Federal Buy America legislation
The Buy America Act (BAA), initially enacted in 1933, is the core domestic preference statute governing US procurement. It covers a number of discriminatory measures, generally termed Buy America restrictions, which apply to government-funded purchases. These take several forms: some prohibit public sector bodies from purchasing goods and services from foreign sources; some establish local content requirements, while others still extend preferential price terms to domestic suppliers. Buy America restrictions therefore not only directly reduce the opportunities for EU exports, but also discourage US bidders from using European products or services. The US industry, through the court system and legislative lobbying, ensures that Buy American preferences are enforced vigorously and maintained.
The restrictions apply to government supply and construction contracts, and require Federal agencies to procure only US mined or produced unprocessed goods, and only manufactured goods with at least a 50% local content. The Executive Order 10582 of 1954,asamended, expands the scope of the BAA in order to allow procuring entities to set aside procurement for small businesses and firms in labour surplus areas, and to reject foreign bids either for national interest or national security reasons. As a result of the GATT (subsequently WTO) Government Procurement Agreement (GPA), waivers from many Buy America provisions have been foreseen for GPA Parties (inter alia, through the 1979 Trade Agreements Act), including for the EU. However, the actual implementation of these waivers may in some cases produce legal uncertainty and this may act as a barrier. In addition, some Buy America provisions continue to significantly limit access to the US procurement market.
One of the most obvious areas of Buy America is federal aid administered by the Department of Transportation (DoT) under several different acts, including the Highway Administration Act, the Urban Mass Transit Act, and the Airports Improvements Act. In accordance with these acts, the DoT provides aid to the State and local governments for various transportation-related procurements. The Federal government may fund 40% to 80% of the project (depending on the nature of the grant), while the State or local government must fund the remaining share. All purchases of goods and services related to these projects must meet various Buy America provisions, usually domestic content requirements of 60% and, failing that, a price penalty of up to 25%. In 2001, a Canadian steel supplier contested the compatibility of BAA provisions in Federal funded projects for transport and highways as contrary to the NAFTA. A final judgement of this case could be obtained in 2002 and would force a limitation of BAA laws.
The European Commission estimates Buy America to affect about US$25 billion of contracts in FY2001, particularly mass transport and airport improvement. These are precisely the sectors where EU business is very competitive. This figure is expected to increase to about US$35 billion by 2005, taking account of budget growth forecasts. These restrictions will negatively impact EU suppliers of products including iron and steel and transport equipment.
National security issues
The Department of Defence (DoD) also has significant procurement expenditures that exclude foreign suppliers of goods or services. The DoD is the largest public procurement agency within the US government, spending many tens of billions of dollars annually on supplies and other requirements. Except as required by the Defence Supplement to the Federal Acquisitions Regulation (DFARS), contracting officers must apply BAA requirements to supply contracts exceeding the US$2,500 micro-purchase ceiling and to service contracts that involve finishing of supplies when the supply portion exceeds the micro-purchase ceiling. In March 1999, the Director of Defence Procurement reminded US defence agencies and military departments to ensure that their contracting officers comply with requirements of the BAA, as an audit report had revealed that some contracts had been awarded to foreign firms in contravention of the relevant provisions.
Many procurements fall under “national security” exceptions to open procurement obligations. Although the concept of national security can be invoked under Article XXIII of the GPA to limit national treatment in the defence sector for foreign suppliers, the use of national security considerations by the US has led to a disproportionate reduction in the scope of DoD supplies covered by the GPA. While the US denies abusing the WTO national security exemption, it has indicated a readiness, in the context of the implementation of the GPA, to disseminate more guidance to US procurement officials for identifying which procurements are covered by the Agreement and which by national security exemptions. It has also expressed its intention to ensure clear and consistent identification of national security procurements, and improve the coherence of the US Federal Supply Classification System with the international Harmonised System. These intentions mark a first small step towards more acceptable practices.
Berry Amendment
The concept of “national security” was originally used in the 1941 Defence Appropriation Act to restrict procurement by the DoD to US sourcing. Now known as the “Berry Amendment”, its scope has been extended to secure protection for a wide range of products only tangentially related to national security concerns -- for example, the 1992 General Accounting Office ruling that the purchase of fuel cells for helicopters is subject to the Berry Amendment fabric provisions, and the withdrawal of a contract to supply oil containment booms to the US Navy because of the same textile restrictions. A recent audit report by the Defence Department’s Office of Inspector General concluded that for certain DoD procurements during fiscal years 1996 and 1997, about half of the solicitations and contracts examined had not incorporated or enforced the relevant domestic sourcing requirements. In response, DoD’s procurement director has taken steps to ensure that contracts at or above the simplified acquisition threshold (presently US$100,000) are domestically sourced. To comply with the Buy America provisions, contracting officers must generally add 50% to the price when evaluating offers with non-qualifying country end products against offers with domestic end products. In September 1996 Congress adopted an amendment that extended the initial scope of the Berry Amendment to cover also all textile fibres and yarns used in the production of fabrics. The result of this extension is that EU fibres and yarns can no longer be used by US manufacturers for producing fabrics that they sell to the DoD.
