The New Buy American Environment: How Does a Canadian Company Comply with the New Rules?
The answer is complicated. Some form of Buy American has been around for more than 80 years, starting with the Buy American Act of 1933, which was passed to promote US jobs. Spurred by the recent recession and the 2009 American Recovery and Reinvestment Act, additional Buy American restrictions have grown in popularity with US legislators. In between, permanent Buy American laws have been passed that regulate government funded projects, including in the transportation arena to name just one.
Therefore, there is not a “one size fits all” Buy American test. Accordingly, certifying that your products meet generally described “Buy American” standards simply because your products are manufactured in a US plant, or because of analysis that has been performed under one particular Buy American program, should be avoided at all costs.
Additionally, because your products are manufactured in the US, you understandably might presume that some of these products may qualify as a “US product” under certain programs in the “Buy American” basket. In parsing out which products may or may not qualify, unfortunately there are no short-cuts — your company must examine the specific US-origin based restrictions in each applicable law to ensure compliance with any Buy American certification.
In this Arent Fox legal alert, we have identified the major Buy American trends in 2015, including two important US procurement sectors to watch, as well as a brief summary of current Buy American requirements in US legislation. The alert follows with a brief discussion of longstanding Buy American laws, namely the Buy American Act of 1933 and the Trade Agreements Act of 1979, and other US laws governing US origin representations made by companies, such as the US Customs marking rules, and the “Made in the USA” requirements administered by the Federal Trade Commission. This alert does not discuss the various state-level domestic content laws passed in recent years; however, we would be happy to provide that information upon request.
The alert concludes with recommendations and strategies on how to deal with the host of Buy American requirements imposed under US law. This overview will hopefully provide a framework for how your company can pursue maximum business opportunities while not running afoul of the multitude of Buy American laws currently on the books, as well as potential new rules on the horizon. Our objective is to help your company best comply with these provisions and to protect the company brand in the US marketplace.
The Congressional Appropriation and Authorization Process
Before undertaking a substantive Buy American analysis, it is important to appreciate the current US Congressional landscape and process. On January 6, 2015, the 114th session of the US Congress was called to order. The leadership in both the US House of Representatives and Senate are now held by Rep. John Boehner (R-OH) and Sen. Mitch McConnell (R-KY) and, for the next two years, they will decide they bills that will come up for a vote. Their legislative agenda is already filling — beginning with must-pass appropriation bills to fund various US federal agencies into 2016.
The “normal” appropriation process is for both Chambers of Congress to consider and pass individual appropriation bills for each federal agency within the Obama Administration. In recent years, Congress has elected to pass massive, omnibus, funding measures to include all agencies within one measure. This year, however, Senate Majority Leader McConnell has vowed to return to the normal legislative process. What this might mean is, new legislative vehicles will be introduced or even passed to introduce new or expanded Buy American constraints for federally funded procurement projects. Concurrently, while Congress must pass appropriation bills to keep the federal government running, it also must pass separate authorization bills to provide each agency with Congressional guidance on what and how to spend that funding (and often for how long).
There are two specific federal agency appropriation and authorization bills to watch in 2015:
- The Environmental Protection Agency (EPA): Many readers will recall the American Iron and Steel (AIS) provisions in the 2014 appropriation bills for the Environmental Protection Agency, which included the requirement that any EPA infrastructure projects funded via the Clean Water State Revolving Loan Fund and the Drinking Water State Revolving Loan Fund use only “iron and steel products that are produced in the United States” and that these constraints would be in effect for the life of the 2014 fiscal year, ending September 30, 2014.
The 113th Congress chose to extend the same provisions to the EPA’s FY 2015 water projects. In that same session, legislators passed the authorizing Water Resources Reform and Development Act of 2014 which essentially made permanent the AIS requirements for all EPA funded Clean Water infrastructure projects.
It is therefore important for Canadian companies selling into US drinking water projects to be well informed of how the 114th Congress will fund the EPA for FY 2016.
- The US Department of Transportation — including the Federal Highway Administration (FHWA) and Federal Transit Administration (FTA): The Surface Transportation Act was re-authorized in 2012 by the Moving Ahead for Progress in the 21st Century (MAP 21) legislation, which is set to expire in 2015. MAP 21 expanded the BA provisions “to require the application of Buy American to all contracts eligible for assistance under title 23 within the scope of a finding, determination, or decision under the National Environmental Policy Act (NEPA), regardless of funding source, if at least one contract within the scope of the same NEPA document is funded with Federal funding provided under Title 23.” Given the heightened political interest in these massive US infrastructure projects, the re-authorization process this year will be important to watch and analyze.
