Not to Be Outpaced: NDAA Presents Measures Addressing China

By Daniel Raddenbach, Chanda Brown, Sarah Schuler & Stephanie Barna on September 8, 2023

Posted in Asia, China, Congressional Action, Defense Issues, Supply Chain

Following our recent overview of key topics to watch in the National Defense Authorization Act (“NDAA”) for Fiscal Year (“FY”) 2024, available here, we continue our coverage with a “deep dive” into NDAA provisions related to the People’s Republic of China (“China” or “PRC”) in each of the House and Senate bills. DoD’s focus on strengthening U.S. deterrence and competitive positioning vis-à-vis China features prominently in the 2022 National Defense Strategy (“NDS”) and in recent national security discourse. This focus is shared by the Select Committee on Strategic Competition Between the United States and the Chinese Communist Party (“Select Committee”), led by Chairman Mike Gallagher (R-WI) and Ranking Member Raja Krishnamoorthi (D-IL).

It is no surprise, then, that House and Senate versions of the NDAA include hundreds of provisions—leveraging all elements of national power—intended to address what the NDS brands as China’s “pacing” challenge, including many grounded in Select Committee policy recommendations. Because the NDAA is viewed as “must-pass” legislation, it has served in past years as a vehicle through which other bills not directly related to DoD are enacted in law. In one respect, this year is no different—the Senate version of the NDAA incorporates both the Department of State and Intelligence 2024 Authorization bills, each of which includes provisions related to China.

To get a flavor of the approach to China in this year’s NDAA, look no further than the “Ending China’s Developing Nation Status Act” in Section 1399L of the Senate bill, which would require U.S. opposition to granting China “developing nation” status in treaties under negotiation and by international organizations of which the U.S. and China are members, such as the World Trade Organization. Classification as a “developing nation” affords China access to preferential loans and other economic benefits intended to increase trading opportunities, notwithstanding its current status as an upper-middle income country (as determined by the World Bank), and the world’s second largest economy, trailing only the U.S. Not to be outdone, Section 155 of the House bill contains a provision mandating expedited deployment of advanced radars to track high-altitude balloons and other potential threats to the U.S., in direct response to the incident earlier this year in which a Chinese balloon flew across the U.S. before being shot down by the Air Force.

Given these provisions, and many more (some we discuss below), this year’s NDAA strikes us as different. It incorporates many more China-related provisions and many of these would impose greater obligations on government contractors to limit their interactions with the PRC and entities affiliated with the PRC Government. Whether the laundry list of China-related provisions in the current NDAA survive, and in what form, will be determined by the conference process currently underway. But these provisions have the potential to impose significant near-term burdens on contractors—requiring them to assess their obligations and make adjustments to ensure compliance. Indeed, these provisions may be far more disruptive than requirements imposed by prior year NDAA China provisions that contractors have navigated by reassessing supply chains and increasing due diligence. All government contractors and suppliers to government contractors with any connection to China would be well advised to monitor how the NDAA conference approaches resolution of this legislation over the coming months.

Highlights of the NDAA’s China Provisions

With this backdrop, we explore five themes of particular relevance to companies that conduct business with the U.S. Government or that may engage in business with, or have operations in China: (1) supply chain and sourcing prohibitions; (2) guarding against sensitive technology transfer; (3) ownership or investment restrictions; (4) monitoring Chinese military and economic power using annual reports; and (5) enhancing the U.S. relationship with Taiwan.