Further DoD procurement restrictions are based on the National Security Act of 1947 and the Defence Production Act of 1950, which grant authority to impose restrictions on foreign supplies in order to preserve the domestic mobilisation base and the overall preparedness posture of the US. At the same time, defence procurement from foreign companies is sometimes also impeded by Buy America restrictions on federally-funded programmes.
Memoranda of Understanding undermined
There has been a trend towards making DoD’s other domestic preferences, apart from the BAA preferences, less restrictive – by expanding the preference to qualifying countries. These are countries that maintain reciprocal memoranda of understanding (MoU) with the US. In practice, all NATO countries (except Iceland), all major non-NATO allies of the US (e.g. Australia, New Zealand) as well as Sweden, Finland and Austria have signed MoUs with the US allowing for a waiver of the corresponding restrictions. However, these MoUs are subject to US laws and regulations, and consequently, other restrictions can be imposed annually by Congress through the appropriations process. For example, US legislation allows the Administration (DoD and USTR) to rescind a waiver if it determines that a particular ally discriminates against US products. In addition, Congress is unilaterally overriding the MoU by imposing ad hoc Buy America requirements during the annual budget process. In this respect, it is especially regrettable that Congress, after having adopted the Fastener Quality Act in 2000, continues to impose Buy America procurement restrictions on anchor and mooring chains. There are also indications that US procurement officers disregard the exemption of Buy America restrictions for MoU countries (e.g. fuel-cells, ball and roller bearings and steel forging items).
An amendment to the FY1998 Defence Appropriations bill, which would have given the Secretary of Defence blanket authority to waive the domestic preference for American speciality metals, stainless steel, flatware, clothing, or naval components, was substantially diluted by Congress. The compromise language only permits the Secretary of Defence to waive the restriction on a case by case basis under certain circumstances on a limited number of products, rendering the application of a waiver much more difficult. In addition, a bill introduced in the Senate (S.384) in February 1999 by the then-Commerce Committee Chairman McCain to authorise the Secretary of Defence to waive certain domestic source or content requirements in the procurement of items procured for the DoD failed to make any progress. In fact, the barriers to defence trade with the US result from a complex set of rules and practices aiming at imposing “domestic source restrictions” in US defence acquisition. A partial identification of all these barriers is provided in a July 1998 report of the US General Accounting Office that was established to justify these “domestic source restrictions”. The following examples illustrate the large variety of obstacles facing EU exporters to the US:
- Specific requirements to produce goods on US soil. This can take many forms, for example as part of the DoD programme approval procedure, a requirement exists that any major defence item must be produced on US soil, so that EU companies can only do business by selling the licences to manufacture (e.g. Harrier Vertical Take-Off and Landing Jet). In relation to large calibre cannons, there is legislation in Congress requiring that they be produced in a particular US plant. Such requirements can also be buried in the annual Defence Appropriations bill – for example, in relation to small arms, DoD is required to justify the need to buy offshore.
- There is no grant-back given for changes made to products by the licensee (a common element of licensing systems in the area of non-defence goods, as the original owner then benefits from changes made).
- Foreign comparative tests (FCT) are carried out to assess the best product for goods not produced in the US. Funds to carry out such tests were reduced in 1999, although the defence budget itself was increased. Also, experience shows that, where an FCT pinpoints a successful product, DoD seeks a licence to produce that product in the US rather than entering into a direct supply contract with the offshore producer. The effect of this practice is that EU suppliers look for a US production partner early in the process.
- Barriers arising from the use of the Foreign Military Sales Regulation (FMSR). The FMSR introduces maximum foreign content threshold requirements for products exported with FMS support. This means that US prime contractors willing to seek FMS support are reluctant to design foreign content into their products. Instead, they prefer replacing any foreign content by US production under licence (e.g. armoured vehicles were obtained under licence from Austria and then sold on to Kuwait through the FMS system – this took sales to third countries away from European companies).
