- President Joe Biden has signed an Executive Order (EO) on America's Supply Chains, mandating a 100-day review of the global supply chains used by key industries in an effort to avoid the shortages in medical equipment, semiconductors and other goods seen as critical during the COVID-19 pandemic.
- The review will address vulnerabilities of supply chains of four key products: large-capacity batteries, pharmaceuticals, critical minerals and semiconductors. The review will also seek to determine whether U.S. firms in these sectors are too reliant on foreign suppliers, particularly those in China, as well as other vulnerabilities, such as extreme weather and environmental factors.
- The EO directs federal agencies to consult with outside stakeholders during the supply chain review process, providing an opportunity for business and industry to engage with the Departments of Defense, Commerce, Energy, Homeland Security, Health and Human Services, Transportation and Agriculture. This is an important opportunity that should not be overlooked, especially given the current political climate and ongoing stimulus discussions.
President Joe Biden has signed an Executive Order (EO) on America's Supply Chains, mandating a 100-day review of the global supply chains used by key industries in an effort to avoid the shortages in medical equipment, semiconductors and other goods seen as critical during the COVID-19 pandemic.
The order, issued on Feb. 24, 2021, is intended to boost manufacturing by strengthening U.S. supply chains. During the past year, the fragility of vital supply chains has been illuminated and exacerbated by the pandemic and increased demand from evolving market forces and government actions. The EO seeks to end the country's reliance on imports of crucial goods, which the administration stresses is a potential national security and economic risk, and to strengthen ties with allies.
With the EO, the president launched an immediate review to address vulnerabilities of supply chains of four key products: large-capacity batteries, pharmaceuticals, critical minerals and semiconductors. The review will seek to determine whether U.S. firms in these sectors are too reliant on foreign suppliers, particularly those in China, as well as other vulnerabilities, such as extreme weather and environmental factors.
There is sufficient evidence to suggest that Chinese-origin goods will come under particular scrutiny.1 By way of example, China recently proposed to restrict rare earths exports, which are crucial materials for the manufacturer of F-35 fighter jets and other sophisticated weaponry.2 China is also a major source of active pharmaceutical ingredients (APIs) that go into making vital drugs, and 13 percent of the API manufacturing facilities supplying the U.S. market are located in China.3
The order also directs year-long reviews of seven sectors: defense, public health, information, technology, transportation, energy and food production, similar to reviews that the U.S. Department of Defense (DoD) executes regularly in order to evaluate the U.S. defense industrial base.
If risks are identified in the supply chains for critical sectors, the administration will aim to push those companies to move their suppliers out of countries such as China and back to the U.S. mainland or allied nations.
Agencies are encouraged to consider the following risks as part of their reviews: critical goods and materials within supply chains, the manufacturing or other capabilities needed to produce those materials, and a variety of risks that may disrupt, strain, compromise or eliminate the supply chain, including risks created by failure to develop domestic capabilities. Agencies subject to the EO are also directed to assess, among other issues, physical threats to key manufacturing and production assets, reliance on nations that are, or are likely to become, unstable or unreliable for the exclusive or dominant supply of critical and essential goods and materials, the possibility of substituting existing suppliers, and the role of transportation systems in supporting supply chains and industrial bases.
President Biden noted in his remarks: "This is about making sure the United States can meet every challenge we face in this new era — pandemics, but also in defense, cybersecurity, climate change, and so much more. And the best way to do that is by protecting and sharpening America's competitive edge by investing here at home … And all this won't just strengthen our domestic capacity, it will help unleash new markets around the world and grow opportunities for American businesses to export their goods that we're going to be making."
The president said that the solution to supply chain issues will be to increase domestic production in certain industries as well as work with allies to prevent future shortages.
