"Buy American" Requirements of Stimulus Law: Trouble Ahead?

Buried in the new stimulus law is a “Buy American” requirement that threatens to delay or even prevent the use of stimulus funds for the construction, maintenance, and repair of highways, bridges, electric transmission lines, energy efficiency projects, port infrastructure, high-speed rail facilities, schools, and hospitals, among others. Unless the Obama Administration acts quickly to remedy the situation through the use of waivers, it could also encourage protectionism among our trading partners just as the world economy is struggling to avoid a replay of the 1930s.

Section 1605 of the Act provides in part that: “None of the funds appropriated or otherwise made available by this Act may be used for a project for the construction, alteration, maintenance, or repair of a public building or public work unless all of the iron, steel, and manufactured goods used in the project are produced in the United States.” Although waivers are available under certain circumstances, and the law is to be applied consistent with U.S. trade agreements, it is unclear whether, and how quickly, these “safety valves” will operate.

In the meantime, U.S. trading partners are responding heatedly. China's official news agency, Xinhua, spoke out within hours of enactment: "History and economic theory show that in facing a financial crisis, trade protectionism is not a way out, but rather could become just the poison that worsens global economic hardships." Citing the example of the Great Depression, Xinhua went on to say that "Trade protectionism will also cause catastrophic effects to some poor countries, making the current financial crisis one of a humanitarian crisis as well."

Members of NAFTA and the WTO strongly opposed the early versions of the prohibition, but softened their rhetoric somewhat after the language requiring consistency with U.S. trade agreements was added. They are now anxiously awaiting indications as to how the requirement will be interpreted and applied.

A. What projects are subject to the Buy American requirement?

The scope of the requirement can be thought of as a three-part test. A project is subject to the requirement if: (1) funds appropriated or otherwise made available by this Act are; (2) used for the construction, alteration, maintenance, or repair of; (3) a public building or public work. Under the first part, most projects that receive funds or a loan guarantee under the new law are subject to the requirement, but there are exceptions. For example, it does not apply to renewable energy projects that are allowed a tax credit or receive a grant in lieu of a tax credit.¹

The second part of the test—“construction, alteration, maintenance, or repair”—includes an extremely broad range of work, but the third part—“public building or public work”—almost certainly excludes work done with respect to any privately owned facility. None of these terms are defined in the legislation, leaving some room for interpretation.

B. What does it mean to be subject to this requirement?

It means that “all of the iron, steel, and manufactured goods” used in the project must have been produced in the U.S. (Emphasis added.) In other words, if any of the iron, steel, or manufactured goods used in the project is produced outside the U.S., the project cannot receive stimulus funding. Depending on how “project” is defined, the use of any foreign iron, steel, or manufactured goods with respect to a small component of a large project could prevent the use of stimulus funds for the entire project.

C. Does the nationality of the company producing the iron, steel, or manufactured goods matter?

No. The only thing that matters is whether production occurs within the U.S.

D. Isn't there already a Buy American requirement in federal law?

Yes, the Buy American Act was originally enacted in 1933.² But there are two important differences between that law and the provision in the stimulus legislation. The Buy American Act applies only to procurement by the federal government, and only requires that the cost of domestic components exceeds 50 percent of the cost of all the components.³

E. What circumstances qualify for a waiver under the stimulus law?

A waiver under the stimulus legislation may be granted for “any case or category of cases” where the head of the relevant federal department or agency finds that: (1) applying the prohibition would be “inconsistent with the public interest”; (2) iron, steel, and the relevant manufactured goods are not produced in the U.S. “in sufficient and reasonably available quantities and of a satisfactory quality”; or (3) inclusion of iron, steel and manufactured goods produced in the U.S. will increase the cost of the “overall project” by more than 25 percent. If the agency or department head makes such a finding, he or she must publish in the Federal Register a detailed justification as to why the provision is being waived.

Perhaps more importantly, the prohibition is also to be applied “in a manner consistent with U.S. obligations under international agreements.” This language was added by the Senate in response to strong objections expressed by key trading partners of the U.S., including Canada and the European Union.

F. What does it mean to be consistent with U.S. obligations under international trade agreements?

It's not entirely clear, but the legislative history (discussed in more detail below) suggests that Congress intends that the Obama Administration will use its existing authority under the 1979 Trade Agreements Act to waive the Buy American requirement where it would otherwise violate a free trade agreement or the WTO. There is also an indication that it should be waived for so-called “least developed countries,” where they agree to assume the obligations of the WTO and are willing to provide similar opportunities for U.S. products.

G. How soon will all this be resolved?

It depends on how soon the Obama Administration begins issuing waivers, and the breadth of those waivers. At one end of the spectrum, federal departments or agencies could issue one or more very broad waivers on public interest grounds, or based on a finding that iron and steel are not produced in the U.S. in sufficient and reasonably available quantities of satisfactory quality. At the other extreme, departments and agencies could take a narrow, project-by-project approach, issuing a waiver only where there is a showing that the cost of the entire project would otherwise be increased by more than 25 percent.

Based on its obligation to remain consistent with international trade agreements, and concerns about triggering more protectionism, it seems likely that the Obama Administration will move relatively quickly to issue waivers as to countries that are members of either WTO or a free trade agreement. Waivers with respect to the least developed countries would presumably be a lower priority, and waivers with respect to developed countries that are not parties to a free trade agreement or WTO would presumably be lower still.

From those seeking stimulus dollars, there will be enormous pressure on the administration to quickly remove the cloud of uncertainty created by this provision, and to minimize its effect on projects that would otherwise qualify. Supporters of the prohibition, on the other hand, are not going to give ground without a fight.

