Buy American

Louis Potvin's steel company, ADF Group Inc., is solidly Canadian: Employees at its headquarters in Terrebonne, Quebec, answer the phone with, "Bonjour." Despite its nationality, ADF finds itself protected by the Buy American Act, which President Herbert Hoover established in 1933 to encourage the federal government to buy from American companies. They needed help because German companies had been poaching their business. Today, companies that manufacture products in dozens of countries, including Germany, are exempt from the law, which means U.S. contractors receive no special consideration when competing against them.

"I'm all for [the act]," says Potvin, ADF's chief financial officer. "We're getting beat up pretty badly by the exports from China. . . . I can't compete with $100 a month," he says of Chinese labor costs. He estimates that between 10 percent and 20 percent of ADF's sales come from contracts with the U.S. government.

But the Buy American Act has been diluted. Trade agreements bestow exemptions from the law on 45 countries. As a result, when federal agencies buy American, they might be buying from Israel, Morocco or any number of countries that have signed a trade agreement with the United States. U.S. industries bolstered by Buy American preferences tend to cringe at every exemption, which they view as the government transferring jobs overseas.

The debate about buying American has deep roots: It ignited the Boston Tea Party in 1773, after British tea merchants tried to undersell Americans. Today, the central questions include: Should the government pay more for American-made goods? What about goods made by U.S. allies such as Canada? Should the government ensure the survival of certain industries in this country, such as weapons makers, even if the same products can be produced more cheaply elsewhere? As the Buy American Act continues to be eroded by exemptions and trade agreements, those questions are being overshadowed by another: Is the

While U.S. companies protected by the American-made preference continue to vigorously defend the law, opponents slowly are gaining ground. Global companies and industry associations have started lobbying more intensely against Buy American preferences. At the same time, the law is feebly enforced-a recent review at the Defense Department found that more than half the contracts examined lacked the required Buy American language-partly because contracting officers have trouble keeping track of the requirements.

It's hard to blame them. The Buy American Act has been transformed by exemptions, additional legislation and legal interpretations throughout its 72-year life. In addition to regional trade agreements, the 1979 Trade Agreements Act super-cedes the Buy American Act on contracts with companies from designated countries and worth more than certain amounts (usually $175,000). Instead of focusing only on where products originate, as the Buy American Act does, the Trade Agreements Act also allows products to be "substantially transformed" in an approved country, providing more flexibility. More than 100 items, including rarely used commodities such as rabbit fur and diamonds, are excluded altogether from the law because they are deemed unavailable in the United States. Annual authorization bills often make further exemptions, such as one for information technology products. The rules are even more complicated for De-fense: The 1941 Berry Amendment governs the Pentagon's purchases of food and clothing, and agreements with 21 different countries add more exemptions.

"It adds a lot of confusion [for] the contractor and the agency," says Sean Bamford, who until recently was the assistant counsel at the Defense Supply Center Philadelphia, which bought $12.4 billion worth of defense supplies in 2004. Bamford, now an associate in the government contracts practice group at the law firm Pepper Hamilton in Washington, says interpretations of Buy American regulations vary even within Defense.

Many officials agreed to discuss the regulations only if their comments were not attributed to them because of the controversy surrounding Buy American. But public documents and statements make clear that the law is not easy to follow. A June 2005 report from the Homeland Security Department's inspector general revealed that the main method of tracking federal purchases, the Federal Procurement Data System, was unable to document compliance with the Buy American Act, making it impossible for the IG to determine whether Homeland Security was violating the regulations. The report did identify, however, least $165 million worth of acquisitions involving products originating outside the United States, including helicopter and pistol parts.

A March 2002 report from the Pentagon's inspector general reached a similar conclusion. It examined $136.7 million worth of procurements of military clothing and other purchases, and found that 67 percent did not include the appropriate Buy American clause. As a result, about $330,281 went to countries that did not qualify for the contracts, including Malaysia and South Korea. The report found that contracting officers used the wrong clauses in contracts, referred to the incorrect section of the law, or did not attempt to figure out where the products were made. "We believe the complexity of the guidance and the number of exemptions, exceptions and waiver authorities make it difficult for contracting officers to understand what is necessary to meet the requirements of the Buy American Act and the Berry Amendment," the IG wrote.

"Put yourself in a poor contracting officer's position," says James Nagle, a lawyer and author of A History of Government Contracting (The George Washington University, 1992). If he's holding a competition for desks, and receives bids from Mexico, Antigua, England and Israel, "different rules apply to every one of those bids," Nagle says.

Breaking the Rules

In October 2002, Safina Office Products, a small, minority-owned business based in Houston, started noticing that its competitors were undercutting its prices for paper clips, pushpins and other office products, and that the cheaper products came from China, Thailand, Taiwan and other Asian countries. In January 2003, Safina filed a complaint against 10 companies, including Office Depot and Staples, alleging that they knowingly violated the Buy American and Trade Agreements acts by selling products to the federal government that were made in Asia. Vincent McKnight, Safina's lawyer, rejects the idea that the defendants might have made an innocent mistake: "If you're not willing to go the extra mile, maybe you should back off and just sell to private citizens. But if you want that prize customer [the government], the law requires you take the extra step."

Three companies settled their cases with the Justice Department: Staples paid $7.4 million, Office Depot paid $4.75 million and OfficeMax paid $9.8 million. Parts of the original complaint are still pending. A company spokesman says Staples does not share information on how it complies with the requirements, but that it is in full compliance.

An attorney who specializes in representing government contractors described the regulations as so complicated, internally inconsistent and subject to interpretation that most contractors probably could be viewed as falling out of compliance at some point.

