Updated January 24, 2022
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. As such, Members
compliant is a challenging task. What follows is an
have sought ways to incentivize U.S.-based production by
overview of BAA and TAA, and issues of congressional
prioritizing the procurement of domestic goods and
interest with implications for U.S. trade policy.
services, while upholding U.S. commitments under various
Buy American Act of 1933
international trade agreements. Separately, the Trump and
BAA is the major U.S. domestic preference statute that
Biden Administrations have issued executive orders that
governs procurement by the federal government. As
aim to maximize the procurement of domestic goods and
implemented, it establishes a price preference for federal
services and increase oversight of waivers that would allow
agencies’ purchases of domestic end products to be used in
government purchases of foreign goods.
the United States. It generally does not prohibit federal
Within this context, Members have raised questions
agencies from purchasing a foreign product if they
regarding how federal agency acquisitions comply with two
determine that it is less costly after a comparative price
domestic sourcing laws: namely, the Buy American Act of
evaluation test. For civilian agency procurement, the
1933 (BAA, 41 U.S.C. §§8301–8305) and Trade
contracting officer typically adds a price evaluation
Agreements Act of 1979 (TAA, 19 U.S.C. §§2501–2581).
“penalty” to the low foreign offer equal to 20% or 30%,
Although both BAA and TAA have provisions that affect
depending on whether the low domestic offer is from a
trade, there is a critical difference between their respective
large or small business. For U.S. Department of Defense
requirements. Whereas BAA operates as a price preference
(DOD) procurements, the “penalty” is typically 50%. (If a
for U.S. products, TAA establishes a prohibition on
foreign offer is accepted, contracting agencies pay the
procuring products and services from nondesignated foreign
proposed price and not the increased evaluated price.)
countries, unless one of TAA’s exceptions applies.
Notably, BAA does not apply to contracts for services.
Background
Figure 1. Applicability
Buy of the Buy
American Act Am
of 193 e
3 rican Act
During the past 50 years, the United States has played a
APPLICATION*
prominent role in the development of international trade
Will the good be procured under a contract with an award value
rules on government procurement. The most notable of U.S.
above the micro-purchase threshold ($10,000) but below the
TAA threshold (generally $183,000)?
international agreements addressing procurement and trade
are the World Trade Organization (WTO)’s plurilateral
COMPLIANCE TEST
Manufactured End Product
Agreement on Government Procurement (GPA) and the
Is it “manufactured in the United States substantially all from
procurement chapters in most U.S. free trade agreements
articles, materials, or supplies mined, produced, or
(FTAs), all of which are implemented primarily through
manufactured in the United States” (41 U.S.C. § 8302) AND does
TAA. Data limitations and other factors make it difficult to
the cost of its components mined, produced, or manufactured
in the United States exceed 55% of the cost of all its
quantify accurately the size of the global government
components (48 C.F.R. § 25.003)?
procurement market. However, these international
Unmanufactured End Product
agreements have opened many procurement opportunities
Is it “mined or produced” in the United States (41 U.S.C. § 8302)?
around the world to international competition, worth
Iron and/or Steel End Product
trillions of U.S. dollars annually, while also requiring
Is it manufactured in the United States, does it consist wholly
or predominantly of iron and/or steel, AND does the cost of
parties to establish transparent and nondiscriminatory rules
U.S. iron and/or steel constitutes more than 95% of the cost of
for certain procurements among the parties. U.S. federal
all the components used in the end product (48 C.F.R. § 25.003)?
procurement expenditures are estimated to have been
EXCLUSIONS
equivalent to 10% of U.S. gross domestic product in 2019.
Nonavailability (quantity and quality)
International regimes on government procurement do not
Resale
Information technology that is a commercial item
cover every country or sector. For example, the 48 parties
bound by the GPA negotiate market access commitments
WAIVERS
on a reciprocal basis, meaning that procurement coverage in
Public interest
Unreasonable cost
each market varies considerably. In addition, the United
Commercially available off-the-shelf (COTS) items
States, while among the world’s most open markets,
“Qualifying countries”
maintains restrictions on foreign sourcing under BAA, and
Source: CRS, BAA, and 48 C.F.R. Part 25.
state and local governments may also have similar
No
A
tes: * A variety of factors determine applicability. BAA may also apply
preferential policies. A 2017 study estimates that while the
above the TAA threshold if, among other things, the relevant trade agreement
excludes a product or agency from TAA coverage. BAA or another domestic
United States opens as much as 80% of its federal contracts
preference law may also apply, for example, to certain acquisitions exempted
to foreign suppliers, South Korea and Japan, for example,
from “ful and open competition” or using “simplified acquisition procedures.”
may do the same for 13% and 30%, respectively.
(1) USTR establishes TAA thresholds bi-annually. (2) There is no statutory
definition of “manufactured” or “substantially all.”
https://crsreports.congress.gov
U.S. Government Procurement and International Trade
Trade Agreements Act of 1979
Determining Pharmaceuticals’ Country of Origin: A
TAA implements several international trade agreements
Hypothetical Case Study
that guarantee that the products and services of signatory
A U.S. drug manufacturing company imports active pharmaceutical
countries and other eligible countries receive
ingredients (API) from China, which it then subjects to a series of
nondiscriminatory treatment for TAA-covered
processing procedures (e.g., testing and mixing) and then encapsulates it in
procurements. Specifically, it authorizes the president to
its U.S. laboratory. The U.S.-made components of the pil account for 56%
waive domestic procurement restrictions and discriminatory
of its overal cost, while the China-sourced API accounts for the remaining
provisions, such as BAA, for eligible or covered products
44%. What is its country of origin and can it generally be procured by a
and services from designated-countries. These are countries
federal agency?
