New guidelines from the Environmental Protection Agency clarify how water utilities should apply the American Recovery and Reinvestment Act’s “buy American” provision, requiring “substantial transformation” in the U.S. from component parts.

Ever since the start of this year, the “buy American” provision included in the American Recovery and Reinvestment Act (ARRA), has polarized not only the nation, but the rest of the trading world. At last month’s National Summit of business and industry leaders, the rules were a major part of the buzz at the conference.

The ARRA provides significant funding for states to finance high-priority infrastructure projects to improve highways and bridges and ensure clean, safe drinking water.

Section 1605(a) of the ARRA requires recipients of the federal assistance to use domestic iron, steel and manufactured goods that are produced in the U.S. Section 1605(b) provides for a waiver of this requirement under circumstances identified and limited in that provision. Section 1605(d) provides that this requirement must be implemented “consistent with U.S. obligations under international agreements.”

This last point in particular is causing tension and creating confusion. Incidents among all three country-partners of the North American Free Trade Agreement (NAFTA) have already taken place wherein “North American companies have been shut out of infrastructure projects,” Today’s Trucking contends.

Now opponents of the “buy American” provisions, including blue-chip American corporations, are rushing to persuade legislators to do something about the measure before a potential trade war erupts. They’re working under a deadline issued by the Federation of Canadian Municipalities on June 6, which gives the U.S. 120 days to exempt Canada from the “buy American” clause, or Canadian municipalities will begin shutting out U.S. firms from bidding on local contracts. (Source: The Canadian Press)

Their efforts come despite recent Environmental Protection Agency (EPA) Webcasts clarifying that international treaties such as NAFTA do not apply to water utilities and, therefore, cannot be used as an excuse for not buying American-made products. “In very limited circumstances, an international trade agreement may apply,” the EPA said in its directives to utilities.

The Webcasts, which provided guidelines for how water utilities should apply the “buy American” provision, included statements on which products fall under the provision. In this context, the Office of Management and Budget (OMB) defines a manufactured good as one “brought to the construction site for incorporation into the building or work that has been processed into a specific form and shape, or combined with other raw material to create a material that has different properties than the properties of the individual raw materials.”

“There is no requirement with regard to the origin of components or subcomponents in manufactured goods used in the project, as long as the manufacturing occurs in the United States,” according to the OMB.

The EPA made it official that its “buy American” guideline requires “substantial transformation” in the U.S. from the component parts used for any water-related infrastructure project. The EPA presentation included parameters for determining if a product has undergone “substantial transformation” in the U.S. from component parts: “In the case of a manufactured good that consists in whole or in part of materials from another country, has been substantially transformed in the U.S. into a new and different manufactured good distinct from the materials from which it was transformed.”

To help local utilities determine whether a good has been “substantially transformed” enough to pass the test, the federal agency provided a series of questions:

1. Were all of the components of the manufactured good manufactured in the U.S., and were all of the components assembled into the final product in the U.S.? (If the answer is “yes,” then this is clearly manufactured in the U.S.)
2. Was there a change in character or use of the good or the components in America? (These questions are asked about the finished good as a whole, not about each individual component.)
3. Were the processes performed in the U.S. (including but not limited to assembly) complex and meaningful?

According to the basic principles of “substantial transformation” analysis, no good “satisfies a substantial transformation test by … having merely undergone ‘[a] simple combining or packaging operation.’” Moreover, “assembly operations that are minimal or simple, as opposed to complex or meaningful, will generally not result in a substantial transformation.”

The EPA also issued stern warnings about the domestic-sourcing rule, placing responsibility for “buy American” compliance on utilities that receive ARRA funding. The directives made clear that the Office of the Inspector General would diligently investigate false statements regarding compliance with the provision.

For slides from the series of Webcasts and more “buy American” information, visit the EPA Web site.

Related

Industry Leaders Address Protectionism at National Summit

U.S. Protectionist Clause Sparks Loud Protest

Defining “American-Made”

Resources

Clean Water and Drinking Water State Revolving Funds
Environmental Protection Agency, July 8, 2009 (last updated)

Complying with ARRA Buy American Provisions for SRF-Funded Projects
Environmental Protection Agency, June 22, 2009

Buy American Provisions for ARRA: Manufactured Goods and Substantial Transformation
Environmental Protection Agency, June 11, 2009

Buy American Provisions for ARRA: Additional Information
Environmental Protection Agency, June 4, 2009

EPA Clarifies ARRA’s ‘Buy American’ Provision
GovPro.com, July 8, 2009

Pro-Free Traders Call for Rally Against NAFTA Protectionism
by Allan Janssen
Today’s Trucking, July 13, 2009

Buy American Lives on as Environmental Protection Agency Talks Tough
by Lee-Anne Goodman
The Canadian Press (via CanadianBusiness.com), June 29, 2009