French Insider Podcast Ep. 10
Buy America Provisions in the Infrastructure Bill: What this Means for Foreign Companies
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Listen to the original podcast released February 2, 2022 here:
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Joining the podcast is David Gallagher, who talks about the U.S. Infrastructure Bill and its Buy America provisions. He discusses items that foreign companies need to keep in mind regarding these provisions when looking to invest or develop a project in the U.S., and the possible long-term effect the bill may have on the supply chain issues.
Guest:
David is an international trade partner in Sheppard Mullin’s Washington D.C. office. He specializes in all aspects of public contracting, including advising domestic and foreign companies on issues relating to compliance with U.S. government procurement regulations such as subcontract and supply chain management, country of origin requirements under the Buy America Act, and other infrastructure projects and requirements unique to small businesses selling to the federal government. He also regularly teaches training courses and conducts internal compliance reviews to help companies know and understand the regulatory requirements, including whether their manufacturing process has satisfied the various Buy America regimes.
Transcript:
Valerie Demont:
Welcome to the French Insider, Sheppard Mullin French Desk’s monthly podcast dedicated to helping French investors and companies in growing their business in the United States. Each episode will feature conversations with thought leaders and experts in various industries, including technology, life sciences, fashion, energy, entertainment, and many others. Tune in to learn about the challenges faced by those investing in the U.S. and the solutions to these challenges. And now, for the inside look.
Sarah Ben-Moussa:
On today's episode of French Insider, we will be talking about the Buy America provisions and the Infrastructure Bill, and the potential impact that it may have on foreign companies. Joining me today is David Gallagher, a partner with the firm's D.C. office. David specializes in all aspects of public contracting, including advising domestic and foreign companies on issues relating to compliance with U.S. government procurement regulations such as subcontract and supply chain management, country of origin requirements under the Buy America Act, and other infrastructure projects, M and A due diligence of companies with public contracts, and requirements unique to small businesses selling to the Federal Government. He also regularly teaches training courses and conducts internal compliance reviews to help companies know and understand the regulatory requirements, including whether their manufacturing process has satisfied the various Buy America regimes. David, welcome to the show.
David Gallagher:
Hi. Thank you so much, Sarah. It's great to be here.
Sarah Ben-Moussa:
Awesome. So I want to jump in a little more broadly at the onset and just talk about can you provide for our listeners a bit of background of what we mean when we talk about the Infrastructure Bill?
David Gallagher:
Yeah, great question. I mean, there's been a lot of talk and frankly, there's been a lot of changes too from this Infrastructure Bill as it rotated through the legislative process through 2019. The bill, as it was officially passed, is titled the Infrastructure Investment and Jobs Act, and it's $1.2 trillion. Some of that is legacy spending that's continuing and some of it is new spending, but it was signed into law on November 15th, 2021. And it basically is designed to give a shot in the arm to U.S. hard infrastructure, hard infrastructure. I say that. This is roads, bridges, rails of the sort.
David Gallagher:
There's a separate act that is still working its way through Congress called the Build Back Better plan. That is currently stalled in the U.S. Senate. For those not familiar with the gory details of U.S. politics, there's essentially three approvals that you need to get before this legislation becomes law. It needs to be approved by the U.S. House, it needs to be approved by the U.S. Senate, and then ultimately by the U.S. President. So the Infrastructure Act itself has made it through all three of those hurdles, $1.2 trillion. It focuses on things roads, bridges, rails, ports, airports, but there's also a big, heavy emphasis in there on green energy, combating climate change, water management, cleaner drinking water, wildfire management, extreme weather events, things like that to try to make the United States a little bit better able to deal with climate change impacts.
David Gallagher:
There's also a lot in there for utilities, trying to help improve smart grid architecture, and also make sure that the U.S. utilities have improved cybersecurity because right now, they're woefully lacking on that. And then, another big element too, it relates to broadband. There's a push here to try to make sure that broadband accessibility is made more available throughout the United States.
David Gallagher:
So those are some of the highlights of it, but it's focusing really on installing stuff to try to make sure that people have better access to communicate and to commute, and to live in and throughout the United States.
