Updated January 14, 2021
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 issued executive orders that aim
governs procurement by the federal government. As
to incentivize companies to relocate to the United States by
implemented, it establishes a price preference for federal
limiting waivers that would allow government purchases of
agencies’ purchases of domestic end products to be used in
foreign goods. Within this context, Members have raised
the United States. It generally does not prohibit federal
questions regarding how federal agency acquisitions
agencies from purchasing a foreign product if they
comply with two domestic sourcing laws: namely, the Buy
determine that it is less costly after a comparative price
American Act of 1933 (BAA, 41 U.S.C. §§8301–8305) and
evaluation test. For civilian agency procurement, the
Trade Agreements Act of 1979 (TAA, 19 U.S.C. §§2501–
contracting officer typically adds a price evaluation
2581). Although both BAA and TAA have provisions that
“penalty†to the low foreign offer equal to 6% or 12%,
affect trade, there is a critical difference between their
depending on whether the low domestic offer is from a
respective requirements. Whereas BAA operates as a price
large or small business. For U.S. Department of Defense
preference for U.S. products, TAA establishes a prohibition
(DOD) procurements, the “penalty†is typically 50%. (If a
on procuring products and services from non-designated
foreign offer is accepted, contracting agencies pay the
foreign countries, unless one of TAA’s exceptions applies.
proposed price and not the increased evaluated price.)
Background
Notably, BAA does not apply to contracts for services.
During the past 50 years, the United States has played a
Figure 1. Applicability of the Buy American Act
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 to have been
equivalent to 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 parties
bound by the GPA negotiate market access commitments
on a reciprocal basis. In addition, the United States, while
Source: CRS, BAA, and 48 C.F.R. Subpart 25.1.
among the most open markets, maintains restrictions on
Notes: * A variety of factors determine applicability. BAA may also apply
foreign sourcing under BAA, and state and local
above the TAA threshold if, among other things, the relevant trade agreement
excludes a product or agency from TAA coverage. (1) USTR establishes TAA
governments may also have similar preferential policies. A
thresholds bi-annually. (2) There is no statutory definition of “manufacturedâ€
2017 study estimates that while the United States opens as
or “substantially al .†Agencies have long construed “substantial y al †to mean
much as 80% of federal contracts to foreign suppliers,
that the costs of a product’s U.S. components exceed 50% of the cost of all its
components, but this definition is not set forth in statute. (3) COTS items are
South Korea and Japan, for example, may do the same for
exempt from BAA’s component cost test. (4) DOD also treats end products
13% and 30%, respectively.
from 27 “qualifying countriesâ€â€”those with which it has signed reciprocal
defense procurement memoranda of understanding—as domestic end
products for BAA purposes.
https://crsreports.congress.gov
U.S. Government Procurement and International Trade
Trade Agreements Act of 1979
nature. A simplified example of government procurement
TAA implements several international trade agreements
of pharmaceuticals illustrates the challenge (see textbox).
that guarantee that the products and services of signatory
countries and other eligible countries receive non-
Determining Pharmaceuticals’ Country of Origin: A
Hypothetical Case Study
discriminatory treatment for TAA-covered procurements.
Specifically, it authorizes the president to waive domestic
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 it in
from designated-countries. These are countries that (1) are
its U.S. laboratory. The U.S.-made components of the pil account for 55%
parties to the WTO GPA, (2) have signed an FTA with the
of its overal cost, while the China-sourced API accounts for the remaining
United States that provides appropriate reciprocal
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,
products, services, and suppliers, or (3) benefit from U.S.
Drug, and Cosmetic Act nor FDA regulations require drug manufacturers
unilateral trade preferences (e.g., Caribbean Basin
to identify a pil ’s “country of origin.†The FDA requires that each drug
countries). The president has delegated TAA’s waiver
label bear the place of business of the manufacturer (defined as one who
authority to the U.S. Trade Representative (USTR), who
performs mixing, granulating, mil ing, molding, lyophilizing, tableting,
establishes TAA thresholds depending on the agreement
encapsulating, coating, or sterilizing). In this case study, only the company’s
and type of contract covered.
U.S. address would be required to be listed on the pil ’s label.
Figure 2. Applicability of the Trade Agreements Act
Customs and Border Protection (CBP). The “substantial
transformation†test is what CBP uses to determine how a product should
be marked under the Tariff Act of 1930, which requires all 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 substantially
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 partially—not
“whol yâ€â€”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
Source: CRS, TAA, and 48 C.F.R. Subpart 25.4.
(above the micro-purchase threshold and below the TAA threshold), as
Notes: * A variety of factors determine applicability. BAA may apply above
the TAA threshold if, among other things, the relevant trade agreement
the cost of the components manufactured in the United States exceeds
excludes a product or agency from TAA coverage. (1) USTR establishes TAA
50% of the cost of all its components.
thresholds bi-annually. (2) There is no statutory definition of “manufacturedâ€
or “substantial transformation.†However, these terms have been interpreted
by agencies and courts.
As the 117th Congress reviews processes and contemplates
Issues for Congress
amending legislation to prioritize federal procurement of
The COVID-19 pandemic has exposed gaps in U.S.
U.S. goods and services, Members may consider clarifying
understanding of how much domestically produced goods
provisions in BAA and TAA. Members may wish to clearly
rely on foreign inputs. Key questions such as “how does an
define terms and requirements and set uniform guidelines
agency ensure that a good procured is manufactured in the
regarding foreign sourcing in federal procurement. This
United States from substantially all U.S. components?†are
could promote transparency, consistency, and proper
not easily answered. The lack of statutory definitions of
application of standards in procurement decisions, thereby
various terms (e.g., “manufactured†and “substantially allâ€)
ensuring that agencies carry out procurement objectives as
and the difference in standards among procuring agencies
prescribed by Congress.
often yield different determinations for the same product.
Moreover, the “substantial transformationâ€
Andres B. Schwarzenberg, Analyst in International Trade
test used to
determine a product’s country of origin for trade purposes
and Finance
is complex, fact-specific, and thus inherently subjective in
IF11580
https://crsreports.congress.gov
U.S. Government Procurement and International Trade
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https://crsreports.congress.gov | IF11580 · VERSION 4 · UPDATED