- Technical data / Technology export control requirements. Non-nationals cannot take their own foreign companies’ technical data out of the US (even if only showing around for sales purposes) unless the US company is granted a licence to export that data – and consequently rights over the data.
- US subsidiaries. One way of circumventing the US-soil production requirements is to set up a subsidiary in the US. However, such subsidiaries need to obtain both security clearance and authorisation to operate. A precondition for obtaining this is that the overseas parent company must relinquish management control of the subsidiary (US Security Manual). These “Chinese walls” are quite systematically established; examples are within Allison (now Rolls-Royce North America) and Tracor (part of BAE Systems).
- Lack of access to bidders conferences / security clearance considerations. Foreign nationals rarely have access to bidder conferences and other pre-contract award procedures, because they are not granted the required security clearances at that stage of the procurement process.
- Congressional approval of the defence budget. The defence budget is approved line-by-line and Congress regularly strikes out lines, including procurement programmes. The effect is that defence contractors lobby Members for support for individual programmes, offering inducements in return – sometimes ensuring that production capability will be located in Members' districts. This represents a kind of “regional juste retour” built into the budget approval process. As an example, the company developing a particular missile programme ensured that 49 States benefited from that particular programme, thereby ensuring that programme's survival in the budget.
Other restrictions based on national security
Management and operation of R&D facilities under the Department of Energy, NASA, the National Science Foundation, or the DoD are often entrusted to private companies and universities under “management and operating (M&O) contracts”. These contracts do not follow the open competition procedures required under the Federal Acquisitions Regulations. Very few M&O contracts have been subject to competitive procedures and often the procurements done by these companies themselves follow Buy America requirements. The US has excluded M&O contracts from its offer in the GPA. More widely, the government has instituted a number of R&D programmes in recent years in which there is a strong preference for US participants. Examples are the Renewable Energy Export Technology Transfer Program and the High Speed Ground Transportation Development Program. Most of these programmes also require BAA compliance with respect to all materials furnished pursuant to the project.
There are numerous other marginal expenditures. While not exhaustive, the following examples of Buy America statutory programmes should be mentioned: the Balance of Payments Program; the Merchant Marine Act of 1936; the Hazardous Materials Transportation Authorisation Act of 1994; the Amtrak Authorisation Act; Grants for Construction of Water Treatment Works; National and Community Service Act; National Science Foundation Act of 1988 (as amended); and the President’s National Space Policy Directive of 1990 and 1994. The latter precluded US Government agencies from using foreign launch services (except, in the case of NASA, in collaborative projects not involving an exchange of funds). This policy was subject to undefined exceptions – a possibility that was never, or almost never, used.
The Commercial Space Act of 1998 on the one hand, calls on Federal agencies to buy space launch services – rather than launch vehicles; on the other hand, it requires these services to be procured from “US commercial providers”, subject to certain exemptions and exceptions, for instance for international collaborative efforts related to science and technology. It thus legislates the Buy America policy contained until then in the President’s National Space Policy but opens the door for NASA to enter into collaborative projects with foreign space agencies even if they involve the disbursement of funds. It remains to be seen whether US Government agencies will use that possibility and, more generally, how they will interpret the notion of “US commercial provider”. The US justified these restrictions, which initially applied to the launching of military satellites, on national security grounds, but they are now also applied to satellites for civilian use. These measures are part of a set of co-ordinated actions to strengthen the US launch industry and are clearly detrimental to European launch service providers. European launch operators remain in any case effectively barred from competing for most US government launch contracts, which account for approximately 50% of the US satellite market.
Finally, it must also be noted that, among the security measures adopted in the aftermath of 11 September, Section 108 of the Aviation and Transportation Security Act, passed in October 2001 requires any private security firm retained to provide airport security services be owned and controlled by a citizen of the US to the extent that the President determines that there are firms owned and controlled by such citizens.
Other indirect barriers
Apart from direct legal barriers, the complexity of procurement rules can act as an effective indirect barrier. Suppliers based in countries that are parties of the GPA are generally not directly excluded from the scope of the BAA and other restrictive regulations. Instead, legislation generally foresees the granting of waivers as regards these suppliers. However, implementation of these waivers can produce a considerable degree of legal uncertainty.
Sub-federal selective purchasing laws
At a sub-federal level, selective purchasing laws (whereby the access of companies to contracts is severely or completely curtailed as a result of the companies’ business links with particular third countries) continue to cause great concern. Such laws have been adopted by the Commonwealth of Massachusetts (in the case of Myanmar) and more than 20 cities and local authorities, and are under consideration by a number of other sub-federal authorities. The Supreme Court found the Massachusetts legislation unconstitutional on the grounds of division of powers between States and the federal authorities. Whilst this removes this particular obstacle, the wider issue of principle vis-a-vis the EU is left unaddressed.