Sarah Ben-Moussa:
Perfect. So just to be clear, when we talk about the Infrastructure Bill, we're really referring to this $1.2 trillion bill that has made it through all three of the steps. Though for our listeners to be clear in the coming weeks or months or who really knows, there is going to be added discussion on Build Back Better, and that made a whole new set of things for people to consider.
David Gallagher:
Yeah, that's exactly right. And frankly, we'll save that podcast for another time here but, yeah, this is really focused on that hard infrastructure stuff that we've talked about before. And I know, Sarah, that you've mentioned that to me offline here that you've talked about some of the other aspects of this relating to some of the climate change initiatives, and frankly, it all is reflected through various spending priorities. But at the end of the day, what the government is trying to accomplish with this is trying to make the United States infrastructure better and more durable here for a 21st century, and that includes through climate change, that includes better spending, better infrastructure, better roads, better usage, all of those things. And of course, as we're going to talk about here today, there's a Buy American component in there because, well, this is important to politicians nowadays and frankly, it's important to a lot of voters as well to the extent the government is spending $1.2 trillion, that a lot of that money is spent on American jobs and American goods.
Sarah Ben-Moussa:
Right. And I think that perfectly segues to what I wanted to talk about next. It's really impossible to separate the political climate from the legislative priorities in this bill. And so, when we talk about Buy America provisions, can you just explain for our listeners what Buy America provisions and then what the purpose of their inclusion in this Infrastructure Bill really is?
David Gallagher:
Yeah. It's a great question. Let me start by bursting a myth here that I get all the time, and that myth is that there is one single Buy American requirement. There isn't, unfortunately. It's a patchwork quilt of Buy American requirements that are sewn throughout U.S. laws. And it's going to vary depending on who spends the money and frankly, it also varies depending on what it is that the government is buying in it. So I guess, caution number one to everybody who's listening to this, think through whenever somebody says, "Can you satisfy Buy American," that's a very nonspecific question. You're going to need to ask a little bit more. And your first follow-up question to that should be, "Which Buy American?" That's just in general.
David Gallagher:
Now, with regard to the Infrastructure Act though, it implements a principle that is commonly referred to as Buy America, with no N on the end. There is a Buy American Act and there is a Buy America Act with no N on the end. And people call me sometimes and they say, "Are you kidding me? What a difference a little N at the end of the sentence can make," but yes, it's real and it's meaningful. And what it does is it contributes to a whole lot of confusion because oftentimes people think that there should be one monolithic Buy America requirement, and it really isn't and that's unfortunate.
David Gallagher:
With regard to the Infrastructure Act though, the Buy America requirement essentially does two things. There's two key things. One is it tries to institutionalize the Buy American priorities across all government grant programs. Now, I just said that it's a patchwork quilt. That is true. One of the things that the Infrastructure Act is trying to do is actually make that a little bit more uniform across the government. Previously, Infrastructure Buy American priority was really only focused on roads, bridges, transportation, iron and steel, things like that, but the new act is trying to impose Buy American requirements whenever any federal money is given to state or local governments. And so, I mentioned utilities earlier. That's an area that would often fall between the cracks on Buy American requirements. The new Infrastructure Bill really tries to institutionalize that.
David Gallagher:
The second key thing that the Infrastructure Act does with regard to Buy American is it's really trying to institutionalize the data collection and the waiver process through which this goes through. Previously, when a particular procurement had a Buy American requirement, the purchasing officer had a lot of flexibility in going through and assessing whether or not a waiver was available and whether or not you could buy foreign in a particular situation. And to the extent that they did issue that waiver, they didn't really have a lot of oversight on that decision-making. And so, at the risk of being a little glib here, the issuance of these waivers was a little fast and loose. And with all due respect actually, the process was designed to give these purchasing agents that flexibility here. But as time has gone on and as this has become a more and more popular political topic, the Federal Government wants to, I think, reign that in a little bit more.
David Gallagher:
So what they're trying to do is they've created specifically a buyamerican.gov website that is really designed to try to institutionalize or centralize all of this information. And this dovetails a little bit with President Biden's near simultaneous creation of the Made in America Office out of the White House. And frankly, they launched a website as well. It's called madeinamerica.gov. And I think the madeinamerica.gov and the buyamerican.gov are going to provide a lot of information there so that when new waivers are requested, there will be a central source of information. There will be an opportunity for the public to weigh in if they feel that a waiver is inappropriate.
