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[ Market Watch ]
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GSA getting it right with Trade Agreements Act
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by Andrew Mohr & C. Kelly Kroll
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In several of our past articles we have discussed the General Services Administration's Get It Right program, which was designed to improve procurements by educating contracting officials on the proper use of GSA's contracting vehicles, especially GSA Schedule contracts. Since the implementation of Get It Right, GSA has focused keenly, whether for better or worse, on various compliance requirements found in all GSA Schedule contracts, such as small business subcontracting reporting and affirmative action plans.
The latest compliance issue for GSA has been the Trade Agreements Act (the Act or TAA), which prohibits the federal government from procuring items manufactured in countries that have refused to enter into reciprocal trade agreements with the United States.
To be fair, the TAA issue has become a hot button issue as of late not just because of Get It Right, but also as a result of recently announcements by the Department of Justice publicizing the settlements of several civil cases involving TAA violations. Specifically, Office Max, Office Depot, and Staples recently agreed to pay GSA millions of dollars to settle claims that they had violated the False Claims Act by failing to abide by the TAA requirements of their respective GSA Schedule contracts.
After a competitor blew the whistle on these companies, it was discovered that all three had been selling prohibited products off their GSA Schedules. These companies should consider themselves lucky, since the failure to comply with the TAA can lead not only to civil false claims penalties, but can also result in the termination of the contract, debarment and/or suspension of the company, and even jail time.
Now that we have your attention, let us tell you a little more about the TAA and some steps you can take to make sure your company is TAA compliant.
Understanding The TAA
The TAA has been in place since 1979 and applies to procurements over approximately $175,000. The TAA requires federal agencies to treat the products of countries that have signed a reciprocal trade agreement as favorably as U.S.-made products in their own government procurements. More importantly, the Act prohibits the purchase of products made in countries that haven't signed a reciprocal trade agreement.
Designated Countries
'Designated Country' for the purposes of the Trade Agreements Act and Free Trade Agreements means any of the following countries: | Afghanistan
Angola
Antigua and Barbuda
Aruba
Austria
Australia
Bahamas
Bangladesh
Barbados
Barbuda
Belgium
Belize
Benin
Bhutan
British Virgin Islands
Burkina Faso
Burundi
Cambodia
Canada
Cape Verde
Central African Republic
Chad
Chile
Comoros
Costa Rica
Cyprus
Czech Republic
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Democratic Republic of Congo
Denmark
Djibouti
Dominica
Dominican Republic
East Timor
El Salvador
Equatorial Guinea
Eritrea
Estonia
Ethiopia
Finland
France
Gambia
Germany
Greece
Grenada
Guatemala
Guinea
Guinea-Bissau
Guyana
Haiti
Honduras
Hong Kong
Hungary
Iceland
Ireland
Israel
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Italy
Jamaica
Japan
Kiribati
Korea
Latvia
Liechtenstein
Lithuania
Luxembourg
Laos
Lesotho
Madagascar
Malawi
Malta
Maldives
Mali
Mauritania
Mexico
Montserrat and the Grenadines
Morocco
Mozambique
Norway
Nepal
Netherlands
Netherlands Antilles
Nicaragua
Niger
Norway
| Poland
Portugal
Rwanda
Samoa
Sao Tome and Principe
Senegal
Sierra Leone
Singapore
Slovak Republic
Slovenia
Solomon Islands
Somalia
Spain
St. Kitts and Nevis
St. Lucia
St. Vincent and the Grenadines
Sweden
Switzerland
Tanzania
Togo
Trinidad and Tobago
Tuvalu
Uganda
United Kingdom
Vanuatu
Yemen
Zambia
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Because GSA considers the TAA in the context of the GSA Schedule contract program as a whole, the TAA applies even if purchase orders placed under a GSA Schedule contract are less than $175,000. Some contractors believe that the TAA doesn't apply to them because the typical order size they receive under the GSA Schedule is well below the $175,000 threshold. This is incorrect. The TAA applies to every single item listed on a GSA Schedule, even something that is thrown in for free.
