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Implications of Buy American Act

There has been much publicity recently relating to a potential trade war between theEuropean Union and the US following the addition of Buy American provisions byCongress into a $820 billion stimulus package introduced by the Obama administration in

early February. The House of Representatives and the Senate had inserted into thestimulus package a requirement that any projects related to the stimulus should only useAmerican made equipment and goods.

This amendment drew a reaction from the EU Commissioner who stated that if the billwas passed to prohibit the sale or purchase of European goods in America the EU wouldnot stand idly by and ignore the protectionist policies. Indeed there was a very negativereaction from inside the US by a number of large multinational American based firms whohave significant operations in the EU including General Electric and Caterpillar. Theyopenly stated that they feared this could result in other territories adopting similar buynational policies, which would have an effect on limiting their involvement in overseasprojects.

However, what many fail to realise is that the Buy American Act has actually been on thestatute book since the last great depression and was introduced by President Hoover in1933. Its express purpose was to require the US Govt. to give preferential treatment toUS made goods and construction materials on Government backed projects such ashighway and transit programmes.

This requirement to purchase US goods, however, is subject to a number of waiversincluding waivers where purchasing the material domestically would burden theGovernment with an unreasonable cost, if the product is not available domestically insufficient quantity or quality or if doing so is in the public interest. Further the Presidenthas the right to waive the Buy American Act within the terms of a reciprocal agreement

or otherwise in response to the provision of reciprocal treatment to US producers. This isbeing used for example in relation to the US Canada Free Trade Agreement, the GeneralAgreement of Tariff and Trade and the US' Israeli Free Trade Agreement.

However, the Act has been used as a protection policy tool for many years. For example,in the recession in the mid 80s the Act was used by a number of US contractors tochallenge awards made by the Government to Japanese manufacturers. This coincidedwith a rise in anti-Japanese import settlement. Similarly, NATO in the 1980s wereextremely concerned about the elimination of a waiver of the Buy American legislation forNATO military programs and again in the 1980s, similar to what is happening now inFrance, a bill was circulated that ultimately was defeated requiring auto makers that sellin the United States to use a minimum percentage of American parts.

In the 1990s and the early parts of 2000 a lot of pressure was brought to bear byindustry groups to repeal or significantly water down the Buy American Act due to theincreasingly difficult compliance with the provisions of the Act given the multi-nationalorigins of many complex products.

One change that was made was that micro purchases were now excluded from the BuyAmerican Act.

Further over the years there has been a lot of support for legislation to waive BuyAmerican Act requirements where the product came from qualifying countries. Forexample, the Department of Defence has waived the Buy American Act in relation to theacquisition of defence equipment which is produced or manufactured in countries such as

Denmark, Germany, France, the Netherlands and the United Kingdom, though

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interestingly enough this general waiver did not apply to Sweden or Finland where it isassessed on a case by case basis.

There are a whole raft of specialist law firms that advise in relation to the Buy AmericanAct as it is a requirement to give an appropriate certification on any Government tenderthat the Buy American Act has been complied with, and indeed one sees regular

complaints from US firms who protest against the award of a contract to a foreign firmoften alleging that the foreign firm has a competitive advantage over the US firmbecause they are not subject to laws and regulations which the US firms must complywith.

For such an Act to have survived even during the good times since 1933 shows thestrength of lobbying that goes on in the United States. The Act and its subsequentmodifications clearly represent one of the most visible and inappropriate examples of USprotectionism and understandably has been cited as a justification for other countries toinstitute their own domestic content requirements particularly in France and Canada.Most recently there has to be no doubt that there was political interference in thedecision by the Chinese authorities to block the acquisition by Coca Cola of a major fruit

juice manufacturer in China no doubt triggered by the latest furore over Buy Americanlanguage from Congress.

Up until the Obama stimulus package the Act was regarded as actually largely ineffectivedue to the numerous loopholes and waiver authority provisions which allow foreign goodsto compete with US goods on a reasonably competitive basis.

It is clear that President Obama has come under significant pressure from the EU towater down the proposals in the stimulus package. Obama has publicly stated that theUS will comply with existing trade deals notwithstanding the language in fiscal stimuluspackage and further there has been a statement that the bill that is ultimately signed willbe consistent with those international trade treaties.

When the G20 met in London in April, protectionism was high on the agenda, and as theEU Commission said, where America leads others tend to follow. We are already seeing anumber of EU countries being put under pressure to put more safeguards in place forlocal workers, which of course is completely inconsistent with the freedom of movementof goods and labour that the EU stands for. The American administration has listened tosome of the concerns expressed by the G20 but we await concrete evidence of a move inpolicy.

EU companies, however, should not regard themselves as being completely excludedfrom the stimulus package in the States. They need to read very carefully the exclusionsfrom the Buy America Act and they should work closely with American trade partners inensuring that where an opportunity does arise to participate in the fiscal stimuluspackage the rules and regulations are complied with.

Robin Johnson

Partner

Eversheds Advokataktieselskab,stergade 27, DK-1100 Kbenhavn.www.eversheds.dk. Tel: +45 33 75 05 05. E-mail: robinjohnson@eversheds.com