US DOMESTIC CONTENT PROVISIONS FOR SWISS COMPANIES
US President Joe Biden was elected with the promise to revitalize manufacturing after the Covid-19 pandemic which resulted in a number of stimuli into numerous sectors of the US economy. At the same time, new or revised domestic content regulations ensure that these financial incentives, including the Infrastructure Investment and Jobs Act (IIJA), benefit the US, domestic economy. In the US, the term ‘domestic content requirements’ refers to provisions which require that items that are purchased by funds made available by Congress need to be produced in the country. The two most well-known set of requirements are the Buy American Act (BAA), which was first established in 1933 and which refers to procurement by the US federal government, while the Build America, Buy America (BABA) Act targets financial assistance (grants) provided by federal agencies. As signatories of the WTO’s Government Procurement Agreement (GPA), Swiss exporters to the US need to abide by these requirements.
U.S. PRESIDENT BIDEN’S ‘MADE IN AMERICA’ POLICIES
Just after his election, in January 2021, President Biden issued the ‘Made in America’ Executive Order (EO 14005) which outlined the Administration’s policy to maximize the use of goods and service produced and offered in the US and also established the ‘Made in America Office’. The Office is part of the US Office of Management and Budget (OMB) and coordinates the Federal Government’s procurement policy and publishes procurement-related decisions such as waivers on the Made in America website. Pursuant to this EO, on March 7, 2022, the Federal Acquisition Regulatory Council published a final rule which increased the domestic content requirements in the BAA. The implementing guidelines for the BAA are set out in the Federal Acquisition Regulations (FAR) which determine whether “construction material” or “end products” are “domestic”, i.e. mined, produced, or manufactured in the US. To that end:
(1) the end product or construction material must be manufactured in the US and
(2) a certain percentage of all component parts (determined by the component costs) must also be mined, produced or manufactured in the US (the “domestic content test”).
The domestic content test is waived for commercially available off-the-shelf (COTS) items, but not if these are iron and steel products (unless they are COTS fasteners). Until October 25, 2022, the cost of domestic contents must exceed 55 percent of the cost of all components. This will increase to 60 percent for items delivered in 2022 and 2023, to 65 percent for items delivered between 2024 and 2028, and to 75 percent for items delivered starting in 2029. For an end product or construction material consisting wholly or predominantly of iron or steel or both, the cost of foreign iron and steel must be less than 5 percent of the costs of all the components. Domestic suppliers receive a 20 percent and small US businesses a 30 percent price preference when it comes to determining whether the price of a domestic offer is “reasonable” compared to a foreign bid. Again, once the final rule takes effect it will affect all procurement done by the US federal government.
THE US INFRASTRUCTURE LAW: BUILD AMERICA, BUY AMERICA PROVISIONS
The IIJA was signed into law on November 15, 2022 and Title IX of this law represents the BABA. Generally, the BABA domestic content provisions are divided into two parts. Part I imposes much broader domestic preference requirements for items purchased with federal grants from US agencies (not the US federal government) – the ‘Buy America’ requirements. Part II tightens federal procurement from the US government – the ‘Buy American’ requirements. The tightening of the Buy American requirements in the second part of the BABA relates to the final rule concerning the BAA, published in March 2022 and laid out above. Part I of the BABA, extended the traditional application of the Buy America requirements (first established in 1978) from public works transportation and water-related infrastructure to other infrastructure projects, including transmission facilities, electric utilities, broadband and buildings. In addition, the BABA broadens the Buy American requirements from iron and steel to nonferrous metals, e.g. copper, plastic, glass and other construction materials. Note that cement and aggregates are not included in this list.
IMPLEMENTING THE BABA: WHITE HOUSE GUIDANCE
On April 18, 2022, the OMB issued a Guidance to assist the federal agencies on the application of the BABA sourcing requirements and for related waivers. The requirements apply to three types of products which are used in infrastructure projects:
(1) Iron and steel products: all manufacturing processes need to occur in the US.
(2) Manufactured products: the end product needs to be manufactured in the US and more than 55% of the total component costs need to originate in the US.
