Recently there have been changes to U.S. regulations that affects Canadian businesses’ access to the U.S. market. In this blog, we review the Buy American Act, recent amendments that came into affect in 2022 and exceptions that impact Canadian businesses.
Recent amendments to the Buy American Act, have once again reignited the conversation on Canada’s ability to export to the U.S. market and Canadian businesses are once again left to grapple with the implications this policy will have on their operations.
The Buy American Act (BAA), as implemented in Federal Acquisition Regulation (FAR) Part 25, has been around since the 1930s and it requires the U.S. government to preferentially purchase goods and services that are made in the United States.
The policy applies to a wide range of purchases over $10,000 USD made by federal agencies for construction projects, infrastructure investments, and procurement of goods and services.
Before October 25, 2022, for a product to be considered as being produced in the U.S., it must be manufactured in the U.S. and at least 55 percent of the cost of their components must come from the U.S. The rule has been recently amended to gradually increase this threshold up to 75% in 2029, as you will see in the section below.
The Department of Defense, General Services Administration (GSA), and National Aeronautics and Space Administration issued a final rule that made significant changes to the domestic preference requirements in Federal Acquisition Regulation (FAR) Part 25. These amendments came into effect on October 25, 2022 and they impact Buy American Act provisions.
Prior to October 25, 2022, the cost of domestic components was required to exceed 55 percent of the cost of all components to satisfy the component test. The new rule increases this domestic content threshold to 60 percent on October 25, 2022, 65 percent in calendar year 2024, and 75 percent in calendar year 2029.
For multi-year contracts, the domestic content threshold will be required to comply with the applicable increased threshold for the items delivered in each year. For example, if the supplier is awarded a contract in February 2023, they will have to comply with the 60 percent domestic content for deliverables prior to 2024 calendar year. But for deliverables between 2024 and 2028, they will need to supply products with 65 percent domestic content.
Currently, the US government waives Buy American requirements for long-standing U.S. Department of Defense bilateral reciprocal defence procurement agreements, such as the Canada-U.S. Defence Production Sharing Agreement (DPSA). DFARS 225.872-1 which supports U.S. DoD’s ability to purchase products, services and solutions from Canada specifically states that:
Essentially, the increase in domestic content threshold does not affect U.S. DoD contracts with Canada businesses since they are exempt from Buy American regulations.
Buy American requirements also do not apply to Canada for U.S. federal purchases covered by the revised World Trade Organization Agreement on Government Procurement (WTO GPA), to which Canada, the U.S. and 46 other countries are Parties. When bidding on U.S. federal procurements covered by these agreements, Canadian suppliers benefit from the same treatment as American suppliers. There are also exceptions in the Buy American Act for the acquisition of commercially available off-the-shelf (COTS) items.
The act also does not apply for end products or construction materials that consist wholly or predominantly of iron or steel or a combination of both, which are subject to more stringent domestic preference requirements (Buy America Act).
For cases where such compliance would not be feasible, the procuring agency’s senior procurement executive, after consultation with the Office of Management and Budget’s Made in America Office, may allow the supplier to comply with an “alternate domestic content test” where the supplier complies with the domestic content threshold that applies at the time of contract award for the entire period of performance.
Waivers are also granted for the public interest, or if the cost of U.S. products is unreasonable compared to equivalent foreign products. They may also be granted if products are not produced in the U.S. in sufficient and reasonably available commercial quantities of satisfactory quality. For more information, please see Exceptions and Waivers.
The final rule also includes a “fallback threshold,” provision until 2030, for the case where the procuring agency has determined that there are no end products or construction materials that meet the new domestic content threshold or that such products can be obtained only at an unreasonable cost. In that case, the original 55 percent domestic content threshold can be used.
The fallback threshold only applies to end products and construction materials that consist wholly or predominantly of iron or steel or a combination of both, which are subject to more stringent domestic preference requirements (Buy America Act), and that are not COTS items.
Except when selling to the U.S. DoD, these amendments, especially the higher thresholds, will affect how many U.S. federal contracts Canadian businesses can bid on. It will also force Canadian businesses to consider new business arrangements with U.S. partners so they can take part in U.S. federal government procurement opportunities.
As mentioned above, when it comes to contracts specifically related to defence and security, Canada gets special consideration given the integrated nature of the North American defence industrial base. “Defence is its own unique circumstance in a lot of ways,” says Darren Boomer, Director, Contract Operations for CCC. “Canada is part of the North American defence industrial base, and the U.S. Department of Defense (DoD) needs access to Canadian solutions.”
Buy American requirements are waived for procurements made by the U.S. DoD under agreements such as the Canada-U.S. Defence Production Sharing Agreement (DPSA) and federal acquisition regulation DFARS 225.872-1.