Congress quietly revises 'Buy America' rule for Defense materials

Much to the surprise of the Defense Department's legion of industry suppliers, Congress last week approved legislation that would give them some relief from heartburn-inducing restrictions regulating the amount of domestic metal content in the U.S. military's weapons systems.

The fiscal 2008 defense authorization bill, which President Bush is expected to sign into law, revises language in last year's defense bill that stipulated that all "specialty metals," including titanium, zirconium and certain steel alloys, in U.S. defense hardware come from domestic sources.

The provision is a relatively obscure one in the sweeping policy measure. But it is almost certain to have significant long-term effects on the defense industry's ability to deliver equipment, such as vehicles and aircraft, to the military.

With fervent "Buy America" heavy hitters, including House Armed Services ranking member Duncan Hunter, R-Calif., behind last year's law, many in the defense industry were resigned to living with the domestic-content restrictions a little while longer.

But it became apparent this year that the restrictions weren't working.

The specialty metals industry complained that the Defense Department had found a way to work around them by using waivers allowed by last year's law.

Meanwhile, defense suppliers cried that it had become too difficult and too costly to comply with the law's requirements. Both sides of the polarizing "Buy America" debate agreed that the law simply was getting impossible to live with.

"You can't bend the laws of physics; it's like ordering me to get taller," quipped House Armed Services Air and Land Forces Subcommittee Chairman Neil Abercrombie, D-Hawaii.

Defense suppliers had to track the origins for every specialty metal in their products -- an arduous and expensive task, they said.

Often hit the hardest were firms that sell mainly in the commercial market, forcing them to weigh whether their limited defense business was worth the headaches associated with last year's law.

One subcontractor on Boeing's massive C-17 Globemaster III cargo plane learned at the last minute that some of the parts it had provided were from foreign sources, John Douglass, the retiring president of the Aerospace Industries Association, recounted in an interview this fall.

The subcontractor ultimately had to charter a jet and fly several engineers to the plane's assembly site to replace "maybe $10 worth of nuts and bolts" before Boeing could deliver the C-17 to the military, he said.

Chris Myers, the Washington manager for Caterpillar Inc., a largely commercial firm that also sells engines and other equipment to the Defense Department, said this fall that executives were doing a cost-benefit analysis of their military business in light of the specialty metals law.

In an e-mailed statement last week, Caterpillar praised the new language, which the company believes will "streamline the compliance process."

Bill Greenwalt, deputy undersecretary of Defense for industrial policy, said he is still reviewing the new legislation, but noted, "The problem with the earlier law is that it doesn't recognize that the department's industrial base is highly dependent upon commercial vendors."

"At the end of the day, I don't think anybody wants to see the Department of Defense unable to take products," Greenwalt added.

To deal with last year's law, the Pentagon issued a broad waiver exempting all fasteners, a major portion of the specialty metals business.

That move drew immediate concerns among U.S. metal manufacturers, who feared the department's work-around was the beginning of a slippery slope toward the gutting of last year's law.

The recently approved FY08 defense bill puts less focus on the waiver process and includes more specific exemptions that leave less wiggle room for the Pentagon while at the same time giving defense suppliers more breathing space.

It closely resembles language pushed by the Senate and the defense industry last year, but ultimately shot down by House lawmakers.

Supporters of "Buy America" laws called the new language a compromise that still reaches their overarching goals of supporting domestic metals suppliers.

Rep. Robin Hayes, R-N.C., a senior member of the House Armed Services Committee and advocate of last year's law, said the intent of the new provision is to "make it realistic, make it practical, make it as flexible as we can."

Still, several industry sources said they were surprised with the outcome of this fall's conference negotiations.

The House originally tried to expand last year's restrictions by tightening the rules and provided little, if any, new relief for defense suppliers while giving greater protection to U.S. specialty metals manufacturers.

Some said they believed the final language came about because Hunter was on the presidential campaign trail and often absent during negotiations.

"Mr. Hunter was otherwise occupied running for president," Abercrombie said. "Buy America" restrictions "did not have the same prominence" in the House-Senate conference this year, he said.

But Hunter -- and congressional aides on both sides of the aisle -- said he was very involved with crafting the new provision, which he touted in an interview as a way to give defense suppliers some relief while still protecting the domestic specialty metals sector.

"I put this package together at the behest of the specialty metals industry that wanted to accommodate the industrial base," Hunter said.

He acknowledged concerns that last year's law might have been "too complicated" and "couldn't be complied with."

The specialty metals industry, meanwhile, is still reviewing the conference to determine how it will affect their sector.

"The specialty metals industry is studying the conference report," said Jeff Green, a former House Armed Services aide who runs a lobbying firm representing several small defense contractors, including metal producers.

Larry Lasoff, who represents the Specialty Steel Industry of North America, likewise said he is still sorting through the language.

"What I see so far is there seems to be real effort here by Congress to achieve some fair balance between the need for flexibility and also the need to preserve the integrity of the law," Lasoff said.