The State of New York proposed in summer 2001 an extension of its selective purchasing legislation based on the MacBride principles. The National Foreign Trade Council and the EU have already transmitted their concerns to the US authorities. Both believe that these measures are incompatible with the GPA (which covers New York entities) and appear to ignore the Supreme Court ruling in the Massachusetts/Myanmar case, at least in relation to the application of the Supremacy Clause. This proposal was dropped in September 2001.
The EU strongly objects to these attempts to regulate the behaviour of EU companies that are acting in full compliance with EU and Member States’ laws.
The Commission will continue to monitor the situation in other sub-federal jurisdictions.
State Buy America legislation and restrictions
Buy America or “buy local” legislation is also rife at State level. More than half of all US States and a large number of localities do apply some “buy local” restrictions in one form or another. In some cases, the procurement of particular products is subject to such restrictions, such as steel, coal, printing and cars. Affirmative action schemes favouring small business or particular types of business (e.g. minority-owned) are also applied extensively in a large number of States. Although 39 of the 50 States are covered by the bilateral agreement of 1994 (and 90% of total procurement by value at State level), there are still gaps in its scope and, in some cases, concerns about its actual degree of implementation. Among the 11 States that have not been bound in the US GPA offer, some maintain very substantial local preferences, which have a negative impact on EU and other foreign suppliers. This is the case of Alaska, New Mexico, South Carolina and, to a lesser extent, Ohio and Virginia. In the case of New Jersey, State legislation also provides that for the construction of public works projects financed by State funds, the materials used (e.g. cement) must be of domestic origin. Even in the GPA-bound States various exemptions (i.e. for purchases of cars, coal, printing and steel and for set aside) seriously limit the procurement opportunities open to foreigners. Besides, all procurements by States and localities that benefit from particular types of federal funding (e.g. in mass transit and highway projects) are subject to BAA.
Set-aside for small businesses
The Federal government actively seeks to promote the growth of small businesses in numerous ways. It provides loans and grants, develops programmes to encourage bids from small business, and sets aside certain procurement contracts for small business. The “set-asides” are specifically exempted from application of the GPA. Small business set-asides account for tens of billions in expenditures or around 30% of all federal procurement dollars.
The relevant legislation is the Small Business Act of 1953, as amended, which requires executive agencies to place a fair proportion of their purchases with small businesses. This is achieved through two different types of set-aside schemes: one where US Federal government contracts are set-aside, regardless of the size of the contractor, in the event that there is a reasonable expectation of bids from two or more eligible US small or minority businesses; the other where all contracts below a certain threshold (currently US$2,500 to US$100,000) are set aside for US small or minority businesses -contracts are only released for competitive bidding in the event that two or more eligible bidders cannot be identified. In this context, small businesses are defined as businesses located in the US that make a significant contribution to the domestic economy (through payment of taxes and/or use of US products, materials, and/or labour) and are not dominant. The standard size criterion for eligibility as a small business for goods-producing industries is 500 employees or fewer. However, for some
industries (i.e. pulp, paper boxes, packaging; glass containers; transformers, switchgear and apparatus; relays and industrial controls; miscellaneous communications equipment; search, detection, navigation guidance systems and instruments) the employee limit is 750 and for some others (i.e. chemicals and allied products; tyres and inner tubes; flat glass; gypsum products; steel and steel products; computers, computer storage devices, terminals; motors and generators; telephone and telegraph apparatus) it is 1000. For services industries, depending on the sector, firms with total annual revenues of less than US$2.5 million to 17 million are considered to be small businesses.
In 1999, the Small Business Administration launched another programme -HUBZone- that provides contracting benefits to small businesses located in “historically under-utilised business zones”. The first goal of the programme is to channel at least 1% of overall federal procurement to HUBZone small businesses, which at current federal spending levels equates to about $2 billion. By the year 2003, that goal rises to 3% or about $6 billion. The notion of fair proportion means that the government-wide goal for participation by small businesses shall be established at no less than 20% of the total value of all prime contract awards for each fiscal year. Under normal bid procedures, there is a 12% preference for small businesses in bid evaluation for civilian agencies (instead of the standard 6%). In the case of the DoD, the standard 50% preference applies to all US businesses offering a US product. An important number of States also operate particularly proactive small businesses and minority set-aside policies. It is estimated that in States like Texas such policies effectively exclude foreign firms from around 20% of procurement opportunities. In Kentucky, as much as 70% of procurement opportunities are set aside for small businesses. The active promotion of small businesses is a common concern for the EU and the US. The EU is, however, concerned that the US "set-aside" measures and their exemption from the GPA are favouring US industry and restricting the ability of foreign (EU and other) companies doing business in the US.
