NDAA Continues Trend of Supply Chain Vigilance to Reduce Reliance on China

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The fiscal year 2024 National Defense Authorization Act includes several provisions that continue the trend of vigilance of defense-critical supply chains to reduce the Defense Department’s reliance on China, Russia and other so-called “countries of concern.”

Given growing apprehension over the security of U.S. supply chains, the government’s risk tolerance has decreased dramatically while regulatory and supply chain requirements for companies doing business with the government have increased.

The Defense Department and other national security agencies are focused not only on where suppliers conduct their operations, but foreign ownership, control or influence of suppliers. The department is more focused than ever on foreign influence arising not only from foreign national executive leadership but also the professional relationships of key management personnel, third-party business arrangements, and complex global supply chains.

And the Pentagon will insist that contractors bring an intensified focus to these issues, too.

Of primary concern to the department is foreign ownership, control or influence within software and hardware supply chains of mission critical products deployed in sensitive military installations or critical infrastructure.

There is an emphasis on reducing risk of critical software that was: initially developed using source code from; continues to be maintained and/or patched in; or is otherwise accessible by foreign developers located in or subject to the laws of countries of concern, in particular, China and Russia.

It is imperative for all contractors to know the degree to which mission-critical products are sourced from foreign entities or derived from foreign source code.

The need for resiliency, diversity and security of U.S. supply chains came into sharp focus after the pandemic, as well as subsequent supply chain disruptions experienced because of Russia’s war in Ukraine.

President Joe Biden’s Executive Order 14017, America’s Supply Chains, signed in February 2021, required U.S. agencies including the Defense Department to review specific supply chain risks associated with critical minerals and rare earth minerals, in addition to defense-critical supply chains within the defense industrial base.

Certain provisions within the FY 2024 NDAA advance the department’s efforts to address critical minerals and rare earth minerals, including Section 1415 “Critical Mineral Independence” requiring a strategy to develop supply chains that are not dependent on mining or processing of critical minerals in or by countries such as China and Russia.

Other provisions of the NDAA, including Sections 867-869, focus on analyzing supply chain vulnerabilities, identifying dependence on foreign entities for certain end items and components, and requiring supply chains of major defense acquisition programs to be substantially manufactured in the United States.

Section 867 would establish a pilot program for analyzing and continuously monitoring key supply chains. A private entity would monitor supply chains for covered weapons platforms, meaning weapons platforms identified in Section 1251(d)(1) of the 2021 NDAA, and analyze defense industrial base supply chains for potential issues and vulnerabilities as well as opportunities for improvement.

Section 868 would require the comptroller general of the United States to conduct a study identifying the Defense Department’s dependence on foreign entities for certain end items and components, including the extent to which its procurement processes permit determining the country of origin of end items and components.

The study would also provide recommendations for legislative or administrative action to address identified vulnerabilities, to include alternative supply chains or alternative sources.

Section 869 would implement a rulemaking process to establish an enhanced domestic content requirement for manufactured articles, materials, or supplies of major defense acquisition programs to be substantially manufactured in the United States. The thresholds for determining whether articles, materials, or supplies are considered to be substantially manufactured in the United States begins at more than 60 percent, increases to 65 percent between Jan. 1, 2024 through 2028, and 75 percent after Jan. 1, 2029.

However, the domestic content requirement would not apply to countries that are members of the national technology and industrial base: Australia, Canada, New Zealand, and the United Kingdom. Additionally, the domestic content requirement would exclude articles manufactured in countries that have executed a reciprocal defense procurement memorandum of understanding with the United States, such as certain European and NATO allies, Egypt, Israel and Japan.

Given the Defense Department’s aim to have greater transparency and reduce Chinese and/or Russian dependencies in supply chains, it is not only foreign-owned companies who need to be mindful of increased supply chain requirements, rather all companies within the defense industrial base.

Indeed, these new provisions are not the only requirements that contractors will soon have to meet. The department is expected to issue an instruction outlining how it will require contractors performing certain large defense contracts to demonstrate that they are not foreign-owned or influenced before contract award, pursuant to Section 847 of the FY 2020 NDAA.

Companies who do not possess the capability to identify and assess foreign ownership, control or influence concerns within supply chains or potential options for mitigations may need to turn to outside experts to understand how to remain in compliance with the Defense Department and other U.S. regulations. The stakes have never been higher.

Jessica Curyto is a senior director of regulatory risk at The Chertoff Group. She served as the special advisor to the assistant secretary of export administration and as acting chief of staff of the Bureau of Industry and Security at the Department of Commerce. Ed Shapiro is a senior advisor to The Chertoff Group. He is an expert on government contracting rules, including compliance with laws and regulations governing procurement and contractor integrity.

Topics: International, Manufacturing, Industrial Base