June 18, 2020
U.S. Government Procurement and International Trade
The COVID-19 pandemic has demonstrated that U.S.
Determining the conditions under which federal agencies
companies and the federal government rely heavily on
must open contracts to foreign suppliers, which legal
global supply chains. This has prompted congressional
framework applies in a given procurement, or how agencies
interest in better understanding the role of international
determine whether goods and services are BAA- or TAA-
trade in U.S. government procurement. In particular,
compliant is a challenging task. What follows is an
Members have sought ways to incentivize U.S. domestic
overview of BAA and TAA, and issues of congressional
production by prioritizing the procurement of domestic
interest with implications for U.S. trade policy.
goods and services, while upholding U.S. commitments
Buy American Act of 1933
under various international trade agreements. Separately,
BAA is the major U.S. domestic preference statute that
the Trump Administration has issued executive orders that
governs procurement by the federal government. As
aim to incentivize companies to relocate to the United
implemented, it establishes a price preference for federal
States by limiting waivers that would allow government
agencies’ purchases of domestic end products to be used in
purchases of foreign goods. Within this context, Members
the United States. It generally does not prohibit federal
have raised questions regarding how federal agency
agencies from purchasing a foreign product if they
acquisitions comply with two domestic sourcing laws:
determine that it is less costly after a comparative price
namely, the Buy American Act of 1933 (BAA, 41 U.S.C.
evaluation test. For civilian agency procurement, the
§§8301–8305) and Trade Agreements Act of 1979 (TAA,
contracting officer typically adds a price evaluation
19 U.S.C. §§2501–2581). Although both BAA and TAA
“penalty” to the low foreign offer equal to 6% or 12%,
have provisions that affect trade, there is a critical
depending on whether the low domestic offer is from a
difference between their respective requirements. Whereas
large or small business. For U.S. Department of Defense
BAA operates as a price preference for U.S. products, TAA
(DOD) procurements, the “penalty” is typically 50%. (If a
establishes a prohibition on procuring products and services
foreign offer is accepted, contracting agencies pay the
from non-designated foreign countries, unless one of
proposed price and not the increased evaluated price.)
TAA’s exceptions applies.
Notably, BAA does not apply to contracts for services.
Background
Figure 1. Applicability of the Buy American Act
Over the past fifty years, the United States has played a
prominent role in the development of international trade
rules on government procurement. The most notable of U.S.
international agreements addressing procurement and trade
are the World Trade Organization (WTO)’s plurilateral
Agreement on Government Procurement (GPA) and the
procurement chapters in most U.S. free trade agreements
(FTAs), all of which are implemented primarily through
TAA. Data limitations and other factors make it difficult to
quantify accurately the size of the global government
procurement market. However, these international
agreements have opened many procurement opportunities
around the world to international competition, worth
trillions of U.S. dollars annually, while also requiring
parties to establish transparent and non-discriminatory rules
for certain procurements among the parties. U.S. federal
procurement expenditures are estimated at 9.3% of U.S.
gross domestic product (GDP) in 2017.
International regimes on government procurement do not
cover every country or sector. For example, the 48 WTO
members bound by the GPA negotiate market access
Source: CRS, BAA, and 48 C.F.R. Subpart 25.1.
commitments on a reciprocal basis . In addition, the United
Notes: * A variety of factors determine applicability. BAA may also apply
States, while among the most open markets, maintains
above the TAA threshold if, among other things, the relevant trade agreement
restrictions on foreign sourcing under BAA, and state and
excludes a product or agency from TAA coverage. (1) USTR establishes TAA
local governments may also have similar preferential
thresholds bi-annual y. (2) There is no statutory definition of “manufactured”
or “substantial y al .” Agencies have long construed “substantial y al ” to mean
policies. A 2017 study estimates that while the United
that the costs of a product’s U.S. components exceed 50% of the cost of al its
States opens as much as 80% of federal contracts to foreign
components, but this definition is not set forth in statute. (3) COTS items are
exempt from BAA’s component cost test. (4) DOD also treats end products
suppliers, South Korea and Japan, for example, may do the
from 27 “qualifying countries”—those with which it has signed reciprocal
same for 13% and 30%, respectively.
defense procurement memoranda of understanding—as domestic end
products for BAA purposes.
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U.S. Government Procurement and International Trade
Trade Agreements Act of 1979
is complex, fact-specific, and thus inherently subjective in
TAA implements several international trade agreements
nature. A simplified example of government procurement
that guarantee that the products and services of signatory
of pharmaceuticals illustrates the challenge (see textbox).
countries and other eligible countries receive non-
discriminatory treatment for TAA-covered procurements.