Supply Chain and Sourcing Prohibitions

Procurement from Certain Chinese Military Companies: The House bill incorporates a Select Committee recommendation to secure defense supply chains by prohibiting DoD from contracting or procuring goods, services, or technology from Chinese “military companies” identified on DoD’s so-called “1260H” list (House Sections 811, 1311). Section 1260H of the NDAA for FY 2021 required the Secretary of Defense to publish and regularly update a list of companies controlled by the People’s Liberation Army (“PLA”) or identified as “military-civil fusion contributors” for the Chinese defense industrial base and operating in the U.S. Section 1103 of the Senate bill further includes a provision that would authorize the Secretary of State to work with nations in the Pacific Island states of Micronesia, the Marshall Islands, and Palau to ensure that their governing bodies do not procure or use systems from Chinese companies on the 1260H list, with a view to enabling interoperability with U.S. systems and minimizing risks of cyberattack or espionage.
Genetic Sequencing Equipment from Beijing Genomics Institute (“BGI”): Section 1880 of the House NDAA would prohibit the U.S. Government and government contractors from acquiring biotechnology equipment or services from BGI and its subsidiaries and would require the Secretary of Defense to evaluate whether biotechnology acquisitions from other companies headquartered in or organized under the laws of the PRC should be similarly barred.
EcoHealth Alliance and Wuhan Institute of Virology: Both the House and Senate bills would prohibit DoD from contracting with EcoHealth Alliance, Inc. for any research supported by the CCP (House Section 1313, Senate Section 1364) and would defund the Wuhan Institute of Virology (House Section 1882, Senate Section 1362).
Consulting with PLA or Affiliated Entities: Although they adopt different approaches, both the House and Senate address DoD’s use of consulting services from firms that purportedly engage in so-called “double dipping” by also consulting with the PLA or affiliated entities. Section 808 of the House NDAA would impose a direct ban on DoD contracts with such consulting firms, whereas Section 819 of the Senate NDAA would require a firm to self-certify either that it does not hold a contract with any covered entities (including PRC Government-affiliated entities) or that it maintains an actionable Conflict of Interest Mitigation Surveillance Plan and will notify DoD contract oversight authorities within 15 days of determining an unmitigated conflict of interest has arisen.
LOGILINK and U.S. Seaports: Both chambers prohibit DoD from contracting with any entity that uses or shares data with LOGILINK, the CCP-backed transportation logistics software. (House Section 866, Senate Sections 1371-73). The House bill would go a step further by imposing the same prohibition on U.S. seaports that accept federal grants. Further, Section 406 of the Intelligence Authorization Act (incorporated in the Senate version of the NDAA) requires an intelligence assessment of the threat posed to U.S. ports by cranes manufactured by or in countries of concern, including Chinese commercial entities such as Shanghai Zhenhua Heavy Industries Co.
Petroleum Products: Both bills would prohibit the export or sale of petroleum products drawn from the Strategic Petroleum Reserve to the PRC Government, the CCP, or any entity owned, controlled, or influenced by either (House Section 1867, Senate Section 3143).
PRC- or CCP-Manufactured Drones: The Senate bill would expand the current ban on DoD’s use of federal funds to procure or operate drones manufactured by any entity domiciled in the PRC or otherwise subject to the influence or control of the PRC Government or the CCP to all executive branch departments and agencies (Senate Sections 1091-99D).
PRC-Manufactured Computers or Printers: Section 832 of the House NDAA would prohibit DoD from acquiring computers or printers if the manufacturer or bidder is an entity owned, controlled, directed, or subcontracted by, or affiliated with, or otherwise connected to the PRC Government. The Biden Administration signaled its opposition to this provision in its Statement of Administrative Policy, citing the burden it would impose on DoD.
Films and Entertainment: The House and Senate bills, respectively, impose limitations on DoD support to the production of films that are subject to conditions on content or altered for screening in the PRC or at the request of the CCP (House Section 1248), and prohibit the use of taxpayer dollars to support entertainment projects with ties to the PRC Government (Senate Section 1361).
Battery Technologies: Section 183 of the House NDAA would prohibit DoD from procuring battery technology produced by six named China-connected companies or their subsidiaries or affiliates.

Guarding Against Sensitive Technology Transfer

Together, the House and Senate bills include a host of overlapping provisions to guard against sensitive technology transfer in the domains of education and research, as outlined below.

Ban on PRC or CCP Research Funding: Section 1879 of the House NDAA would establish a government-wide prohibition on funding grants, contracts, and cooperative agreements for research to be conducted by the PRC Government, the CCP, or any entity they own or control.
Confucius Institutes: The House and Senate bills would close loopholes that enabled DoD funds to go to U.S. universities operating so-called Confucius Institutes—cultural institutes funded by the PRC Government or the CCP—and the House bill would specifically require that all such institutes close by September 30, 2026 (House Sections 1041-42; Senate Section 1079).
Report on Gifts and Grants to U.S. Institutions: Section 1369 of the Senate NDAA would mandate a report to Congress from the Secretary of the Treasury listing and describing all gifts and grants to U.S. institutions of higher education from entities on the Non-SDN Chinese Military-Industrial Complex Companies List maintained by the Office of Foreign Assets Control.
Chinese Research Labs: The House and Senate bills would require an Inspector General audit to identify the diversion of DoD funding to Chinese research labs (House Section 230, Senate Section 6243).
Fundamental Research: Section 229 of the House NDAA would restrict DoD-funded fundamental research from contributing to higher-education research collaborations with China. As a condition of receiving DoD funds, an institution of higher education must certify that the principal investigator of the project to which DoD funds would be applied is not and will not conduct fundamental research in collaboration with Chinese academic institutions or PLA-affiliated entities during the period in which the project receives DoD funding.
Benefits of U.S.-funded Research: Section 1810 of the House NDAA would require a federal interagency report to Congress on the extent to which China has benefitted from U.S. taxpayer-funded research.