Bearings
Congress has imposed a Buy America requirement on the procurement of ball and roller bearings since 1988, most recently to the end of 2005. In May 1996, the Federation of European Bearings Manufacturers’ Association (FEBMA) made a submission to DoD, in opposition to the restriction. The 1997 DoD Authorisation Act contains the “McCain Amendment” authorising DoD to waive Buy America requirements that would impede the reciprocal procurement of defence items under the MOU. The EU and 21 NATO countries asked for the effective implementation of the McCain Amendment and the termination of discrimination vis-a-vis imports from countries with which DoD has signed defence co-operation agreements, thus supporting FEBMA’s position. The DoD’s implementing interim rule was published on 24 June 1997 and included bearings. However, the interim rule notes that acquisition of non-commercial ball and roller bearings is restricted to domestic sources by DoD Appropriations Acts. Each annual DoD Appropriations Act since 1997 has contained a similar restriction. Therefore, Buy America restrictions remain and the McCain Agreement waiver cannot be utilised fully for non-commercial ball and roller bearings.
Iron, Steel and Non-Ferrous Metals
The main problem for the steel sector is the imposition of local content requirements or the preference given in works and other government procurement contracts for bids that include locally produced steel. This practice is notably common at the sub-federal level. Many States (such as Connecticut, Louisiana, Maine, Michigan, Illinois, Maryland, New York, Pennsylvania, Rhode Island and West Virginia) have such requirements that also apply to private contractors and subcontractors.
As already mentioned above, West Virginia and Ohio have recently adopted legislation that introduces procurement restrictions on steel imports.
Electrical and Electronic Equipment
The conditions and procedures applied by many States, cities and utilities to procure electrical and electronic equipment favour local suppliers and local content. Admittedly suppliers and equipment from other parts of the US are also discriminated against, although to a lesser extent than foreign suppliers and equipment. At the federal level the Department of Defence, and to a lesser degree other departments, also handle procurement rules that discriminate against foreign supplies. All in all, public procurement of electrical and electronic equipment in the US does not abide by the principle of most favoured nation in respect to countries to which the US has granted that treatment.
Telecom equipment
As a result of the failure to liberalise purchases of telecom equipment, the US decided in 1993 to impose sanctions against the EU and certain Member States under Title VII of the Omnibus Trade and Competitiveness Act of 1988. The sanctions bar EU suppliers from bidding, inter alia, for US Federal government contracts that are below the threshold values of the GPA.
The EU responded with counter-sanctions (Regulation 1461/93) that also bar US bidders from applying for contracts awarded by central government agencies below the threshold values. Following the bilateral Marrakech procurement agreement of April 1994, which liberalized around US$ 100 billion of procurement opportunities on both sides, the EU considers that the sanctions are an unnecessary impediment to the bilateral relationship.
Following the liberalisation of the EU telecom sector and the new legislative regime on government procurement before the EP which will exclude the whole telecom sector from the scope of EC Directives on Government Procurement, the EC proposed to mutually remove the existing sanctions. The US Administration has started to investigate this possibility which may become effective upon adoption of the new Directives. Anticipating this positive solution, the European Commission has adopted in January 2002 a proposal for a Council Regulation repealing EC counter-sanctions (Regulation 1461/93). This Regulation will be adopted by the Council once the US lift their sanctions.
Central procuring agencies and e-procurement Public authorities have increasingly used central purchasing agencies open to the US Federal entities. Procuring entities are given a choice: either they follow the "traditional system", which requires publication of a notice in the Commerce Business Daily (CBD)-Net, or use the "new" electronic schedule system.
The EU is currently examining this system in order to verify its consistency with the GPA.
EU actions in the context of the GPA
Many of the problems experienced by EU suppliers in accessing procurement opportunities in the US could be solved by an increase of the coverage of the GPA and by the elimination of the exceptions introduced in the US GPA offer. Apart from other initiatives, the EU considers that the current review of the GPA offers a good opportunity to improve the situation.
US Food Aid purchases
Under US regulations, only US commodities may be used in food aid transactions. Legislation expressly includes opening up markets for US exports among its food aid objectives. The provision of such non-genuine food aid causes losses to commercial supplies of commodities. Several EU markets have been targeted by non-genuine US food campaigns.
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