Buy American Act: How new amendments affect Canadians businesses
Recently there have been changes to U.S. regulations that affects Canadian businesses’ access to the U.S. market. In this blog, we review the Buy American Act, recent amendments that came into affect in 2022 and exceptions that impact Canadian businesses.
Recent amendments to the Buy American Act, have once again reignited the conversation on Canada’s ability to export to the U.S. market and Canadian businesses are once again left to grapple with the implications this policy will have on their operations.
What is the Buy American Act?
The Buy American Act (BAA), as implemented in Federal Acquisition Regulation (FAR) Part 25, has been around since the 1930s and it requires the U.S. government to preferentially purchase goods and services that are made in the United States.
The policy applies to a wide range of purchases over $10,000 USD made by federal agencies for construction projects, infrastructure investments, and procurement of goods and services.
Before October 25, 2022, for a product to be considered as being produced in the U.S., it must be manufactured in the U.S. and at least 55 percent of the cost of their components must come from the U.S. The rule has been recently amended to gradually increase this threshold up to 75% in 2029, as you will see in the section below.
New Buy American Act requirements for 2022
The Department of Defense, General Services Administration (GSA), and National Aeronautics and Space Administration issued a final rule that made significant changes to the domestic preference requirements in Federal Acquisition Regulation (FAR) Part 25. These amendments came into effect on October 25, 2022 and they impact Buy American Act provisions.
Increased thresholds
Prior to October 25, 2022, the cost of domestic components was required to exceed 55 percent of the cost of all components to satisfy the component test. The new rule increases this domestic content threshold to 60 percent on October 25, 2022, 65 percent in calendar year 2024, and 75 percent in calendar year 2029.
For multi-year contracts, the domestic content threshold will be required to comply with the applicable increased threshold for the items delivered in each year. For example, if the supplier is awarded a contract in February 2023, they will have to comply with the 60 percent domestic content for deliverables prior to 2024 calendar year. But for deliverables between 2024 and 2028, they will need to supply products with 65 percent domestic content.
Threshold exemptions for U.S. DoD purchases
Currently, the US government waives Buy American requirements for long-standing U.S. Department of Defense bilateral reciprocal defence procurement agreements, such as the Canada-U.S. Defence Production Sharing Agreement (DPSA). DFARS 225.872-1 which supports U.S. DoD’s ability to purchase products, services and solutions from Canada specifically states that:
- As a result of memoranda of understanding and other international agreements, DoD has determined it inconsistent with the public interest to apply restrictions of the Buy American statute to the acquisition from qualifying countries, Canada being one of those countries.
Essentially, the increase in domestic content threshold does not affect U.S. DoD contracts with Canada businesses since they are exempt from Buy American regulations.
Other exemptions to thresholds
Buy American requirements also do not apply to Canada for U.S. federal purchases covered by the revised World Trade Organization Agreement on Government Procurement (WTO GPA), to which Canada, the U.S. and 46 other countries are Parties. When bidding on U.S. federal procurements covered by these agreements, Canadian suppliers benefit from the same treatment as American suppliers. There are also exceptions in the Buy American Act for the acquisition of commercially available off-the-shelf (COTS) items.
The act also does not apply for end products or construction materials that consist wholly or predominantly of iron or steel or a combination of both, which are subject to more stringent domestic preference requirements (Buy America Act).
For cases where such compliance would not be feasible, the procuring agency’s senior procurement executive, after consultation with the Office of Management and Budget’s Made in America Office, may allow the supplier to comply with an “alternate domestic content test” where the supplier complies with the domestic content threshold that applies at the time of contract award for the entire period of performance.
Waivers are also granted for the public interest, or if the cost of U.S. products is unreasonable compared to equivalent foreign products. They may also be granted if products are not produced in the U.S. in sufficient and reasonably available commercial quantities of satisfactory quality. For more information, please see Exceptions and Waivers.
Fallback threshold
The final rule also includes a “fallback threshold,” provision until 2030, for the case where the procuring agency has determined that there are no end products or construction materials that meet the new domestic content threshold or that such products can be obtained only at an unreasonable cost. In that case, the original 55 percent domestic content threshold can be used.
The fallback threshold only applies to end products and construction materials that consist wholly or predominantly of iron or steel or a combination of both, which are subject to more stringent domestic preference requirements (Buy America Act), and that are not COTS items.
