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President Biden Directs Broad Review of America’s Supply Chains

March 2, 2021, Covington Alert

Summary

On February 24, 2021, President Biden signed an Executive Order entitled “Executive Order on America’s Supply Chains” (the “Order”). Among other things, the Order is an initial step toward accomplishing the Biden Administration’s goal of building more resilient American supply chains that avoid shortages of critical products, facilitate investments to maintain America’s competitive edge, and strengthen the country’s national security posture. The Order is part of a broader strategy by the Biden Administration to use regulatory processes and other means to identify and address supply chain vulnerabilities across the U.S. industrial base.

The Order imposes no new regulatory obligations on industry but rather outlines a process for federal departments and agencies to assess risks to U.S. supply chains. The first set of reviews focusing on four critical product areas will take place over a 100-day period, while the second set of reviews targeting a broader set of key sectors will be completed over a one-year period. The heads of the agencies and departments responsible for these reviews are directed to consult with outside stakeholders, including industry. The Order charges the Assistant to the President for National Security Affairs (“APNSA”) and the Assistant to the President for Economic Policy (“APEP”) with coordinating the work of the executive branch under the Order.

The Order raises a number of key questions that may impact future business plans for companies operating in the industries or sectors to be reviewed, including:

  • Whether the process will result in greater clarity as to whether (or when) a supply chain is considered to be "secure," what actions need to be taken to attain that security, and/or which transactions will not threaten the security of supply chains.
  • The extent to which foreign ownership of supply chain assets will be given weight in the risk determinations.
  • The extent to which the recommendations resulting from this effort may impact existing foreign-owned businesses in the U.S. or parties contemplating foreign investment transactions in the U.S.

These considerations and others will be critical to defining the ultimate scope of impact of the Order, and highlight the importance of industry taking early advantage of the Order’s charge that agencies consult with industry during the review process.

Agency Reviews

100 Day Supply Chain Reviews

As noted, the Order first calls for a review and report of certain key supply chain risks and policy recommendations to be completed within 100 days of the date of the Order. These reviews are targeted at particular supply chains that presumably present higher immediate risk. Specifically, the Secretaries of Commerce, Energy, Defense, and Health and Human Services are required to conduct reviews of the following supply chains:

  • Commerce: Semiconductor manufacturing and advanced packaging supply chains
  • Energy: High-capacity batteries, including electric-vehicle batteries
  • Defense: Critical minerals and other identified strategic materials, including rare earth elements
  • Health and Human Services: Pharmaceuticals and active pharmaceutical ingredients
     

Sectoral Supply Chain Reviews

The Order also requires certain federal agencies to conduct reviews of broader sectoral supply chain risks and produce reports within one year of the date of the Order. Specifically, the Secretaries of Defense, Health and Human Services, Commerce, Homeland Security, Energy, Transportation, and Agriculture are required to conduct reviews of the following sectoral supply chains:

  • Defense: The defense industrial base (updating previous supply chain resiliency and defense industrial capabilities reports and identifying areas where civilian supply chains are reliant on competitor nations)
  • Health and Human Services: The public health and biological preparedness industrial base
  • Commerce and Homeland Security: Critical sectors and subsectors of the information and communications technology (ICT) industrial base, including the industrial base for the development of ICT software, data, and associated services
  • Energy: The energy sector industrial base
  • Transportation: Supply chains for the transportation industrial base
     

Reports and Recommendations

The reports submitted for these sectoral supply chain reviews must include, among other things:

  • A review of the critical and other essential goods and materials underlying the supply chain and the manufacturing capabilities necessary to produce those materials.
  • An assessment of the factors that may disrupt or compromise the supply chain, including the failure to develop domestic manufacturing capabilities.
  • The resilience and capacity of the supply chains in the United States to support national and economic security and emergency preparedness.

