On January 15, 2009, the Government issued a final rule adjusting the dollar thresholds at which the Trade Agreements Act ("TAA") applies to U.S. Government procurements. See 74 Federal Register 2745. The changes were originally enacted as an interim rule in February 2008 (see 73 Federal Register 10962 and 73 Federal Register 16747; see also 72 Federal Register 71166; 72 Federal Register 73904), raising the threshold to account for inflation from $193,000 to $194,000 for most procurements involving countries that have agreed to the World Trade Organization Agreement on Government Procurement ("WTO GPA"). For other Free Trade Agreements ("FTAs") with countries such as Australia, Mexico, and Singapore, the threshold is raised from $64,786 to $67,826. Details on the application of the TAA and the revised thresholds are outlined in FAR Subpart 25.4.
While these TAA changes are not exactly breaking news – they have been in place for nearly a year – compliance with the requirements of TAA and domestic preferences continues to be a demanding undertaking, requiring continuing scrutiny of applicable law and regulation in connection with every transaction. Plainly, the confusion inherent in TAA compliance adds risk to anyone selling products or services to the United States government. Commercial suppliers who sell to the Government on a regular basis – especially those on the GSA Schedule – must be aware of the complex compliance risks associated with the TAA and other "country of origin" requirements. One specific point must be remembered, especially by commercial companies who may not normally track the country of origin of their various commercial products – countries such as China, Taiwan, India, Malaysia, and South Africa are not designated countries under the TAA because these countries have not yet entered into an FTA with the United States. While some countries such as China and Taiwan may be negotiating to be covered by an FTA (in their cases the WTO GPA), they are not yet covered. "Made in China," "Made in Taiwan," or "Made in Malaysia" can get companies into trouble when it comes to selling to the Government – as happened to several name brand suppliers of office products as recently as 2005.
Given the complicated nature of the "Buy American" and "country of origin" laws and their interaction with various FTAs to which the United States is a signatory, this blog is treating the recent changes in the TAA thresholds as an opportunity to discuss the TAA in a "bigger picture" context, beginning with the basic concepts underlying "Buy American" policy and the WTO and Free Trade Agreements. Given the recent public debate regarding the "Buy American" provisions of the 2009 Stimulus Package (H.R. 1), the issues surrounding "country of origin," FTAs, and barriers to international trade seem especially timely.
"Buy American" Laws In General
- Buy American Act. The BAA (41 U.S.C. §§ 10a-10d) generally prefers the purchase of products or services that are manufactured or substantially transformed in the United States.
- Trade Agreements Act. For procurements over the listed thresholds, the TAA (19 U.S.C. §§ 2501-2581) preempts the BAA. The TAA generally requires the purchase of products or services that are of U.S. domestic origin, or that are from a "designated country" that has signed an FTA with the U.S.
- Other Domestic Source Restrictions. In addition to the TAA requirements, there are also other domestic source restrictions that are wholly separate from and in addition to the TAA. For example, the Berry Amendment (10 U.S.C. § 2533a) and the specialty metals restrictions (10 U.S.C. § 2533b), apply to covered DOD procurements, in addition to the TAA requirements. (Click here for our extended discussion of the specialty metals restrictions). Some of these restrictions (such as those relating to specialty metals) allow exceptions for certain FTA partners. Others (such as those relating to the purchase of food or clothing under the Berry Amendment) do not.
The World Trade Organization and FTAs Generally
The WTO is an international trade organization committed to opening avenues for international trade and reducing trade barriers. The WTO's member states (of which the United States is one) negotiate and sign agreements aimed at helping producers of goods and services, exporters, and importers conduct their business in the international markets. Such agreements are referred to generally as "free trade agreements" or FTAs.
There are several types of FTAs. (See generally)
- There are bilateral FTAs, executed between the U.S. and another country, such as (for example) Australia or Singapore.
- There are multi-lateral or regional FTAs, executed between several countries in a particular region, such as (for example) the North American Free Trade Agreement ("NAFTA") between the U.S., Canada, and Mexico.
- There are global FTAs, agreements that are negotiated at a global level between numerous countries. One of the most predominant global FTAs is the WTO GPA, which applies generally to the U.S. and twenty-eight other signatory countries, although the specific terms applicable to each country may vary according to the specific terms, conditions, and reservations to which each country agrees.
