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Panoptic Enterprises' FEDERAL CONTRACTS DISPATCH

DATE: August 8, 2001

SUBJECT: Department of Defense (DOD); Buy American Act Exemption for Commercial U.S.-Made End Products

SOURCE: Federal Register, August 8, 2001, Vol. 66, No. 153, page 41561

AGENCIES: Department of Defense (DOD)

ACTION: Request for Comments

SYNOPSIS: The Office of the Under Secretary of Defense (Acquisition, Technology, and Logistics) is seeking information that will assist it in evaluating a proposed exception to the Buy American Act (BAA) in procurements subject to the Trade Agreements Act (TAA) for commercial U.S.-made end products, substantially transformed in the United States, that do not qualify as domestic end products under the BAA.

EDITOR'S NOTE: The Buy American Act is covered in FAR Subpart 25.1, Buy American Act -- Supplies, and the Trade Agreements Act is covered in Federal Acquisition Regulation (FAR) Subpart 25.4, Trade Agreements. Defense FAR Supplement (DFARS) coverage is in Subparts 225.1 and 225.4, respectively.

DATES: Comments must be received no later than September 24, 2001.

ADDRESSES: Send comments to Domenico C. Cipicchio, Deputy Director, Defense Procurement, Contract Policy & Administration, OUSD (AT&L), 3060 Defense Pentagon, Washington, DC 20301-3060.

FOR MORE INFORMATION CONTACT: Susan M. Hildner, Procurement Analyst, Defense Procurement, Defense Systems Procurement Strategies, OUSD (AT&L), 3060 Defense Pentagon, Washington, DC 20301-3060, 703-695-4258, or e-mail: Susan.Hildner@osd.mil.

SUPPLEMENTAL INFORMATION: The BAA restricts the purchase by the government of supplies that are not "domestic end products." To qualify as a domestic end product, the article (1) must be manufactured in the United States, and (2) the cost of its components mined, produced, or manufactured in the United States must exceed 50% the cost of all its components (see definition of "domestic end product" in FAR 25.003, Definitions). However, DOD defines a "domestic end product" as an article in which "the cost of its qualifying country components and its components that are mined, produced, or manufactured in the United States exceeds 50% of the cost of all its components" (see DFARS 252.225-7007, Buy American Act -- Trade Agreements -- Balance of Payments Program).

Under the TAA, the BAA is waived for eligible products (that is, those listed in DFARS 225.403-70, Products Subject to the Trade Agreements Act) from designated countries (that is, a Caribbean Basin country as defined in FAR 25.003; a designated country as defined in FAR 25.003; a North American Free Trade Agreement (NAFTA) country as defined in FAR 25.003; or a qualifying country as defined in DFARS 225.872-1)). The country of origin for eligible products is the country in which the articles/components (wherever the origin) have been substantially transformed into an article of commerce with a name, character, or use distinct from that of the articles from which it was transformed. Since the TAA applies only to products of foreign countries, the BAA is not waived for products substantially transformed in the United States from mostly foreign components, (that is, U.S.-made end products that do not qualify as domestic end products). This results in treating such U.S.-made end products less favorably than designated country end products, which might encourage companies to manufacture products or locate manufacturing facilities in a designated foreign country rather than in the United States.

Because of the different rules of origin, U.S.-made end products that do not qualify as domestic end products are at a competitive disadvantage against designated foreign countries when competing for DOD procurements because of the application of the 50% evaluation factor to U.S.-made end products that do not qualify as domestic end products. Additionally, the different rules of origin result in a disproportionately burdensome record-keeping requirement on firms offering both domestic and U.S.-made end products -- the component content requirement of the BAA requires vendors to determine, control, and track the source of components. In today's global economy, this has become an extremely difficult, if not impossible, task and creates a disincentive for commercial companies to sell to DOD. On the other hand, this burden does not apply to vendors from designated countries, because the TAA substantial transformation rule of origin does not require tracking the origin of components. This is especially true for commercial items.

Given the effect of the different rules of origin, it seems appropriate to determine that application of the BAA to commercial U.S.-made end products is inconsistent with the public interest in procurements subject to the TAA. The proposed exception will eliminate the burdensome record-keeping requirements for U.S. companies, allow DOD to procure U.S.-made commercial items if they are lower in cost, allow DOD access to state-of-the-art commercial technology, and reduce the incentive to move end product manufacturing facilities to a designated foreign country.

The Office of the Under Secretary of Defense (Acquisition, Technology, and Logistics) is seeking information and comments on this proposed exception to the BAA.

EDITOR'S NOTE: On May 16, 1997, the Under Secretary of Defense (Acquisition & Technology) signed a similar determination that it is not in the public interest to apply the restrictions of the BAA to U.S.-made information technology products in Federal Supply Group 70, General-Purpose Information Technology Equipment, or Federal Supply Group 74, Office Machines, Text Processing Systems, and Visible Record Equipment, that are subject to the Trade Agreements Act (that is, those over $177,000 -- see paragraph (b)(1) of FAR 25.403, Trade Agreements Act). Defense Acquisition Circular 91-13, published March 9, 1998, implemented this determination by adding DFARS 252.225-7020, Trade Agreements Certificate, DFARS 252.225-7021, Trade Agreements, and making other amendments in DFARS Parts 225 and 252.

FOR FURTHER INFORMATION CONTACT: Panoptic Enterprises at 703-451-5953 or by e-mail to Panoptic@FedGovContracts.com.

Copyright 2001 by Panoptic Enterprises. All Rights Reserved.

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