Country of Origin Key Rules & Exceptions for Foreign Companies Supplying Products Under U.S. Federal Contracts

By February 12, 2024 No Comments

Sareesh Rawat, Esq.

As the largest single consumer in the world, contracting with the United States (U.S.) federal government is naturally viewed as a desirable avenue of expansion for foreign companies. However, prospective foreign contractors looking to supply products to the U.S. government must navigate a somewhat complex regulatory maze of country-of-origin (COO) rules in federal contracts. These COO rules serve the function of implementing U.S. domestic preferences while fulfilling U.S. obligations to its trade partners under bilateral and multilateral international trade agreements.

Interested foreign companies must satisfy the requirements of two main federal statutes that restrict the U.S. government from procuring foreign products. Enacted during the Great Depression, the Buy American Act (BAA) of 1933 is the primary domestic preference statute. Meanwhile, the Trade Agreements Act (TAA) of 1979 is the statute permitting the U.S. government to acquire products from a long list of countries with which the U.S. has entered into bilateral or multilateral trade agreements. Understandably, both statutes have several exceptions, allowing the U.S. government additional flexibility in procuring products when certain conditions are met.

  • Buy American Act

The BAA generally requires that the U.S. Government only acquire products for public use that are manufactured in the U.S. Additionally, the products must all be manufactured substantially from articles, materials, or supplies that are mined, produced, or manufactured in the U.S. That is unless the cost of such products is deemed unreasonable. This unreasonable cost exception of the BAA is implemented through the application of an evaluation factor to low foreign offers that are not eligible offers pursuant to Federal Acquisition Regulations (FAR) 25.106(b).

Additionally, commercial off-the-shelf (COTS) products are exempt from the BAA domestic content requirement. In other words, under FAR 25.101(a)(2), a COTS end-product complies with the BAA even when manufactured predominantly from foreign components. This includes Information Technology (IT) end-products that are considered commercial off-the-shelf. The terms “commercial product” and “commercial off-the-shelf product” are defined in FAR 2.101.

  • Trade Agreements Act

The TAA generally provides for reciprocal treatment by the U.S. in government procurement with signatory countries of bilateral and multilateral trade agreements. Under the TAA, contractors from countries with bilateral and multilateral free trade agreements with the U.S. that do not discriminate against U.S.-made products can freely compete for U.S. federal contracts. Conversely, the TAA also prohibits products originating from countries that do not have such agreements with the U.S. from competing for U.S. federal contracts.

The TAA defines a product of a country as an article that is:

  • Wholly the growth, product, or manufacture of that country or
  • Has been substantially transformed into a new and different article with a name, character, or use distinct from that of the article or articles from which it was transformed if produced in whole or in part of materials from another country.

This is also known as the “Substantial Transformation” test, which is generally applied to the final stage of manufacturing of a product to determine whether the product has been transformed into a new product, different from its foreign components. Under the test, the U.S. Customs and Border Protection (CBP) – the agency responsible for interpreting and implementing the TAA – conducts a rigorous totality of circumstances analysis to determine whether the product has undergone substantial transformation. 

Notably, the TAA excludes commercial products from countries like India and China from use in U.S. federal contracts due to the absence of free trade agreements. However, an exception to this rule exists under a U.S. Federal Court decision, Acetris Health, LLC v. United States, 949 F.3d 719 (Fed. Cir. 2020). This exception is particularly applicable to foreign companies that supply constituent ingredients of pharmaceutical products to U.S. manufacturers. Under this decision, products meeting the requirements of a “U.S.-made end product” under the FAR’s trade agreements clause in FAR 52.225-5 qualify for procurement by U.S. government agencies.

The Acetris decision held that the FAR does not adopt the TAA’s COO test for determining what are “products of a foreign country or instrumentality, focusing instead solely on the FAR’s definition of a U.S.-made end product. This subtle but significant departure from a previous interpretation allows U.S. end-product manufacturers, under certain circumstances, to manufacture products using components from non-TAA eligible countries, such as India and China, for use in U.S. federal contracts – even if these end products may not pass the more exacting substantial transformation test under the TAA. Contributing to this result is the fact that the Acetris decision also requires procuring U.S. federal agencies to determine whether a product meets COO requirements as applicable to their procurement contracts – preventing agencies from delegating this responsibility to the CBP.

Prospective foreign companies seeking to supply their products to the U.S. government should thoroughly analyze the U.S. federal statutory framework impacting their products, as several different factors determine the applicability of COO rules and specific exceptions. This is especially true if their products are deemed to have been manufactured in a country without a reciprocal free trade agreement with the U.S. Therefore, having a general understanding of the COO requirements of the two main federal statutes governing the purchase of foreign products by the U.S. government along with some of their applicable standard exceptions can be a good first step for prospective contractors towards determining whether their products qualify for U.S. federal procurement.

This U.S. Federal Procurement Insight is provided as a general summary of the applicable law in the practice area and does not constitute legal advice. Contractors wishing to learn more are encouraged to consult the TILLIT LAW PLLCClient Portal or Contact Us to determine how the law would apply in a specific situation.