Other Buy American Provisions in US Legislation: Buy American provisions have also been inserted in the following laws:
- The 2009 American Recovery and Reinvestment Act (ARRA) prohibited the use of recovery funds for a project for the construction, alteration, maintenance, or repair of a public building or public work unless all of the iron, steel, and manufactured goods used in the project are produced in the US. The monies for these recovery projects have mostly been allocated and projects are already well under way. The bilateral agreement between Canada and the United States provided some relief, but only for those projects funded by recovery monies and identified under the agreement.
- The longstanding Buy American domestic content provisions under the Federal Aviation Administration (FAA) require all steel and manufacturing products to be produced in the US. When procuring a facility or equipment under the Airport and Airway Improvement Act of 1982, the cost of components and subcomponents produced in the United States must be more than 60 percent of the cost of all components and the final assembly of the facility or equipment must occur in the United States.
- The FHWA requires that the steel, iron, and manufactured goods used in its procurement process be produced in the United States. Buy American provisions are applied to transit-related procurements valued over US $100,000, for which funding includes grants administered by the FTA or the FHWA. Some important waiver applications have been adopted since the original introduction, including a 1983 rulemaking which determined that Buy American did not apply to raw materials and waived its application to manufactured goods when certain conditions applied.
- The Federal Railroad Administration (FRA) Buy American chapters also require that the steel, iron, and manufactured goods be produced in the United States under its High Speed Rail Program.
- The FTA’s Buy American provisions are similar to the FRA requirements with the exception that the Buy American provisions do not apply to the procurement of buses and other rolling stock if the cost of components produced in the United States is more than 60 percent of the cost of all components and that final assembly takes place in the United States.
US International Trade Obligations — WTO Government Procurement Agreement (GPA)
International obligations, notably the GPA, affect the scope and reach of Buy American requirements imposed by US law. The United States and Canada are among the signatories to the GPA. In addition, there are a number of sub-federal (states and municipalities) that are signatories to the GPA. In the US, 37 states are covered to varying degrees by the GPA.1 This means that a WTO member’s goods and supplies should be treated on equal footing with respect to US domestic products for procurement opportunities with state level entities covered by the agreement, in addition to maintaining existing free access at the federal level, where the procurement value of the prime contract exceeds the established WTO thresholds (currently US $7.864 million).
The GPA, however, does not give open access to municipal level procurement. Under the North American Free Trade Agreement (NAFTA), the US requires that Canadian goods and suppliers be exempt from these requirements if procurement is being done directly by a listed US federal department or agency and if the value of procurement exceeds NAFTA thresholds (currently US $25,000 for goods, US $79,507 for general services, and US $10,335,931 for construction services).
Finally, the waiver process. Most, if not all, of the legislation cited above also provide procurement decision makers with the responsibility to grant Buy American waivers for an individual project. It is usually the recipient of the federal monies (e.g., state procurement offices), which must apply for a waiver and these are granted when the following general conditions apply:
- The Buy American requirement would be inconsistent with the US public interest;
- The iron or steel (or relevant manufactured goods) are not produced in the United States in sufficient or reasonably available quantities; or
- Inclusion of the BA requirement would increase the cost of the overall project by more than 25 percent.
The Buy American Act and the Trade Agreements Act
If it is determined that none of these specific Buy American requirements applies to your product, you are not home-free yet. The Buy American Act of 1933 (BAA) is not limited to departments or agencies, but applies to most US federal government purchases (e.g., not procurement grants) over a certain dollar threshold. Therefore, prior to making any Buy American representation, a company should determine whether the products at issue are in compliance with the BAA or, alternatively, whether an exemption to the BAA exists, such as the Trade Agreements Act of 1979 (TAA).
The BAA, in general, requires that manufacturers and distributors may only supply “domestic end products” to the federal government. “Domestic end products” are those products that are manufactured in the United States if the cost of their components mined, produced, or manufactured in the United States exceeds 50 percent of the cost of all of their components.
If the 50 percent test is not made and the TAA applies, then companies may supply products even when the BAA is triggered, provided those products are “US-made” end products or products from certain “designated” countries. To be a “US-made” end item, or an end item from a designated country, the item must have been mined, produced, or manufactured in the United States or in an eligible country, or it must have been “substantially transformed” into a new and different article of commerce with a name, character, or use distinct from that of the article or articles from which it was transformed in the US or in an eligible country.
Designated countries include countries that have signed on to the GPA, countries that have entered into free trade agreements with the US, and certain Caribbean countries and least-developed countries. In addition, free trade agreements (e.g., NAFTA, GPA) may override BAA requirements.
