How does 'U.S.-made' differ from 'domestic'?

A reader asked the following question: In most U.S. government acquisitions, vendors are required to identify the countries of origin of the products they offer. Often, these acquisitions provide preferential treatment for items that originate in the United States. However, at least two different terms are used to define these products: "domestic end products" and "U.S.-made end products." What are the differences in these two definitions? What is the impact of offering one or the other type?As discussed in the last Legal View column, numerous laws establish preferences for products that originate in the United States or other designated countries, including the Buy American Act, the Trade Agreements Act, the North American Free Trade Agreement and the Berry Amendment (for Defense Department procurements). While none of these laws, by itself, is particularly complicated, they overlap and interrelate in ways that make them extremely difficult to apply in practice.Under the Buy American Act, an agency must give a preference to domestic end products. This preference is in the form of an upward adjustment to the price of any nondomestic item. The adjustment can be as much as 50 percent for DOD procurements. A domestic end product is defined as an item that is manufactured in the United States from components whose cost is more than 50 percent domestic. Agencies may accept products that are not domestic, but only if they still represent the best value to the government after application of the relevant evaluation differential.Under the Trade Agreements Act, which currently applies to acquisitions of more than $190,000, a procuring agency may not accept any foreign product unless it has been "substantially transformed" in one of the countries specifically designated in the act "into a new and different article of commerce with a name, character or use distinct from that of the article or articles from which it was so transformed." When the Trade Agreements Act applies, the Buy American Act's evaluation preference is waived for the products of designated countries.The United States itself is not a designated country under the Trade Agreements Act. However, in response to a decision by the General Services Administration's Board of Contract Appeals in International Business Machines, GSBCA No. 10532-P, 90-2 BCA Paragraph 22,824, many agencies have adopted rules under which U.S.-made end products are treated similarly to designated-country end products. U.S.-made end products are items that have been substantially transformed in the United States but do not meet the 50 percent content requirement of the Buy American Act.Case LawThere is a large body of case law interpreting these rules in various contexts. It is clear that the concept of "manufacturing" under the Buy American Act is a different and a somewhat lower test than the concept of "substantial transformation" under the Trade Agreements Act. Having to comply only with the lower "manufacturing" test can be a substantial advantage to an offeror on a government procurement. Also, DOD agencies generally still favor offers of domestic end products compared with offers of U.S.-made end products. Thus, Defense agencies typically will apply the Buy American Act evaluation preference.In Ron-Paige Co. v. United States, 35 Fed. Cl. 117 (1996), the Court of Federal Claims upheld a decision by GSA to terminate for default a contract for cookware because the plaintiff's assembly process did not meet the applicable substantial transformation test. According to the court, the plaintiff merely was attaching handles to prefabricated pots and lids, which did not change the character, use or name of the product.In contrast, in A&D Machinery Co., B-242546, May 16, 1991, 91-1 CPD Paragraph 473, the General Accounting Office noted that the concept of manufacturing under the Buy American Act may include fairly nominal assembly operations. Said GAO: "Manufacturing may include a mechanical operation performed on a foreign product or assembly of separate items, whereby the identity and character of the end item is established and fixed as to its current and future use. Thus, the key in determining whether a process constitutes manufacturing for Buy American Act purposes is not necessarily whether a foreign product has been significantly altered but whether the item being purchased by the government is made suitable for its intended use and its identity established."But in General Kinetics Inc., 70 Comp. Gen. 473, 91-1 CPD Paragraph 445 (1991), GAO held that the procuring agency had improperly evaluated a proposed digital fax machine as a domestic end product under the Buy American Act when the imported base fax machine underwent some manufacturing operations in the United States but the essential nature of the machine was not altered.Although the manufacturing test of the Buy American Act may be lower than the substantial-transformation test of the Trade Agreements Act, it is not low enough to allow relatively trivial processing to pass.The application of all these rules can be very complicated. Companies must be very cautious to follow the guidelines established in each specific solicitation and correctly represent the products they offer.Peckinpaugh is a member of the government contracts section of the law firm of Winston & Strawn, Washington, D.C."A reader asked the following question: In most U.S. government acquisitions, vendors are required to identify the countries of origin of the products they offer. Often, these acquisitions provide preferential treatment for items that originate in the United States. However, at least two different terms are used to define these products: "domestic end products" and "U.S.-made end products." What are the differences in these two definitions? What is the impact of offering one or the other type?

