On January 25, 2021, President Joe Biden signed Executive Order 14005 entitled “Ensuring the Future Is Made in All of America by All of America’s Workers” (the Executive Order). The Executive Order is designed to increase reliance on U.S. manufacturing through changes to the “component test” under the Buy American Act (BAA) and by centralizing and potentially limiting the availability of waivers under “Made in America Laws” as well as the use of exemptions under the Buy American Act.1
1. How will the Buy American Act component test and other requirements change?
By July 26, 2021, the Federal Acquisition Regulatory Council (FAR Council), which has authority to promulgate regulations relating to government procurements, is directed to propose revisions to certain BAA regulations for notice and comment. The regulations under review include (1) the “component test,” (2) the numerical threshold for domestic content requirements for end products and construction materials, and (3) the price preferences for domestic end products and domestic construction materials.
The first, and most important, change is to the component test. Under the current regulations, for an end product to qualify as a domestic end product under the BAA, it must be “manufactured in the United States,” and the “cost of the components mined, produced, or manufactured in the United States” must exceed “50 percent of the cost of all its components” or the product must be a “commercial off-the-shelf” (COTS) item. Under the Executive Order, the FAR Council has been instructed to replace the current cost-based component test with “a test under which domestic content is measured by the value that is added to the product through U.S.-based production or U.S. job-supporting economic activity.” Whether a particular product will be affected by this rule change will require a product-by-product analysis possible only after the FAR Council determines how value will be defined and calculated. However, even at this early stage it seems reasonable to speculate that products manufactured from non-U.S. components or raw materials will need significant value-adding U.S.-based manufacturing or other U.S. job-supporting economic activity (perhaps such as research and development) to qualify as a domestic end product. In addition, because the Executive Order does not make any changes to the COTS exception to the component test, the Executive Order’s changes to the component test will likely not be felt by manufacturers that sell COTS items to the government.
The second change increases the numerical threshold for domestic content required to qualify as a domestic end product or domestic construction material. Traditionally, the cost of all U.S. components of a manufactured end product not “wholly or predominantly of iron or steel” had to be 50% or more (excluding integration costs) to qualify as a domestic end product. The Trump Administration’s Executive Order 13881 (Maximizing Use of American-Made Goods, Products, and Materials) instructed the FAR Council to increase the numerical threshold to 55% for domestic end products not “wholly or predominantly of iron or steel” and to 95% for iron and steel end products.2 Under the Executive Order, the FAR Council is to consider raising these numerical values yet again, though the Executive Order is silent on how much the Biden Administration would like to see these numbers increase. However, as the Executive Order also purports to eliminate the component test, in favor of a value based test, it is unclear how the numerical threshold will be applied to the value test.
The third change is to the price preference used to evaluate products in competitive procurements where both domestic end products and foreign end products are being considered for contract award. The Buy American Act does not prohibit the purchase of foreign end products, but domestic end products receive a price preference over foreign end products. For evaluation purposes, foreign end products are treated as if they are more expensive, based on the percentage price preferences. The Trump Administration’s Executive Order 13881 instructed the FAR Council to increase the price evaluation factor placed on foreign end products from 6% to 20% when the U.S. business competing for the award is large and from 12% to 30% when the U.S. business competing for the award is a small business. Price preferences applicable to Department of Defense procurements remained unchanged at 50%.3 The Biden Administration is considering raising these price preferences even higher, though the Executive Order does not address the intended scope of such changes. However, BAA evaluation price preferences are not applied if the foreign end product receives a waiver; thus, the Executive Order also appears designed to restrict the availability of waivers.
The Executive Order also raises the possibility that an important exclusion from the BAA relating to commercial information technology will be changed. If that happens, the adverse impact on manufacturers could be very substantial.
2. Does the Executive Order affect TAA compliance?
While the BAA tries to increase procurements from U.S. companies through the application of evaluation price preferences, the Trade Agreements Act (TAA) is a different Made In America Law that actually prohibits procurements above certain thresholds from countries other than the U.S. and approximately 135 “designated countries.” The TAA reflects commitments made by the U.S. through Free Trade Agreements (FTAs), the World Trade Organization’s Government Procurement Agreement (WTO GPA), and other federal agreements. Notably, the Biden Executive Order does not contain any explicit changes to the TAA standard that purchased products must be “wholly manufactured” or “substantially transformed” in the U.S. or designated countries. However, because the TAA technically requires that the BAA be waived for procurements that are subject to the TAA, it is possible that this TAA requirement might be affected. On the other hand, because any changes to the TAA require changes to international agreements into which the U.S. has entered, it is not at all clear what the Executive Order intends regarding procurements subject to the TAA.
The Executive Order does not revoke but also does not comment on whether the United States will pursue any changes to its government procurement commitments under the WTO GAA and FTAs, as had been directed by the Trump Administration in Executive Order 13944 (Combating Public Health Emergencies and Strengthening National Security by Ensuring Essential Medicines, Medical Countermeasures, and Critical Inputs Are Made in the United States).