H. What's the legislative history of this provision?

Due to the pace of Congressional action on the bill, the legislative history of this provision is relatively sparse. On Jan. 21, 2009, Rep. Pete Visclosky (D-Ind.) offered an amendment in the House Appropriations Committee that contained the language cited above, but with two differences. It did not contain the section requiring compliance with U.S. trade obligations, and it included definitions of “public building” and “public work” as having “the meanings given such terms in section 1 of the Buy American Act (41 U.S.C. 10c) and include airports, bridges, canals, dams, dikes, pipelines, railroads, multiline mass transit systems, roads, tunnels, harbors and piers.” It was adopted 55 to 0, and remained in the bill passed by the House on Jan. 28.

The Senate took up the House-passed bill on Feb. 2, striking the entire text and substituting its own version (which is a common practice). The Buy American provision in the Senate amendment was identical to the provision in the House-passed bill.⁴ In response to pressure from U.S. trading partners and concerns expressed by President Obama, Sen. Byron Dorgan (D-N.D.) offered an amendment on Feb. 4, consisting of the section requiring compliance with U.S. trade obligations.

Speaking in support of the amendment, Sen. Sherrod Brown (D-OH) argued that it makes the provision “WTO compliant. It follows U.S. and international global trade rules.”⁵ Sen. Chuck Grassley (R-Iowa) also spoke in support: “The original Buy American language in the bill doesn't specifically provide an exemption for countries that provide reciprocal access for the United States in the area of government procurement. But we are obligated under international agreements to provide such a carveout. This amendment will fix this problem.”⁶

Sen. John McCain (R-Ariz.) was the sole speaker in opposition, stating that “what this amendment does is basically stand in direct contradiction to the amendment itself.”⁷ After less than five minutes of debate, the amendment was adopted without objection.⁸ Curiously, the Dorgan amendment also dropped the definitions of “public building” and “public work,” without explanation, thereby leaving those key terms undefined.⁹

The Senate then debated an amendment offered by Sen. McCain that would have stricken the entire Buy American provision.¹⁰ McCain argued that the amendment will have the same effect as the 1930 Smoot-Hawley tariff legislation, which “helped spark an international trade war that turned a severe recession into the greatest economic depression in modern history.”¹¹ Citing opposition to the amendment from President Obama, Canada, the European Union, and over 100 U.S. businesses, he urged that “We should not sit idly by while some seek to pursue a path of economic isolation, a course that could lead to disaster. It didn't work in the 1930s, and it certainly won't work today.”¹²

In response, Sen. Dorgan first noted that 20,000 people a day are losing their jobs, and then turned to the requirement of compliance with U.S. trade obligations:

We already have a “Buy American” provision under current law. That is not violative of our trade agreements. We just added an amendment that says this section, the “Buy American” section, “shall be applied in a manner consistent with United States obligations under international agreements.”

I don't think anyone can credibly argue that somehow this undermines our international agreements. But we do have a $700-billion-a-year trade deficit, and my hope would be that as we push this money out the door, we do it in support of American jobs.¹³

After less than five minutes of debate, the McCain amendment was rejected, 31 to 65.¹⁴ The Senate passed its version of the bill on Feb. 10, and called for a conference with the House to resolve the differences between the two bills.

In adopting the Senate version of the Buy American provision, the joint explanatory statement of the conference committee adds only the following guidance:

Section 1605(d) is not intended to repeal by implication the President's authority under Title III of the Trade Agreements Act of 1979. The conferees anticipate that the Administration will rely on the authority under 19 U.S.C. 2511(b) to the extent necessary to comply with U.S. obligations under the WTO Agreement on Government Procurement and under U.S. free trade agreements and so that section 1605 will not apply to least developed countries to the same extent that it does not apply to the parties to those international agreements. The conferees also note that waiver authority under section 2511(b)(2) has not been used.

Although not entirely clear, it appears from this that Congress intends for the Obama Administration to use its existing authority under the 1979 Trade Agreements Act to waive the Buy American requirement where it would otherwise violate a free trade agreement or the WTO, or where one of the least developed countries, pursuant to the requirements of 19 U.S.C. 2511(b)(2), is agreeing to assume the obligations of the WTO and is willing to provide similar opportunities for U.S. products.

FOOTNOTES

1 The Buy American provision applies to projects receiving “funds appropriated or otherwise made available by this Act.” Section 4 of the legislation specifies that references to “this Act” contained in any division of the legislation are to be treated as references only to the provisions of that division. The new law is divided into Division A and Division B. Because the Buy American provision appears in Division A, the prohibition does not apply to funds appropriated or otherwise made available pursuant to Division B. The tax provisions relating to renewable energy projects are contained in Subtitle B, Part I, of Division B, and are therefore not subject to the prohibition. Similarly, grants in lieu of tax credits are authorized by Section 1603 of Division B. Specifically, Section 1603(i) appropriates to the Secretary of the Treasury such sums as may be necessary to carry out that section.

2 41 U.S.C. Secs. 10a through 10d.

3 48 CFR 25.101(a)(2).

4 Cong. Rec. for January 30, 2009, p. S1175, Section 1604 to Amendment No. 98.

5 Cong. Rec. for February 4, 2009, p. S1528.

6 Cong. Rec. for February 4, 2009, p. S1528.

7 Cong. Rec. for February 4, 2009, p. S1528.

8 Cong. Rec. for February 4, 2009, p. S1528.

9 Cong. Rec. for February 4, 2009, p. S1528.

10 Cong. Rec. for February 4, 2009, p. S1530.

11 Cong. Rec. for February 4, 2009, p. S1528.

12 Cong. Rec. for February 4, 2009, p. S1529.

13 Cong. Rec. for February 4, 2009, p. S1530.

14 Cong. Rec. for February 4, 2009, p. S1530.