Security Concerns Spark Multiple Supply Chain Initiatives | Skadden, Arps, Slate, Meagher & Flom LLP

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  • As a national and economic security initiative, the Biden administration is developing policies to protect several critical supply chains.
  • The Commerce Department should take new steps to regulate imports of information and communications technology and services from countries deemed adversarial.
  • A wide ban on imports from China’s Xinjiang region due to forced labor concerns will make it difficult to import some products, including solar panels.
  • Tariff exclusions previously granted for some Chinese products are likely to be extended, but there is pressure to expand the process of finding exceptions.

A leading US media has dubbed 2021 “the year of supply chains,” for good reason. Shortages of semiconductors and other products and components caused by the pandemic, combined with trade-related national security concerns, have resulted in a number of regulatory initiatives in 2021 that will lead to new restrictions – and potentially new opportunities. commercial – this year.

A renewed process for granting exclusions to China-related Section 301 tariffs, which is also in the works, should help alleviate some supply issues.

Companies should carefully monitor these developments as they unfold.

Supply Chain Critical Reviews

President Biden opened his administration by proclaiming that “resilient, diverse, and secure supply chains” will ensure the economic prosperity and national security of the United States, and he directed several cabinet agencies to review and make report on recommended regulations to strengthen them.

  • Developments in 2021. In June 2021, the administration released reports identifying vulnerabilities and making policy recommendations to ensure the long-term availability of several critical product categories: semiconductor manufacturing and advanced packaging, electric vehicles and other high-capacity batteries. , critical minerals and other strategic materials, and pharmaceuticals. and active pharmaceutical ingredients. Similar reports are due to be finalized in early 2022 for other broader economic sectors: defence, public health and biological preparedness, information and communications technology, energy, transport, and agricultural and food products.
  • What to expect in 2022. Several departments have sought input from industry and the public on appropriate government initiatives to strengthen supply chains: Defence, Transportation, Energy, Agriculture, Commerce, Health and Human Services. They were tasked with formulating policy recommendations, both “positive” (for example., workforce development, funding opportunities, inventory building) and “negative” (for example., dealing with surveillance and cyber risks). Agencies are expected to start working on regulatory or legislative proposals later in 2022.

Information and Communications Supply Chain Restrictions

In response to a May 2019 executive order, the Department of Commerce imposed restrictions, in the interests of U.S. national security, on the importation of information and communications technology and services (ICTS).

  • Developments in 2021. Shortly before President Trump’s departure, the Commerce Department issued regulations giving the agency the power to prohibit a wide range of transactions related to ICTS goods and services involving designated “foreign adversaries” (currently defined as including China and Hong Kong, Cuba, Iran, North Korea, Russia and Venezuela) if the Commerce Department determines that the transaction threatens national security. The Department can take prospective or retroactive action to prohibit such transactions and has broad discretion in determining restrictions.

    The Biden administration has maintained these ICTS regulations, but it’s unclear what, if anything, Commerce has done to implement or enforce them since the new president took office. The department has done little to clarify its intentions, leaving a number of fundamental definitional and jurisdictional questions unanswered, such as the threshold for determining when a transaction is sufficiently related to a foreign adversary to trigger coverage. , or if Commerce will issue guidelines clarifying its application. priorities and expectations.

    In November 2021, Commerce proposed to extend these regulations to cover ICTS transactions involving “apps” or connected software applications. Proposed criteria for imposing restrictions include potential surveillance capabilities as well as the scope and sensitivity of the data collected.

  • What to expect in 2022. The Biden administration is expected to amend and clarify existing ICTS regulations this year to design a more workable framework, though no specifics have been offered. Some industry players have pushed for a mechanism to obtain Commerce authorization or licenses for ICTS transactions, which would serve as a refuge from retroactive reviews. Others have suggested that the Department establish a “blacklist” of foreign companies considered prohibited for ICTS transactions, assuming that other ICTS transactions are not prohibited. Whichever approach is taken, businesses should be prepared for more aggressive Commerce enforcement once regulations are clarified or revised.

Xinjiang Supply Chain Restrictions

Importing some products has also been complicated by restrictions imposed in response to US government findings that goods made in China’s Xinjiang Uyghur Autonomous Region (Xinjiang) were produced by forced labor.

  • Developments in 2021. The US government has continued to impose sanctions on Chinese government entities and companies in response to their actions in Xinjiang. U.S. Customs and Border Protection has issued hold release orders blocking the entry of products from China due to forced labor, including 10 specifically targeting activity in Xinjiang.
  • What to expect in 2022. On December 16, 2021, the US Congress passed legislation that effectively bans imports of goods made in whole or in part in Xinjiang, based on a strong presumption that forced labor is used in all products from China. region. President Biden signed the legislation on December 23, 2021, and the import ban will take effect 180 days later. In particular, this legislation will affect the US solar industry, as Xinjiang is a major center for polysilicon manufacturing. (See our customer alert of December 17, 2021 “Legislation targeting imports from Xinjiang region moved to President Biden’s office. »

Section 301 tariffs: Exclusions in sight?

At the same time, new import restrictions are being imposed and considered, companies are pushing for relief from Section 301 tariffs imposed on products from China from 2018.

  • Developments in 2021. The Biden administration has maintained those tariffs, which apply to the majority of goods shipped to the United States from China, and it has been slow to restart the administration’s Section 301 tariff exclusion process. Trump, whereby companies could argue that fees should not be imposed on their products. In October 2021, the United States Trade Representative (USTR) invited public comment on whether to reinstate expired tariff exclusions. (See our customer alert of October 12, 2021 “USTR relaunches China’s Section 301 tariff exclusion process. A large bipartisan group of lawmakers is reportedly advocating changes to make it easier to find exclusions, citing (among other things) the harm to U.S. supply chains from the tariffs.
  • What to expect in 2022. The USTR will likely reinstate most of the tariff exclusions for which it has sought public comment and move forward with another, potentially expanded, process to seek exclusions in 2022. Broader item tariff relief 301, however, remains unlikely. The United States and China successfully reached a ‘Phase 1’ trade deal in 2019, but the prospects for a more ambitious ‘Phase 2’ deal – which could eliminate or significantly reduce tariffs – look remote , at least in the short term. In addition to ongoing geopolitical tensions between the two countries, China likely failed to meet its Phase 1 commitments to buy an additional $200 billion worth of American goods and services by the end of 2021.

Supply chain initiatives to present challenges and opportunities in 2022

In 2022, we expect the US government to devote considerable attention to addressing the supply chain challenges described above. U.S. companies affected by these initiatives should carefully monitor developments, consider providing information as appropriate, and prepare to comply with new restrictions and take advantage of new opportunities.

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