US Customs and Federal Trade Commission Origin Requirements
Heretofore, the underlying primary purposes of the Buy American regimes discussed above is to promote or protect US industry and create jobs for American workers. However, there are other US laws in which determining whether products are of US origin is central to their respective purpose.
Two major US laws in this category are the US Customs and Border Protection (CBP) marking/labeling law and the Federal Trade Commission (FTC) “Made in the USA” requirements. These laws are aimed at protecting US consumers by providing origin information concerning products they purchase or are considering purchasing. However, each of these laws has its own legal standards in determining whether a product is of US origin.
- CBP Country of Origin Marking Laws
The country of origin for marking purposes is the last country where they product underwent a “substantial transformation.” A “substantial transformation” is defined generally as working or processing which results in the creation of a new and different article of commerce, having a name, character, or use different from any of the product’s inputs.
The substantial transformation test must be applied on a case-by-case basis; often, it is necessary to obtain guidance or rulings from Customs. Where a processing operation is minor, no substantial transformation occurs. In these cases, the product is considered to be a foreign product, and must be marked to show its country of origin.
Where goods are imported into the US from Canada or Mexico, their country of origin, for marking purposes, is determined according to the NAFTA Marking Rules, set out at 19 C.F.R. Part 102. These rules generally deem an article to be a Product of Canada or Mexico for marking purposes (not for NAFTA tariff preferences), if non-NAFTA origin materials have undergone certain changes in tariff classification by reason of processing in Canada or Mexico. In order to apply the NAFTA Marking Rules, it is necessary to know the classification of the finished product, as well as of its major constituent materials. Different rules of origin apply to different goods, based on their tariff classification.
- FTC “Made in the US” Representation
The FTC generally requires that “all or virtually all” of the product advertised as “Made in the US” be made in the United States. As a threshold matter, in determining whether a product is “all or virtually all” made in the US, the product’s final assembly or processing must take place in the United States. The FTC also considers how much of the product’s total manufacturing costs can be attributed to US components/inputs, and how far removed any foreign content is from the finished product. “Made in US” claims are proper only if a de minimis amount of foreign content is present.
- NAFTA and Other FTA Duty Preference Programs
Further complicating implementing a US origin determination process, free trade agreements such as NAFTA have their own specific origin determination rules as agreed by the negotiators. For example, NAFTA product eligibility is based on technical rules of origin based on the tariff classification of the finished goods and the inputs used to make the finished goods, the North American regional value content (typically 50 or 60 percent), or a combination of the two. The NAFTA duty preference origin rules can be, and are often, different than the NAFTA country of origin marking rule for the very same product. There is no substantial transformation analysis.
The Dilemma and Challenge
Now to the original question posed on whether a company can provide a general Buy American certification. Simply put, the plethora of Buy American programs makes this request impossible to honor without the company assuming significant and unacceptable risks. Rather, the response to the questions should be contingent on examining each potential applicable Buy American requirement. This will largely depend on the funding of the project to which a company’s product will be used. For example, a product that satisfies the BAA’s 50 percent component test may not satisfy the EPA’s AIS Buy American provisions or the FTC’s “all or substantially all” requirement. Similarly, the BAA’s 50 percent requirement might be met in a particular case, but if the MAP 21 requirements also apply and are not satisfied, then a Buy American certification should not be provided in this case.
How to Prepare Your Company for Buy American Inquiries
The Canada-US Cross Border Business Affairs practice has provided counsel to a number of Canadian companies on the various Buy American/Buy American provisions and we have worked with individual US federal regulators to seek waivers on behalf of our clients. Generally speaking, when we are asked by our clients whether their product lines are subject to any domestic preference or Buy American constraints, we ask the following initial questions for each project:
- How is the project being funded by the federal government (including state revolving funds passed through by the federal government and not from a privately funded infrastructure contract)?
- Which federal agency is funding the project (and passing the funding to states and municipalities)? In most Buy American cases, even one dollar of federal assistance can trigger the BA provision for the entire project.
- Where is the product being used (i.e., what infrastructure project)? Many states and a few municipalities in the US are parties to the WTO Agreement on Government Procurement.
- What is the dollar amount of the project? There is a number of varying threshold values where Buy American provisions are triggered, depending on which federal agency and which funding project (highway, transit, railroad, etc.).
When we have these answers, we can advise on the specific analysis that will be required to determine whether a Buy American certification is possible.
Our practice has considerable expertise in these matters and how Canadian companies can best meet the myriad of requirements under the Buy American umbrella and to work with US procurement offices in ensuring that companies take full advantage of business opportunities in the US without running afoul of Buy American requirements.