A word of caution on global contracting

Infotech and the law | Legal insights for today's market

In a world that is flat, trade laws can make all the difference.
This is as true in public procurement as in the software, steel or
wheat markets. For non-U.S. companies, there is increasing
interest in tapping into the U.S. public-contracting market.

The U.S. government is the world's single
largest buyer of goods and services, and
some states have procurement budgets larger
than those of some foreign countries.

For U.S. companies, global contracting
offers not only additional markets for their
technology and services but also a significant
source of subcontracting and outsourced
labor. And in public procurement,
where price is always a factor, reduction of
labor costs can provide a decisive competitive
edge.

But there are numerous trade
restrictions that affect public
contracting, and it is a complicated
area of law. Thus, any company
interested in selling to
Uncle Sam and taking advantage
of global markets must understand
the trade laws applicable to
U.S. procurement.

A critical law, which affects many large
U.S. procurements, is the Trade Agreements
Act. TAA implements the World Trade
Organization's Government Procurement
Agreement (GPA), which is a treaty requiring
that signatory nations not discriminate
against the supplies and services of other
signatory nations. TAA applies to certain
government procurements above a preestablished
monetary threshold, which is
set at $194,000.

Accordingly, for acquisitions with an estimated
value equal to or exceeding that
amount, the United States must treat end
products from all WTO GPA signatory
nations the same as U.S. products unless an
exception to the law has been negotiated. In
addition, if no exception applies, the U.S.
government must purchase either a U.S.
end product or a designated country end
product to comply with TAA.

A designated country end product refers
to a product from any WTO GPA country or
certain other countries that have negotiated
free-trade agreements with the United
States. This means that end products from
designated countries such as Singapore are
treated the same as U.S. products, and end
products from countries that have not
signed the WTO GPA, such as the People's
Republic of China, may not be purchased.

The monetary threshold is applied on a
line-item basis, and the estimated value of
an acquisition includes the value of all
option periods. Accordingly, an acquisition
might have some line items governed
by TAA, while others are governed by
other trade laws such as the Buy
American Act.

Under TAA, an item is the end product
of a country if it is entirely the
growth, product or manufacture of the
country or has been substantially transformed
in the country. The substantial
transformation test asks whether the
item was transformed into a new and
different article of commerce with a
name, character or use distinct from
the origin article within the country in
question.

For end products with components
made in more than
one country, determining
the country of
origin can require a
detailed analysis of the
source of components
and the manufacturing
processes involved.

For example, if an item has multiple components
that are mechanically and electrically
integrated in China before being
shipped to the United States for finishing
work, the item likely violates TAA and
would not be eligible for award.

Therefore, it is critical that non-U.S. and
U.S. contractors determine whether TAA
applies to a given procurement and whether
their proposed product satisfies the law. To
ensure the ability to compete and avoid
potential prosecution for a false certification,
this analysis must be done before certifying
compliance with the law.

Richard Rector is chairman of the government
contracts practice at DLA Piper US LLP.

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