(3) Construction materials: all manufacturing processes for the materials need to occur in the US.
DIFFERENCES BETWEEN THE BABA AND THE BAA UNDER THE NEW GUIDANCE
While the BABA and the BAA contain a number of similarities, the provisions under the BABA are different from the BAA requirements in four key ways. First, the BABA limits the domestic content threshold to 55% without indicating that this threshold will increase. This is different to the BAA which gradually increases the domestic content threshold to 75% by 2029. Second, the BAA applies the domestic content test while under the BABA the 55% domestic content threshold may be replaced by “another standard for determining the minimum amount of domestic content”. An alternative method hasn’t been specified, yet. Third, the BAA recognizes an exception to the domestic content threshold requirement for COTS items. The BABA and the Guidance do not mention this exception, which indicates that the partial waiver will not be available for infrastructure projects. Last, the BAA applies to every “end product” purchased by the federal government, including chairs and ancillary equipment. This is not the case for the BABA which only applies to “articles, materials, and supplies that are consumed in, incorporated into, or affixed to infrastructure projects.”
WAIVERS UNDER THE BABA
The Guidance provides detailed guidance to the agencies on all issues related to waiver requests and requires the Made in America Officer to manage the waiver process. Agencies can issue waivers under the following circumstances:
(1) the waivers are consistent with the public interest: a “catch-all category” which provides flexibility to the agencies;
(2) products or construction materials are not produced in the US or
(3) domestic products will increase the overall project costs by 25%.
It has not been clarified yet whether the existing general waivers of some agencies, such as the general waiver of the Federal Transit Administration (FTA) for small purchases below USD 150k can be transferred to the BABA. If this is the case, the Made in America Office will have to approve the request. In addition, the OMB has also imposed a May 15, 2022, deadline until which federal agencies need to have policies and procedures in place to comply with BABA requirements.
In short, a lot is still in flux when it comes to the implementation of the provisions of the BABA and Swiss companies are advised to check on regular updates on the agency- and product-related guidelines, the Made in America Office and the OMB. In addition, US associations with Swiss (and other international) members are advocating for general waivers for their products or for limited term waivers to implement supply chain and operational changes.
THE STATUS QUO AS OF APRIL 2022
As of April 2022, the $1.2 trillion funds within the IIJA are going into overall 375 programs of which 125 are new. The majority of the funds will flow through the US Department of Transportation (DOT) and 90% of the funds will be distributed through non-federal entities. 55-65% are formula funds which are distributed first and will go to state governments through established pipelines. States and localities will compete for the distribution of the remaining funds (‘competitive funds’), which will happen once the formula funds have been distributed. So far, states have received over $110 billion funding. Each state needs to name an infrastructure coordinator which could be a helpful point of contact for Swiss companies.
SUMMING IT UP: DOMESTIC CONTENT FOR SWISS INFRASTRUCTURE COMPANIES
The IIJA provides an enormous economic stimulus to US infrastructure. At the same time, the BABA and the final rule of the BAA contain stricter domestic content requirements which ensure that the IIJA funding benefits US businesses. The threshold for US, domestic content is high and the implementation guidelines favor domestic suppliers, but Swiss companies display a number of unique capabilities that are sought after in the US infrastructure. For that purpose, the IIJA contains waivers for Swiss, foreign suppliers, associations are pushing back on the new domestic content requirements and federal agencies are still to define implementation guidelines. This means that Swiss companies can look out for regular, agency- and project-specific guidelines and can build relationships in the market to take advantage of the opportunity presented through the IIJA funding. The Swiss Business Hub USA provides support with establishing a network in the US market, including with trade shows and business visits.
Side note:
Independent of the BAA and the BABA, the tightened domestic content provisions within the American Iron and Steel Act (AIS) are relevant to Swiss companies with an interest in grants provided by the Environmental Protection Agency (EPA). These state that 100% of the value of iron and steel products used for EPA projects needs to originate in the US, which includes pumps, motor drives and disinfection systems (previously exempt from AIS provisions). Waivers can be granted if suppliers fulfil any of the criteria stated above.