3. What is the Executive Order’s effect on current waivers under the BAA?
The BAA can be waived based on several different standards, including the unavailability of the product in the U.S., the general public interest, or unreasonably high prices for U.S. products. There is also a list of blanket waivers that is regularly published in the Federal Acquisition Regulation (FAR), and a general waiver of the applicability of the BAA to information technology that is a “commercial item” under the FAR, which is often the case with commercially available computer products. While the Executive Order does not revoke any waivers already granted under the BAA, the Executive Order does call on the head of each agency to consider suspending, revising, or rescinding agency actions that are inconsistent with the policy set in the order, that is, that the U.S. government “should, whenever possible, procure goods, products, materials, and services from sources that will help American businesses compete in strategic industries and help America’s workers thrive.” The Executive Order instructs agency heads to engage in this review as soon as practicable, which will likely vary for each agency depending on its prioritization of particular tasks. Here, as well, the effect of this Executive Order is not clear, and it will take some time before agencies publish guidance or promulgate rules in this area.
4. What will the Executive Order change about the process for obtaining waivers?
While it seems clear that the Executive Order intends to make future BAA waivers more difficult to obtain, its focus is on the creation of new bureaucratic offices that are likely at least to slow down the process for obtaining BAA waivers, while not making clear what the overall impact may be.
Increased centralization. The Executive Order creates a new Made in America Office (hereinafter MA Office) within the Office of Management and Budget (OMB) that is designed to centralize the waiver granting process, which would be a significant change to the existing process. Agencies will be required to submit descriptions of proposed waivers of the BAA and their justifications to the MA Office prior to approving them. As noted, it is unclear whether the Biden Administration intends to include waivers required by the TAA in this review process and, if so, how that could even be accomplished.
At this early stage, the most clear effect of the centralized process will be to prolong waiver approval. In some cases delay will be no more than 15 days, but in others where the agency head and the OMB Director and Made in America Director (MA Director) disagree, delay may be as long as 75 days. It is also possible that the number of individual waivers for smaller procurements will decrease as Contracting Officers may not want to go through this process for small benefits. Waivers for reasons like domestic non-availability and significantly increased costs seem likely to continue, though, again, we cannot be sure whether this will occur.
Interagency consultations for certain waivers. The Executive Order requires the Director of OMB, through the Administrator of the Office of Federal Procurement Policy, to review amendments proposed by the FAR Council in consultation with the Secretary of Commerce and the MA Director for future amendments to the list of domestically non-available articles. Continuing a requirement established in Executive Order 13788, which this Executive Order revoked, a granting agency is required to consider whether the cost advantage of a foreign-sourced product is the result of the use of dumped or injuriously subsidized steel, iron, or manufactured goods before granting a waiver in the public interest.
Increased transparency. The Administrator of General Services is instructed to develop a website centralizing the information on proposed and granted waivers, thereby increasing the transparency of the process. Information on granted waivers will be published within five days on the website, provided making such information public is consistent with national security and executive branch confidentiality interests. It is therefore not clear how much information will actually be published and how much increased transparency there will be.
5. What is the significance of strengthening the Jones Act on use of U.S.-flag vessel carriers?
The Executive Order includes in its coverage of Made in America Laws the Merchant Marine Act of 1920, also known as the Jones Act. This law mandates that only U.S.-flag vessels carry cargo between U.S. ports. According to a White House press release on this Executive Order, “[t]he President will continue to be a strong advocate for the Jones Act ... which supports American production and America’s workers,” and, together with the signing of the 2021 National Defense Authorization Act, “the Jones Act has also been affirmed as an opportunity to invest in America’s workers as we build offshore renewable energy, in line with the President’s goals to build our clean energy future here in America.” Based on the press release, specific mention of strengthening the Jones Act may be a signal that new infrastructure projects backed by the federal government for offshore renewable energy will include Buy American requirements and may require the use of U.S.-flag vessels. The overall effect, however, of this Executive Order on such maritime preferences remains unclear.
This Executive Order contains a strong expression of federal policy, with potentially great impact on many sectors of the economy. However, the lack of specificity in the Executive Order makes it difficult to assess what proposals will actually be made by agencies for changes in applicable regulations. Contractors will need to await guidance from the OMB, the General Services Administration, the FAR Council, and possibly other agencies before knowing the full extent of the intended effects of the Executive Order.
It is likely that the new Administration will provide adequate notice and comment periods regarding how the new regulations will be formulated and finalized. Therefore, contractors, grantees, and any entities or individuals interested in the potential effect of this Executive Order should monitor for announcements of proposed rules and accompanying comment periods that would allow them input into the development of those new regulations. Sidley will monitor developments in this area and will issue new Client Alerts when needed. We encourage our clients and all interested parties to contact their Sidley lawyer or one of the Sidley lawyers listed below to discuss any concerns and how Sidley can help.
1 The Executive Order applies to all statutes, regulations, rules, and executive orders relating to federal financial assistance awards or procurement that require or provide a preference for the purchase or acquisition of goods, products, or materials produced in the United States, referred to collectively as “Made in America Laws.”
2 The FAR Council published these new rules in the Federal Register on January 19, 2021, with an effective date of January 21, 2021. Further, the rules apply only to solicitations made after February 22, 2021, and their resulting contracts. However, a regulatory freeze issued by President Biden on January 20, 2021, which applies to rules that were published in the Federal Register but had not yet taken effect, complicates the status of the Trump Administration’s Executive Order. For rules published in the Federal Register but not yet in effect, the new Executive Order asks agency heads to consider delaying the effective date of the rule by 60 days to allow further analysis of fact, law, and policy, and to consider notice and comment for the pending rules. At this point, it is unclear how the FAR Council and other significant agencies involved in procurement, such as the Department of Defense, will implement this regulatory freeze.
3 As noted above, this change may be subject to a regulatory freeze.
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