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By Dawn Killough
May 22, 2017
Last month, President Donald Trump signed an executive order that seeks to increase the number of American-made products used by federal agencies. The order doesn’t call for any changes yet, but it could have impacts on the construction industry in the near future.
The Buy American, Hire American executive order calls for all federal agencies to review their current policies and procedures in regard to current legislation to see if any improvements can be made to the sourcing of American-made products and American labor. Agencies have 150 days to perform this review and make recommendations for increasing the use of American products and components, including construction materials like steel, iron, aluminum, and cement.
Once the agencies have done their research, the Secretary of Commerce will review the reports, and then will have 70 days to compile a comprehensive report, including recommendations, and submit it to the President for review.
Buy American is not a new theme in the federal government. Current legislation calls for agencies to source products from American sources. There are three laws that shape the current Buy American efforts for federal agencies.
Buy American Act of 1933
This act was originally established during the Great Depression and has been updated throughout the years. It states that all products and services purchased by the federal government must comply with the terms of the law.
The act defines American-made as "51% of the constituent components of a given product have to be made in America." The product must also be "substantially transformed" in some way by American labor, meaning that the product must undergo some kind of change in this country, whether it be in form or shape, according to Scott Berry, director of the Associated General Contractors of America's utility infrastructure division, environment and trade.
Some products from out of the country are allowed, as the US is a signatory on the World Trade Organization’s Agreement on Government Procurement (GPA), which states that member countries can treat other members’ goods as being made in their own country. The contracts must meet a minimum value threshold, however, which for the US is $5 million.
Surface Transportation Assistance Act of 1982
A provision of this act states that all projects funded by the Department of Transportation must purchase American-made products, including iron and steel. It’s definition of American-made is much stricter than the 1933 act, as it requires 100% of all components, products, and processes to originate in the US, according to Berry.
This means that steel, a major component of DOT projects, can only be sourced from one of 11 American facilities, all east of the Mississippi River. These are the only facilities in the country that melt, pour, shape, and coat steel. Numerous “slab-reheater” factories cannot provide materials to these projects, even though they may be closer to the project, because they source their steel from various locations, some outside the US.
Because of the terms of this act, DOT projects are not subject to the GPA agreement, as they are considered sub-federal projects, owned and administered by state and local governments, which aren’t subject to international trade law. Also, the GPA agreement itself excludes transportation projects.
Finally, the Environmental Protection Agency has its State Revolving Fund American Iron and Steel Requirement. It applies to products like manhole covers, which are required for public water and treatment projects. These products must be produced in the US.
While the recent Buy American order doesn’t make any changes to current policy, it has raised the debate about the existing legislation and its effect on today’s global marketplace.
"It's very politically appealing to buy American," but the rules "ignore the global supply chain that exists in a 21st century world," said AGC’s Berry. "The economy no longer looks like it did after World War I, and it's never going back there," he said.
In addition to the increased cost of purely American-made and produced materials, there is a potential threat to current trade relations with other countries. If the US doesn’t buy these materials from other countries, they may not be so willing to provide other goods to the US in the future.
As a result of increased emphasis on American-made products, US companies could end up competing against each other to appear more American. This could lead to fraud, as companies try to pass their products off as American-made even though they come from outside sources. Companies can buy samples from US steel mills and save the documentation to use to pass foreign-made steel products through. Attorneys recommend that agencies test steel and other materials to confirm their origins.
Some projects may not even get off the ground due to the higher cost of materials or the inability to source the required American-made products. Developers of a proposed high-speed rail system from Las Vegas to Los Angeles abandoned a deal with a Chinese partner and financial backer after officials rejected their plans to use Chinese-made cars.
Whether any changes will be made to the current rules is anyone’s guess. Because definitions of "American-made" are regulatory and not legislative, Berry said their scope could be changed to allow more sourcing of foreign products or to ease up on the regulations to allow more products manufactured in the US to qualify as American-made. But, the popularity of being "pro" American feeds into the message that the country's politicians, as well as the public, have bought into, according to Berry.
"There are so many wheels in motion and moving parts that we don’t know exactly what the potential policies are and the chances of them being enacted," said Peter Muoio, chief economist and executive vice president of commercial real estate firm Ten-X.
In addition, he said, this executive order could eventually work against some of Trump’s other promises. "Some of these policies meant to raise the economy could raise costs," Muoio said.
For example, Muoio said, immigration reform could increase the cost of construction if vital workers are deported and other workers aren't able to come in. This could negatively impact Trump’s $1 trillion infrastructure plan, as could shortages or higher costs resulting from the Buy American side of this latest order.
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