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Monday, March 22, 2010

The perils of preference

It is a rare jurisdiction which doesn't have a local preference provision. Such a provision is intended to provide varying degrees of preferential consideration for bidders from the soliciting jurisdiction.

Because procurement law is a specie of government, be it municipal, state, national or whatever, matters of community welfare weigh heavier than they would in a strictly commercial context. Some preference may be justifiable as a means of putting money back to work in the community from which the tax dollars came. That argument is supported by need of government to shore up and expand its tax base.

As with many good ideas, though, it can often be abused or lead to more detriment than benefit. Where particular preference is given to particular interests, for instance, favoritism begins to seep in, which begins to feed on itself and spread corruption of the whole system. It can lead to propping up failing ventures that do not really benefit the community at large; that do not expand the tax base but consign it to old technology or the maintenance of inefficient production or outmoded products.

Moreover, there becomes the question as to just what is a local provider? The world is by an large a much more complex and interconnected economy, and the geographic "home" of enterprise often belies its supply lines and production base. This is true at a legal level as much as at a political or economic level. We aren't in Kansas anymore, Toto.

Finally, there comes the big economic-political issues involving trade subsidy and protectionism. We learned from the world wide Great Depression of the early 20th Century that protectionism can horribly exacerbate the economic downside of the business cycle. However popular it may be with the populace, where a little local preference may be a good thing, we find out too late that a lot of it is not such a good thing.

The recent posturing in the United States and China illustrate the political as well as economic ills when local preference takes on more political importance than economically justified.

“Buy American” Provision in Stimulus Legislation Poses Serious Compliance Challenges for Public Works Contractors and DHS Suppliers
the financial stimulus legislation (American Recovery and Reinvestment Act, or ARRA) passed by Congress late last week contains a strong “Buy American” provision mandating that all iron, steel, and manufactured products used in ARRA-funded public building and works projects be produced in the United States. The ARRA also imposes a sweeping prohibition on the Department of Homeland Security (DHS) that precludes DHS from using any appropriated funds to acquire clothing, individual equipment, and textile products made outside the United States.

he ARRA's Buy American provision, enacted as Section 1605, actually overlays and combines aspects of two existing, oft-confused, and quite different U.S. domestic content laws — the “Buy American Act” and the “Buy America” statute. The first statute, the Buy American Act, enacted in 1933 and since amended, applies only to U.S. government procurements and construction projects — that is, when the federal government directly buys products or itself builds public buildings or works via a procurement covered by the Federal Acquisition Regulation. The second statute, the Buy America law, first enacted in 1964 and amended on numerous occasions since, applies principally to Federal Transit Administration (FTA) grants provided to states and localities.

While both the Buy American Act and the Buy America law require that final products delivered to the government be made domestically, the 1964 Buy America law is much more demanding than the Buy American Act in keys respects — for example, the treatment of manufactured goods and construction materials components, which generally are parts and supplies incorporated directly into the final manufactured product or construction material. Buy America mandates that 100 percent of the components be made in the United States for the final manufactured good or construction material to qualify as U.S.-made. By contrast, the Buy American Act requires only 51 percent of the components of supplies and construction materials be made domestically for the final product to qualify as U.S.-made. In like manner, under Buy America, the cost of domestic materials must be 25 percent more expensive than foreign materials for a cost-based waiver, while under the Buy American Act the cost differential is just six percent (12 percent for a small business.)

ARRA Section 1605 combines the coverage of both the Buy American Act and the Buy America law. Because Section 1605 applies to both federal ARRA-funded public building and works projects, and all state and local ARRA grant-funded public buildings and works projects, and because Section 1605 tracks the statutory language of the Buy America law, it will likely apply that law's more exacting requirements. Thus, federal, state, and local public buildings and works procurements using ARRA funds will likely require a 100-percent U.S. component test, rather than the 51-percent component test, for end products to qualify for U.S.-made status.

Canada–U.S. "Buy American" Agreement
These [ARRA] provisions were a cause of concern to Canadian industry in that they restricted Canadian access to the U.S. procurement market and did so in areas in which Canadian suppliers had traditionally enjoyed access even in the absence of formalized access commitments. As a result, the Canadian government engaged in discussions with the U.S., with the goal of providing to Canadian suppliers an exemption from these restrictions. Those discussions resulted in the [US-Canada] Agreement, which was announced on February 5, 2010.

