Updated July 11, 2023
U.S. Government Procurement and International Trade
The COVID-19 pandemic 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. Some 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, some 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 of the Buy American Act
During the past 50 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. Yet, 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 nondiscriminatory rules for certain
procurements among the parties. U.S. federal procurement
expenditures are estimated to have been equivalent to 10%
of U.S. gross domestic product in 2020.
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, meaning that procurement coverage in
each market varies considerably. In addition, the United
States, while among the world’s most open markets,

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
Notes: * 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.”
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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 61%
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
39%. 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
Figure 2. Applicability of the Trade Agreements 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
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 February 2020 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
used under TAA to determine whether a product is made in the United
States or a “designated foreign country,” and thus eligible for government
contracts above the TAA threshold. 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. 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

60% of the cost of all its components.
Source: CRS, TAA, and 48 C.F.R. Part 25.
Notes: * A variety of factors determine applicability. BAA may apply above
the TAA threshold if, among other things, the relevant trade agreement
As Congress oversees the implementation of recent
excludes a product or agency from TAA coverage. Neither “manufactured”
legislation and proposes other changes to prioritize federal
nor “substantial transformation” are defined in statute; however, these terms
have been interpreted by agencies and courts.
procurement of U.S. goods and services, Members could
Issues for Congress
consider the potential implications of such measures for
U.S. businesses (including exporters and government
The COVID-19 pandemic exposed gaps in U.S.
contractors) and workers, and their consistency with U.S.
understanding of how much domestically produced goods
obligations under international agreements. Members could
rely on foreign inputs. Key questions such as “how does an
engage with the Administration as it seeks to define terms
agency ensure that a good procured is manufactured in the
United States from substantially all U.S. components?” are
and set uniform guidelines regarding foreign sourcing in
federal procurement. This could promote transparency,
not easily answered. The lack of statutory definitions of
various terms (e.g., “manufactured” and “substantially all”)
consistency, and proper application of standards in
procurement decisions, thereby helping to ensure that
and the difference in standards among procuring agencies
agencies carry out procurement objectives as prescribed by
may yield different determinations for the same product.
Moreover, the “substantial transformation”
Congress.
test used to
determine a product’s country of origin for trade purposes
Andres B. Schwarzenberg, Analyst in International Trade
is complex, fact-specific, and thus inherently subjective in
and Finance
nature. A simplified example of government procurement
of pharmaceuticals illustrates the challenge (see textbox).
IF11580
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U.S. Government Procurement and International Trade


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https://crsreports.congress.gov | IF11580 · VERSION 13 · UPDATED

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