Ownership or Investment Restrictions

The House and Senate bills contain numerous provisions focused on restricting both inbound and outbound investment to and from China:

Foreign Ownership of Agricultural Land: Section 1868 of the House bill would require DoD to identify and assess the threat, if any, posed by foreign ownership of agricultural land within 50 miles of a military installation, while Section 1086 of the Senate bill would require review by the Committee on Foreign Investment in the United States of transactions involving the purchase or lease of U.S. agricultural land by a foreign person. More generally, Section 2869 of the House bill would require the Secretary of Defense to establish guidelines to identify and mitigate “encroachment,”—that is, activities conducted in close proximity to military installations or U.S. Government property—including by foreign investors, that may pose a national security risk.
CCP or Other Ownership of Military Fuel Providers: Section 828 of the House NDAA would require DoD to ensure military fuel providers are not owned or infiltrated by the CCP or other adversaries.
DoD Investment in PRC Companies: Section 872 of the House bill would prohibit DoD Office of Strategic Capital (“OSC”) investments in companies incorporated under the laws of the PRC or companies that are more than 50% owned by citizens of, or entities incorporated under the laws of the PRC. OSC is the DoD office intended to connect companies developing critical technologies vital to national security with private capital to bridge the “Valley of Death” between the laboratory and full-scale production.
Outbound Investment in Critical Technology Providers: In July, the Senate voted 91-6 to include in the NDAA an amendment offered by Senators John Cornyn (R-TX) and Bob Casey (D-PA) that would require covered U.S. persons to provide notice to the Treasury Department of certain transactions with covered foreign persons (including persons from China or any other “country of concern”), involving a number of industries, including advanced semiconductors or microelectronics, AI, quantum technology, hypersonics, and other critical technologies (Senate Section 1085). The amendment would require the Treasury Department to provide Congress annually with a list of notifications received and an assessment of the national security risks of the notified activities.
The Senate version of the NDAA passed before President Biden issued his executive order (“EO”) on outbound investment on August 9, 2023. The release of the EO, given its partial overlap with the Senate Section 1085 in both timing and substance, complicates the debate over outbound investment screening more generally. It is unclear whether Congress will seek to codify the EO, negotiate new language addressing perceived gaps in the EO, or take some other tack. The Treasury Department has already requested public comment on an advanced notice of proposed rulemaking issued in parallel with the EO, and the formal rulemaking process will continue in the coming months. The final rule, which is not expected to be published until late 2024, will impose prohibitions and notice requirements on U.S. outbound investments in entities engaged in particular technology sectors—including semiconductors and microelectronics, quantum information technologies, and artificial intelligence systems—in China, Hong Kong, and Macau, and entities related thereto. For more information, see our colleagues’ prior alert.

Monitoring Chinese Military and Economic Power Using Annual Reports

Both chambers appear to be intent on monitoring the evolution of Chinese military and economic power via reports and briefings, including the following:

Assess Critical and Emerging Technologies: Section 1317 of the House bill would require DoD’s annual China Military Power report to provide an assessment of the PRC’s development of critical and emerging technologies and identify key PRC entities—including entities domiciled in the PRC or controlled or directed by the PRC Government and its affiliates—involved in each technology sector.
Assess Overall PRC Defense Spending: The House and Senate bills would require an independent “building block”-based assessment of the PRC Government’s defense budget to accurately assess overall PRC Government defense spending (House Section 1315, Senate Section 1357).
Evaluate Space-Related Activities: Section 1614 of the House bill would mandate a DoD report to Congress evaluating the space-related activities of the Russian Federation and the PRC, including satellites, space stations, moon exploration, and the acquisition of minerals from the moon, while House Section 1609 would require the U.S. Space Force to share information about threats from China with commercial space operators.
Assess PLA Military Readiness: Section 1360 of the Senate bill would requiring the Secretary of Defense to brief Congress semi-annually on the military activities of the PRC relating to any possible Taiwan or South China Sea contingency, including PRC weapons purchases and the readiness of the PLA to potentially conduct aggressive military action against Taiwan, as well as efforts by DoD to engage with the PLA.

Enhancing the U.S. Relationship with Taiwan

No discussion of China would be complete without consideration of Taiwan. Both the House and Senate versions of the NDAA reflect commitment to enhancing the U.S. relationship with Taiwan.

Military Coordination Efforts: The House and Senate bills would support greater military coordination between the U.S. and Taiwan, including conducting exercises; developing joint concepts of operation and tactics, techniques, and procedures; strengthening military cybersecurity cooperation; and other security measures to help Taiwan meet its self-defense needs (House Section 1505, Senate Sections 1342, 1352).
FMS Backlog: Section 1310N of the House NDAA would addressing the current Foreign Military Sales backlog to Taiwan by directing the Secretaries of Defense and State to submit to Congress a plan through which the U.S. will provide to Taiwan the defense articles, services, and training it has requested.
Strategic Trade Eligibility: Section 6242 of the Senate NDAA would render Taiwan eligible for the strategic trade authorization exception to certain export control licensing requirements.
Improving Bilateral Relationships: Section 1368 of the Senate bill would encourage the expansion of local military acquisition agreements with neighboring Pacific Island nations to improve bilateral relationships and counter the CCP’s increased presence and activity in the region, and lauds the U.S. network of security alliances and partnerships in the Pacific as our “single greatest asymmetric strength.”