Category: Domestic Preferences

Corporate Counsel: Five Geopolitical and International Trade Issues for U.S. Businesses to Watch in 2023

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Corporate Counsel, February 14, 2023

Anthony Rapa and Justin A. Chiarodo ●

Last year marked an inflection point in the geopolitics of the 21st century, with the Biden administration declaring the post-Cold War era “definitively over” against the backdrop of Russia’s invasion of Ukraine and the U.S.-China strategic competition. That dynamic drove a range of national security and economic statecraft policies in 2022—notably including broad sanctions against Russia and semiconductor export controls regarding China—that will create heightened legal and business risks for companies with international supply and distribution chains. These risks will be particularly acute for companies and investors operating in highly regulated industries, including aerospace, defense, manufacturing, technology, and financial services. We highlight below five key geopolitical and international trade issues to watch in 2023.

1. Trade war becomes tech war.

The U.S. strategic competition with China will continue in 2023 and beyond, with a continued focus on limiting the flow of advanced and emerging technologies. U.S. authorities are expected to build on key China-related measures implemented in 2022, which included sweeping semiconductor export controls, designations of Chinese companies on restricted lists, and FCC equipment bans.

Perhaps counterintuitively, total U.S.-China trade in 2022 reportedly was at or around an all-time high, and the Biden administration has stated that “[w]e do not seek conflict or a new Cold War.” U.S. Secretary of State Antony Blinken’s planned visit to China in 2023, postponed after the U.S. shot down a Chinese high-altitude balloon drifting through U.S. airspace, had been intended to build on dialogue between President Biden and Chinese president Xi Jinping on the sidelines of the G20 summit in Indonesia last November.

Key takeaway: Expect stronger enforcement measures to weigh on China trade for the foreseeable future. Companies should revisit the risk profile of their international supply chains—including whether any of their technology is subject to the new export controls or could be the subject of future controls—and consider enhancements in their supplier diligence and risk management practices.

Read more on our website.

FY 2023 NDAA Muddies the Water on Whether Chinese Semiconductor Ban Will Apply to Contractors

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Robyn N. Burrows ●

Last month, we wrote about a proposed amendment to the FY 2023 National Defense Authorization Act (“NDAA”) that would prohibit contractors from selling certain Chinese semiconductor technologies to federal agencies and from using these same covered products and services. This measure was added through Section 5949 of the NDAA.

On December 6, the House passed a compromise version of the NDAA, which appears to scale back the semiconductor ban by applying it only to federal sales of covered products and services, without also banning contractors from using them. However, the explanatory statement accompanying the NDAA suggests contractors (including their affiliates and subsidiaries) may ultimately be prohibited from using covered semiconductor technologies—which would raise a host of compliance and implementation concerns.

Compromise Version of NDAA Limits Semiconductor Ban to Federal Sales

Section 5949 bans semiconductor products and services from Semiconductor Manufacturing International Corporation, ChangXin Memory Technologies, and Yangtze Memory Technologies Corp., plus their subsidiaries and affiliates. This ban was modeled after the supply chain restrictions from Section 889, which prohibit contractors from selling and using covered telecommunications and video surveillance equipment from five Chinese telecom companies.

Continue reading “FY 2023 NDAA Muddies the Water on Whether Chinese Semiconductor Ban Will Apply to Contractors”

Senate Majority Leader Schumer Proposes Section 889 Expansion

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Robyn N. Burrows and Merle M. DeLancey, Jr. ●

On October 18, 2022, Senate Majority Leader Chuck Schumer (D-NY) issued a press release signaling a potentially significant expansion of Section 889 through a proposed amendment to the 2023 National Defense Authorization Act (“NDAA”). Schumer’s proposal is aimed at extending the telecommunications supply chain prohibitions in Section 889 to the semiconductor manufacturing industry.

