A couple weeks ago, Steve Charnovitz posted about a domestic content requirement in the U.S. Paycheck Protection Program being run by the Small Business Administration. We discussed the issue a bit in the comments, but I was curious about the origins of the requirement. I asked a Cato intern named Catherine Kraft, a University of Baltimore law student, to look into it. Here's what she came up with:
Introduction
Over the past few weeks, Americans across the country have read accounts of the financial burdens faced by local businesses throughout the country due to the COVID-19 worldwide pandemic. Businesses, including family-owned restaurants, hardware stores, and shops, have been forced to close their doors for an unforeseeable amount of time because they cannot afford to pay the overhead to stay afloat. On March 27, President Trump signed a $2 trillion stimulus package aimed at helping small businesses, among others, weather the crisis. The stimulus package allocated $350 million to the Paycheck Protection Program (PPP), to fund small business loans to pay for payroll and operating costs (additional funding is on the way).
Beyond all the various general policy issues that arise here, a narrower trade policy question can be found in the wording of the Small Business Administration’s (SBA) Borrower Information Form, also known as Form 1919, which must be filled out by any business seeking a PPP loans. By signing the form, small businesses agree to purchase American-made products and equipment. Specifically, a provision on the form states that a small business owner agrees “[t]o the extent feasible, to purchase only American-made equipment and products.” This blog post will discuss the origins of this provision, to the extent I have been able to identify them. If anyone knows more, please feel free to mention it in the comments.
Placement and Origin of the “American-made” Provision in Form 1919
The “American-made” provision is not noticeable at first glance. The provision is not bolded and is not underlined. It is placed strategically at the end of the form in a section entitled “Representations and Authorizations.” But that does not mean the provision is a sneaky insertion by a nationalist Trump administration: A crucial point here is that the provision pre-dates Trump.
The provision has been on Form 1919 for almost 14 years. The form first appeared on the SBA’s website around July 19, 2006. Prior to Form 1919’s debut, there were no other forms containing similar language to suggest a predecessor of the form. Although the form first appeared on the SBA’s website in July 2006, it did not become effective until June 28, 2007. A careful look at an older version of the SBA website revealed that there was a heavy focus on the September 11 terrorist attacks and natural disasters around the time the “America-made” provision first appeared. Perhaps these incidents gave rise to a nationalist sentiment that triggered the inclusion of the provision.
It is worth pointing out that while the state of trade or the economy at a particular moment may have been the trigger to incorporate the “American-made” provision in the application form, the language found in the provision can be traced to section 102 of the Small Business Investment Act of 1958. Section 102 states in part “[i]t is declared to be the policy of the Congress and the purpose of this Act to improve and stimulate the national economy in general and the small-business segment thereof… by establishing a program to stimulate and supplement the flow of private equity capital and long-term loan…It is the intention of the Congress that in the award of financial assistance under this Act, when practicable, priority be accorded to small business concerns which lease or purchase equipment and supplies which are produced in the United States…”[1] The Small Business Investment Act allows for small businesses to apply for loans to receive funds to help pay for operational expenses.[2] Thus, similar language has always existed, but it is likely that the SBA, due to various specific events affecting the economy, relied on the language from the Act as the basis for inserting the “American-made” provision.
Wording of the “American-made” Provision
The first time I read the “American-made” provision, the phrase that caught my attention was “to the extent feasible.” The phrase has been consistent throughout every version of Form 1919, dating all the way back to its inception. The SBA makes no attempt in the current form, earlier forms, or on its website to explain “to the extent feasible.” What does this phrase actually mean? Does it mean that small businesses can purchase international products, but only up to a certain percentage? Or does it mean that small businesses can purchase international products if it is unavoidable or an instrumental part of the business? If it is the former, the SBA has failed to identify what percentage is acceptable. If it is the latter, we run into the problem of what the SBA deems as unavoidable or instrumental. A quick search in the dictionary reveals that “feasible” means capable of being done successfully. The definition of feasible does not assist in decrypting what the SBA likely meant when it chose to preface the “American-made” provision with “to the extent feasible.”
Another problem with the “to the extent feasible” preface is whether the SBA will enforce punishment if the “American-made” provision is violated. Since Form 1919’s debut, there is no case law to indicate that the SBA has enforced violations of “American-made” provision. This could also indicate that small businesses that have received loans from the SBA have not violated the “American-made” provision; however, this is unlikely because of how much the United States engages in global commerce.
What is concerning about the “to the extent feasible” preface is that because there are no clear standards on how it will be assessed, the SBA has discretion over when it will enforce the “American-made” provision. This effectively forces small businesses to comply out of fear of facing fines or the repeal of its loan. But what about small businesses that did not read Form 1919 meticulously? Most small businesses may be unaware of any of this, and there is a risk that it could surprise them later.
Conclusion
It does not appear that the “American-made” provision will be disappearing from Form 1919 any time soon. The provision has been on the form since its inception and it pulls from the language found in the Small Business Investment Act to support its presence on the form. Although it does not appear that the provision has been enforced, this does not mean the SBA will not enforce the provision in the future. The major concern with the wording found in the “American-made” provision is that it lacks specificity in providing standards or guidelines. Small businesses are navigating blind when they receive SBA loans and they have no clue how to adhere to the “American-made” provision. Because of the ambiguity and lack of enforcement in the past, it is unlikely that the SBA will enforce the provision in the future. Small business, however, should stay vigilant and purchase wisely because there is no telling when the SBA will start enforcing the provision.
[1] Small Business Investment Act of 1958, 15 U.S.C. § 661 (1958).
[2] 15 U.S.C. § 661 (1958).
