U.S. Government Procurement and International Trade

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Updated August 9, 2024

U.S. Government Procurement and International Trade

The COVID-19 pandemic demonstrated that U.S. companies and the federal government rely heavily on global supply chains. This has prompted congressional interest in better understanding the role of international trade in U.S. government procurement. Some Members have sought ways to incentivize U.S.-based production by prioritizing the procurement of domestic goods and services, while upholding U.S. commitments under various international trade agreements. Separately, the Trump and Biden Administrations have issued executive orders that aim to maximize the procurement of domestic goods and services and increase oversight of waivers that would allow government purchases of foreign goods. Within this context, some Members have raised questions regarding how federal agency acquisitions comply with two domestic sourcing laws: namely, the Buy American Act of 1933 (BAA, 41 U.S.C. §§8301–8305) and Trade Agreements Act of 1979 (TAA, 19 U.S.C. §§2501–2581). Although both BAA and TAA have provisions that affect trade, there is a critical difference between their respective requirements. Whereas BAA operates as a price preference for U.S. products, TAA establishes a prohibition on procuring products and services from nondesignated foreign countries, unless one of TAA’s exceptions applies.

Background

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 about 10% of U.S. gross domestic product in 2021.

International regimes on government procurement do not cover every country or sector. For example, the 49 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 state and local governments may also have similar preferential policies. A 2017 study estimates that while the United States opens as much as 80% of its federal contracts to foreign suppliers, South Korea and Japan, for example, may do the same for 13% and 30%, respectively.

Determining the conditions under which federal agencies must open contracts to foreign suppliers, which legal framework applies in a given procurement, or how agencies determine whether goods and services are BAA- or TAA- compliant is a challenging task. What follows is an overview of BAA and TAA, and issues of congressional interest with implications for U.S. trade policy.

Buy American Act of 1933

BAA is the major U.S. domestic preference statute that governs procurement by the federal government. As implemented, it establishes a price preference for federal agencies’ purchases of domestic end products to be used in the United States. It generally does not prohibit federal agencies from purchasing a foreign product if they determine that it is less costly after a comparative price evaluation test. For civilian agency procurement, the contracting officer typically adds a price evaluation “factor” to the low foreign offer equal to 20% or 30%, depending on whether the low domestic offer is from a large or small business. For U.S. Department of Defense (DOD) procurements, the “factor” is typically 50%. (If a foreign offer is accepted, contracting agencies pay the proposed price and not the increased evaluated price.) Notably, BAA does not apply to contracts for services.

Figure 1. Applicability of the Buy American Act

Source: CRS, BAA, and 48 C.F.R. Part 25. Notes: * A variety of factors determine applicability. BAA may also apply above the TAA threshold if, among other things, the relevant trade agreement excludes a product or agency from TAA coverage. BAA or another domestic preference law may also apply, for example, to certain acquisitions exempted from “full and open competition” or using “simplified acquisition procedures.”

U.S. Government Procurement and International Trade

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USTR establishes TAA thresholds bi-annually. For current TAA thresholds, see 88 FR 85718.

Trade Agreements Act of 1979

TAA implements several international trade agreements that guarantee that the products and services of signatory countries and other eligible countries receive nondiscriminatory treatment for TAA-covered procurements. Specifically, it authorizes the President to waive domestic procurement restrictions and discriminatory provisions, such as BAA, for eligible or covered products and services from designated-countries. These are countries that (1) are parties to the WTO GPA, (2) have signed an FTA with the United States that provides appropriate reciprocal competitive government procurement opportunities to U.S. products, services, and suppliers, or (3) benefit from U.S. unilateral trade preferences (e.g., Caribbean Basin countries). The President has delegated TAA’s waiver authority to the U.S. Trade Representative (USTR), who establishes TAA thresholds depending on the agreement and type of contract covered. Figure 2. Applicability of the Trade Agreements Act

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 excludes a product or agency from TAA coverage. USTR establishes TAA thresholds bi-annually. For current TAA thresholds, see 88 FR 85718.

Issues for Congress

The COVID-19 pandemic exposed gaps in U.S. understanding of how much domestically produced goods rely on foreign inputs. Key questions such as “how does an agency ensure that a good procured is manufactured in the United States from substantially all U.S. components?” are not easily answered. The lack of statutory definitions of various terms (e.g., “manufactured” and “substantially all”) and the difference in standards among procuring agencies may yield different determinations for the same product. Moreover, the “substantial transformation” test used to determine a product’s country of origin for trade purposes is complex, fact-specific, and thus inherently subjective in

nature. A simplified example of government procurement of pharmaceuticals illustrates the challenge (see text box).

Determining Pharmaceuticals’ Country of Origin: A

Hypothetical Case Study

A U.S. drug manufacturing company imports active pharmaceutical ingredients (API) from China, which it then subjects to a series of processing procedures (e.g., testing and mixing) and then encapsulates it in its U.S. laboratory. The U.S.-made components of the pill account for 66% of its overall cost, while the China-sourced API accounts for the remaining 34%. What is its country of origin and can it generally be procured by a federal agency? Food and Drug Administration (FDA). Neither the Federal Food, Drug, and Cosmetic Act nor FDA regulations require drug manufacturers to identify a pill’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, granulating, milling, molding, lyophilizing, tableting, encapsulating, coating, or sterilizing). In this case study, only the company’s U.S. address would be required to be listed on the pill’s label. 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 pill 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 wholly 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 “wholly.” It is unclear in this case study if the pill 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 partially—not “wholly”—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 pill is a product of China—not a TAA-designated country. Unless it were granted a waiver, the pill could not be placed on a Federal Supply Schedule. Buy American Act (BAA). The pill 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 65% of the cost of all its components.

As Congress oversees the implementation of recent legislation and proposes other changes to prioritize federal procurement of U.S. goods and services, Members could consider the potential implications of such measures for U.S. businesses (including exporters and government contractors) and workers, and their consistency with U.S. obligations under international agreements. Members could engage with the Administration as it seeks to define terms and set uniform guidelines regarding foreign sourcing in federal procurement. This could promote transparency, consistency, and proper application of standards in procurement decisions, thereby helping to ensure that agencies carry out procurement objectives as prescribed by Congress.

U.S. Government Procurement and International Trade

https://crsreports.congress.gov | IF11580 · VERSION 17 · UPDATED

Andres B. Schwarzenberg, Specialist in International Trade and Finance

IF11580

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