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Compliance with the Trade Agreements Act.

Contractors on the GSA Federal Supply Schedule need to understand compliance issues presented by the Trade Agreements Act. The TAA essentially provides that the government may acquire only U.S.-made end products, or those from designated countries. This issue comes up frequently with commercial products sold to the government, because several countries that are major suppliers of goods or services to the U.S. market--such as China, India, Malaysia, Thailand, and Taiwan--are not "designated countries" under the TAA. Most frequently, products from China pose the problem because of their dominance in commercial markets and competitive pricing. There have been a number of high-profile qui tam (whistleblower) suits against contractors in the office supply business for selling non-compliant products on GSA Schedule contracts, resulting in serious fines and penalties.

TAA designated countries are Caribbean Basin countries, WTO GPA countries, Free Trade Agreements countries, and certain "least developed" countries as listed in FAR 52.225-5. The TAA essentially requires that end products from designated countries be treated the same as U.S.-made products for government procurement purposes, and prohibits the acquisition of end products from other, non-designated countries. The TAA applies to all U.S. government acquisitions over a certain dollar threshold, generally $194,000 for the acquisitions of supplies or services, although some individual Free Trade Agreements (e.g., Canada, Mexico, Chile and Australia) apply lower thresholds. GSA Federal Supply Schedule contracts typically include a TAA Certification requiring the offeror to certify that each end product is a U.S.-made, or designated country, product.

Currently the TAA applies a rule-of-origin requirement to the end product being supplied and requires that end products acquired by the government must be "wholly the growth, product and manufacture" of the U.S. or of a designated country, or "substantially transformed [in the U.S. or a designated country] ... into a new and different article of commerce with a name, character, or use distinct from that of the article or articles from which it was transformed." The question of whether a product has been "substantially transformed" can present complex issues of interpretation and application that must be considered on a case-by-case basis, based on the determinations of the Bureau of Customs and Border Protection.

While questions of substantial transformation are generally rooted in Customs, the Government Accountability Office will occasionally take jurisdiction over such questions in matters involving a bid protest. In the Matter of Klinge Corporation, B3099030.2 GAO stated that the contracting agency properly investigated whether significant work or processes necessary to the functioning of the product in question would occur in the U.S. The product in question was to be acquired in Singapore (a designated country), shipped to China where it would be processed, then ultimately shipped to the U.S. for additional and necessary manufacturing processes. GAO upheld the decision of the contracting agency that a "substantial transformation would occur in the U.S. such that [the product) would qualify as a U.S.-made end product."

On July 25, 2008, Customs proposed new regulations (73 Fed. Reg. 43385) that would establish a uniform rule governing the determination of the country of origin of imported products. The proposed rule would replace the current subjective "substantial transformation" test, with a more objective "tariff-shift" test. The basis of this proposed rule is the Harmonized Tariff Schedule of the United States, which categorizes all products imported into the U.S. If this proposed regulation is implemented, the relevant question will be, tin which country was the product located when the final tariff shift took place?" This will be the country of origin for that particular product.

This proposed rule will presumably eliminate the case-by-case decision making currently employed to determine if a certain product underwent a substantial transformation to qualify as U.S.-made end product. Under this rule, an imported product does not qualify as a U.S.-made end product until it is transformed to the point of failing under a new tariff category.

At this time the "tariff-shift" test has not yet been made into law, and thus the "substantial transformation test" remains the guide that must be followed. However, under either test, failure to understand and comply with the TAA compliance creates a risk of potentially substantial civil liability, or conceivably, even potential criminal liability. Clearly, manufacturers or resellers with direct contracts with GSA face those issues most directly, as they are in privity of contract with the government and are subject to reviews, audits and investigations. Companies that do not hold GSA schedule contracts, but instead sell through resellers, can also face TAA compliance issues. Such companies typically need to have an understanding of the TAA because they may be asked to provide a representation or certification of TAA compliance to their resellers as part of their letters of supply.

By William B. Barton

Barton, Baker, McMahon & Tolle

William Barton, a partner at Barton, Baker, McMahon & Tolle LLP, can be reached at 703-448-1810 ext. 12 or
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Title Annotation:Legal Issues
Author:Barton, William B.
Publication:Set-Aside Alert
Date:Oct 10, 2008
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