that (1) are parties to the WTO GPA, (2) have signed an
Food and Drug Administration (FDA). Neither the Federal Food,
FTA with the United States that provides appropriate
Drug, and Cosmetic Act nor FDA regulations require drug manufacturers
reciprocal competitive government procurement
to identify a pil ’s “country of origin.” The FDA requires that each drug
opportunities to U.S. products, services, and suppliers, or
label bear the place of business of the manufacturer (defined as one who
(3) benefit from U.S. unilateral trade preferences (e.g.,
performs mixing, granulating, mil ing, molding, lyophilizing, tableting,
Caribbean Basin countries). The president has delegated
encapsulating, coating, or sterilizing). In this case study, only the company’s
TAA’s waiver authority to the U.S. Trade Representative
U.S. address would be required to be listed on the pil ’s label.
(USTR), who establishes TAA thresholds depending on the
Customs and Border Protection (CBP). The “substantial
agreement and type of contract covered.
transformation” test is what CBP uses to determine how a product should
A
Figure 2. Applicability
Trade A of th
greem e Trade
ents Act Agree
of 1979 ments Act
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
APPLICATION*
study the pil would be determined to be a product of China and should be
Will the good or service be procured under a contract with an
award value at or above the TAA threshold (generally $183,000)?
marked accordingly. CBP does not consider processing procedures and
encapsulation in the United States a “substantial transformation” of the
COMPLIANCE TEST
API. (See, for example, CBP Customs Ruling HQ 561975.)
Good
Is it wholly the growth, product, or manufacture of the United
Federal Acquisition Regulation (FAR). FAR defines a “foreign end
States or a designated country? If no, has it been substantially
product” as an article that it is whol y the growth, product, or
transformed in the United States or a designated country into a
manufacture of a foreign country or that has been substantially
new and different article of commerce with a name, character,
transformed there into a new product. The FAR definition for a “U.S.-
or use distinct from that of the article or articles from which it
made end product” omits the term “whol y.” It is unclear in this case study
was transformed (19 U.S.C. § 2518)?
if the pil would qualify for high-value government contracts (above the
Service
Is the firm that is providing it established in the United States
TAA threshold) under current FAR guidelines. A February 2020 decision
or a designated country (48 C.F.R. § 25.402)?
by the U.S. Court of Appeals for the Federal Circuit (Acetris Health, LLC v.
EXCLUSIONS
United States) suggests that a U.S.-made end product may be partial y—not
Acquisitions set aside for small businesses
“whol y”—manufactured in the United States for it to be TAA-compliant.
Acquisitions of arms, ammunition, or war materials, or
Trade Agreements Act (TAA). The substantial transformation test is
purchases indispensable for national security or for national
also used under the TAA to determine whether a product is made in the
defense purposes
United States or a “designated foreign country,” and thus eligible for high-
Acquisitions of end products for resale
value government contracts (above the TAA threshold). In this case study,
Nonavailability or insufficient availability
it would be determined, under the substantial transformation test, that the
Contracts for certain services (e.g., research and development,
pil is a product of China—not a TAA-designated country. Therefore,
utility services, dredging, and military support services)
unless it were granted a waiver, the pil could not be placed on a Federal
DESIGNATED COUNTRIES
Supply Schedule.
WTO GPA parties
Buy American Act (BAA). The pil in this case study would qualify for
Certain U.S. FTA countries
sale as a “domestic end product” under lower-value government contracts
Least developed countries (“United Nations List”)
Caribbean Basin countries
(above the micro-purchase threshold and below the TAA threshold), as
Source: CRS, TAA, and 48 C.F.R. Part 25.
the cost of the components manufactured in the United States exceeds
No
A
tes: * A variety of factors determine applicability. BAA may apply above
55% of the cost of all its components.
the TAA threshold if, among other things, the relevant trade agreement
excludes a product or agency from TAA coverage. Neither “manufactured”
nor “substantial transformation” are defined in statute; however, these terms
As the 117th Congress and the Biden Administration review
have been interpreted by agencies and courts.
processes and contemplate amending legislation and
Issues for Congress
regulations on U.S. government procurement, Members
The COVID-19 pandemic has exposed gaps in U.S.
may consider the potential implications of such measures
understanding of how much domestically produced goods
for U.S. businesses (including government contractors) and
rely on foreign inputs. Key questions such as “how does an
workers and their consistency with U.S. obligations under
agency ensure that a good procured is manufactured in the
international agreements. Members may engage with the
United States from substantially all U.S. components?” are
Administration to clearly define terms and requirements
not easily answered. The lack of statutory definitions of
and set uniform guidelines regarding foreign sourcing in
various terms (e.g., “manufactured” and “substantially all”)
federal procurement. This could promote transparency,
and the difference in standards among procuring agencies
consistency, and proper application of standards in
often yield different determinations for the same product.
procurement decisions, thereby ensuring that agencies carry
Moreover, the “substantial transformation” test used to
out procurement objectives as prescribed by Congress.
determine a product’s country of origin for trade purposes
is complex, fact-specific, and thus inherently subjective in
Andres B. Schwarzenberg, Analyst in International Trade
nature. A simplified example of government procurement
and Finance
of pharmaceuticals illustrates the challenge (see textbox).
IF11580
https://crsreports.congress.gov
U.S. Government Procurement and International Trade
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https://crsreports.congress.gov | IF11580 · VERSION 9 · UPDATED