New Executive Order Aimed at Tightening the Definition of “American-Made Products” Will Impact Domestic Manufacturers, Especially Those Utilizing Global Supply Chains

On January 25, 2021, President Joe Biden signed Executive Order 14005 (“EO”) intended to force the federal government to buy more domestically produced goods and, in turn, boost the United States manufacturing industry. The EO directs the Federal Acquisition Regulatory Council (“FAR Council”) to tighten the definition of “American-made products” and establishes a Made in America Director (“Director”) position at the Office of Management & Budget (“OMB”) to review and coordinate the Buy American Act (“BAA”) provisions. Part of the Director’s role will include oversight of product waiver applications, whereby certain foreign-made products are exempted from the BAA provisions found within the American Recovery and Reinvestment Act (“ARRA”). Within the next 180 days, manufacturers can expect regulators to propose rules that significantly change the definition of an “American-made” product, heighten scrutiny of waiver applications, and strengthen enforcement of the BAA provisions.

Changes To The Domestic “Component Test”
Pursuant to the EO, within 180 days the FAR Council must consider proposing rules amending the provisions in the Federal Acquisition Regulation (FAR), title 48, C.F.R., that would:

(i) Replace the “component test” in Part 25 of the FAR that is used to identify domestic end products and domestic construction materials with 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;
(ii) Increase the numerical threshold for domestic content requirements for end products and construction materials; and
(iii) Increase the price preferences for domestic end products and domestic construction materials.

To qualify for domestic purchasing preference under the current BAA content requirements, an end product must be manufactured in the U.S., and the cost of the product’s components mined, produced, or manufactured in the U.S. must exceed 55% of the total cost of its components. This BAA “component test” measures only the cost of U.S.-manufactured components, regardless of the cost and origin of any subcomponents used. As a result, many U.S. manufacturers have satisfied the component test by converting foreign materials and subcomponents into originating U.S. components through intermediate manufacturing steps in the U.S. By contrast, the EO does not identify content purely in terms of cost, but rather contemplates 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.” It is unclear how the FAR Council will implement this EO provision or how “U.S.-based production” and “U.S. job-supporting economic activity” will be measured, but the impact will likely be significant. Current BAA-compliant products with substantial amounts of foreign content are most at risk since the anticipated changes seem poised to strip such products and materials of their preferential treatment or force manufacturers to incorporate greater “domestic value” into these end products.

Similarly, the proposed increases to the numerical threshold for domestic content requirements for end products and corresponding price preferences also stand to disrupt the status quo. Increasing domestic content and / or cost requirements could render U.S. manufacturers unable to certify their domestic end products without additional U.S. content or manufacturing, likely at greater expense. Manufacturers should prepare for this transition with the understanding that BAA requirements are expected to tighten and be enforced with a pronounced emphasis on increasing domestic content through U.S. manufacturing.

Centralized Waiver Review Through The OMB
Product waivers are defined as exceptions or waiver of Made in America requirements typically because those products are not available in the U.S. in sufficient quantities. Through waivers, various products have been exempted from BAA component test requirements even though they did not meet domestic content thresholds. The EO is expected to reduce the overall number of product waivers issued by federal agencies through a heightened review process. Under the EO, each agency seeking to grant a product waiver must now seek approval from the Made in America Director. As part of that process, the agency must provide a description of the proposed waiver and a detailed justification for the use of goods, products or materials that have not been mined, produced or manufactured in the U.S. This heightened review is aimed at raising transparency and scrutiny of the waiver process and is expected to result in less exemptions for foreign products and content.

Executive Order 14005, and the new rules to come, will certainly raise the bar for manufacturers to meet the Made in America requirements of the BAA. On the other hand, for those who see the glass half full, the expected rule changes will present opportunities for businesses that can swiftly adapt to the changing landscape.

Robert A. Assuncao is a founding partner based in the New Jersey office.
David A. Gonzalez is located in our New Jersey office.