David Gallagher:
Let's say I'm a manufacturer and I see a waiver issued to buy something from Asia, that it was manufactured in Asia. I have the chance to raise my hand, so to speak, and express the comment, "Look, that waiver shouldn't be granted because there is a U.S. option that's available here." That institutionalizing that waiver process through these websites, through the Made in America Office, I think, is one of the big steps forward in this because it takes a lot of the discretion out of the hands of the purchasing officer and it lifts it up to the federal level so that there can be greater scrutiny and, frankly too in many respects, more public shaming to the extent it doesn't go the way the government and the public thinks that it should go.
Sarah Ben-Moussa:
Okay. And so, I think because it seems like so much of this is such a big undertaking for the Federal Government, I want to take a step back and just maybe trace through at a concrete level for a foreign company what this would look like in terms of say, I'm an investor, I'm looking to either acquire a company in the United States or develop a project in the United States. I'm just thinking about the myriad of ways in which this now plays into whatever deal I'm considering. In these beginning thoughts and initial considerations, what are things that foreign companies may need to keep in mind or bake into their preparation?
David Gallagher:
Well, gosh, that's a great question. Let me pull out my crystal ball here and see what we need to think through here. Well, let me, I guess, come back to the driving force behind this. The driving force behind this is it's called Build America, Buy America. So the truth of the matter is the policy that drives this is the Federal Government wants to onshore more U.S.-based manufacturing. They want to get more jobs. And frankly, the Biden administration would love it if they were good union level jobs as well that pay high wages, that offer good opportunities to elevate the worker. That's a very important priority here. And so, I think for especially international companies, people with international supply chains which is frankly just about everybody, whether they're U.S. or other, the truth of the matter is there is now an increased priority in anything that is bought with federal dollars, whether directly by the U.S. government or through dollars that are granted down through state, local, county governments here in the United States that there be U.S.-based manufacturing and U.S.-based jobs that are driving this.
David Gallagher:
That's going to do a couple things. One, it's going to disrupt your supply chain because now what you have traditionally been buying, which is mostly from Asia, the question is, "Is that going to work?" And so, that's, I think, a very real impact there that's going to force everybody, not just international companies, but U.S. companies as well to try to figure out, "Okay, what does my supply chain look like? And how does this material that I'm buying that I'm going to import to the U.S. and manufacture and then ultimately deliver to the government customer, is that process sufficient?" And so, it's going to make supply chains a little bit more complicated.
David Gallagher:
The other part of it too is frankly, it's going to have a cost impact. As you bring in these jobs back to the United States with higher wages, that's going to... You have the capital investment that you need to do on the manufacturing based here in the United States, you have those extra costs associated with those jobs, it's going to make the product more expensive. It's going to make the process more expensive. The Federal Government is actually fine with that. They recognize that. They recognize that it's going to be more expensive and it's a priority that they're willing to pay for. The trouble is that the budgets don't always expand to respect that extra cost. And so, that puts vendors in a catch-22 where there is an inevitability associated with the increased price, but there's not necessarily a corresponding concession from the individual purchasing agents where they still want price to be rock bottom here as it comes through purchasing. So that's going to be, I think, the two of the key disruptions.
David Gallagher:
I'll tell you for traditional transportation, in many respects, like roads and bridges, the Infrastructure Act won't change much. I mentioned that there's this patchwork quilt of Buy America requirements. The truth of the matter is that for decades, road and bridge projects have long required U.S. made iron and steel and manufactured products at a very high level, meaning that they needed to be manufactured in the U.S. and contain all or virtually all U.S. content. So I think in those respects, that very strict standard is going to continue. But for other infrastructure projects, utilities, broadband, things like that as we build out, I guess maybe in some respects too, a lot of the electronic vehicle, the EV build out that this infrastructure tries to go to, there will be this new standard here that they're trying to institutionalize across all grant programs.
