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Introduction

In early March of this year, a bipartisan group of members of the House Armed Services Committee formed the Defense Critical Supply Chain Task Force (the “Task Force”).  Co-chaired by House Democrat Elissa Slotkin (Michigan) and Republican Mike Gallagher (Wisconsin), the Task Force was formed to address what has been perceived as U.S. overreliance on vulnerable defense supplies manufactured in other countries, such as China.  We previously reported on this on our blog here.  After studying this issue over the past several months, the Task Force released its final report.  This blog post briefly addresses the “extreme supply chain vulnerabilities” that Rep. Gallagher (and the Task Force at large) views as a threat to the U.S. defense supply chain—vulnerabilities which, if left unaddressed, could put the country’s national defense at risk.  This post also highlights the key recommendations proposed by the Task Force in its final report, and offers some insight into how these recommendations, if ultimately adopted into law, could impact corporate supply chains from a compliance standpoint.

Vulnerabilities in U.S. Defense Supply Chain

The Task Force specifically focused on the global, industrial-base supply chain of the Department of Defense (“DoD”), which furnishes parts, materials, systems and services to DoD, and reducing U.S. reliance on foreign suppliers to prevent future shortages.  As such, one of the main products of concern for the Task Force is integrated circuits.  According to the Pentagon’s Fiscal Year 2020 Industrial Capabilities Report released earlier this year, China is projected to dominate global semiconductor production by 2030.  Of further concern for the Task Force is China’s domination of the shipping industry.  Rep. Gallagher reported that as of 2019, China not only operated 70% of the world’s busiest ports, but also built one-third of the world’s ships, 80% of the world’s ship-to-shore cranes, and 90% of the world’s global consumer drones.  This reliance on China for key defense products is concerning for the Task Force in light of growing U.S.-China tensions.  For Rep. Slotkin, the extent of this reliance was highlighted when China-made medical devices were difficult to obtain at the start of the global coronavirus pandemic.

The Task Force’s Recommendations

In its final report, the Task Force proposed six recommendations for inclusion in the annual defense bill.  These recommendations include:

  1. The Pentagon making supply chain security a priority, and Congress requiring DoD to conduct an annual, department-wide risk assessment.
  2. Congress requiring DoD to map out its entire supply chain so that it (Congress) better understands high-risk points.
  3. The Pentagon identifying critical supplies for major programs that come from potential adversaries, and implementing steps to mitigate U.S. reliance on parts from those nations.
  4. DoD establishing a coalition with defense industry partners, educational organizations, career-training agencies, and other federal partners to help grow and raise the profile of domestic manufacturing efforts.
  5. The Pentagon working through the National Technology and Industrial Base (an alliance of national security researchers and manufacturers in the U.S., Canada, the U.K., and Australia) to help coordinate efforts with allies to reduce reliance on potentially hostile governments.
  6. The Pentagon doing everything it can to protect and strengthen the supply chain for rare earth materials, many of which come from China.

What This Could Mean for Your Supply Chain

These recommendations are directed towards U.S. government entities, such as DoD, and thus may not (on their face) appear applicable to corporate supply chains.  However, the recommendations could result in changes in laws, regulations, and policies down the line that increase compliance risks for companies.  For example, the U.S. government could pull a number of tools from its toolbox, including requirements for foreign investment reviews, export controls to restrict China’s access to technology that is critical to these defense supply chains, trade and import measures, and increased regulatory requirements. 

The reports that the Biden Administration issued in June under the America’s Supply Chains Executive Order contained many of these types of recommendations for four key sectors:  (1) semiconductor manufacturing and advanced packaging; (2) large capacity batteries, including electric vehicle batteries; (3) critical minerals and materials; and (4) pharmaceuticals and advanced pharmaceutical ingredients (see our blog post here and subsequent deeper dive blog posts into some of these compliance-related recommendations). There is overlap between the Biden Administration’s efforts under the America’s Supply Chain Executive Order and these defense-specific supply chain efforts coming out of Congress, so it will be important for companies involved in the defense supply chains to continue to monitor both initiatives. 

Author

Aleesha Fowler is an associate in Baker McKenzie’s North American Litigation Practice Group in New York, New York. She has experience in the areas of white collar criminal defense, internal investigations, regulatory compliance matters, and complex civil litigation. Aleesha’s pro bono practice focuses on indigent populations. She has provided legal advice to clients seeking to assert their rights in state housing court, as well as incarcerated clients seeking parole and other available remedies.

Author

Kerry Contini is a partner in the Firm’s Outbound Trade Practice Group in Washington, DC. She has served as co-chair of the Firm's Pro Bono committee for several years and has managed award-winning pro bono work involving Baker McKenzie professionals in North America, Europe and Asia. She has written on export controls and trade sanctions issues for several publications, including The Export Practitioner and Ethisphere. Kerry is a co-chair of the Export Controls and Sanctions Section of the Association of Women in International Trade. She joined the Firm as a summer associate in 2005 and became a full-time associate in 2006.

Author

Bruce Linskens is a Senior Analyst for International and Legislative Affairs at Baker McKenzie LLP

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