The TAA essentially divides products into three categories. First, a product is a U.S.-made end product if it has been produced, manufactured, or substantially transformed in the United States. Second, a product is a "designated country end-item" if it was produced, manufactured, or substantially transformed in one of the many countries that have signed a reciprocal trade agreement. Third, although not specifically defined in the regulations, a product is commonly referred to as a "non-designated country end-item" if it was made or substantially transformed in a country that has not signed a reciprocal trade agreement. A list of the countries that have signed a reciprocal trade agreement is on page TK, but as you'll quickly discover that China, Malaysia, and Taiwan are not on the list.
For the purposes of the TAA, the country of origin is where the item is wholly manufactured or where it was "substantially transformed" into the end product if its components parts were manufactured elsewhere. A substantial transformation occurs when parts lose their identity and become articles having a new name, character, or use.
That's the whole test and it seems simple enough. In practice, however, the results are not always clear.
Whether or not something is substantially transformed depends on the extent of the operations performed, and specifically whether the components lose their identity and become an integral part of the new article, are critical factors in a substantial transformation analysis. In general, an assembly process will not constitute a substantial transformation unless the operation is "complex and meaningful," which in turn depends on the nature of the operation, including the number of components assembled, the number and types of different operations involved, and the degree to which a significant period of time, skill, detail, and quality control are necessary for the assembly operation.
Thus, the simple acts of attaching handles to pots or rubber soles to leather shoe uppers have been found not to constitute a substantial transformation. However, even more complex assembly operations, such as a 20-step assembly of a fan, have failed to meet the test because the parts were not physically altered, the assembly processes did not require large amounts of skilled labor or specialized equipment, and the cost of the process was low.
If we were to add soldering and galvanizing to the assembly process, then the likelihood of a substantial transformation finding increases significantly. Unfortunately, where the line is between substantial transformation and no substantial transformation is far from clear -- because each case is extremely fact dependant.
An Ounce Of Prevention
While many contractors feel the sudden increased emphasis on the TAA is unfair given GSA's past practices of overlooking or simply ignoring these issues, the fact remains that these contractors have entered into a contract with GSA. That contract stipulates that the contractors will comply with certain requirements and the failure to do so ultimately rests with the contractor. The TAA is one of those requirements.
There are, however, certain things a contractor could, and should, do now to ensure compliance with the TAA. For example, if you manufacture your own products, then first and foremost make sure the country in which they are manufactured is on the list.
There are some countries that you would think would be on the list but aren't. For example, until only a year ago Australia, an Iraq Coalition partner, wasn't on the list.
If your products are manufactured in a country that isn't on the list, then remove them from the Schedule immediately. GSA, for the most part and to its credit, has been allowing contractors to quickly remove these items without further penalty.
If a product is not wholly manufactured in one country but perhaps is assembled in a country from parts of one or more countries, or involves various production stages in multiple countries, including one non-designated country, then you should analyze the entire manufacturing process to determine whether the process meets the TAA's substantial transformation test. Again, the substantial transformation test is very fact dependant, so it would be best to involve legal counsel in this process.
If you are a dealer selling the products of other manufacturers on your GSA Schedule, you still have to be TAA compliant. That is, the responsibility rests with you, not the manufacturer. To protect yourself, we suggest that you ask the manufacturer to certify where the products were made and tell you of any changes.
Finally, once you have determined that the products are compliant, you should regularly check to make sure you are still compliant. This means quarterly checking the list of designated countries to make sure your country of manufacture is still on the list and/or analyzing any changes in the product manufacturing process to ensure that the substantial transformation test is still being met.
Get It Right is not going away anytime soon, and it appears that compliance will be the name of the game for years to come. It's best to check your compliance now than write a check for fines and penalties later.
Andrew Mohr is a partner in the law firm of Cohen Mohr LLP and a Professorial Lecturer at American University in Washington, DC, who specializes in government and commercial contracts, including GSA schedules. C. Kelly Kroll is an associate at Cohen Mohr with extensive experience in GSA Schedule contract proposal preparation, negotiation, and administration. Contact them at (202) 342-2550, fax (202) 342-6147, or at www.cohenmohr.com.
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