2009) by John Luckey, the Buy American Act (BAA) dates from 1933 and has been the subject of just four significant amendments since then. Its purpose is to control the purchase of goods and services by the federal government with the intent of protecting the domestic labor resources.
Although that sounds straightforward enough and therefore simple to understand, the complexity comes in the detail of just how to determine what are actually deemed to be American goods and/or services. Zirkelbach (2009) provides further clarification of the requirements in her article published in an issue of the Financial Fraud Law Report.
Where goods are mined, produced or manufactured is important in determining if they are “American”. Canni (2008), in an article entitled Decoding the Buy American Regime, explains that products coming within the scope of the BAA are classified as domestic end products, which means the goods have to satisfy these criteria:
Must be manufactured in the United States, and the cost of domestic components must represent at least 50 percent of the total cost of all components. Does not apply to purchases of COTS (Commercially available Off The Shelf) components.
There are exceptions to the rules that allow purchases not meeting those criteria:
Purchases below a specified threshold cost (the “micro-purchase threshold”);
Unreasonable cost of domestic products. “Unreasonable” is calculated by applying an evaluation factor to the non-domestic offer price. This factor is either 6% or 12% but jumps to 50% for defense contracts.
Non-availability in the US is another valid exception;
BAA preference can be ignored if it is in the public interest to do so.
Considering the BAA requirements as summarized above, my initial reaction is to label the Act as pure protectionism, effectively preventing US citizens benefitting from lower purchase costs for federal projects, goods and services, and therefore – indirectly – from lower taxes because the government would have consequently spent less. However, the other side of the coin is that without any such restrictions, the probable scenario is to see much of our manufacturing move to countries paying lower wages and having less overhead costs due to lack of health & safety regulations and so on. If more of our goods and services are sourced from overseas, our own factories will begin to close down, meaning increased domestic unemployment, and – in the longer term – loss of the expertise to restart those industries should the situation change in future. So, fewer jobs would mean less tax revenues for the Treasury, which might well amount to the cancelling out of any perceived benefit from the short term benefit of reduced purchase costs of the foreign goods and services.
Although the US has the BAA to restrict federal purchases from overseas, I believe that we are for the most part still a free market. One of the significant exceptions written into the BAA criteria is the “unreasonable cost” clause. If the foreign-originated product or service is still cheaper after factoring in the appropriate evaluation percentage, there is no problem in buying it. So although there are rules to abide by, there is no “blanket” prohibition of buying abroad. The BAA helps domestic manufacturers but doesn’t totally prevent sourcing goods and services from abroad.
I know that the steel industry in the United Kingdom declined at least in part because domestic users were free to buy steel at much lower costs from South East Asia and from Spain, where the industry received government subsidies. The same could happen in the US.
Burton Folsom Jr. was one of several contributors to a feature in the New York Times entitled “That ‘Buy American’ Provision” (February, 2009). He offered reasons why such limited restrictions are not so wrong as one might think. Firstly, he makes the point that if we buy American-made goods that are higher priced than the foreign made product, then it could be that all we are doing is subsidizing inefficient home-grown producers. He goes on to postulate that refusing to buy any and all products from (say) China, would simply result in China blocking US exports in retaliation.
As summarized earlier in this paper, the BAA provisions have a number of exceptions, which provide freedom in a number of circumstances and always for smaller value projects. For the most part I can see the reasoning behind those exceptions and agree that they make sense, that they add refinement to the implementation of the BAA and should therefore be included in the provisions of the Act. However, there is one area that concerns me. There is in existence a system of “designated countries” created under the Trade Agreement Act (TAA) of 1979. Canni notes that the list of designated countries has created an unanticipated problem in regard to the BAA. As Canni states, the provisions of the TAA allow products from those countries to be treated the same as US domestic products (i.e. no evaluation factor needs be applied). Because of the manufacturing and assembly detail included in those provisions, the end result is that a finished product can actually be treated more favorably than an equivalent genuine US domestic product. In my view that anomaly needs to be addressed.
The evaluation factors set at 6% for small businesses and 12% for large businesses seem reasonable, but I feel that the evaluation factor for defense products and contracts being set at a massive 50% is excessive, unfair, and – I would imagine – makes it extremely difficult for foreign companies to compete at all. Whether that high level of protection for US defense contractors is justified, and in the longer term is actually beneficial to them, I cannot say. My concern is that it must encourage them to set excessively high prices, knowing that they are safe from competition from outside the US. If that is the case, it would not only be unfair, but would be disadvantageous to the US taxpayer.
References
Canni, Todd, J. (February, 2010). Decoding the “Buy American” Regime. Contract Management, February 2010. Retrieved from http://www.mckennalong.com/media/site_files/1182_
Decoding%20the%20Buy%20American%20Regime.pdf
Folsom Jr., Burton. (February, 2009). That ‘Buy American’ Provision. New York Times Opinion Pages. Retrieved from http://roomfordebate.blogs.nytimes.com/2009/02/11/that-buy-american-provision/
Luckey, John, R. (March, 2009). The Buy American Act: Requiring Government Procurements to Come from Domestic Sources. Congressional Research Service. Retrieved from http://www.seia.org/galleries/pdf/CRS_Report_-_The_Buy_American_Act_3.13.09.pdf
Zirkelbach, Gail, D. (July/August, 2009). Anti-Fraud Regulatory Scheme Imposed on Stimulus Fund Contracts. Financial Fraud Law Report. Retrieved from http://www.jacksonkelly.com/JK/pdf/zirkelbach.pdf