Each report must also provide potential policy recommendations for ensuring a resilient supply chain and decreasing dependencies on foreign competitors. The Order directs agencies to consider a variety of recommendations, including: (i) reshoring supply chains and developing domestic supplies; (ii) cooperating with allies and partners to identify alternative supply chains; (iii) building redundancy into domestic supply chains; (iv) ensuring and enlarging stockpiles; (v) developing workforce capabilities; (vi) enhancing access to financing; (vii) expanding research and development to broaden supply chains; (viii) addressing risks due to vulnerabilities in digital products relied on by supply chains; and (ix) addressing risks posed by climate change.

These reports are to be prepared in unclassified form (with a classified annex if necessary) and submitted to the APNSA and APEP, but it is unclear to what extent they will be made available to the public.

Following the receipt of the sectoral supply chain reports, the Order directs APNSA and the APEP, in coordination with the heads of appropriate agencies, to make recommendations to the President concerning: steps needed to strengthen the resilience of American supply chains; actions to engage with allies and partners to strengthen the supply chains; reforms to domestic and international trade rules and agreements needed to support supply chain resilience, security, diversity, and strength; and education and workforce reforms that will strengthen the domestic industrial base.

Implications

The Order is the latest in a string of recent federal efforts to strengthen critical supply chains by bolstering domestic production and reducing reliance on foreign adversaries and strategic competitors, such as China.[1] Particularly noteworthy is the recent Interim Final Rule scheduled to go into effect on March 20, 2021, to implement Executive Order 13873, “Executive Order on Securing the Information and Communications Technology and Services Supply Chain” (May 15, 2019). As noted in a prior client alert, that Executive Order and the Interim Final Rule grant the Secretary of Commerce the authority to prohibit certain transactions, including commercial transactions, involving information and communications technology and services (“ICTS”) that have been “designed, developed, manufactured, or supplied by persons owned by, controlled by, or subject to the jurisdiction or direction of foreign adversaries” and that pose an “undue or unacceptable risk to the national security of the United States.” This Order does not revoke or supersede the Interim Final Rule or Executive Order 13873.[2] However, given the scope of the reviews that will be undertaken pursuant to this Order, reconsideration of the Trump Administration’s approach to addressing supply chain risks in the ICTS sector may be addressed.

Although the Order does not outline any immediate policy changes, the findings and recommendations that arise from the review process could eventually affect a broad range of industries and sectors. The ultimate scope and effect of any recommendations is yet to be determined. However, because the recommendations will be driven by reviews of particular industries or sectors performed at individual agencies, it is possible that any future recommendations and policymaking efforts will be tailored to the specific industries or sectors identified in the Order. Still, given the breadth and strategic significance of these sectors, even this sort of “limited” scope would carry the potential for far-reaching effects on the supply chain management strategies of many multinational corporations.

Finally, the priorities laid out in the Order appear likely to result in actions that build on ongoing efforts to decrease U.S. reliance on adversaries such as China and Russia through policies aimed at decreasing U.S. industrial base reliance on adversarial supply chains. Reducing dependencies on China in critical sectors will likely be a continuing priority for the Biden Administration. The Order also underscores the Biden Administration’s view that close cooperation with allies and partners who share U.S. values will foster collective economic and national security. It is likely that recommendations from the reports will include cooperation with allies and partners as an important strategy for reinforcing supply chain resiliency in key industries. 

If you have any questions concerning the material discussed in this client alert, please contact the following members of our Supply Chain Initiative.

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[1] These efforts include the Biden Administration’s January 2021 “Made in America” Executive Order (see client alert here), the September 2020 establishment of an interagency Federal Acquisition Security Council authorized to exclude products and companies from the federal market in the name of supply chain security (see client alert here), and a series of regulatory and administrative efforts aimed at implementing both phases of Section 889’s restrictions on certain Chinese telecommunication products and services (see client alert here).

[2] Recent media reporting has suggested that the Biden Administration may move forward with implementation of the Interim Final Rule in March as planned.

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