A quiet panic is spreading in Washington and corporate boardrooms that a law taking effect in two months, which bans Huawei Technologies Co. gear, will threaten the business of government contractors.
Aerospace, technology, auto manufacturing and a dozen other industries are engaged in a lobbying frenzy ahead of an Aug. 13 deadline to comply with a far-reaching provision that was tucked into a defense spending bill two years ago.
The broadly written defense law could implicate virtually all companies that count the federal government as a customer, including global subsidiaries and service providers deep in a firm’s supply chain. Excluding subcontractors, more than 100,000 companies provided $598 billion in goods and services directly to the U.S. government last year, according to a Bloomberg Government tally.
To date, measures taken by the Trump administration against Huawei and other Chinese tech companies have been aimed at cutting off their access to American components and networks. This law would ratchet up the pressure even more, putting the onus on U.S. government contractors to comb through their businesses to ensure they have no connections to banned Chinese companies.
Known by the wonky name of Section 889, part B, of the National Defense Authorization Act, the law would require companies to certify that their entire global supply chain—not just the part of the business that sells to the U.S. government—is devoid of gear from Huawei, Chinese telecom giant ZTE Corp., surveillance provider Hangzhou Hikvision Digital Technology Co., and other Chinese surveillance companies.
“Congress is deadly serious about eliminating Chinese technology from our critical infrastructure and related systems,” said David Hanke, a former Capitol Hill staffer who has worked on defense spending legislation and is now a partner at Arent Fox. “As written, this statutory provision doesn’t offer federal agencies all that much flexibility, so come August some companies that want to continue doing business with the government may find themselves in a tight spot.”
But while Huawei and ZTE have virtually no market share in the U.S. and have been banned from American government systems, they are dominant in many other countries around the world.
“It’s inevitable to find Huawei prevalent in systems across China, Europe and Africa,” said Samantha Clark, special counsel at law firm Covington & Burling LLP. “Some companies that might sell products that eventually get bought by the U.S. government’s many links down the line don’t even realize just how much they are involved in the U.S. procurement chain.”
In recent months, trade groups that represent companies like Lockheed Martin Corp., Amazon.com Inc., Apple Inc., 3M Corp. and Ford Motor Co., have been pushing the Trump administration and lawmakers to fix the wide-ranging provision. They also want to delay its implementation to ensure firms can comb through their supply chains to comply, a task made more difficult by the global pandemic.
“If part B is implemented as written, many businesses with international and domestic operations will be forced to halt their work providing key products and services to agencies, including equipment that is needed to fight the coronavirus pandemic today and in the coming months,” 10 groups, including the U.S. Chamber of Commerce and the Aerospace Industries Association, wrote in a letter to members of Congress in April.
If the law is taken at face value, lawyers say, it could mean that none of a company’s suppliers, service providers, or international outposts will be able to use any internet service providers, cloud networks, shipping companies, or other vendors that might be built with routers, switches or other components made by restricted companies.
As an example, that would capture a U.S. company with a London office that uses the Royal Mail service to ship products, because the U.K.’s national mail carrier could employ Huawei networking gear deep in its systems, according to an analysis by one trade group.
The provision could also apply to a pharmaceutical company that sells medicines to the U.S. Department of Veterans Affairs, if the company, for example, has an Indian manufacturing plant that taps one of India’s largest telecom companies, Bharti Airtel Ltd., for its employees’ mobile phone service. Airtel relies on Huawei for networking gear to operate its mobile phone services, the analysis said.
Clark, who managed the passage of the 2018 defense bill as deputy staff director and general counsel on the U.S. Senate Armed Services Committee, said Congress omitted definitions of “use” and “entity,” which broaden the scope of the law, so that U.S. intelligence agencies could tailor the implementation of the law later to address specific national-security threats.
The politics around China policies are now complicating the matter as the two countries trade barbs over the handling of the coronavirus outbreak and hot-button issues like the status of Hong Kong and Taiwan.
“Two years ago this might have seemed like an overreach but since then a lot of things have happened and it’s now consistent with U.S. policy,” Hanke said of the provision.
Some administration officials are aware of the potential negative consequences for U.S. businesses and the government, but they are also wary of the optics in the current political environment should they intervene to narrow the scope of the law, people familiar with the internal deliberations said.
Before the law takes effect, the administration has to issue regulations to implement it, which would allow businesses to make their concerns known. That rule is now with the Office of Management and Budget and it’s been stalled there for months, the people said.
A senior administration official said the administration is working through the inter-agency process to meet the August deadline and implement the law. The official also said that the process takes longer for some rules than others.
The defense law allows for government agencies to grant companies a one-time waiver but lawyers say that’s unlikely to solve the underlying problems.
Instead, the business community is asking Congress to insert language into the next coronavirus stimulus package to delay the implementation and then clarify the scope when the next Defense authorization bill comes up for debate, according to people familiar with the deliberations.
Still, it’s unclear if the Trump administration or Congress can be convinced to amend the law at a time when the relationship between the world’s two largest economies is rapidly deteriorating.
To prepare for a worst-case scenario, some lawyers are advising their clients to draw up waiver applications, and for companies to analyze what their businesses would look like if they no longer sought government contracts. For some, that might mean they will reconsider that part of their business.
“If it’s so complicated, maybe it’s not worth it to keep working with the government,” Clark said.