Now that the American Recovery and Reinvestment Act of 2009, more commonly known as the stimulus bill, has become law, the attention of American industry and America’s trading partners has turned to how its Buy America provisions will be implemented. This is illustrated by formal questions that the European Union delegation submitted to the United States through the World Trade Organization (WTO) on March 27, 2009, and by a letter from the Telecommunications Industry Association (TIA) to the Office of Management and Budget (OMB).
The stimulus bill requires that steel and manufactured products used in public buildings and public works be produced in the U.S., but subject to the proviso that this restriction “shall be applied in a manner consistent with the United States’ obligations under international agreements.”
European Union Questions to the United States Regarding the Buy America Restriction
The WTO Committee on Government Procurement, comprising the parties to the WTO Government Procurement Agreement (GPA), discussed the stimulus bill Buy America provision in its meeting on February 25, 2009. On March 23, the Delegation of the European Communities (EC) circulated its questions to regarding the United States’ interpretation and implementation of that provision. The EC requested a written response, as a basis for discussion at the next Committee meeting, to be held the week of May 11.
These questions highlight the importance that the EC, as well as other WTO members, attach to the implementation of Buy America provisions. Contrary to some assertions during the legislative debate over the stimulus bill, the EC’s questions signal that U.S. trading partners do not readily accept the notion that “buy national” restrictions are less likely to generate trade controversies than other types of protection of domestic industries.
Specifically, the questions raised by the EC addressed three principal subjects: 1) how the U.S. will ensure adherence to treaty obligations (notably the GPA); 2) administrative implementation of the new domestic preference requirements; and 3) the scope of coverage of stimulus bill-funded procurement by sub-central governments such as states, local governments, and regional agencies.
Consistency with the GPA and other international obligations. In theory, the EC should not have to worry about respect for the GPA, because the stimulus bill explicitly requires it. However, the EC has correctly recognized that the U.S. may have a view of compliance different than that of its trading partners. For example, the EC inquired how compliance with international obligations will be achieved, and whether product eligibility procedures for stimulus bill projects will be spelled out in implementing regulations or guidance, similar to the longstanding procedures in Federal Acquisition Regulation (FAR) Part 25 for direct federal procurements. The EC specifically requests confirmation that the United States will honor its 1995 exchange of letters in the Uruguay Round, by which GPA coverage of sub-central governments (including 37 U.S. states) was acknowledged.
Administrative implementation of the Buy America requirements. The EC asked how “manufactured goods,” “produced in the United States,” and “public work” will be defined. The answers to these questions could have a significant impact on the scope of the Buy America provisions. For example, if the administration were to adopt a rule of origin based on the percentage of U.S. content on cost basis (i.e., “domestic content”), rather than the “substantial transformation” test applied under the Trade Agreements Act (TAA) and in other contexts, suppliers and procuring agencies could find compliance more complex and harder to achieve. More products might be excluded, and procedures to establish compliance could be more complex and expensive.
Another key area of the EC’s questions concerns the procedure and criteria for granting waivers from Buy America requirements. As we noted in our previous update on Buy America, it is unclear to what extent the Obama administration might grant waivers on “public interest” grounds in order to simplify implementation, to increase efficiency, or for reasons of economic policy. Some U.S. manufacturers may see an advantage to their own position through increased protection from international competition, while others who have a multinational supply chain and/or profit from exports may seek waivers. In short, there are likely to be U.S. interests on both sides of the “public interest” waiver question in specific cases.
State and local procurement funded by stimulus bill grants. The EC questions also ask that the United States explain the differences between grants and procurement, particularly when the United States supplies stimulus bill funds to sub-central government entities. General Note 2 to the United States’ obligations under the WTO GPA provides that there is no GPA coverage for federal non-contractual assistance, including grants. However, 37 states have independently agreed to engage in procurement activities in accordance with the requirements of the GPA. Therefore, some of their stimulus bill-funded procurements may be covered. GPA coverage also varies from state to state.
OMB recently announced that a new interim FAR rule regarding stimulus bill procurement would be published “soon.” An interim rule takes immediate effect but allows for public comment before the final rule is published. We expect the interim rules to address some or all of the questions raised by the EC. It is therefore likely that the administration will finalize the interim FAR rule before responding to the EC.
Telecommunications Industry Association Letter to OMB
A recent TIA letter typifies the views of many U.S. companies that produce in multiple countries, have international supply chains, and/or profit from export sales. On March 16, 2009, TIA wrote to OMB and the FAR Council requesting a public interest waiver for information and communication technology (ICT) products purchased with stimulus bill funds. In the absence of a waiver, coverage of ICT could vary greatly from project to project. For example, a router procured by a network prime contractor for a broadband access public work project could be covered, whereas the same router would not be covered if procured in a separate, non-public work procurement. Coverage could also vary from project to project depending on the GPA coverage of the procuring federal or sub-federal entity. A waiver for ICT products as a whole would eliminate such inconsistent application, and, in TIA’s view, would be more sensible in light of the internationally integrated nature of its industry.
As a fallback position, TIA suggested a waiver covering only TAA–eligible products. Products eligible under the TAA include those produced in GPA countries, other countries having similar free trade agreements with the U.S., or certain “least developed” countries, which benefit from a unilateral preference. In effect, this would allow all stimulus bill-funded procurements to be conducted according to TAA rules rather than only those projects that are already covered by federal or state GPA commitments. Non-TAA products, such as those from China or Brazil, would be excluded, but the differences in origin restrictions between works projects would be largely eliminated.
While the passage of the stimulus bill represented a milestone in the Buy America debate, the EC and industry responses suggest that the road to implementation will be long and difficult, and could generate international disputes.