Since the United States (U.S.) government is the single largest consumer in the world, contracting with the government is naturally viewed as a desirable avenue of expansion for many foreign companies. However, prospective foreign contractors looking to supply products to the U.S. government must navigate a somewhat complex regulatory maze of country-of-origin (COO) rules. These COO rules serve the function of implementing U.S. domestic preferences while fulfilling U.S. obligations to its trade partners under bilateral and multilateral international trade agreements. Interested foreign companies must satisfy the requirements of two main federal statutes that govern the U.S. government’s acquisition of foreign products. Enacted during the Great Depression, the Buy American Act (BAA) of 1933 is the primary domestic preference statute. Meanwhile, the Trade Agreements Act (TAA) of 1979 dictates the rules surrounding the U.S. government’s acquisition of products from a long list of countries with which it has bilateral or multilateral trade agreements. The Federal Acquisition Regulation (FAR) trade agreements clause at FAR § 52.225-5 harmonizes and implements the BAA and the TAA, requiring contractors to deliver “only U.S. made or designated country end products” in covered procurements.

· Buy American Act (BAA)

The BAA generally requires that only products manufactured in the U.S. be acquired for public use. Additionally, the products must all be manufactured substantially from articles, materials, or supplies that are mined, produced, or manufactured in the U.S. The BAA generally applies unless the cost of such domestic products is deemed unreasonable. This unreasonable cost exception of the BAA is implemented through the application of a price evaluation factor as described in FAR § 25.106(b) to the low non-domestic or foreign offer. If, after the application of the price evaluation factor, the foreign offer is still lower than the domestic offer, then the domestic offer is considered unreasonable, and the unreasonable cost exception applies. In such situations, the government may acquire the foreign product at the originally quoted price before the application of the FAR § 25.106(b) price evaluation factor. Notably, commercial off-the-shelf (COTS) products are exempt from the BAA domestic content requirement. In other words, under FAR § 25.101(a)(2), a COTS end-product complies with the BAA even when it is manufactured predominantly from foreign components. This includes COTS Information Technology (IT) end-products, which the U.S. government often procures via General Services Administration (GSA) federal supply schedule (FSS) contracts.

· Trade Agreements Act (TAA)

The TAA ensures that the U.S. government offers reciprocal treatment in public procurement to countries that have entered into bilateral and multilateral free trade agreements with it. Under the TAA, signatory countries that do not discriminate against U.S.-made products can freely compete for U.S. federal contracts. Conversely, the TAA prohibits products originating from countries that do not have such agreements with the U.S. from competing for U.S. federal contracts. Notably, the TAA excludes commercial products from countries like India and China from use in U.S. federal contracts due to the absence of free trade agreements.

The TAA defines a product of a country as an article that is wholly the growth, product, or manufacture of that country. Alternatively, articles consisting of materials from another country will be considered the product of a country if they have been substantially transformed into a new and different article with a name, character, or use distinct from the constituent parts from which they were transformed. This is also known as the TAA “Substantial Transformation” test and is generally applied to the final stage of product manufacturing to determine whether a product has been transformed into a new product, distinct from its components that may have originated in non-qualifying countries. The U.S. Customs and Border Protection (CBP) is the agency generally responsible for interpreting and implementing the TAA. When components from a non-qualifying country such as India or China are involved, the CBP utilizes a rigorous totality of circumstances analysis to determine whether the end product has sufficiently transformed to qualify as a U.S. or qualifying country product. Until the Federal Circuit’s decision in Acetris Health, LLC v. United States, 949 F.3d 719 (Fed. Cir. 2020), government agencies had to adopt the results of the CBP’s substantial transformation test to determine whether a product qualified for federal procurement.

Under the Acetris decision, which focuses on the FAR § 25.003 definition of a “U.S.-made end product,” a product need not be wholly manufactured or even substantially transformed in the United States to be a “U.S.-made end product.” In conducting a plain meaning analysis of the FAR § 25.003 definition of a “U.S.-made end product,” the Federal Circuit in Acetris ruled that products may be “manufactured” in the United States even if they are made from foreign-made components and do not themselves undergo “substantial transformation.” Furthermore, the Federal Circuit in Acetris, also ruled that each procuring U.S. government agency is independently responsible for determining whether an offered product qualifies as a “U.S. made end product.” In other words, the CBP’s COO determinations are not binding on individual U.S. government agencies, and such procuring agencies have discretion in determining whether an offered product qualifies as being manufactured in the U.S. The combination of these rulings in the Acetris decision means that certain products that are manufactured in U.S. facilities but are made of foreign components may now qualify as being manufactured in the U.S. even if they do not undergo “substantial transformation” in accordance with the CBP’s implementation of the TAA.

Prospective foreign contractors seeking to supply their products for U.S. government procurement should thoroughly analyze the U.S. federal statutory framework impacting their products, as several factors impact the implementation of COO rules. This is especially true if their end products are assembled in facilities in the United States but made of foreign components. Understanding the general applicability of COO requirements to their product is a good first step for prospective foreign contractors to determine whether their product qualifies for U.S. federal procurement.

This Federal Procurement Insight is provided as a general summary of the applicable law in the practice area and does not constitute legal advice. Contractors wishing to learn more are encouraged to consult the TILLIT LAW PLLC Client Portal or Contact Us to determine how the law would apply in a specific situation.