A quiet panic is spreading in Washington and US corporate boardrooms that a law taking effect in two months, which bans Huawei Technologies gear, would threaten the business of government contractors.
Aerospace, technology, auto manufacturing and a dozen other industries are engaged in a lobbying frenzy ahead of an Aug. 13 deadline to comply with a far-reaching provision that was tucked into a defense spending bill two years ago.
The broadly written defense law could implicate virtually all companies that count the federal government as a customer, including global subsidiaries and service providers deep in a firm’s supply chain.
Excluding subcontractors, more than 100,000 companies provided US$598 billion in goods and services directly to the US government last year, a Bloomberg Government tally showed.
To date, measures taken by US President Donald Trump’s administration against Huawei and other Chinese tech companies have been aimed at cutting off their access to US components and networks. This law would ratchet up the pressure even more, putting the onus on US government contractors to comb through their businesses to ensure they have no connections to banned companies in China.
Known by the wonky name of Section 889, part B, of the National Defense Authorization Act, the law would require companies to certify that their entire global supply chain — not just the part of the business that sells to the US government — is devoid of gear from Huawei, Chinese telecom giant ZTE, surveillance provider Hangzhou Hikvision Digital Technology and other Chinese surveillance companies.
“Congress is deadly serious about eliminating Chinese technology from our critical infrastructure and related systems,” said David Hanke, a former Capitol Hill staffer who has worked on defense spending legislation and is now a partner at Arent Fox. “As written, this statutory provision doesn’t offer federal agencies all that much flexibility, so come August some companies that want to continue doing business with the government may find themselves in a tight spot.”
However, while Huawei and ZTE have virtually no market share in the US and have been banned from US government systems, they are dominant in many other countries around the world.
“It’s inevitable to find Huawei prevalent in systems across China, Europe and Africa,” said Samantha Clark, special counsel at law firm Covington & Burling. “Some companies that might sell products that eventually get bought by the US government’s many links down the line don’t even realize just how much they are involved in the US procurement chain.”
Over the past few months, trade groups that represent companies such as Lockheed Martin, Amazon.com, Apple, 3M and Ford, have been pushing the Trump administration and lawmakers to fix the wide-ranging provision.
They also want to delay its implementation to ensure that firms can comb through their supply chains to comply, a task made more difficult by the COVID-19 pandemic.
“If part B is implemented as written, many businesses with international and domestic operations will be forced to halt their work providing key products and services to agencies, including equipment that is needed to fight the coronavirus pandemic today and in the coming months,” 10 groups, including the US Chamber of Commerce and the Aerospace Industries Association, wrote in a letter to members of the US Congress in April.
Lawyers have said that taking the law at face value could mean that none of a company’s suppliers, service providers or international outposts could use any Internet service providers, cloud networks, shipping companies or other vendors that might be built with routers, switches or other components made by restricted companies.
As an example, that would capture a US company with a London office that uses the Royal Mail service to ship products, because the UK’s national mail carrier could employ Huawei networking gear deep in its systems, an analysis by one trade group said.
The provision could also apply to a pharmaceutical company that sells medicines to the US Department of Veterans Affairs, if the company, for example, has an Indian manufacturing plant that taps one of India’s largest telecom companies, Bharti Airtel, for its employees’ mobile phone services, as Airtel relies on Huawei for networking gear, the analysis said.
Clark, who managed the passage of the 2018 defense bill as deputy staff director and general counsel on the US Senate Armed Services Committee, said that Congress omitted definitions of “use” and “entity,” which broaden the scope of the law, allowing US intelligence agencies to later tailor the implementation of the law to address specific national-security threats.
The politics around China policies are complicating the matter, as the two countries trade barbs over the handling of the COVID-19 outbreak and hot-button issues such as the status of Taiwan and Hong Kong.
“Two years ago this might have seemed like an overreach, but since then a lot of things have happened and it’s now consistent with US policy,” Hanke said of the provision.
Some administration officials are aware of the potential negative consequences for US businesses and the government, but they are also wary of the optics in the current political environment should they intervene to narrow the scope of the law, people familiar with internal deliberations said.
Before the law takes effect, the administration has to issue regulations to implement it, which would allow businesses to make their concerns known, the people said, adding that the rules have been stalled for months at the US Office of Management and Budget.
The Trump administration is working across agencies to meet the August deadline and implement the law, but the process takes longer for some rules than others, a senior administration official said.
The defense law allows for government agencies to grant companies a one-time waiver, but lawyers have said that the provision is unlikely to solve the underlying problems.
Instead, the business community is asking Congress to insert language into the next coronavirus stimulus package to delay the implementation and then clarify the scope when the next defense authorization bill comes up for debate, people familiar with the deliberations said.
Still, it is unclear if the Trump administration or Congress can be convinced to amend the law at a time when the relationship between the world’s two largest economies is rapidly deteriorating.
To prepare for a worst-case scenario, some lawyers are advising their clients to draw up waiver applications and counseling companies to analyze what their businesses would look like if they no longer sought government contracts. For some, that might mean that they would need to reconsider that part of their business.
“If it’s so complicated, maybe it’s not worth it to keep working with the government,” Clark said.
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