Section 889 currently prohibits contractors from providing the federal government or using any products or services that incorporate “covered telecommunications equipment or services” from five Chinese telecom companies and their affiliates and subsidiaries: (1) Huawei Technologies Company, (2) ZTE Corporation, (3) Hytera Communications Corporation, (4) Hangzhou Hikvision Digital Technology Company, and (5) Dahua Technology Company.

Schumer’s 2023 NDAA amendment would expand Section 889 by banning semiconductor products like microchips from the following three Chinese entities: (1) Semiconductor Manufacturing International Corporation (“SMIC”), (2) ChangXin Memory Technologies (“CXMT”), and (3) Yangtze Memory Technologies Corp. (“YMTC”). Schumer noted that these companies have known links to the Chinese state security and intelligence apparatuses. The amendment is aimed at filling a gap in federal procurement restrictions that currently do not include semiconductor technology and services, creating a vulnerability for cyberattacks and data privacy. The amendment would not take effect until three years after the NDAA’s enactment, or until 2025.

Although we do not yet know whether Schumer’s amendment will be incorporated into the final NDAA bill, contractors should nevertheless begin evaluating their supply chains to identify any semiconductor products from any of the three named Chinese manufacturers. Schumer’s amendment signals a continually expansive interpretation and enforcement of Section 889, which may be reflected in the final rulemaking for Section 889. The current FAR docket anticipates a final rule in December 2022, although these deadlines continue to be moving targets.

Are You Ready for Increasing Buy American Act Content Requirements?

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Merle M. DeLancey Jr. ●

Effective October 25, 2022, the domestic content requirements for government purchases subject to the Buy American Act (“BAA”) will increase. A March 7, 2022, final rule implemented significant domestic content threshold increases over a seven-year timeframe for procurements subject to the BAA requirements of FAR Part 25. These increases were based on President Biden’s January 25, 2021, Executive Order 14005, Ensuring the Future Is Made in All of America by All of America’s Workers. (See, Buy American Act—Final Rule: What Has Changed?) Note that these changes apply to the BAA as implemented in non-Department of Defense (“DoD”) purchases—the rules for implementing the BAA in DoD acquisitions are set forth in the DFARS, and differ from the FAR implementation in several important respects that we will address in a future post.

Unlike the Trade Agreements Act (“TAA”), which bans government purchases of non-compliant products, the BAA applies pricing preferences to encourage government agencies to purchase “domestic end products.” Thus, items that are not BAA compliant may still be purchased by government agencies, but they must be significantly less expensive. Currently, FAR Part 25 provides that large businesses offering domestic end products receive a 20 percent price preference and small businesses offering domestic end products receive a 30 percent price preference. The FAR sets forth a two-part test to determine whether a manufactured end product or construction material qualifies as a domestic end product: (1) the end product or construction material must be manufactured in the United States; and (2) the cost of any components mined, produced, or manufactured in the United States must exceed a certain percentage of the cost of all components.

Continue reading “Are You Ready for Increasing Buy American Act Content Requirements?“

DoD Section 889 Telecommunications Prohibition Waiver Expires

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Merle M. DeLancey Jr. ●

Effective October 1, 2022, Department of Defense (“DoD”) contractors must comply with Part B of Section 889 of the FY 2019 National Defense Authorization Act (“NDAA”). The approximately two-year long Part B waiver granted to the Director of National Intelligence expired October 1. DoD contractors cannot seek a DoD agency-level waiver as DoD cannot grant waivers under the statute. Thus, as with other agencies, DoD is prohibited from entering into, extending, or renewing contracts with contractors who use covered telecommunications or video surveillance equipment and services from certain Chinese companies in any part of their business.

Compliance with Part A of Section 889 was straightforward. Part A prohibited contractors from selling covered technology to the federal agencies. Comparatively, compliance with Part B is much more complicated. Part B requires a contractor to certify that it does not use “any equipment, system, or service that uses covered telecommunications equipment or services as a substantial or essential component of any system, or as critical technology as part of any system.” The prohibition applies to all contracts at any dollar value. “Covered telecommunications equipment or services” is defined as equipment, services and/or video surveillance products from Huawei Technologies Company, Hangzhou Hikvision Digital Technology Company, Hytera Communications Company, Dahua Technology Company, ZTE Corporation, or any entity controlled by the People’s Republic of China.

