On June 8, 2021, the White House published a set of reports on the 100-day interagency reviews conducted pursuant to Executive Order 14017 “America’s Supply Chains” (“the Reports”). The Reports were accompanied by a White House Fact Sheet summarizing the key findings, expressing support for some of the policy recommendations, and announcing additional Biden Administration measures directed at strengthening the resilience of the country’s supply chains. Our prior blog post summarizing high-level key compliance-related aspects of the Reports is available here. This post provides a deeper dive into the compliance-related measures and policy recommendations specifically authorized by the Defense Production Act (“DPA”) to incentivize onshore or nearshore production in critical supply chains.

DPA Key Authorities

The DPA allows the president to direct private companies to prioritize orders from the federal government, to allocate materials, services, and facilities for national defense purposes, and to restrict hoarding of necessary supplies. Key DPA authorities include:

  • Title I: Priorities and Allocations, which allows the president to require persons and corporations to prioritize and accept contracts for goods and services necessary for national defense.
  • Title III: Expansion of Productive Capacity and Supply, which allows the president to incentivize domestic production and supply of critical goods and materials. This occurs through financial measures (e.g., loans, loan guarantees, direct purchases, purchase commitments) and the authority to procure and install equipment in industrial facilities owned by the Federal Government or private persons.
  • Title VII: General Provisions, which allows the president to establish voluntary agreements with private industry, to block proposed or pending foreign corporate mergers, acquisitions, and takeovers that threaten national security, and to establish a volunteer group of industry executives to be called to government service if needed.

In response to the COVID-19 pandemic, the Trump and Biden Administrations invoked the DPA to restrict exports of personal protective equipment (“PPE”). Our sister blog, the Baker McKenzie Sanctions & Export Controls Update, has been publishing updates on the PPE export restrictions and their various changes and extensions. Our most recent blog post on this topic is available here.

The Reports

The Reports’ White House Executive Summary establishes a new interagency DPA Action Group to recommend ways to leverage the authorities of the DPA to strengthen supply chain resilience. The Reports state that the DPA can support investment in other critical sectors to enable more effective collaboration between industry and government, citing how the DPA expanded production of necessary supplies to combat the COVID-19 pandemic.

The Departments of Commerce (“Commerce”), Defense (“DoD”), Energy (“DOE”), and Health and Human Services (“HHS”) each offered recommendations that leverage the DPA.

Commerce: Review of Semiconductor Manufacturing and Advanced Packaging

Commerce made seven recommendations to expand and secure the US semiconductor supply chain. This includes a recommendation to leverage the DPA to protect the US technological advantage and to ensure foreign investment reviews are conducted for national security considerations in the semiconductor manufacturing and advanced packaging supply chain.

Commerce recommends that the Committee on Foreign Investment in the United States (“CFIUS”) continue to conduct robust outreach as appropriate with foreign partners to share information related to industry and acquisition trends and to implement robust national security-based investment screening regimes, as authorized by the DPA. Commerce believes these recommended interagency efforts will allow the United States and its partners to better address transnational risks and foreign investments that threaten national security.

DOE: Review of Large Capacity Batteries

DOE recommends leveraging the DPA to establish a sustainable domestic lithium supply chain. Lithium resources exist in North Carolina (ore), Arkansas (brine), Nevada (brine, clay), and California (brine), however lithium project development can be costly and poses high future costs to producers that hamper project initiation. DOE recommends using DPA Title III and VII authorities to support these extraction efforts and develop new public financing streams, such as through purchase price and quantity guarantees for a stockpile serving as a backstop. Additionally, DOE recommends using the DPA as part of a mix of purchasing guarantees to invest in domestic refinement of ore, brine, or clay into lithium chemicals. DOE notes China’s domestic investment in this field, which made them a global leader despite limited domestic lithium supply.

DoD: Review of Critical Minerals and Materials

DoD recommends deploying the DPA to incentivize production across the supply chain, including downstream, high value-added manufacturing such as new magnet capabilities, and advanced electric motor designs. Specifically, DoD suggests the use of DPA Title III to support proven research and development (“R&D”) capacities and emerging technologies, especially those developed by small businesses through the Small Business Innovation Research program. DoD argues that DPA Title III should also be used to support domestic production in sustainable processing operations, such as greenhouse gas reduction, financial, and end-use requirements of DOE’s loan program.

