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PPP loans and Buy American requirements

A curious certification requirement appears in SBA Form 2483, the form distributed by the Small Business Administration (“SBA”) to enable millions of American small businesses affected by the COVID-19 pandemic to apply for forgivable Paycheck Protection Program (“PPP”) loans.  On page 2 of the form, in the first set of Certifications and Authorizations, the borrower must certify, among other things, as follows:  “To the extent feasible, I will purchase only American-made equipment and products.”

The SBA does not provide any guidance on the meaning of this certification and how it would enforce compliance with it.  There are several different standards in federal law as to what would qualify as products made in America.  What in the world could the words “American-made” mean in this certification?

PPP borrowers will be hard-pressed to find many products bearing the unqualified statement “Made in the USA” or “American-made.”  Such statements must satisfy a very rigorous Federal Trade Commission “all or virtually all” standard.  The FTC guides that “All or virtually all” means that all significant parts and processing that go into the product must be of U.S. origin.  The FTC declines to put a number on it, but informally it is considered that at least 98% of the value must be of U.S. origin.  Very few products qualify for such an unqualified label, and that is why it is as rare as a full solar eclipse.  Most products, aside from cars, textile, wool, and fur products, are not required to have a statement of U.S. content at all.  Many manufacturers who do a substantial part of their processing in the United States, however, choose to make qualified claims such as “Assembled in the U.S. with imported materials.”

Quite a number of different “Buy American” standards are implemented through federal and state procurement laws and regulations.  What “American-made” means under government procurement rules really depends on the product involved, the value of the procurement contract, the time of procurement, and the identity of the procuring government agency.  For example:

  • Under the Trade Agreements Act (“TAA”), which applies to relatively large federal acquisitions, a product is considered to have U.S. origin if it undergoes a “substantial transformation” in the U.S.  This is the same subjective test that is generally used by the United States to determine the country of origin of a product, and it considers whether the manufacturing process in a given country was such that it changed the “essential character” of the materials or components into a finished product.
  • The Buy American Act (“BAA”), which covers smaller federal acquisitions (above the $2,500 micro-purchase threshold and bellow TAA threshold, which is currently $182,000), the government must purchase products “manufactured in the United States substantially all from articles, materials, or supplies mined, produced, or manufactured in the United States.”  Pursuant to the BAA “component” test, at least 95% of iron and steel components, and at least 55% of other components, must be of U.S. origin.
  • The Berry Amendment requires that the Department of Defense purchases of food, textiles, and certain hand or hand or measuring tools, including not only the end items, but also all components and materials, be wholly grown, reprocessed, reused, or produced in the United States.

One can quickly surmise that determining whether a product is American-made under federal law involves a lot of legal complexity and depends on many factors.  So what should millions of small business owners applying for PPP loans make of the certification in SBA Form 2483, and how can they comply?

Since there is no other guidance available at this time and no clear way for the SBA to enforce the certification, I think it should be treated as encouragement rather than a legal requirement.  After all, it begins with the words “to the extent feasible.”  Business owners should try to buy American-made products with PPP funds, and if that is not feasible, they may buy foreign products.  When they do so, it would be prudent to document that purchasing American-made product was not feasible and why.  The reason for feasibility could be lack of availability of American-made products, unacceptably-long lead times, failure of American products to meet the necessary requirements or specifications, or pricing that is far in excess of market prices.

That leaves the thorny question of what business owners should consider to be “American-made” at the end of the day.  Again, without further guidance from the government, we can only guess.  I think, however, that in light of the breadth and the hardly enforceable nature of this certification requirement, it would be unreasonable for the SBA to attempt to apply the FTC’s strict “all or virtually all” standard.  Instead, it is more likely that the government would follow the recent trend of applying tighter Buy American standards, which requires both manufacturing in the United States, and sourcing of majority of component value from the United States.

Valentin Povarchuk
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I am Valentin Povarchuk, international trade attorney and owner of Midwest Trade Law. I wanted to become a lawyer since I was 13, and I am living my dream. I prepared well for my legal career, obtaining my undergraduate degree from Cornell University with honors summa cum laude (highest honors), and serving as Editor-in-Chief of Pacific Rim Law & Policy Journal at the University of Washington School of Law.