Buy American: Biden sees industry pushback as allies warn of trade consequences

WASHINGTON ― President Joe Biden traveled this summer to the Mack Trucks factory in Pennsylvania to circle back to a politically potent message from his campaign: Biden would revitalize U.S. manufacturing to spur job growth ― and he would do it by boosting “Buy American” requirements that the U.S. government buy goods made here.

“In recent years, Buy American has become a hollow promise, and my administration is going to make Buy American a reality, and I’m putting the weight of the federal government behind that commitment,” Biden said.

Biden has since taken executive action to boost Buy American requirements, but ― in spite of loopholes to protect allied countries ― not everyone is happy about it. The defense industry is pushing back, wary the protectionist policy will trigger a backlash that shuts out American-made weapons and gear from overseas markets.

Defense advocates note that foreign military sales fuel a $40.6 billion trade surplus for the sector and help Washington gain interoperability with allied militaries, and they warn those benefits could decline.

“My colleagues and some of the other trade organizations are actually more concerned for the U.S. industry, because if you don’t allow Germany or Sweden to sell to the U.S., it will be difficult for the U.S. to sell to the very same countries,” said Norwegian-American Defense and Homeland Security Industry Council President Eirik Tord Jensen. “It’s going to be very bad for trade.”

The Global Business Alliance, a large trade association that represents U.S. subsidiaries of companies based abroad, said the Buy American push ignores that these subsidiaries support 2.8 million American manufacturing jobs, and that for defense items, many of the international suppliers originate from long-time allies, including NATO countries.

“The cost of revamping global supply agreements outweighs the benefit of competing in the federal procurement market; the U.S. may lose out on investments and job creation from international businesses,” GBA’s chief executive, Nancy McLernon, said in a recent letter to the Biden administration.

In January, Biden signed an executive order to boost domestic-content preferences in new federal contracts ― one of a number of steps aimed at fixing supply chain gaps for goods like semiconductors and pharmaceuticals that were revealed in the early days of the coronavirus pandemic. The idea is to direct more of the $600 billion the federal government spends on procurement contracts each year back into the American economy.

The order would initially boost domestic-content preferences from 50 percent to 55 percent, but Biden has since proposed a rule ramping them up to 75 percent by 2029. The House has passed language to codify those requirements for the Pentagon.

Though the Pentagon will largely be shielded from the requirement because of separate trade agreements with allies, critics argue that for defense firms, stiffening U.S. domestic content requirements could alienate the allies Biden hopes to woo in America’s competition with China. They say it could give ammunition to protectionists in European countries who want to lock down their own markets, punishing U.S. companies.

The largest defense and aerospace union in North America, the International Association of Machinists and Aerospace Workers, has long proposed domestic-content increases to Congress. The union argues Biden’s plan will lead to new jobs in aerospace and shipbuilding that will spill over into the commercial sides of the businesses and snowball into broad, long-term economic benefits.

“What this is certainly going to do is it’s going to create and maintain jobs in this industry,” said the union’s assistant legislative director, Loren Almeroth. “As we put money into the pockets of aerospace workers, they’re going to be spending that money and creating a multiplier effect for the economy.”

What it means

The January executive order modifies the rules for the Buy American program, making it harder for contractors to qualify for a waiver and sell foreign-made goods to federal agencies. It also changes the rules so more of a manufactured good’s components must originate from U.S.-based factories.

The order seeks to open up government procurement contracts to new suppliers by scouting potential contractors based in America. It has created a public website for companies that received waivers to sell foreign goods to the government, so U.S. manufacturers can have more information and be in a more competitive position.

Going further, the Federal Acquisition Regulatory Council issued a proposed rule on July 30 to increase the threshold for domestic content to 60 percent and, two years after that, to 65 percent. In five years, it would reach 75 percent ― marking a total increase from 55 percent to 75 percent over seven years.

But, in practice, and crucially for defense, there are exemptions from the regulations for existing reciprocal agreements between the Pentagon and 27 countries ― including Australia, Egypt and Germany, though not India and South Korea.

