Evaluating the Effect of US Domestic Content Requirements

Cross-Border Markets: Evaluating the Effect of U.S. Domestic Content Requirements on the U.S.-Canada Economic Partnership WSHDC-RFP-004 September 15, 2017 Submitted by The Trade Partnership 1701 K Street, NW Suite 575 Washington, DC 20006 1 EXECUTIVE SUMMARY This study examines the effeCt of U.S. domestiC Content requirements on the U.S.-Canada eConomiC partnership. We examine the impaCts by ConduCting in-depth interviews with offiCials at Companies with signifiCant Cross-border trade where domestiC Content requirements do (e.g., Buy America or Buy AmeriCan rules) or Could (e.g., proposed rule requiring U.S. steel in pipelines) shape supply chains. We also spoke to U.S. government agenCies whose proCurement is subjeCt to suCh rules. We found: U.S. domestic content requirements can impact U.S. companies by limiting sourcing options and increasing product costs, both of which negatively impact U.S. jobs and competitiveness. • Buy AmeriCa requirements Can prevent Companies from purChasing some inputs from preferred suppliers, even if few alternative U.S. suppliers exist. • Many U.S. manufaCturing jobs exist in spite, not beCause, of domestiC Content requirements. • DomestiC Content requirements Can Create additional ComplianCe Costs for Companies selling similar produCts to both CommerCial and federally funded projeCts. • Taking additional steps to Comply with domestiC Content requirements Can inCrease the priCe of goods signifiCantly without leading to a similar increase in U.S. jobs. Proposed domestic content changes that could prevent companies from sourcing from Canada would disrupt existing supply chains and harm many U.S. businesses, particularly in the short term. • The Current inability of U.S. produCers to supply key materials (e.g., aluminum) makes whole industries reliant upon imports from Canada. • Extensive Co-produCtion oCCurs between U.S. and Canadian faCilities, meaning that some produCts Cross the border multiple times before final sale. • Imposing new or more restriCtive domestiC Content requirements between the United States and Canada Could interrupt longstanding manufaCturing proCesses and threaten jobs and investments in both Countries. Government agencies impacted by U.S. domestic content requirements typically procure goods and services from companies that are longstanding suppliers and know what is expected of them, so the compliance burden falls on contractors while the extra cost burden falls on (unknowing) taxpayers. • ContraCting authorities view ComplianCe with Buy AmeriCa requirements as a “standard operating procedure” beCause an industry has grown up speCifiCally to meet them. • Requests for domestic content waivers are rare since engineers and contractors design projeCts with the rules in mind. • Following the “well worn” path of using the same designs, materials, and suppliers Can slow projeCts and inCrease their costs, but in ways that are impossible to quantify. • Failure to obtain a Buy AmeriCa waiver in instanCes when it is neCessary Can Cost loCal agenCies signifiCant amounts of time and money. • New programs in several states now allow loCal projeCts to avoid rules suCh as Buy AmeriCa, but there is minimal evidenCe that such opportunities are being utilized. 2 2 I. INTRODUCTION For nearly 85 years, the United States has maintained “Buy AmeriCa” and “Buy AmeriCan” programs requiring that Certain Federal and/or state or loCal government funded produCts or purChases meet domestiC Content requirements.1 In Certain limited Cases, loCal Content requirements Can be waived.2 These requirements have been amended and adapted over time. 2017 has seen a number of new proposals that would extend domestiC Content preferenCes, either de jure (e.g., proposal to require U.S. “melted and poured” steel for domestiC pipeline projeCts) or de facto (e.g., SeCtion 232 national seCurity investigations that Could prevent imports altogether). Given the popularity of domestiC Content proposals and their growing prominenCe in politiCal rhetoriC in 2017, one might assume that ample evidence existed substantiating the benefits of such provisions, or at least the limited Costs. Yet few studies solidly quantify the benefits or Costs of domestiC Content poliCies. When asked about the impaCts on them, Companies and government proCurement agencies alike generally Can provide aneCdotal – or at least hypothetiCal – examples of why suCh programs may inCrease Costs, but few Can provide any data that Could be used to quantify overall impaCts. The reason is quite simple: neither Companies nor agencies have an inCentive to collect or analyze the information. For Contracting agenCies, the Buy AmeriCa rules are always back-of-mind: engineers design projeCts using only readily sourCed materials that Comply; ContraCtors