David Gallagher:
Now, let me explain actually what that is because in some respects, I buried the lead here by not talking about it yet, but what the core Buy American requirement is under the Infrastructure Act is it essentially requires two things in order to qualify as Buy America compliant. One, the end product that you're delivering to the government customer needs to be manufactured in the U.S. and, two, at least 55% of the content needs to be U.S. origin. Now, there are some wrinkles on that, there are some variations if you're delivering certain products that are not made majority out of iron and steel, or maybe there are some variations on this, but the government hasn't really implemented any of those regulations yet so we don't know the details. The statute itself talks in terms of those two-prong tests. One, the end product needs to be manufactured in the U.S. and, two, at least 55% of the content needs to be U.S. sourced.
David Gallagher:
So that's going to require a little bit of homework. Actually, a lot of homework to get into the supply chain to figure out where are these products from, where are my materials from, what am I manufacturing in the U.S. as a mid-level step, as a component, and is that transmuted into U.S.-based content, and the answer is probably yes. So it will make the manufacturing process probably a little bit more multi-tiered and it will probably make sure that the supply chain, that there's greater scrutiny in terms of where all of these things are coming from, because you're going to need to make sure that at least 55% of that content is U.S. sourced.
Sarah Ben-Moussa:
So if let's say for an example, I'm a company looking at a traditional M and A transaction or project development, in terms of what may inevitably have me incur additional costs, are we really looking at this idea of federal grant money or government customers? Is that the main hinging question on what's going to pull me into whether or not this review needs to be done, or is this just generally going to affect all types of transactions?
David Gallagher:
So it's mostly the former. It's mostly your government customers. What the Federal Government hopes here is that they're creating enough of a sourdough starter, so to speak, here of moving the market, that it will also affect commercial markets. And frankly, commercial companies may very well choose to follow this of their own volition because they say that's good policy or they may see that this is where the markets are moving and adjust to it, but it's really going to be flowing through U.S. government spending. And one of the new things about the Infrastructure Act is it's implementing these federal priorities down through state, local, county governments and those that traditionally set their own rules. So it is expanding the market.
David Gallagher:
So let's say I'm a European company from the EU and I want to invest in the U.S., there is still plenty of opportunity for these international companies. The key on this though is going to be where the manufacturing is going to be taking place. And so, the investment that is largely going to take place from this hypothetical EU company is going to need to invest in U.S. manufacturing. The idea that we currently manufacture in Germany or in Italy is probably not going to be good enough, notwithstanding all the various free trade agreements between the U.S. and the EU. There could be some circumstances where those free trade agreements are going to override, but for the most part for the state and local purchasing, it's going to require an investment in the U.S. So you could have an EU company that is now incurring those extra costs of building out that manufacturing based in the U.S. and hiring those people in the U.S. Those are going to be the main costs and, I guess, strategic moves that they're going to need to consider.
Sarah Ben-Moussa:
Right. And it's interesting because we're living in an age where there are so many supply chain logistics issues as is with COVID-19. And so, I'm interested, it's either the Biden administration has spoken to or there's been any other consideration about, between the supply chain diligence that we talked about earlier and the ongoing issues, has there been any discussion on the effect this may have on the supply chain?
David Gallagher:
So I don't know that there's been any serious discussion. And when I say serious, I mean, reaching an ultimate solution. The Biden administration right now, with one hand, they're banging a drum saying Buy America and with the other hand, they're banging a drum that says supply chain security. Some of the coded language under that supply chain security is there are many in the Federal Government, including in the U.S. Department of Defense, that truly believe that increasing the U.S.-based manufacturing is going to improve that security. And I don't know if that's ultimately some paranoia that China is lurking in the back, installing firmware that may very well weasel its way into any of our systems. That might be overly paranoid. But at the end of the day, the concern with regard to supply chain is recognizing we can do more to secure the supply chain by improving local U.S. manufacturing.
David Gallagher:
Now, you've seen this, there was a report that was issued in 2021 that the White House issued. They basically looked at certain key areas. They looked at pharmaceuticals, they looked at defense industrial bases, and critical minerals. They looked at electric vehicles and batteries, recognizing that most of these markets are supplied internationally. And the solution that was come up with was, "Well, we need to do more to do this domestically." So in that respect, the supply chain security vision, I think, dovetails with this idea of Build More American and Buy More American. Again, there's a huge cost associated with that. It's highly disruptive associated with that, but I think that that's how the supply chain and Buy American overlap.
