An Overview of the Trade Agreements Act
Federal procurements usually have some preference for U.S. made end products. The Buy American Act is the implementing regulation that promotes the acquisition of domestic goods in federal government acquisitions. An exception to the Buy American Act is the Trade Agreements Act (TAA), which treats products from certain “designated countries” the same as U.S.-made products for procurement purposes thereby allowing contractors to sell non-U.S. made products to the government. The TAA is most notably the applicable rule regarding the source of end products in GSA Multiple Award Schedule contracts, a widely used acquisition vehicle that allows contractors to sell government-wide more easily, as they have been vetted by GSA as a responsible vendor and have provided a set of products at discounted prices. Because of the prevalence of GSA Schedules and the prolific sourcing of products from outside the U.S., TAA compliance garners high scrutiny within government contracts.
As mentioned above, the Trade Agreements Act prohibits the government from purchasing products from non-designated countries. In acquisitions where the TAA applies, contractors must supply end products that are wholly the growth, product or manufacture of the U.S. or of a designated country. Federal Acquisition Regulation (FAR) 52.225-5 is the TAA clause either specifically outlined or incorporated by reference in applicable contracts. This FAR clause sets out the list of designated countries from which contractors may supply products. The Act further requires contractors to self-certify that each end product meets the requirements of a U.S.-made or designated country end-product.
The difficult part of TAA compliance normally centers around the concept of substantial transformation. The Act says that end products acquired by the Government must be wholly the growth, product or manufacture of the U.S. or of a designated country, or substantially transformed in the U.S. or a designated country 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 transformed. Because many products or components thereof come from China or other non-designated countries, contractors that substantially transform those products under the right circumstances may legally claim that they are U.S. or designated country end products for TAA compliance purposes.
Unlike determinations under the BAA, whether there has been substantial transformation for Trade Agreements Act purposes is not based primarily on the value or percentage of U.S. (or designated country) content (components), but on whether the article in question has been given a different character or use as a result of the process it underwent in the U.S. (or designated country). Making TAA substantial transformation determinations requires complex issues of analysis of processes, the interpretation of the governing law, and application of the facts, on a case-by-case basis, to the law. In fact, many contractors will need an opinion letter from counsel, particularly if the company is actually not the contractor but a supplier to a government contractor. The best course of action for contractors (or suppliers) that need to utilize substantial transformation in order to have compliant products is to seek a determination from the Bureau of Customs and Border Protection (CBP). CBP has the authority to make country of origin determinations for TAA purposes. Final decisions from CBP provide the greatest liability protection for contractors or suppliers who want to sell a product to the government under a TAA covered contract that is only compliant if substantial transformation has occurred.
TAA compliance is essential for contractors and suppliers for a variety of reasons, not the least of which is False Claims Act (FCA) liability. FCA suits and settlements abound based on contractors unlawfully selling products from non-designated countries to the government. Additionally, bid protests arise frequently over TAA matters that can cause delay or loss of a contract. For suppliers who must provide representations to contractors regarding the country of origin of products, a clear determination of substantial transformation is critical as more contractors are asking suppliers for specific representations and warranties of TAA compliance in connection with letters of supply or to agree to indemnification for any resulting financial consequences. As such, any entity subject to or having to make representations around TAA compliance should take care to ensure that if substantial transformation makes the product satisfactory under the TAA that it has thoroughly reviewed and analyzed the process of transformation against the law or has secured an opinion of counsel or determination from CBP.