submit bids using only those compliant materials, and agencies only select winning bids from the pool of proposals that meet the domestiC Content requirements. As a result, agencies do not Consider if a projeCt Could be designed more effiCiently; built more Cost-effectively with other materials, or finished sooner. Companies similarly are not inCentivized to “think outside the box” about ways to deliver low-cost, high-value results for projeCts subjeCt to federal funding restraints. Companies Compete in one market for projeCts subjeCt to Content requirement rules, and in a different market for CommerCial projeCts. Even when companies could use imported materials to complete projects faster or in a more Cost-effective manner, they do not bother to submit a bid that would inClude those inputs. In eaCh Case, reviewing or submitting non-compliant bids would be a waste of time and resourCes. So while many Can give examples of why rules likely raise Costs, actual quantifiCation is rare. This research Confirmed past research, by The Trade Partnership and others, of the diffiCulties assoCiated with quantifying the impaCts of U.S. domestiC Content requirements. As far baCk as 2001, respondents to surveys about Buy America’s impaCt yielded the Conclusion “SinCe this regulation has been around so long and all vendors are familiar with the requirements, it’s really not a problem or an issue.”3 A 2008 U.S. Government ACCountability OffiCe (GAO) report on federal highway funding found that no reviewed studies attempted to quantify the Costs of Buy AmeriCa program requirements. A Federal Highway Administration (FWHA) report identified major potential Costs, suCh as “higher iron and steel priCes, higher overall projeCt Costs, reduced bidding Competition, and projeCt delays,” but did not attempt to quantify them. In a survey of state Departments of Transportation (DOTs), five of 51 respondents said “the Buy AmeriCa program faCtored into their deCision to use nonfederal funds” for speCifiC projeCts.4 3 3 More reCently, the FHWA requested Comments on two proposed nationwide Buy AmeriCa waivers in late 2016.4 The request inCluded the following question: “Does your agency or company track costs associated with the administrative or compliance efforts associated with the Buy America requirements?” DOTs from 15 states answered the question direCtly, but not one reported traCking speCifiC Costs. Among the 14 agenCies that direCtly answered the question, none responded yes.5 Several reports released in 2017 attempted to quantify overall Costs (as opposed to Company- speCifiC Costs). One study found that returning potential savings from higher government purChases of imports in the form of a tax Cut Could generate $22 billion in eConomic aCtivity and support over 300,000 net jobs, but job losses in many manufaCturing seCtors.6 Another study showing U.S. metro cars Cost 34 percent more than foreign metro cars on average concluded “Buy America policies almost Certainly Contribute to higher infrastruCture Costs in the U.S., but it is hard to gauge just how muCh.”7 Finally, a 2017 Congressional ResearCh ServiCe report on Buy AmeriCa’s effeCts found: “EmpiriCal evidenCe on the eConomiC benefits or Costs of domestiC Content laws is largely laCking.”8 Given the Constraints to quantifying the Costs of U.S. domestiC Content requirements, this report foCuses on agenCy and Company Case studies affeCted by local Content restriCtions in four ways: • Companies impaCted by existing U.S. domestiC Content requirements; • Companies potentially impaCted by proposed U.S. domestiC Content requirements; • Companies with extensive U.S.-Canada Co-produCtion at risk of supply Chain disruptions, and • AgenCies impacted by existing U.S. domestiC Content requirements. EaCh Case study is based on interviews with individuals at the ContraCting agenCy or Company. Interviewees held a number of roles related to supply Chains, proCurement, operations, engineering, sales, ComplianCe, CommuniCations, and publiC affairs. For most Company Case studies, multiple employees across funCtions played a role in ColleCting the information presented. The conclusions refleCt information obtained from available literature, the profiled Companies and contracting agencies, as well as others that agreed to interviews only on background. 1 “Buy AmeriCan” laws and provisions typiCally regulate direCt federal government spending (e.g., The Buy AmeriCan ACt of 1933, Trade Agreements ACt, Berry Amendment). “Buy AmeriCa” laws and provisions typiCally regulate indireCt federal government spending, suCh as grant funds to state and loCal governments (e.g., many relating to transportation spending). They often define what it means to be produCed or manufaCtured in the United States in different

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