Additionally, DoD recommends using DPA Title VII authorities to convene industry stakeholders to expand production. Under VII authority, the Federal Government could convene a government-industry working group to identify opportunities to expand sustainable domestic production, and explore additional opportunities to create public-private partnerships for sustainable domestic processing of key strategic and critical materials. DoD argues that agencies with information collection requirements should engage Commerce to improve the availability of data, which currently remains a significant constraint to effective mitigation programs in the strategic and critical materials sector.

In modeling strategic and critical materials under national emergency conditions, DoD assumes that the Federal Government will maximize its allocation and prioritization authorities pursuant to DPA Title I. The model assumes that if a certain supply chain were threatened that such materials would be diverted from civilian markets to the defense industrial base, similar to the recent diversion of health resources from the private sector to the Federal Government during the COVID-19 pandemic response. Under DPA Title I, DoD currently has the necessary authority to place priority ratings on strategic and critical materials through the Defense Priorities and Allocations System regulation administered by Commerce.

HHS: Review of Pharmaceuticals and Active Pharmaceuticals Ingredients

HHS recommends boosting US production with a blended approach of targeted investments and financial incentives, R&D to create new manufacturing technologies, greater supply chain transparency, and better data collection. Specifically, HHS recommends leveraging the DPA and current public-private partnerships to establish a consortium for advanced manufacturing and onshoring of domestic essential medicines production. Under DPA Title VII authority, the consortium will be headed by HHS and will include the Environmental Protection Agency, Commerce (including the National Institute of Standards and Technology), DoD, Department of Labor, Federal Trade Commission, U.S. International Development Finance Corporation, U.S. EXIM Bank, Department of Homeland Security, Department of Justice, and Small Business Administration, as well as relevant private sector stakeholders. HHS tasks the consortium with evaluating the merits of a successor financing program to the DPA Loan Program to boost private sector willingness to develop domestic production capacity. As indicated in the White House Fact Sheet, their first task is to select 50-100 critical drugs, among the Food and Drug Administration’s essential medicines list, to be the focus of an enhanced onshoring effort.

Additionally, HHS recommends R&D investment to establish novel platform production technologies as mainstream. Under DPA Title III, HHS has broad authority to commercialize novel platform technologies through traditional development programs. HHS recommends utilizing these funding opportunities to pursue commercialization.

Key Takeaways

  1. Companies operating in the above sectors should be mindful of possible forthcoming directives under the DPA’s priorities and allocations authority. Although the Reports largely invoke positive incentives, the Biden Administration may continue to use the DPA’s priorities and allocations authority, as occurred during the pandemic by both the Trump and Biden Administrations.
  2. Based on the prospect of potentially more rigorous CFIUS reviews, companies operating in these sectors should consider the impact of policy or regulatory changes as they relate to joint ventures or co-investments with non-US parties.
  3. Lastly, the Administration indicates a consistent theme of sustainability/ESG across the Reports, including a sustainable domestic lithium supply chain and sustainable production and processing operations.  Companies should continue to ensure ESG considerations are integrated into their supplier management and oversight efforts.

*          *          *

Related Blog Posts

Author

Kerry Contini is a partner in the Firm's International Trade Practice Group in Washington, DC. Kerry focuses her practice on export controls, trade sanctions, and antiboycott laws. This includes advising US and multinational companies on trade compliance programs, risk assessments, licensing, review of proposed transactions, and enforcement matters. Ms. Contini works regularly with companies across a wide range of industries, including the pharmaceutical/medical device, oil and gas, and nuclear sectors.

Photo of Reagan Demas
Author

Reagan Demas has significant experience working on behalf of companies and investors in emerging markets and high risk jurisdictions. He has managed major legal compliance investigations for a variety of Fortune 500 companies and negotiated settlements before the US Department of Justice, US Securities and Exchange Commission, and other federal and state regulatory entities, obtaining declinations in a number of matters. He has also conducted risk assessments and due diligence in a variety of legal compliance matters for companies across industries, and has worked on the ground evaluating partnerships, investments and other business opportunities worldwide. Reagan has written and spoken extensively on corruption, business ethics, human rights-related legal obligations and emerging regulatory regimes.

Author

Graham Cronogue is a Senior Associate in Baker McKenzie's North America Litigation and Government Enforcement Practice Group. Graham focuses on complex disputes. He has secured important victories in both state and federal courts throughout the country, and at all stages of the litigation process. Prior to joining the Firm, Graham clerked in the United States District Court for the District of Columbia and for the United States District Court for the District of New Jersey.

Author

Alexandra Pasch is a summer associate in Baker McKenzie's Washington, DC office. She focuses on international trade law, including compliance with economic sanctions and export controls. Alexandra has experience advising aerospace and defense companies on international trade compliance issues.