Defense Issues

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.…

Continue Reading Not to Be Outpaced: NDAA Presents Measures Addressing China

This is the twenty-sixth in a series of Covington blogs on implementation of Executive Order 14028, “Improving the Nation’s Cybersecurity,” issued by President Biden on May 12, 2021 (the “Cyber EO”).  The first blog summarized the Cyber EO’s key provisions and timelines, and the subsequent blogs described the actions taken by various government agencies to…

As part of the FY23 National Defense Authorization Act (“NDAA”), Congress has given the Department of Defense authority to pay defense contractors for increased costs due to inflation.  Section 822 of the NDAA amends Public Law 85-804 (50 U.S.C. 1431) to allow contractors to apply for adjustments, while also giving the DoD wide discretion to grant or deny requests.  President Biden is expected to sign the FY23 NDAA soon, and Section 822 has the potential to be welcome news for contractors who have been battling inflation under multi-year, fixed-price contracts. 

As readers of this blog know from prior posts, DoD has issued position papers over the last year that attempt to address inflation with existing legal tools, but as a practical matter, the Department has provided few options for contractors impacted by rising costs.  The new NDAA provision could finally provide DoD with the legal support it needs to aid contractors struggling with inflation.  However, many questions remain about how this law will work and whether it will actually meet the growing needs of the defense industrial base.  In particular, Congress has not yet appropriated money to fund applications for relief, and DoD must prepare guidance for implementing the statute.  Both of these things will need to happen before contractors can apply for and potentially receive inflation-based price adjustments under this amended Public Law 85-804 authority.

This post discusses the amendment and analyzes the hurdles that remain between defense contractors and inflationary relief.…

Continue Reading Congress Offers Greater Hope for Defense Contractors Battling Inflation; Actual Relief Is Still Not Clear

Presidential Action Triggered by Crisis in the U.S. Solar Industry

In recent months, the U.S. solar industry has been in the midst of an existential crisis, triggered by the threatened imposition of retroactive and future tariffs on a significant portion of U.S. imports. That crisis began on April 1, 2022, when the Department of Commerce (“Commerce”) initiated an inquiry to determine whether solar cells and modules from Cambodia, Malaysia, Thailand, and Vietnam are circumventing antidumping (“AD”) and countervailing duty (“CVD”) orders on solar cells from China. Solar cells from these countries generally accounted for approximately 80% of U.S. solar module imports in 2020.[1] If Commerce finds circumvention, solar cells and modules from the four target countries could not only be subject to combined AD/CVD tariffs approaching 250%, but Commerce’s regulations also allow for the agency to apply these tariffs retroactively to merchandise entering on or after April 1, 2022 (and potentially as far back as November 4, 2021). This threat of AD/CVD tariffs triggered a steep decrease in imports of solar cells and modules from Southeast Asia, and caused parts of the U.S. solar industry to come to a stand-still, furthering domestic reliance on coal.[2] Given this paralysis in the solar industry, lawmakers and others urged the President to provide relief from potential AD/CVD tariffs.[3]

The President’s Response

On June 6, 2022, President Biden issued a declaration of emergency (the “Declaration”)[4] pursuant to section 318(a) of the Tariff Act of 1930, as amended (19 U.S.C. § 1318), and issued a determination pursuant to section 303 of the Defense Production Act of 1950, as amended (50 U.S.C. § 4533) (“the DPA Determination”)[5]. The Declaration finds that an emergency exists “with respect to the threats to the availability of sufficient electricity generation capacity” and authorizes Commerce to issue a moratorium on tariffs on solar cells and modules from Cambodia, Malaysia, Thailand, and Vietnam for up to a 24-month period, while the DPA Determination aims to “expand the domestic production capability” for solar cells during this 24-month period. The Declaration itself does not prevent the imposition of tariffs on imported solar cells and modules from the Southeast Asian countries, rather it authorizes the Secretary of Commerce to “take appropriate action” to permit the duty-free importation of solar cells and modules for 24 months after the Declaration’s issue date.[6]…

Continue Reading President Acts to Prevent Import Tariffs on Solar Cells and Modules from Southeast Asia

On the heels of the FTC’s opposition to Lockheed Martin’s acquisition of Aerojet Rocketdyne and Lockheed’s termination of the deal, the Department of Defense (DoD) released a report expressing concerns about the state of competition among its contractors.  Of particular note, the report encourages DoD action to (1) increase oversight of M&A transactions and (2)…

On December 22, 2021, the Defense Security Cooperation Agency (DSCA) announced the Fiscal Year 2021 transaction figures for the Foreign Military Sales (FMS) Program, reporting $34.8 billion in total transaction value.  FMS declined for the second consecutive year, down 31 percent from $50.8 billion dollars in transactions in FY 2020.  The 2021 figure represents the lowest volume of FMS transactions since FY 2016.

