February 5, 2009 4:43PM

Deciphering the ‘Buy American’ Dispute

Many of you may have heard the argument that the United States already has Buy American laws, so therefore all of the whining about the provisions in the spending bill is nothing but bluster. Well, that’s not really an argument. That’s just the pep rally speech that Steel Caucus representatives give before sympathetic, unquestioning fans.

A short (but by no means complete) summary of Buy American laws might help give some perspective to the significance of the language in the spending bills.

Yes, since 1933, Buy American laws have been used to limit competition for government procurement projects to domestic firms. Under current law, there are general Buy American restrictions affecting all government procurement of supplies and materials for use within the United States. And there are even more restrictive Buy American provisions governing Transportation Department procurement rules for highway and related projects. In a nutshell, the language in the spending bill would subject its appropriations to the more restrictive Buy American process, while denying the waivers we currently grant to most major trade partners.

The “general” Buy American provision requires all “unmanufactured” products (essentially, raw materials) procured to be mined or produced in the United States and that all manufactured articles procured fit the definition of a “domestic end product,” which is an article manufactured in the United States from components, which are at least 50 percent (by value) U.S.-produced.

Those Buy American restrictions can be waived if any one of three conditions applies: (1) a waiver would be in the public interest; (2) the products are not available from domestic sources in sufficient quantity or of satisfactory quality, or; (3) the cost of using U.S.-made products is deemed “unreasonable.” Under the Federal Acquisition Regulations, “unreasonable cost” is defined as a situation where foreign supplies and materials are offered at a price that is six percent or more below the price of domestic supplies and materials.

The more restrictive Buy American provision governing Transportation Department procurement requires that all of the iron, steel, and manufactured products used be produced in the United States. The definition of U.S.-manufactured products is the same here as under the general Buy American provision, and the same thresholds for public interest and short supply waivers also apply. However, the unreasonable cost waiver is considerably different. Under this provision waiving the restriction on the basis of unreasonable cost requires that the total project cost (not the input cost) be at least 25 percent higher. That is an enormous cushion for domestic suppliers.

For example, under the general provision, a domestic supplier has to be mindful of the world price for steel. The domestic offer could be rejected in favor of a foreign supplier if there is more than a six percent price differential. But under the more restrictive Transportation Department provisions, the domestic supplier’s price is not even remotely disciplined by the potential of foreign participation in the bidding process because it is the total cost of the project—and not a competitor’s bid—that would trigger the waiver. So, if the steel in a highway project constitutes about 10 percent of the total cost of the project—say $10 million out of $100 million—then the steel price can rise from $10 million to $260 million before the project cost increases by 25 percent. Effectively, suppliers under the more restrictive Buy American rules can charge whatever they want to charge.

There is another set of waivers that are perhaps the most effective at ensuring some competition in the U.S. government procurement market. Under the Trade Agreements Act of 1979, the president is authorized to invoke the public interest waiver of the Buy American rules and exempt countries which reciprocally waive their own buy‐​local restrictions for U.S. firms. Those countries include signatories to the World Trade Organization’s Government Procurement Agreement or parties to U.S. free trade agreements (like the North American Free Trade Agreement) that contain full government procurement chapters.

The Buy American provisions in the recently‐​passed House bill and the still‐​pending Senate bill seek to apply the more restrictive Transportation Department rules to all public works projects funded by the legislation—with the exception that in the House version manufactured goods are excluded. Not only would the unrealistic 25 percent “unreasonable cost” waiver threshold apply, but the waivers granted to U.S. trade partners under obligation of international agreement would not apply. And that is why there has been so much resistance and opposition to this proposal from overseas.

Now we can properly assess the meaning of language inserted into the Senate bill last night. The amendment simply inserts the “assurance” that the Buy American provision will be “applied in a manner consistent with United States obligations under international agreements.” That is no doubt a subjective and therefore vague assurance. It doesn’t preclude the promulgation of new regulations that intend, but fail, to administer the law in a manner consistent with U.S. obligations under international agreements. It would be clear, objective, and reassuring to stipulate that the same waivers that firms in foreign countries enjoy now will be honored with respect to the appropriations authorized under the legislation. That would make things right with Canada, Europe, Mexico, Japan and about 12 other important trading partners, and the talk of trade retaliation would subside.But it still stinks for U.S. taxpayers (and will foster some ill‐​will abroad) because the U.S. government procurement market will be made even less accessible to suppliers from countries that are not signatories to the various procurement agreements. The more rigid cost waiver will exclude bids from, among others, Chinese suppliers of iron, steel, and manufactured goods (in the Senate version). And with low‐​cost suppliers of crucial materials effectively excluded from the process, U.S. suppliers will be less restrained in their cost proposals. And that means fewer projects, fewer higher, and more wasted resources.