President Joe Biden on Jan. 25 signed a “Buy American” executive order aimed at encouraging the federal government to buy more U.S.-made products and materials. The order itself is short on specific policy changes, but it asks agencies to tighten government procurement regulations and close loopholes in how U.S.-made products are measured.
Most notably, the order directs the Federal Acquisition Regulatory Council to replace the cost of components test that is used to determine whether an item manufactured in the U.S. qualifies as a “domestic end product” under the Buy American Act.
Previously, this test required more than 50% of the cost of a product’s component parts to be manufactured in the U.S. in order for it to be considered a domestic end product. On Jan. 19, the FAR Council posted a final rule increasing the requirement to 55% for most products — a change proposed under a Trump administration executive order issued in 2019.
Biden’s executive order proposes swapping the costs of components test for “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.”
“The executive order is not crystal clear on what they’re envisioning will happen,” said Gale Monahan, a partner in Dentons’ Denver office. “But it does use some pretty broad language that is more focused on replacing the cost of components test altogether with something that I think takes a more holistic view and looks at the issue in terms of value added.”
Monahan added that while he’s not sure what that test would look like, “I would think that if you’re going to talk about value added, then you’re going to have to talk about intellectual property.”
Holland & Hart attorney Shaun Kennedy said the proposed change reflects the Biden administration’s impression that the cost of components test is “somewhat subject to abuse” or loopholes. “Contractors may use foreign components that comprise the most expensive components of the end product,” he said, “but then sort of backfill that with domestically made or domestically sourced components to get over that 50% threshold.”
The executive order also directs the Director of the Office of Management and Budget to establish a “Made in America Office,” which will review requests for waivers that grant exceptions to domestic preference laws and regulations.
“I think a lot of contractors are going to see that as a bit of a double-edged sword,” Kennedy said. “On one hand, there’s been some criticism that there can be unequal application of potential requests for waivers and approvals under the Buy America Act,” he said, adding that waiver processes or requirements can vary from agency to agency, and sometimes from contract to contract.
“I think with the establishment of this Made in America Office, and being centralized through the OMB, there may be more … definitive criteria or consistent application,” Kennedy said.
“On the other side of the coin,” he added, “with this new Made in America Office, I think there is some concern that the process may slow down and bottleneck the approval process for waivers and may make it more difficult to receive waivers.”
The executive order is intended to put the $600 billion the federal government spends on procurement toward “American manufacturing and good-paying jobs for America’s workers,” White House Press Secretary Jen Psaki said when announcing the order.
According to the Wall Street Journal, the Government Accountability Office has said foreign products account for less than 5% of direct foreign procurement, although the actual percentage may be higher due to “system errors and limitations.” Biden’s announcement drew criticism from some U.S. allies, particularly Canada, over fears the order could hurt their companies and that the policy signals a protectionist stance on trade under the new administration.
The attorneys said it’s hard to say what the effects of the order will be on companies looking to do business with the federal government as the FAR Council hasn’t proposed rule changes yet. Most of the agencies named in the order have 180 days to take action on the president’s recommendations.
“I think that to the extent the government wants to entice commercial businesses or companies that are not what I would call ‘traditional government contractors’ to do business with them,” Monahan said, “the more difficult they make it, the fewer new entrants there will be in that market.”
If the government makes the new requirements “too burdensome,” he added, traditional government contractors might consolidate their positions in the industry because they already have the compliance mechanisms and supply chain structures in place to meet potentially more onerous regulatory and contractual requirements.