David Gallagher:
At the end of the day though, it's the Federal Government pushing policies and ideas. And I have not really seen anything concrete that people are grabbing onto saying, "This is the path forward." There's a lot of good ideas, there's a lot of bad ideas out there, and companies, I guess, in the meantime, are being forced to navigate and figure out what's going to work best for them, for their customers, for their market.
Sarah Ben-Moussa:
Right. And you touched on a point that brings me to my final question, in that, part of the reason I think this bill was able to pass in the first place was this idea of a united front against the Chinese market, especially when it came to sourcing of specific materials. And so, I really want to talk about the long term legislative trend we're going to see under the Biden administration and perhaps even other administrations. Do we see this perhaps as the springboard for similar initiatives?
David Gallagher:
Yeah, I think so. I mean, look, you've seen this. It's an interesting turn. Over the last 40 years or so, the U.S. government has been very big in terms of trade agreements, right? With the vision being if we can expand the markets rising sea levels, sorry, no pun intended there, but rising sea levels lift all ships, right? And so, if we can get U.S. companies better access overseas, the fact that we lose some domestic jobs is offset by the other collateral benefit of that. And it's interesting that that really ruled the day for a lot of years. And you even saw through the Obama administration, where the Obama administration was pushing multiple free trade agreements, including the Trans-Pacific Partnership trying to build that out. And there were a lot of President Obama's in his own party that were opposed to it because they felt it's outsourcing working class jobs.
David Gallagher:
When the Trump administration came in, one of the first things they did was just rip that up and walked away. And the tone, I think, has certainly changed in terms of the administrations and in terms of the population here in America. You had a Republican president that was very much anti-free trade agreements and go Buy American, and Trump used tariffs and all kinds of other tools in his disposal to try to throw up trade barrier walls. Biden has not necessarily been as aggressive on things like tariffs, but Biden has certainly continued the Buy American priorities that Trump has. And you don't hear the Biden administration talking about free trade agreements.
David Gallagher:
So I think that given the populous swell that we've had in the United States over the last 10 years or so, there is really a push that is trying to throw up some of these trade walls to try to make sure that U.S. jobs, U.S.-made products, U.S.-made companies get cut to the front of the line here and that international companies, well, that they have to wait their turn.
David Gallagher:
What that means, I think, for international companies is they need to be strategic about how they partner with U.S. companies. They need to be strategic about selling into the U.S. and manufacturing into the U.S. Again, there are opportunities that exist for an EU company to sell a product that was made in the USA using U.S.-made labor. There's going to be increased cost associated with that, but those opportunities still exist. The fact that you're an EU company doesn't necessarily disqualify you from that. It's going to really focus on what's the product, what's being purchased, and how it came to the government. And I don't really see that as changing. Again, the fact that Biden and Trump, two people who are very dissimilar in so many ways, the fact that they're locked in arms when it came to Buy American and we see continuity from one administration to the next, to me tells me that like what we've seen with the Infrastructure Act, we're probably going to continue to see more things like that giving priority for U.S.-made goods and U.S. workers.
Sarah Ben-Moussa:
Right. And I think what's really helpful about that is we like to give our listeners a sense of just the temperature of U.S. policy and how it's going to impact investment. And particularly in this case, I think what is sometimes difficult to parse through is the back and forth of different priorities and different administrations. But the fact that you've qualified that this is more of a long term trend across administrations, I think, will help companies in terms of their strategy moving forward, and I look forward to a lot of the discussions we're going to have regarding how the Buy America provisions play out. I think it's going to be a great topic to really dive into. Thank you so much, David. This has been very, very insightful and I think our listeners will have a lot of questions, I suppose.
David Gallagher:
Well, it has been a pleasure being here. I thank everybody. I thank everybody for listening and Sarah, I thank you for talking Buy American. I do this all the time and I'll tell you, like I said, it's a little bit of a maze, it's a little bit of confusion here, but I'm happy to help shed a little bit of light on this otherwise tough topic. And for everybody out there doing business, I wish you the best. Good luck to you.
Contact Information:
David Gallagher web bio: https://www.sheppardmullin.com/dgallagher
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