Paying the Price

Even companies that take time to understand the rules have trouble complying. "It's virtually impossible for us to keep track of [where product components are made], and in fact, we don't keep track of that anymore," says Bruce Leinster, a senior procurement policy consultant at IBM and former chairman of the Arlington, Va.-based Information Technology Association of America's procurement policy committee. When the Buy American Act applies, IBM discloses its tracking limits and lets the agency weigh its options. Leinster says because IBM's larger procurements are governed by the Trade Agreements Act and not the Buy American Act, smaller contracts are not worth the tracking costs.

"The consequence is, you have any number of IT products that anyone in the world can buy . . . but the U.S. government can't buy them. It does hurt the U.S. and imposes a huge burden on companies like IBM," says Leinster. To comply with the Trade Agreements Act, companies such as IBM have to track where their products are manufactured or "substantially transformed." He estimates that the requirements cost companies that are IBM's size at least $1 million per year. Those that also sell to the commercial sector often have to change their entire business structure to comply with government requirements, industry representatives say.

Those costs, of course, often get passed on to the customer-in this case, taxpayers. Geoffrey Segal, director of government reform for the Reason Foundation, a Los Angeles-based nonprofit organization that promotes free markets, estimates that some commodities probably cost at least 7 percent to 10 percent more here than in foreign markets, and that technical services could cost 20 percent to 30 percent more. In addition to cost, industry groups argue that global companies can be forced to buy inferior supplies if they are limited to the domestic market, which can leave the military less well equipped than its adversaries.

Buy American requirements also hurt companies trying to sell their wares in foreign lands, says Pete Steffes, vice president of government policy for the Arlington, Va.-based National Defense Industrial Association, which represents defense contractors. "If you want to do business with your overseas customers, you can't slam your doors on what they're selling," he says.

There is one exception to the Buy American Act that both economists and unionists tend to agree with: some parts of the U.S. industrial base deserve protection. Bob Baugh, executive director of the AFL-CIO's Industrial Union Council, says Buy American is important because it en-sures that the United States maintains "the capability of making things. That's a crucial aspect of defense preparedness in the long run." High-tech missiles and other advanced equipment are among the items on that list.

Matthew Biggs, legislative and political director for the International Federation of Professional and Technical Engineers, thinks most American industries deserve that protection for economic reasons: "If you're going to do business with the American government and provide services to the taxpayer, you should reinvest those dollars in this country," he says.

Winners and Losers

Local residents and visitors buy up Don Biermann's fur coats and hats, which he sells out of his small shop in the Kickapoo Valley Reserve in southwestern Wisconsin. The high-quality fur comes from coyotes, raccoons, red fox and other animals caught by local trappers in the cold Midwest woods and marshes. One desirable customer, however, shops elsewhere: The U.S. government.

The fur used in military hats is exempted from the Buy American Act, partly because the Defense Department determined that rabbit fur, the traditional lining of cold-weather military hats, was thicker when it came from overseas. "It would be tremendous if the government bought from us," says Biermann. He recommends beaver trooper hats for police and members of the National Guard. Not only would the business be a boon to his company, but he says it would also help local trappers, who tend to have low incomes, and reduce the number of pesky animals on farms and residential areas. The cost difference likely would be substantial: A full beaver fur hat costs around $150, says Biermann, while he estimates the hats police officers currently wear run closer to $15.

Long-protected industries, such as textile manufacturers, fiercely defend the need for that price differential. "We would see it as shortsighted to say, 'You should get the lowest-cost good regardless of whether it's Asian or African.' It's U.S. workers who are paying taxpayers," says Missy Branson, senior vice president of the Washington-based National Council of Textile Organizations, an industry group that lobbies Congress and the Defense Department. Branson thinks most taxpayers would agree with her belief that the government should buy American, even if it means paying more. The military buys textiles for uniforms for the armed services, among other purposes. Those purchases are covered by the 1941 Berry Amendment, which Branson says she would like to see strengthened and applied beyond the Defense Department, to which it is currently limited.

And what of Economics 101, which teaches that international trade enables countries to specialize in what they are best at producing and makes everyone better off? William Hawkins, an economist and senior fellow for national security studies at the Washington-based U.S. Business and Industry Council, says that's just not true. The council supports strengthening the Buy American Act. "The simple model has a win-win situation. In a true competitive model, some people win and some people lose," he says.

Changing the Rules

As lawmakers negotiated fiscal 2006 authorization bills in late 2005, Buy American provisions were up for grabs. Rep. Donald Manzullo, R-Ill., amended the House Defense Authorization Act to require the Defense Department to buy products with at least 50 percent of their components made in the United States. The amendment also prohibits the Pentagon from exempting a country from the Buy American Act without congressional approval. "This legislation closes the loopholes . . . which will help restore the struggling U.S. industrial base and create jobs for Americans," Manzullo said in May. President Bush threatened to veto the bill if it was handed to him with the amendment still intact. At press time, House and Senate conferees still were debating the bill.

"Any changes to current law can have administrative and other costs associated with them," says Jonathan Etherton, vice president of legislative affairs for the Arlington, Va.-based Aerospace Industries Association, because companies have developed their processes and supply chain around the current law. IBM's Leinster says it would be virtually impossible for information technology companies to comply with the amendment.

Buy American supporters are worried that the law will be weakened even further. "We've expanded trade deals to NAFTA, CAFTA and lord knows what's next," says Frank Carelli, director of the government employees department for the AFL-CIO's International Association of Machinists and Aerospace Workers. "What will be left in this country for people to do to make a good living?"