The Biden Administration's focus on securing supply chains is further bolstered by an earlier interim final rule focusing, particularly, on the national security risks posed by identified foreign adversaries to the United States' information and communications technology and services (ICTS) supply chains. Effective March 22, 2021, the aforementioned interim rule authorizes the U.S. Department of Commerce to prohibit or otherwise restrict certain transactions involving ICTS supply chains that have a nexus with "foreign adversaries," a term presently covering the following foreign governments and non-government persons: The People's Republic of China (including the Hong Kong Special Administrative Region), the Republic of Cuba, the Islamic Republic of Iran, the Democratic People's Republic of Korea, the Russian Federation and Venezuelan politician Nicolás Maduro.
The review called for under the EO could potentially lead to financial incentives, tariffs or changes in procurement options. If the risks are dire, the Biden Administration could use the Defense Production Act (DPA) to force companies to produce certain goods domestically or expand federal agencies' existing DPA authorities. The president might also work with Congress to fashion incentives and worker training programs to get suppliers to relocate to the U.S. or allies.
The administration has already invoked the DPA to expedite vaccine production and expand the supply of COVID-19 equipment, but the Korean War-era national security mobilization law could be leveraged further to spur domestic manufacturing of critical products.
Federal Use of DPA Authorities
Several federal agencies have already been delegated DPA authority to respond to the challenges of COVID-19, including the U.S. Department of Health and Human Services (see EO 13911), the U.S. Department of Homeland Security (see EO 13911) through the Federal Emergency Management Agency (FEMA), and the U.S. International Development Finance Corporation (DFC).
In May 2020, former President Donald Trump signed EO 13922 to boost U.S. production of critical materials. The EO delegated to the chief executive officer of the DFC authority under Title III of the DPA to make loans, make provision for purchases and commitments to purchase, and take additional actions to create, maintain, protect, expand and restore the domestic industrial base capabilities, including supply chains within the United States and its territories, needed to respond to the COVID-19 outbreak.
Under Section 302 of the DPA, DFC is able to provide loans to private businesses for the creation, maintenance, expansion, protection or restoration of capacity, the development of technological processes, or the production of essential materials, including the exploration, development and mining of strategic and critical metals and minerals. Since the beginning of the pandemic, other DPA orders have also been used to increase the supply of protective equipment, such as respirators and ventilators, through procurement contracts and grants. The Trump Administration utilized its Title I authority to place a priority rating on contracts forcing companies to sell available goods to the federal government ahead of nonfederal customers (until the federal government's needs were met). In addition, Title III was utilized to provide grants to manufacturers to increase production capacity of necessary goods and equipment to fight the pandemic, such as N95 respirators. In the waning days of the Trump Administration, it also began to utilize DPA Title III authority to assist with onshoring critical supply chains experiencing disruption in the wake of COVID-19. Each of these uses of the DPA requires companies to quickly acquire a comprehensive understanding of the DPA so that they understand when a DPA order can be rejected and under what circumstances.
Holland & Knight Insights
Although there have been no public statements from the Biden Administration as to its plans for the DFC DPA program or other uses of the DPA grant and procurement funding authority, the EO provides support for continuation of the DFC DPA program. The focus of the EO squarely aligns with the DPA work that the DFC is engaged in — primarily domestic supply chains and COVID-19 response. Companies in relevant industries should consider the DFC DPA program if they are having difficulty obtaining commercial financing.
In addition to its relevance to DFC DPA financing opportunities, the EO directs federal agencies to consult with outside stakeholders during the supply chain review process, providing an opportunity for business and industry to engage with the Departments of Defense, Commerce, Energy, Homeland Security, Health and Human Services, Transportation and Agriculture. This is an important opportunity that should not be overlooked, especially given the current political climate and ongoing stimulus discussions.
1 Gavin Bade, "Biden Orders Supply Chain Review for 4 Industries," Politico (Feb. 24, 2021).
2 Sun Yu and Demetri Sevastopulo, "China Targets Rare Earth Export Curbs to Hobble US Defense Industry," Financial Times (Feb. 16, 2021).
3 Testimony of Janet Woodcock, M.D., Commissioner of FDA before House Committee on Energy and Commerce, Subcommittee on Health, "Safeguarding Pharmaceutical Supply Chains in a Global Economy" (Oct. 30, 2019).