Negotiating Supply Chain Agreements Under the New U.S.-China Trade Sanctions

Description

As tensions in U.S.-China relations continue to affect the trade dimension, companies must proactively manage their supply chains. In light of fast moving legal developments, risk mitigation measures are more important than ever. Several U.S. laws and regulations in recent years highlight these challenges.

The Uyghur Forced Labor Prevention Act (UFLPA) created a rebuttable presumption that "any goods, wares, articles, and merchandise mined, produced, or manufactured wholly or in part in the Xinjiang Uyghur Autonomous Region of the People's Republic of China" or produced by a "UFLPA entity" will be prohibited from entry into the United States. U.S. Customs and Border Protection (CBP) has significantly increased its tools available under the ULFPA and Section 307 of the Tariff Act of 1930 to enforce the forced labor import ban. These developments have wide-ranging effects on the way supply chain management and due diligence should be conducted.

In addition, on Oct. 7, 2022, the U.S. Commerce Department's Bureau of Industry and Security (BIS) issued the much anticipated rules aimed at restricting China's ability to obtain advanced computing chips, develop and maintain supercomputers, and manufacture advanced semiconductors. This new rule imposed a wide range of new and enhanced restrictions targeting China's advanced computing and semiconductor sectors by, among other things: (1) adding certain semiconductor manufacturing equipment, advanced chips, and commodities containing such chips to the Commerce Control List of the Export Administration Regulations (EAR); (2) adding new license requirements for certain items destined for China, including certain items for use in supercomputers, the development or production of semiconductors or semiconductor manufacturing equipment, and destined for semiconductor fabrication facilities (fabs) in China that produce certain advanced chips; (3) restricting U.S. persons from engaging in or facilitating activities supporting the development or production of certain integrated circuits at fabs in China; and (4) substantially expanding the scope of items that are "subject to the EAR" under the foreign direct product (FDP) rules to cover additional items in the advanced computing and semiconductor sector produced outside the U.S. This has caused, and continues to cause, a major supply chain disruption in advanced semiconductors and related fields.

BIS also has continued to target Chinese entities for trade restrictions under its Entity List for a variety of reasons. Notably, BIS recently designated several Chinese entities for their role in supporting Russia's invasion of Ukraine, identifying them as Belarusian or Russian "military end users." Given the recently expanded scope of FDP rules for Belarus and Russia, and widely reported concerns that Chinese entities may send items to support the Russian military, companies should be on guard against such potential diversion risks.

Lastly, the National Defense Authorization Act for Fiscal Year 2023 (NDAA) enacted in December 2022 includes provisions that target certain goods and services from China for U.S. government contracts. In particular, Chinese-origin semiconductor products and services will become subject to these restrictions. Federal contractors should begin reviewing their agreements and sourcing strategies to stay ahead of the new NDAA restrictions.

Listen as our expert panel discusses these regulations and what companies with contracts for goods produced in restricted Chinese regions can do to overcome the presumption against them, what suppliers of goods subject to the EAR's export controls can do to ensure compliance, what goods and services may become off-limits for U.S. government contracts, and what documentation is needed to reduce the risk of delay in continued international trade between the countries.