As recently as FY 2019, FMS program sales totaled $55.4 billion, with a $51 billion average transaction value from 2017-2019.  FMS transactions slipped slightly in FY 2020 to $50.8 billion but then cratered this past year.  Because FMS program sales figures fluctuate annually due to a few, high-value transactions, DSCA includes three-year rolling averages in their annual reports rather than only single year fluctuations.  For example, FMS sales declined 28 percent in FY 2016 before recouping most of those losses the next year.  Therefore, the significant 2021 decline may be an anomaly.  Even though 2021 FMS numbers may recover quickly, several notable takeaways remain.

First, the steep decline in FMS in FY 2021 may not signal a decrease in America’s commitment to its global allies.  Indeed, even though FMS declined by 31 percent, the United States increased funding to the Foreign Military Financing (FMF) program from $3.3 billion to $3.8 billion.  In addition, U.S. contributions to the Building Partner Capacity programs remained relatively steady, declining slightly from $2.69 billion to $2.34 billion.  The decrease in overall FMS figures was driven by a 36 percent fall in foreign government-funded transactions.

Second, Direct Commercial Sales (DCS) arrangements between U.S. defense contractors and foreign governments dropped 16.8 percent in FY 2021, from $124.3 billion in FY 2020 to $103.4 billion.  FMS involve the U.S. government directly procuring defense materiel or services before transferring materiel or services to a foreign defense ministry.  In contrast, DCS do not involve the U.S. as a contractual party.  The U.S. government oversees DCS, and U.S. export controls laws govern all DCS.  But, compared to its direct involvement in FMS, the U.S. government’s oversight of DCS is primarily indirect.  Therefore, the decline in DCS may indicate that the budgetary concerns of America’s allies drove the contemporaneous decline in FMS more than the Pentagon’s shifting priorities did.

Third, certain critical factors may impede FMS figures from rebounding quickly in FY 2022.  Besides the COVID-19 pandemic’s ongoing impact on national defense budgets, the country-by-country figures published by DSCA reveal areas for potential regression in FY 2022.  For example, the FY 2021 figures included approximately $1.26 billion in sales to Afghanistan, an amount that likely will decrease given the recent regime change.  The FY 2021 numbers include a $1.5 billion allocation to France, which appears to have been boosted by an unusually large $1.3 billion transaction to supply aircraft launch and recovery equipment for France’s naval carrier program.  In FY 2022, U.S. sales to France may regress closer to $220 million, the average for transactions with France from the preceding four years.  Germany also entered into an unusually large $1.7 billion FMS contract for P-8A aircraft and accompanying services and equipment.

On the other hand, the United States’ recent commitment to support Australia’s submarine program may offset decreases in U.S. arms sales to countries like Afghanistan, France, and Germany in the long term.  The 2021 agreement between the United States and the United Kingdom to deliver nuclear submarines to Australia will likely have a lasting impact on U.S. defense exports.  Still, the budgetary impact of those commitments on DSCA programs remains uncertain.
Continue Reading U.S. Foreign Military Sales Down Over Thirty Percent in FY 2021

On November 5, 2021, an Editorial Note was added to the Federal Register stating “An agency letter requesting withdrawal of this document was received after placement on public inspection. The document will remain on public inspection through close of business November 4, 2021. A copy

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In a December 2020 speech, Deputy Assistant Attorney General Michael Granston warned that cybersecurity fraud could see enhanced enforcement under the False Claims Act (“FCA”).  On October 6, 2021, Deputy Attorney General Lisa Monaco announced that the Department of Justice (“DOJ”) would be following through on that warning with the launch of the DOJ’s Civil…

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Three summits last week—G-7, NATO, and U.S.-EU—launched a wide range of transatlantic initiatives to coordinate policy, particularly on trade, technology, and defense. These new formats and dialogues can ensure a much deeper level of regulatory cooperation between the United States and Europe by exchanging perspectives, briefing materials, and in some cases, staff. For companies on both sides of the Atlantic, these emerging policy trends also open up new opportunities to engage decision-makers both in Washington and European capitals.
Continue Reading Transatlantic Summits: Main Takeaways for Tech and Defense