For more information regarding Part B compliance, see our prior posts For Part B of Section 889, Is Compliance by August 13, 2020, Realistic? and Five Steps to Take to Prepare for Part B of the Section 889 Ban.

New York Law Journal: Recent Developments in U.S. Supply Chain Security

Preparing for Compliance Risks Under the ICTS Rules, the Uyghur Forced Labor Prevention Act, and the National Critical Capabilities Defense Act

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New York Law Journal, September 22, 2022

Anthony Rapa and Justin A. Chiarodo ●

Supply chain security remains a key bipartisan policy goal and burgeoning compliance risk area. This article examines three recent initiatives that exemplify these trends: the regulations on securing the Information and Communications Technology and Services supply chain, the Uyghur Forced Labor Prevention Act, and the proposed National Critical Capabilities Defense Act.

Companies with cross-border supply chains should assess their exposure under these emerging regimes and prioritize their compliance efforts accordingly. The risk profile is greatest for companies developing technology and software across borders; companies importing items produced in (or incorporating components produced in) the Xinjiang region of China; parties seeking to invest in certain critical capabilities outside the United States; and government contractors that may be exposed to foreign adversaries in their supply chains.

Information and Communications Technology and Services Rules

One pillar of the U.S. government’s developing architecture for supply chain security is the U.S. Department of Commerce’s (Commerce’s) regulations on Securing the Information and Communications Technology and Services (ICTS) Supply Chain (ICTS Regulations), set out at 15 C.F.R. Part 7. Promulgated pursuant to Executive Order 13873, the rulemaking identifies the ICTS supply chain as critical to “nearly every aspect” of national security, acknowledging the degree to which American government, business, and the economy at large rely on ICTS. See Securing the Information and Communications Technology and Services Supply Chain, 86 Fed. Reg. 4909 (Jan. 19, 2021).

The ICTS Regulations empower Commerce to review, prohibit, or restrict specified “ICTS Transactions” that present national security risks. The term “ICTS Transactions” is defined broadly to include: “any acquisition, importation, transfer, installation, dealing in, or use of any information and communications technology or service, including ongoing activities, such as managed services, data transmission, software updates, repairs, or the platforming or data hosting of applications for consumer download.”

You can read more on our website.

C4ISRNET: Congress May Tighten Scrutiny of U.S. Investment in Foreign Technologies

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C4ISRNET, September 1, 2022

Justin A. Chiarodo and Anthony Rapa ●

Building on recent national security initiatives to shore up the protection of U.S. critical assets from strategic adversaries (notably including China and Russia), Congress is considering new government powers to review outbound U.S. investments in certain high-technology sectors.

Inbound foreign investments in key sectors are reviewed by the Committee on Foreign Investment in the United States (CFIUS). However, screening of outbound investments – a so-called “reverse CFIUS” – would be new, and could significantly impact industries ranging from aerospace and defense to fintech to pharmaceuticals.

How did we get here?

The last several years have witnessed an accelerated national security pivot from the twenty-year global war on terror to strategic competition with major state adversaries. Unclassified assessments of the U.S. national security posture reveal significant threats in domains ranging from artificial intelligence to hypersonic weapons to energy, many of which have been exacerbated by the theft of U.S. technology. The legislation proposing a “reverse CFIUS” review would seek to counter these threats by adding new controls to the flow of U.S. capital and intellectual property abroad.

The contemplated regime formally originated with the proposed National Critical Capabilities Defense Act (NCCDA), which passed the House of Representatives in February 2022 as part of the America COMPETES Act of 2022, H.R. 4521, a larger package focused on U.S. domestic semiconductor production and other aspects of U.S. competitiveness (certain elements of which, not including the NCCDA, eventually were signed into law as part of the CHIPS and Science Act in August 2022). Most notably, the NCCDA would create a Committee on National Critical Capabilities (the “Committee”), with authority to review – and block – covered outbound foreign investments.