Determining Pharmaceuticals’ Country of Origin: A
Specifically, it authorizes the president to waive domestic
Hypothetical Case Study
A U.S. drug manufacturing company imports active pharmaceutical
procurement restrictions and discriminatory provisions,
ingredients (API) from China, which it then subjects to a series of
such as BAA, for eligible or covered products and services
processing procedures (e.g., testing and mixing) and then encapsulates
from designated-countries. These are countries that (1) are
it in its U.S. laboratory. The U.S.-made components of the pil account
parties to the WTO GPA, (2) have signed an FTA with the
for 55% of its overal cost, while the China-sourced API accounts for
United States that provides appropriate reciprocal
the remaining 45%. What is its country of origin and can it be procured?
competitive government procurement opportunities to U.S.
Food and Drug Administration (FDA). Neither the Federal Food, Drug,
products, services, and suppliers, or (3) benefit from U.S.
and Cosmetic Act nor FDA regulations require drug manufacturers to identify
unilateral trade preferences (e.g., Caribbean Basin
a pil ’s “country of origin.” The FDA requires that each drug label bear the
place of business of the manufacturer (defined as one who performs mixing,
countries). The president has delegated TAA’s waiver
granulating, mil ing, molding, lyophilizing, tableting, encapsulating, coating, or
authority to the U.S. Trade Representative (USTR), who
sterilizing). In this case study, only the company’s U.S. address would be
establishes TAA thresholds depending on the agreement
required to be listed on the pil ’s label.
and type of contract covered.
Customs and Border Protection (CBP). The “substantial
Figure 2. Applicability of the Trade Agreements Act
transformation” test is what CBP uses to determine how a product should be
marked under the Tarif Act of 1930, which requires al imports to be marked
with its country of origin. Under CBP regulations, in this case study the pil
would be determined to be a product of China and should be marked
accordingly. CBP does not consider processing procedures and encapsulation
in the United States a “substantial transformation” of the API. (See, for
example, CBP Customs Ruling HQ 561975.)
Federal Acquisition Regulation (FAR). FAR defines a “foreign end
product” as an article that it is whol y the growth, product, or manufacture of
a foreign country or that has been substantial y transformed there into a new
product. The FAR definition for a “U.S.-made end product” omits the term
“whol y.” It is unclear in this case study if the pil would qualify for high-value
government contracts (above the TAA threshold) under current FAR
guidelines. A recent decision by the U.S. Court of Appeals for the Federal
Circuit (Acetris Health, LLC v. United States) suggests that a U.S.-made end
product may be partial y—not “whol y”—manufactured in the United States
for it to be TAA-compliant.
Trade Agreements Act (TAA). The substantial transformation test is also
used under the TAA to determine whether a product is made in the United
States or a “designated foreign country,” and thus eligible for high -value
government contracts. In this case study, it would be determined, under the
substantial transformation test, that the pil is a product of China—not a TAA-
designated country. Therefore, unless it were granted a waiver, the pil could
not be placed on a Federal Supply Schedule.
Buy American Act (BAA). The pil in this case study would qualify for sale
as a “domestic end product” under lower-value government contracts (above
the micro-purchase threshold and below the TAA threshold), as the cost of
the components manufactured in the United States exceeds 50% of the cost of
al its components.
Source: CRS, TAA, and 48 C.F.R. Subpart 25.4.
Notes: * A variety of factors determine applicability. BAA may apply above
As Congress continues to review processes and
the TAA threshold if, among other things, the relevant trade agreement
excludes a product or agency from TAA coverage. (1) USTR establishes TAA
contemplates amending legislation to prioritize federal
thresholds bi-annual y. (2) There is no statutory definition of “manufactured”
procurement of U.S. goods and services, Members may
or “substantial transformation.” However, these terms have been interpreted
consider clarifying provisions in BAA and TAA. Members
by agencies and courts.
Issues for Congress
may wish to clearly define terms and requirements and set
uniform guidelines regarding foreign sourcing in federal
The COVID-19 pandemic has exposed gaps in U.S.
procurement. This could promote transparency,
understanding of how much domestically produced goods
rely on foreign inputs. Key questions such as “how does
consistency, and proper application of standards in
an
procurement decisions, thereby ensuring that agencies carry
agency ensure that a good procured is manufactured in the
out procurement objectives as prescribed by Congress.
United States from substantially all U.S. components?” are
not easily answered. The lack of statutory definitions of
Andres B. Schwarzenberg, Analyst in International Trade
various terms (e.g., “manufactured” and “substantially all”)
and Finance
and the difference in standards among procuring agencies
often yield different determinations for the same product.
IF11580
Moreover, the “substantial transformation” test used to
determine a product’s country of origin for trade purposes
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U.S. Government Procurement and International Trade
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https://crsreports.congress.gov | IF11580 · VERSION 1 · NEW