Morgan Crapps of Parker Poe Consulting recently provided insight in Area Development about President Biden's Executive Order about the Made in America regulations for federal procurement. The article can be found below and on the Area Development website.
On January 25th, President Biden issued one of his first Executive Orders, making changes to the “Made in America” program. The order left many with questions about how it would affect trade and international investment into the U.S.
About the Executive Order
- The Executive Order is designed to strengthen the requirements for federal procurement in the U.S., allowing more of a preference for domestic products and supply chains (e.g., components) of domestic products.
- The order creates a new “Made in America” office to administer the new processes, which will be housed under the Office of Management & Budget (OMB) and will have its own director.
- All federal agencies have been tasked with “suspending, revising or rescinding” agency actions that are inconsistent with this policy, or proposing additional actions necessary to enforce the policy. Federal agencies have also been directed to work with Manufacturing Extension Partnership (MEP) offices (located in all 50 states) to try to identify domestic supply sources where possible.
- All procurement waivers for non-domestic suppliers must be approved through the OMB and/or “Made in America” director. Most waivers and justifications (except those that pose a national security interest or executive branch confidentiality interest) will be publicly available online.
- Over the next six months, the Federal Acquisition Regulatory Council (FAR Council) will draft amendments to the Buy American Act of 1933 (federal procurement act) to:
- Replace the current component test with one that focuses on “value added” through U.S. production;
- Increase the numerical thresholds for domestic content requirements for domestic end products and domestic construction materials; and
- Increase the price preferences for domestic end products and domestic construction materials.
- The FAR Council is also charged with looking at existing constraints on information technology that is a commercial item.1
Who Should Pay Attention?
- International information technology companies — These companies have previously been exempted from the “Made in America” standards for federal procurement. While we don’t know what will happen following the FAR Council’s review, we do know that this exemption is now under the microscope, and companies should begin planning for it to be modified or even removed altogether.
- International component manufacturers — Currently, under the Buy American Act, a product must be manufactured in the U.S., with at least 55 percent2 of the cost of all components coming from domestic components to be considered a domestic end product. This is also now a consideration for the FAR Council, which has been charged with increasing the domestic content thresholds (although we do not know to what extent). International component manufacturers exporting to the U.S. are at risk of finding their U.S. contracts on the chopping block if they don’t begin to produce domestically once the threshold increases — particularly where there are domestic companies producing the same items.
- Domestic federal suppliers — With new regulations expected, companies with substantial federal contracts should begin to proactively re-evaluate international supply chains in preparation for more stringent requirements in the short-term future.
- International federal suppliers with domestic competition — Although the vast majority of federal contracts are already awarded to domestic companies, federal contracts for international companies are sure to be under closer scrutiny in this administration, especially with heightened public transparency that the Executive Order brings. While waivers will remain a possibility, it appears that the FAR Council will be examining ways to provide an even greater benefit to domestic companies in the amended requirements. International companies that were able to win previous bids may not come out on top if preferences are adjusted to be even more favorable for their domestic competitors.
- NOT companies that only supply consumers — It’s important to note the distinction between the Buy American Act and “Made in the USA” labeling. The Buy American Act covers federal procurement. “Made in the USA” is a standard enforced by the Federal Trade Commission (FTC) that is designed to protect American consumers. “Made in the USA” follows a different set of standards than the Buy American Act.
Some of the Remaining Questions
- What will the revised requirements entail? Over the next six months, the FAR Council will be busy analyzing existing requirements and drafting new ones, considering a multitude of issues that these important decisions will bring. There will then be a public comment period prior to adoption. This means that — although we’ll have an idea sometime this summer of what some of the changes may look like — it will probably be the end of 2021 or early 2022 before we know for sure what the new regulations will require of companies and federal agencies.
- How will this impact trade? Key trade partners to the U.S., such as Canada, have already voiced their intent to push back on these restrictions. Will loopholes be created for certain trade partners? Will our trade partners create similar restrictions in retaliation that will harm U.S. exporters?
- Will states follow suit? U.S. states follow their own procurement regulations. It will not be surprising to see states choose to make adjustments to their procurement codes as well.
- Will unions have a role? While the order itself did not specifically mention unions, the White House press release about the Executive Order made three separate references to not just “American jobs” but “union jobs.” Right-to-work laws and labor climates vary dramatically across U.S. states, and many states pride themselves on low unionization rates. Labor climate/unionization is also an important site selection factor for many companies — especially international clients. The Biden administration’s specific references to union jobs in its briefing could signal the expectation that unions may have a heightened role during this administration.
For international companies falling into the categories above that were considering U.S. manufacturing projects in the Trump era, Biden’s Executive Order may be the push they needed to pull the trigger. Domestic companies aiming to pursue federal bids — or deriving large portions of their revenues from federal contracts — will certainly be watching this closely and may even proactively begin searching for an increased domestic supply chain.
There are plenty of challenges associated with this order, which were largely not addressed in this article. The Buy American Act and its interpretation have historically been (and remain) quite complex. However, while there will certainly be issues with implementation and ensuring the positives outweigh negatives, this recent order creates additional momentum for U.S. manufacturing and is bound to give certain global companies extra incentive to consider production in the U.S.
1 Information technology is defined under FAR 2.101 as “any equipment, or interconnected system(s) or subsystem(s) of equipment, that is used in the automatic acquisition, storage, analysis, evaluation, manipulation, management, movement, control, display, switching, interchange, transmission or reception of data or information by the agency.” It includes “computers, ancillary equipment (including imaging peripherals, input, output, and storage devices necessary for security & surveillance), peripheral equipment designed to be controlled by the central processing unit of a computer, software, firmware and similar procedures, services (including support services) and related resources.”
2 Iron and steel end products have a 95 percent domestic content requirement.