Each FTA, as executed, applies to specific types of goods and services. Generally, in executing an FTA, the U.S. broadly designates specific types of goods or services to which the FTA will apply, reserving discrete sub-groups of the products or services for protectionist treatment. For example, in the U.S. the WTO GPA applies generally to purchases of all goods and products (unless specifically excepted), and all services, except for the following:
- Overseas military support services;
- Certain automatic data processing and telecommunications services;
- Management and operations services for governmental or private facilities;
- Research and development;
- Transportation services;
- Utility services; and
- Certain construction services.
When the U.S. seeks to procure any "covered" goods or services, it must treat an FTA partner equally with a domestic U.S. company.
As part of the bilateral, multilateral, or global FTAs discussed above, the U.S. has entered into FTAs with a number of different designated countries including: Please click here to view table.
Certain developing countries or Caribbean nations are also considered "designated countries" that satisfy the TAA when goods or services subject to the WTO GPA are being procured. Examples of these countries include: Please click here to view table.
TAA Dollar Thresholds
The new TAA dollar thresholds (already in place since February 2008) are as follows: Please click here to view table.
The 2009 Stimulus Package and the Law of Unintended Consequences
The 2009 Stimulus Package includes a provision that has been much discussed in the media of late. In particular, the version of the Bill that recently passed the Senate on February 10, 2009 provides that “[n]one of the funds appropriated or otherwise made available by this Act may be used for” public works or public buildings projects “unless all of the iron, steel, and manufactured goods used in the project are produced in the United States.” See H.R. 1, § 1604(a) (final Senate version) (compare H.R. 1, § 1110 (final House version), imposing similar requirements with regard to all "iron and steel"). This requirement appears to be very protectionist and all-encompassing – a true “Buy American” requirement. Or is it?
Section (d) of the Senate version of this "Buy American" provision requires that “This section shall be applied in a manner consistent with United States obligations under international agreements.” Those international agreements are the very ones discussed above that exempt products from a multitude of companies from our “Buy American” laws and regulations, even when the products made in those countries include or are completely manufactured from products or materials from other countries with which we do not have such international agreements. We have pointed out in the context of the specialty metals restrictions (discussed here) how these international agreements actually elevate the industries of foreign signatories to a status above that of U.S. firms – a so-called “Frankenstein’s Monster” that allows FTA signatory countries to use materials from non-signatory countries, while simultaneously denying U.S. firms the same prerogative and exposing them to False Claims Act liability for simply doing what foreign concerns are permitted to do. We wonder whether the law of unintended consequences is once more on the loose? Does Section (d) essentially render the new "Buy American" restrictions of the Stimulus Package so narrow that the only adverse impact will be on U.S. contractors occupying a less favored status than companies located within the geographical borders of our multilateral trading partners? “Haste makes waste,” and this adage is as applicable to the U.S. Congress as it is to all of us in our daily lives, more so since all of us as taxpayers foot the bill for the waste. Otto Von Bismarck was right – “To retain respect for sausages and laws, one must not watch them in the making.”
Clearly, especially in connection with the Stimulus Package, the issues related to "Buy American" or "country of origin" requirements are not only timely but sure to come up again in the near future. The Senate amendments to H.R. 1 made clear that the U.S. must honor its obligations under the various FTAs, and this sentiment has been echoed by President Obama. As recent media coverage of the Stimulus Bill has demonstrated, the interplay between "Buy America" and our FTA obligations is a difficult issue for the American public to understand, evoking strong emotions. Even more so, the interplay between "Buy America" and the various FTAs presents complicated legal questions that all companies selling to the Government (either now or in the future, whether as a prime- or a sub-contractor) must adequately address. Failure to carefully consider "country of origin" obligations under the TAA and other statutes carries significant risks and potentially significant costs.
Presently, if a contract for a covered product or service, is at or above the revised TAA thresholds, then the TAA will likely apply and products or services from designated countries must be treated equally with domestic products. However, if the source of the product is not from a "designated country" – "Made in China," "Made in Taiwan," or "Made in Malaysia," for example – then the product does not comply with the TAA, and the Government is prohibited from purchasing under the TAA. Companies should be aware whether the TAA or other domestic source restrictions apply to their contracts, and they should also be aware of the countries of origin of products being delivered to the United States. Remember that there is no exemption under the TAA (or the Stimulus Package, for that matter) for commercial companies, and commercial sellers are under the same obligations under the TAA as other non-commercial vendors.