As discussed in the last Legal View column, numerous laws establish preferences for products that originate in the United States or other designated countries, including the Buy American Act, the Trade Agreements Act, the North American Free Trade Agreement and the Berry Amendment (for Defense Department procurements). While none of these laws, by itself, is particularly complicated, they overlap and interrelate in ways that make them extremely difficult to apply in practice.

Under the Buy American Act, an agency must give a preference to domestic end products. This preference is in the form of an upward adjustment to the price of any nondomestic item. The adjustment can be as much as 50 percent for DOD procurements. A domestic end product is defined as an item that is manufactured in the United States from components whose cost is more than 50 percent domestic. Agencies may accept products that are not domestic, but only if they still represent the best value to the government after application of the relevant evaluation differential.

Under the Trade Agreements Act, which currently applies to acquisitions of more than $190,000, a procuring agency may not accept any foreign product unless it has been "substantially transformed" in one of the countries specifically designated in the act "into a new and different article of commerce with a name, character or use distinct from that of the article or articles from which it was so transformed." When the Trade Agreements Act applies, the Buy American Act's evaluation preference is waived for the products of designated countries.

The United States itself is not a designated country under the Trade Agreements Act. However, in response to a decision by the General Services Administration's Board of Contract Appeals in International Business Machines, GSBCA No. 10532-P, 90-2 BCA Paragraph 22,824, many agencies have adopted rules under which U.S.-made end products are treated similarly to designated-country end products. U.S.-made end products are items that have been substantially transformed in the United States but do not meet the 50 percent content requirement of the Buy American Act.

Case Law

There is a large body of case law interpreting these rules in various contexts. It is clear that the concept of "manufacturing"under the Buy American Act is a different and a somewhat lower test than the concept of "substantial transformation" under the Trade Agreements Act. Having to comply only with the lower "manufacturing" test can be a substantial advantage to an offeror on a government procurement. Also, DOD agencies generally still favor offers of domestic end products compared with offers of U.S.-made end products. Thus, Defense agencies typically will apply the Buy American Act evaluation preference.

In Ron-Paige Co. v. United States, 35 Fed. Cl. 117 (1996), the Court of Federal Claims upheld a decision by GSA to terminate for default a contract for cookware because the plaintiff's assembly process did not meet the applicable substantial transformation test. According to the court, the plaintiff merely was attaching handles to prefabricated pots and lids, which did not change the character, use or name of the product.

In contrast, in A&D Machinery Co., B-242546, May 16, 1991, 91-1 CPD Paragraph 473, the General Accounting Office noted that the concept of manufacturing under the Buy American Act may include fairly nominal assembly operations. Said GAO: "Manufacturing may include a mechanical operation performed on a foreign product or assembly of separate items, whereby the identity and character of the end item is established and fixed as to its current and future use. Thus, the key in determining whether a process constitutes manufacturing for Buy American Act purposes is not necessarily whether a foreign product has been significantly altered but whether the item being purchased by the government is made suitable for its intended use and its identity established."

But in General Kinetics Inc., 70 Comp. Gen. 473, 91-1 CPD Paragraph 445 (1991), GAO held that the procuring agency had improperly evaluated a proposed digital fax machine as a domestic end product under the Buy American Act when the imported base fax machine underwent some manufacturing operations in the United States but the essential nature of the machine was not altered.

Although the manufacturing test of the Buy American Act may be lower than the substantial-transformation test of the Trade Agreements Act, it is not low enough to allow relatively trivial processing to pass.

The application of all these rules can be very complicated. Companies must be very cautious to follow the guidelines established in each specific solicitation and correctly represent the products they offer.

Peckinpaugh is a member of the government contracts section of the law firm of Winston & Strawn, Washington, D.C.