You can read more on our website.

Buy American Act—Final Rule: What Has Changed?

Scott Arnold and Ustina M. Ibrahim*

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On March 7, 2022, the FAR Council published the final rule containing changes to Buy American Act (“BAA”) domestic preference requirements.

This final rule is a significant step towards implementation of a policy to enhance domestic preferences announced by President Biden in E.O. 14005 just a few days after taking office. You may recall that the FAR Council previously issued a proposed rule that contemplated (1) phased increases in domestic content thresholds, (2) enhanced preferences for critical products and components, and (3) post-award reporting requirements for critical products and components. See our prior posts addressing President Biden’s E.O. 14005 and the proposed rule.

The final rule retained most of what the FAR Council initially proposed, but there are a few changes that we discuss below. We also point out some aspects of the new policy that remain to be fleshed out in future rulemaking.

Increased Domestic Content Thresholds

The proposed rule contemplated increasing the current domestic content threshold from 55 percent to 60 percent, with subsequent increases to 65 percent and 75 percent beginning in calendar years 2024 and 2029, respectively. The final rule retains these increases but allows for a longer period than typically provided before the first increase to 60 percent becomes effective. The 60 percent threshold will take effect October 25, 2022—over six months after publication, rather than the customary 30 or 60 days after publication. Thus, contractors and agencies have several more months to plan for the new threshold.

Continue reading “Buy American Act—Final Rule: What Has Changed?”

Expect GSA to More Closely Scrutinize Trade Agreements Act Compliance

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Merle M. DeLancey Jr.

On January 21, 2022, the General Services Administration (“GSA”) Office of Inspector General (“OIG”) informed the Federal Acquisition Service (“FAS”) that ongoing monitoring by the OIG found that the FAS failed to properly monitor the sale of products for compliance with the Trade Agreements Act (“TAA”) during the COVID-19 response. Previously, in April 2020, GSA relaxed compliance with the TAA for a limited number of Federal Supply Classes (“FSCs”) to aid the government’s response to the COVID-19 pandemic. The applicable FSCs included those covering N95 masks, cleaners and disinfectants, disposable gloves, and hand sanitizers. After several extensions, the TAA exception policy expired on April 30, 2021.

The OIG identified two deficiencies in FAS’ implementation of the TAA exception policy. First, the OIG found that FAS failed to properly track the addition of non-compliant products to contracts. As a result, after expiration of the exception policy, there was no effective way for GSA to remove the non-compliant products from contracts. Second, the OIG found that GSA improperly permitted the addition of non-compliant products to GSA contracts. For example, some products that were added were unrelated to the government’s response to the pandemic; some products were added to GSA contracts prior to the effective date of the TAA exception policy; and, remarkably, in one case, a product was added to a contract that identified North Korea as its country of origin.

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Buy American Act Domestic Content Requirements Likely to Increase Soon

Scott Arnold, Justin A. Chiarodo, and Robyn N. Burrows







As directed in President Biden’s January 25, 2021, Executive Order we discussed six months ago, last week the FAR Council proposed increases to the Buy American Act (“BAA”) domestic content requirements, and previewed enhanced price preferences and reporting obligations for “critical” domestic products and components under the BAA.

The proposed rule, issued on July 30, 2021, contains three key elements: (1) Phased increases in domestic content thresholds from the current 55% to 75% by 2029, (2) enhanced price preferences for critical products and components, and (3) post-award reporting requirements for critical products and components.

A virtual public meeting to discuss the proposed rule will be held on August 26, 2021, and comments are due by September 28, 2021. The DAR Council also has an open DFARS Case relating to BAA provisions (2019-D045).

We provide an overview of the rule below along with practical takeaways for contractors to consider in light of these potentially significant changes.

Continue reading “Buy American Act Domestic Content Requirements Likely to Increase Soon”
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