Protectionism and the US Stimulus Package

Sergio Garcia and Steven D. Tibbets, guest contributors
Reed Smith Global Regulatory and Enforcement, Public Policy and Infrastructure Group, Client Bulletin

Under the American Recovery and Reinvestment Act of 2009 (“Recovery Act”), Public Law 111-5, billions of dollars will be used to purchase goods and services through a variety of government procurement, grant, and loan programs. A provision in the Recovery Act requires certain goods purchased using Recovery Act funds be American-made. Numerous publications have discussed the express Buy American requirements imposed by the Recovery Act. However, less appreciated are the latent Buy American requirements that the Recovery Act imposes, or could impose, that may restrict foreign businesses’ ability to exploit U.S. Government stimulus spending. This article provides a brief overview of the express Buy America provisions of the Recovery Act, then discusses the latent or less-obvious aspects of the bill that may limit the extent to which foreign firms can participate in projects that involve Recovery Act funds.

The Recovery Act’s Buy American Requirement

The Recovery Act was signed into law on February 17, 2009. The Recovery Act, among other expenditures, appropriates billions of dollars for grants to state and local governments and other public entities, which could be used for a wide variety of projects.

Section 1605 of the Recovery Act states as follows:

“SEC. 1605. USE OF AMERICAN IRON, STEEL, AND MANUFACTURE GOODS. (a) None of the funds appropriated or otherwise made available by this Act may be used for a project for the construction, alteration, maintenance, or repair of a public building or public work unless all of the iron, steel, and manufactured goods used in the project are produced in the United States.” Pub. L. 111-5 § 1605. There are three situations in which projects may be excepted from this requirement: (1) when applying the Buy American provision would be inconsistent with the public interest; (2) when iron, steel, and the relevant manufactured goods are not produced in the United States in sufficient and reasonably available quantities and of a satisfactory quality; or (3) when inclusion of iron, steel, and manufactured goods produced in the United States will increase the cost of the overall project by more than 25 percent.

Thus, the Recovery Act imposes specific “Buy American” requirements, but those requirements are limited to “project[s] for the construction, alteration, maintenance, or repair of a public building or public work.” funded with money appropriated or made available by the Recovery Act. In addition, agencies, in their discretion, may find that the facts surrounding a specific procurement or grant program warrant the use of one of several exceptions. Notice of a waiver of the Recovery Act Buy American requirements must be published in the Federal Register. Such notice must include justification to support the waiver.

Other Aspects of the Recovery Act that Impose Additional De Facto Buy American Requirements. Reports from industry in other countries, particularly heavy trading partners of the United States such as Canada and Japan, indicate that the Buy American aspects of the Recovery Act have generated frustration and resentment from officials and firms that feel the Recovery Act’s Buy American provisions are unfairly protectionist. In response, commentators and some policymakers have pointed out that the exceptions to the Buy American provisions “carve out” a significant portion of funding that is not subject to the Buy American requirement. Still, there are several ways in which the Recovery Act may impose de facto Buy American requirements on the government agencies tasked with distributing the funds.

Consider the use of job creation potential as a criterion for disbursement of stimulus funds and the “economy transformation” aims of the Recovery Act. Guidance from the U.S. Office of Management and Budget (“OMB”) has ordered agencies to distribute funds so that projects that create the greatest number of jobs in the United States are most likely to receive funding. In addition, many of the programs funded under the program are designed to precipitate changes in the U.S. economy by creating domestic industries for products that, heretofore, had not been manufactured in the United States.

For example, the Recovery Act includes a $2 billion appropriation to fund the establishment of advanced vehicle manufacturing facilities. Awards are to fund those projects with the greatest potential to create jobs in the United States, among other factors. Currently, the global supply base for lithium-ion vehicle batteries is concentrated in Southeast Asia, and the market for lithium-ion batteries in the United States is growing. If the Recovery Act succeeds in “jump-starting” a U.S.-based lithium-ion battery manufacturing capability, the comparative advantage of U.S. suppliers will eclipse that of overseas suppliers with respect to the U.S. market.

Similarly, in early May 2009, the U.S. Department of Energy (“DOE”) issued a grant announcement soliciting applications for Recovery Act funds to support the development and demonstration of pilot “integrated biorefinery” operations. Integrated biorefineries are facilities that employ various combinations of feedstocks and conversion technologies to produce a variety of products, with the main focus on producing biofuels and bioproducts. Co- or by-products can include additional fuels, chemicals (or other materials), and heat and power. The DOE encouraged applications that propose novel or breakthrough technologies and those that include appropriate collaboration between and among industry, academia, and DOE National Laboratories, Federally Funded Research and Development Centers, or other Government-funded facilities. One of the requirements for eligibility was that proposed projects must “be located in the U.S. and the feedstock will be obtained from a domestic source.” Thus, while it would not be readily apparent from the text of the Recovery Act that a grant to fund integrated biorefinery research would implicate “Buy America” restrictions, the DOE’s grant announcement very explicitly limits the geographic scope of both the projects themselves and the source of the raw material, feedstock, necessary to support any projects.

We are not opining on the public policy merits of these circumstances. Rather, we are observing that this is an example of how the job creation mandates of the Recovery Act may generate protectionist-like outcomes despite express “Buy American” statutory or regulatory provisions. It is significant for firms both abroad and within the United States to understand how the Recovery Act may affect their industries by spurring the growth of particular sectors in the United States and to plan accordingly.

For Further Information
Attorneys in Reed Smith’s Global Regulatory Enforcement Group are actively monitoring developments in implementation of the Recovery Act, including regulations and solicitations concerning the Buy American preference. For further information, please contact Sergio Garcia (415-659-4748, sgarcia@reedsmith.com) or Steven D. Tibbets (202-414-9242, stibbets@reedsmith.com).

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One Response to Protectionism and the US Stimulus Package

  1. Ronaldo says:

    Excellent. Thank you for this information.

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