What amendments mean to Canadian businesses
Except when selling to the U.S. DoD, these amendments, especially the higher thresholds, will affect how many U.S. federal contracts Canadian businesses can bid on. It will also force Canadian businesses to consider new business arrangements with U.S. partners so they can take part in U.S. federal government procurement opportunities.
Impact on Canadians defence and security companies
As mentioned above, when it comes to contracts specifically related to defence and security, Canada gets special consideration given the integrated nature of the North American defence industrial base. “Defence is its own unique circumstance in a lot of ways,” says Darren Boomer, Director, Contract Operations for CCC. “Canada is part of the North American defence industrial base, and the U.S. Department of Defense (DoD) needs access to Canadian solutions.”
Buy American requirements are waived for procurements made by the U.S. DoD under agreements such as the Canada-U.S. Defence Production Sharing Agreement (DPSA) and federal acquisition regulation DFARS 225.872-1.
Download our guide to learn what opportunities are available to Canadian businesses, where to find these opportunities and how to get started selling to the U.S. Department of Defense.
Mitigating impacts of Buy American Act
So, what can Canadian businesses do to mitigate the impact of recent amendments? One solution is for Canadian businesses to focus on innovation and differentiation. By developing innovative products and services that are not available in the U.S. market, Canadian businesses can carve out a niche for themselves and avoid direct competition with American companies.
Other options include:
- working with Canadian officials to exercise exemptions under the WTO or DPSA;
- being a subcontractor to a U.S. company;
- setting up a joint venture;
- establish a U.S. affiliate;
- obtaining a waiver;
- engaging in projects that don’t use federal funds.
Work with Canadian officials
Canadian businesses can also work with the Canadian government to exercise existing exemptions and exceptions to the Buy American Act. The Canadian government has historically been successful in negotiating recognition of exemptions for Canadian businesses, and this may continue to be a viable option in the future.
Become a subcontractor to a U.S. firm
According to the Trade Commissioner Service, Canadian firms legally do not qualify to bid directly on contracts set aside for small, minority or disadvantaged businesses. However, there are a number of ways Canadian suppliers may participate in such a contract. One option is to subcontract.
A small business prime contractor may spend up to 50% of the value of a contract set aside for a small business on any other type of business.
Setting up a joint venture
Canadian suppliers may decide to partner with U.S. firms by either entering into joint ventures or becoming a subcontractor to a U.S. firm. One joint venture option is to partner with a small U.S. business that will provide access to U.S. federal government procurements below US$250,000 that must be set aside for U.S. small businesses.
Another joint venture option is a protégé-mentor joint venture with a small U.S. business to bid on a set aside contract. As stated in an EDC article, the mentor must provide technical or financial assistance to the protégé, while the protégé must be designated as the manager of the joint venture and perform at least 40 percent of the work. The small business must also own at least 51 percent of the joint venture entity.
Establish a U.S. affiliate
Canadian companies can become Buy America compliant by letting their U.S.-based affiliate do the work for the contract. Canadian companies should get professional legal and accounting assistance to understand their options when setting up an affiliate.
According to Christelle Shirandi, EDC’s associate regional manager in the United States, having a U.S. affiliate offers significant investment tax credits and carrying out a merger or acquisition is much easier if it’s done by a Canadian company’s U.S. affiliate. An affiliate also puts a Canadian company logistically closer to U.S. buyers and projects.
Apply for waivers
Waivers are allowed where the Buy America requirement for a particular project would be inconsistent with U.S. public interest, the materials required aren’t produced in the U.S. in sufficient quantities and/or satisfactory quality and the use of required domestic material over foreign material would increase the cost of the overall project by more than 25 percent.
According to Michael Gonsalves, EDC’s Director of Global Business Development in the United States, obtaining a waiver can be arduous, complex, and not designed for fast-moving projects. Obtaining a waiver is also a public and transparent process and requires companies to disclose what they do and how they are positioning themselves to obtain the waiver. Disclosing such details may be a competitive disadvantage.
How CCC can help
Based on our experiences and through our collaboration with Government of Canada partners, we can help you navigate government regulations such as Buy American Act and connect you with experts to understand government procurement markets and processes. Remember that contracts with U.S. DoD are not impacted by Buy American regulations – Learn more about Selling to the U.S. Military.
This post was last updated on April 26, 2023.
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