The defense industry sees those exemptions as a win, but there’s concern the Biden administration is discussing steps to roll back those exemptions for foreign allies and further increase domestic-content percentages, according to Keith Webster, president of the U.S. Chamber of Commerce’s Defense and Aerospace Export Council.

“The chamber’s position is that we respect a free-market enterprise,” he said. “We understand the national security implications, and we are happy to partner with the administration to forge the most informed approach in policy, and we prefer industry to have the freedom to do what they need to do to produce.”

More and more, countries buying weapons from American vendors are requiring “offsets,” which means some benefit has to be funneled back to the purchasing country’s economy. American defense firms fear reconciling Buy American with offset requirements could complicate or even derail future deals.

“Where we’re selling major platforms where there’s a direct offset mandate, I’m worried that the U.S. industry ― as these percentages go from 50 to 55 percent, and I think the president wants to go as high as 75 percent over a five-year period ― is going have major challenges in negotiating offsets and being competitive,” Webster said.

Critics in the defense industry fear trade partners will see Buy American in the same light as former-President Donald Trump’s nationalist “America First” stance. Webster said he’s hearing from overseas industry representatives who know their countries are exempt, “but their voters, who don’t understand the mechanics of these things, are saying: ‘Look at America. Why are we buying from them?’ ”

Industry groups say they’re sympathetic to the goal of strengthening U.S. supply chains, but see this as bad economics, with potential price increases that will hurt the Pentagon’s buying power. Critics warned the higher threshold could fuel added costs for taxpayers and artificially support suppliers, making them less competitive.

In a statement, the Aerospace Industries Association said it’s reviewing Biden’s order with an eye toward “enhancing global competitiveness for our member companies — large and small — who provide economic and national security for the U.S.” and “reducing administrative and regulatory burdens that raise costs, slow the acquisition process, and delay innovation.”

“We also recognize that access to international markets and global suppliers allows us to deliver the best quality products to customers, including our own military forces and those of our partners and allies,” the association said.

The Pentagon, in September, established a department-wide supply chain resiliency working group with a two-year mandate to illuminate its suppliers at lower tiers, where the weaknesses are and how to mitigate them. Critics think the effort, which follows a separate executive order from Biden aimed at strengthening America’s supply chains, puts the cart before the horse.

“I think the administration is doing this backward,” said a U.S. defense industry source, who spoke on condition of anonymity because of the political sensitivities involved. “They have decided on a percentage for Buy American and have not done the full recon of the supply chain, with data and input from various industries to get them to a number. If they had a full picture of the supply chain, whether it’s domestic or supported by allies, then they could make a determination about what part of the supply chain needs assistance.”

Despite criticisms that reshoring isn’t feasible or that it will raise costs for taxpayers, Almeroth, of the aerospace and defense union, argued the changes are gradual enough to give the industry time to find domestic suppliers. In cases where it’s needed, the Pentagon will still have the ability to waive domestic-content rules if it deems costs too high or there’s no domestic supplier.

Mirroring the Biden administration, the House-passed defense bill includes language from Rep. Donald Norcross, D-N.J., to boost the requirement to 60 percent when the bill is enacted, 65 percent by 2024 and to 75 percent by 2029. Norcross, who chairs the House Tactical Air and Land Forces subcommittee, is a labor leader and worked with the aerospace workers union on the legislation.

“Buy American requirements help bring jobs back to the United States and improve manufacturing capacity here at home,” Norcross said in a statement. “A critical component of that manufacturing capacity, and our supply chain, is a skilled domestic workforce. When we invest in policies like Buy American, we are more resilient to supply chain disruptions and invest in the American worker. Ultimately, this benefits America’s national security by ensuring we have the capacity to build what we need when we need it.”

Illinois Democratic Sen. Tammy Duckworth, who is Norcross’ Senate counterpart, introduced similar language Oct. 28 in a proposed amendment to the Senate’s defense policy bill.