Buy American’ loophole is big enough for Navistar to drive armored truck through
"Buy American" provisions in procurement laws are so loose that bullets made in China and Israel now are used routinely by U.S. troops fighting in Afghanistan along with hundreds of other foreign-made items, said Sheila Ronis, a director of the National Defense University, an arm of the Pentagon that trains military officers.

Only weeks after landing a $752 million Pentagon order for 1,050 armored trucks, Navistar International will close its massive Indianapolis iron foundry in April, dismiss the final 130 workers, and then most likely buy iron engine parts for the military trucks from a Mexican foundry.

Losing the entire Navistar complex, which employed 2,250 in the foundry and diesel assembly plant next door in 2001, disgruntles workers in Indianapolis. And it hits the pocketbook of taxpayers paying to retrain workers dislocated by foreign trade.

Grass is Really Greener on the Otherside
a new analysis of green energy projects shows 79 percent of stimulus money for wind and solar projects went to overseas companies, according to the Investigative Reporting Workshop. A second study by Bloomberg New Energy Finance shows Chinese corporations taking over the solar panel market, jumping from a 3 percent share in California early in 2007 to 46 percent today.

"The Chinese have such low manufacturing costs, the U.S. may need protections like we have in farming."

Australian company Babcock and Brown received $178 million to install Japanese turbines on a Texas wind farm. French Co. enXco received $69 million to install German turbines on an Indiana wind farm. Eurus Energy from Japan received $91 million to erect its towers in Texas.

No one paid much attention to these American subsidies until the Department of Energy granted $450 million to A-Power of China to install its turbines in Texas.

‘Buy American’ solar rules threaten tit-for-tat
“Buy American” provisions that could be attached to government-funded stimulus projects have foreign solar panel manufacturers scurrying to set up U.S. facilities — and worrying that countries like China might follow suit.

Several Chinese companies with U.S. headquarters in the Bay Area, including Yingli Green Energy Americas and UpSolar, have said they will build manufacturing facilities here in part because of “Buy America” clauses in the American Recovery and Reinvestment Act and in rules that govern other financing programs.

But it’s a potentially treacherous line to toe, said Steve Chadima, a spokesman for San Francisco-based Suntech America.

“There’s the catch 22. It may look like … that will encourage more companies to build more factories in the U.S.,” Chadima said. “But the problem with this whole thing is escalating protectionism. We’re trying hard to work with the Chinese government to not include a ‘Made in China’ clause for Chinese government-funded projects.”

A Made in China clause could threaten U.S. projects like that of Tempe, Ariz.-based First Solar, which has a 50-person office in Oakland.

Report says China is squeezing U.S. firms out of its massive wind-power market
U.S. companies are getting squeezed out of the big Chinese wind-power market even as Dallas investors are bringing Chinese firms here via a big wind farm in Texas, according to a new industry report.

U.S. Trade Representative Ron Kirk won a pledge from the Chinese last fall to drop rules giving preference to Chinese makers of wind-power equipment. But Kirk's office hasn't seen any evidence that the pledge has been carried out, said spokeswoman Carol Guthrie.

Meanwhile, Chinese manufacturers are entering the U.S. wind market under a joint venture led by Dallas investor Cappy McGarr.

McGarr's Chinese partners announced plans last week to build a wind turbine factory in Nevada, and McGarr says most of the jobs for the West Texas project will be American.

"A minimum of 70 percent of each wind turbine in the ... project, including the massive towers and blades, will be wholly manufactured in the United States and made entirely of American steel," McGarr said.

China Rules Hurt U.S. Companies as Google Exit Looms (Update1)
China’s new rules to encourage home-grown technology are eroding sales at U.S. companies and raising concern these losses may multiply, according to an American Chamber of Commerce survey released today in Beijing.

Foreign companies with operations in China are concerned the rules are discriminatory and may extend beyond the 599 billion yuan ($87.8 billion) government-procurement market to orders from state-owned enterprises, which last year had combined revenue of 22.5 trillion yuan. The chamber represents companies including Microsoft Corp., JPMorgan Chase & Co. and United Technologies Corp.

“Many foreign companies are starting to believe that the future China business opportunity is shrinking,” said James McGregor, a senior counselor in Beijing at APCO Worldwide, a public affairs company. “This indigenous innovation policy seems clearly aimed at forcing foreign technology here so that Chinese companies can tweak it and call it their own.”

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