U.S. Government Procurement and International Trade, IN FOCUS, CRS, Sep. 22, 2023.
Andres B. Schwarzenberg
The COVID-19 pandemic demonstrated that U.S.
companies and the federal government rely heavily on
global supply chains. This has prompted congressional
interest in better understanding the role of international
trade in U.S. government procurement. Some Members
have sought ways to incentivize U.S.-based production by
prioritizing the procurement of domestic goods and
services, while upholding U.S. commitments under various
international trade agreements. Separately, the Trump and
Biden Administrations have issued executive orders that
aim to maximize the procurement of domestic goods and
services and increase oversight of waivers that would allow
government purchases of foreign goods.
Within this context, some Members have raised questions
regarding how federal agency acquisitions comply with two
domestic sourcing laws: namely, the Buy American Act of
1933 (BAA, 41 U.S.C. §§8301–8305) and Trade
Agreements Act of 1979 (TAA, 19 U.S.C. §§2501–2581).
Although both BAA and TAA have provisions that affect
trade, there is a critical difference between their respective
requirements. Whereas BAA operates as a price preference
for U.S. products, TAA establishes a prohibition on
procuring products and services from nondesignated foreign
countries, unless one of TAA’s exceptions applies.
Background
During the past 50 years, the United States has played a
prominent role in the development of international trade
rules on government procurement. The most notable of U.S.
international agreements addressing procurement and trade
are the World Trade Organization (WTO)’s plurilateral
Agreement on Government Procurement (GPA) and the
procurement chapters in most U.S. free trade agreements
(FTAs), all of which are implemented primarily through
TAA. Data limitations and other factors make it difficult to
quantify accurately the size of the global government
procurement market. Yet, these international agreements
have opened many procurement opportunities around the
world to international competition, worth trillions of U.S.
dollars annually, while also requiring parties to establish
transparent and nondiscriminatory rules for certain
procurements among the parties. U.S. federal procurement
expenditures are estimated to have been equivalent to about
10% of U.S. gross domestic product in 2021.
International regimes on government procurement do not
cover every country or sector. For example, the 48 parties
bound by the GPA negotiate market access commitments
on a reciprocal basis, meaning that procurement coverage in
each market varies considerably. In addition, the United
States, while among the world’s most open markets,
maintains restrictions on foreign sourcing under BAA, and
state and local governments may also have similar
preferential policies. A 2017 study estimates that while the
United States opens as much as 80% of its federal contracts
to foreign suppliers, South Korea and Japan, for example,
may do the same for 13% and 30%, respectively.
Determining the conditions under which federal agencies
must open contracts to foreign suppliers, which legal
framework applies in a given procurement, or how agencies
determine whether goods and services are BAA- or TAA-
compliant is a challenging task. What follows is an
overview of BAA and TAA, and issues of congressional
interest with implications for U.S. trade policy.
Buy American Act of 1933
BAA is the major U.S. domestic preference statute that
governs procurement by the federal government. As
implemented, it establishes a price preference for federal
agencies’ purchases of domestic end products to be used in
the United States. It generally does not prohibit federal
agencies from purchasing a foreign product if they
determine that it is less costly after a comparative price
evaluation test. For civilian agency procurement, the
contracting officer typically adds a price evaluation “factor”
to the low foreign offer equal to 20% or 30%, depending on
whether the low domestic offer is from a large or small
business. For U.S. Department of Defense (DOD)
procurements, the “factor” is typically 50%. (If a foreign
offer is accepted, contracting agencies pay the proposed
price and not the increased evaluated price.) Notably, BAA
does not apply to contracts for services.
Trade Agreements Act of 1979
TAA implements several international trade agreements
that guarantee that the products and services of signatory
countries and other eligible countries receive
nondiscriminatory treatment for TAA-covered
procurements. Specifically, it authorizes the President to
waive domestic procurement restrictions and discriminatory
provisions, such as BAA, for eligible or covered products
and services from designated-countries. These are countries
that (1) are parties to the WTO GPA, (2) have signed an
FTA with the United States that provides appropriate
reciprocal competitive government procurement
opportunities to U.S. products, services, and suppliers, or
(3) benefit from U.S. unilateral trade preferences (e.g.,
Caribbean Basin countries). The President has delegated
TAA’s waiver authority to the U.S. Trade Representative
(USTR), who establishes TAA thresholds depending on the
agreement and type of contract covered.
Issues for Congress
The COVID-19 pandemic exposed gaps in U.S.
understanding of how much domestically produced goods
rely on foreign inputs. Key questions such as “how does an
agency ensure that a good procured is manufactured in the
United States from substantially all U.S. components?” are
not easily answered. The lack of statutory definitions of
various terms (e.g., “manufactured” and “substantially all”)
and the difference in standards among procuring agencies
may yield different determinations for the same product.
Moreover, the “substantial transformation” test used to
determine a product’s country of origin for trade purposes
is complex, fact-specific, and thus inherently subjective in
nature. A simplified example of government procurement
of pharmaceuticals illustrates the challenge (see textbox).
As Congress oversees the implementation of recent
legislation and proposes other changes to prioritize federal
procurement of U.S. goods and services, Members could
consider the potential implications of such measures for
U.S. businesses (including exporters and government
contractors) and workers, and their consistency with U.S.
obligations under international agreements. Members could
engage with the Administration as it seeks to define terms
and set uniform guidelines regarding foreign sourcing in
federal procurement. This could promote transparency,
consistency, and proper application of standards in
procurement decisions, thereby helping to ensure that
agencies carry out procurement objectives as prescribed by
Congress.
https://sgp.fas.org/crs/row/IF11580.pdf