“When taxpayer dollars are at stake, we should do everything in our power to ensure we are leveraging them to support American workers, manufacturers and small businesses,” Duckworth said in a statement. “Right now, our Buy American standards simply fall short. If we’re serious about reshoring manufacturing and building resiliency in our supply chain, we must raise the bar on our Buy American policies to help ensure taxpayer dollars go back into the U.S. economy.”

Stiffening Buy American requirements was once a Democratic cause, but it’s evolved into a wedge issue for Republicans that unites populist lawmakers on both sides of the aisle.

Norcross last year succeeded in getting language into last year’s defense bill that would have increased the domestic-content requirement to 100 percent; the language did not make it past negotiations with the Senate and into the final bill.

It’s an open question whether the Duckworth proposal will pass in the Senate, where there are fewer populists than in the House and which has yet to take up its version of the defense bill.

Mixed messaging

Another question for the Biden administration is how the new mandates will jibe with its own messaging in favor of technological cooperation efforts with allies, framed around the west’s competition with China.

At that Global Emerging Technology Summit in Washington this summer, sponsored by the National Security Commission on Artificial Intelligence, Defense Secretary Lloyd Austin and Secretary of State Antony Blinken both praised the idea of cross-border innovation efforts.

“We must preserve our competitive and comparative advantages. That means building resilient, diverse and secure supply chains for critical technologies,” Blinken said. “We can’t onshore everything. We don’t need to. We’ll work with partners to ‘friend-shore’ and ‘near-shore’ our supply chains, and that will make all of us more resilient.”

As a practical matter, the U.S. simply does not have enough engineering talent to innovate against China without its friends, according to Bill Greenwalt, a former Pentagon industrial policy official and Senate Armed Services Committee staffer.

“Our advantage is our allies, so why do we want to unnecessarily annoy them and say, ‘We treat you like our enemies,’” he said.

Along these lines, the Pentagon’s industrial policy chief, Jesse Salazar, has been pushing to more closely integrate U.S. defense industrial capabilities with America’s closest allies: Australia, Canada and the United Kingdom. Asked at an industry conference in September about the tension between expanding Buy American and growing its work with partners, Salazar said DoD was “working to calibrate ... a balanced approach” toward multiple goals.

Foreign partners see a mixed messaging from Washington that potentially sabotages trade opportunities.

“The high-level Buy American message does create some confusion through the system, at the tactical level,” said Bobby Kwon, the chief executive of Canadian Commercial Corp., which facilitates international trade on behalf of Canadian industry.

“Navigating processes, rules and regulations, Canadian companies may find the barriers to working with U.S. defense partners can be at the buyer level,” he added. “As companies attempt to navigate a myriad of standards, individual interpretations get in the way of that closer collaboration and partnership.”

The protectionism ignores the way foreign defense firms often create U.S. subsidiaries and employ Americans, said Tord Jensen of the Norwegian-American Defense & Homeland Security Industry Council. He noted the U.S. buys missiles and remote weapons stations from Norwegian companies, with some components manufactured in the U.S. by American workers.

“For Norway, the United States is the strongest ally, the best friend we have, but if they implement something like this, it will be perceived as negative and put a strain on the relationship,” Tord Jensen said.

More In Pentagon

How the Space Force is making its systems more resilient

A little-known board has been working over the last year to identify resiliency measures and ensure the systems the Space Force buys meet those standards.

Lack of standards slows allied tech-sharing, Space Force official says

While the issue is often raised by commercial firms, the official told the Defense Innovation Board it is also a challenge for international allies.

Ellis to succeed Rey as director of Army Network Cross-Functional Team

Brig. Gen. Patrick Ellis is expected to take over this summer.

Anduril pairs with Korean shipbuilder to design new unmanned platforms

Anduril and HD Hyundai will collaborate to pair American software and autonomy with South Korean mass manufacturing in shipbuilding.

Air Force to get a head start on GPS, target tracking efforts

The service's first two Quick Start efforts involve boosting GPS resilience and advancing moving target indication capabilities.