Biden Administration Supply Chain EO Creates Opportunities and Risks in Key Manufacturing Sectors
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On February 24, 2021 President Biden signed an Executive Order (EO) on America's Supply Chains as a step toward fulfilling the Biden campaign's promise to address US supply chain vulnerabilities exposed by the COVID-19 pandemic and subsequent national shortages of crucial resources, including medical supplies and semiconductors. The EO calls for creating more resilient and secure supply chains for "critical" and "essential" goods, including four specific product categories—semiconductors, high-capacity batteries, critical minerals, and pharmaceuticals and active pharmaceutical ingredients (APIs), as well as six broader industrial base sectors: defense, public health, information and communications technology, energy, transportation, and food supply.1
The EO mandates a comprehensive review and recommendation process, but raises many questions regarding the policy proposals that will come out of those assessments. Will the EO lead to new restrictions on foreign sourcing for US government procurement? Will agencies recommend assistance to US manufacturers, incentives for new US production capacity, and/or new trade restrictions? Could heightened scrutiny of foreign direct investment in the sectors identified be on the table? While immediate policy shifts are unlikely, heightened scrutiny on supply chains could give rise to both risks and opportunities as the Biden Administration's policy focus on jobs, manufacturing, climate change, and a holistic view of national security takes shape.
The EO directs multiple federal agencies to conduct a series of short-term assessments for the four specific product categories, to be completed within 100 days, and at least six longer-term assessments of specific sectors of the US industrial base within one year. At the conclusion of the reviews, the designated agencies are to issue reports recommending how the United States might prevent future supply chain disruptions due to natural disasters, trade disruptions, or production shortages for those products and sectors.
The EO reflects the Biden Administration's focus on domestic manufacturing and jobs, as well as concerns about China's dominance in key supply chains, a concern that has been heightened by shortages of medical supplies and semiconductors during the COVID-19 pandemic. While the EO does not specifically mention China, supply chain stability and reliance on China for many of the listed products and sectors has been an issue of bipartisan concern and a target of presidential and regulatory actions in recent years.2 The EO acknowledges similar interagency assessments conducted during the Trump Administration covering critical minerals and the defense industrial base, and states that the Biden Administration also intends to "update" those assessments.3
The EO does not specify next steps after the individual reviews are complete, committing instead to tailored approaches for each specific product category and sector identified. Section 4(c)(ix) of the EO outlines a menu of potential policy objectives, including:
- Sustainably reshoring supply chains and developing domestic supplies;
- Cooperating with allies and partners to identify alternative supply chains;
- Building redundancy into domestic supply chains;
- Ensuring and enlarging stockpiles;
- Developing workforce capabilities;
- Enhancing access to financing;
- Expanding research and development to broaden supply chains;
- Addressing risks due to vulnerabilities in digital products relied on by supply chains; and
- Addressing risks posed by climate change.
The EO calls for recommendations, including, inter alia 4:
- "trade policy. . . actions that can successfully engage allies and partners to strengthen supply chains jointly or in coordination";
- "reforms to domestic and international trade rules and agreements needed to support supply chain resilience, security, diversity, and strength"; and
- "Federal incentives and any amendments to Federal procurement regulations that may be necessary to attract and retain investments in critical goods and materials and other essential goods and materials…."
The multilateral cooperation with allies envisioned by the EO, of course, has been a key pillar of Biden Administration's China policy.5 In addition, this EO, together with EO 14005 on Ensuring the Future is Made in All of America by All of America's Workers may foreshadow further overhaul of government procurement policy, as well as continuation of the Trump Administration efforts to revise commitments in international agreements that open US procurement to foreign suppliers. Early statements from key White House officials underscore that "levers like procurement authority," and incentives for increasing domestic production are on the table. Finally, a heightened focus on domestic supply chains, workforce capabilities, financing, and mitigating risks to security may mean that in some sectors, recommendations for continued or increased scrutiny of foreign direct investment will also be on the table.
Section 3 of the EO directs the Assistant to the President for National Security Affairs (APNSA) and Assistant to the President for Economic Policy (APEP) to coordinate with relevant agency heads to conduct the initial reviews of supply chain vulnerabilities and generate policy recommendations for the four product categories. As noted, these product categories have been the subject of bipartisan concern during the pandemic. They also align with Biden Administration policy objectives like supporting domestic manufacturing of clean energy vehicles and products and services dependent on semiconductors. The latter product category encompasses production across the full range of information technology and communications industries, including emerging 5G, artificial intelligence, and data science sectors. The four product categories and the agencies leading the reviews are:
- Semiconductors and advanced packaging (Department of Commerce);6
- High-capacity batteries, such as those used in electric vehicles (Department of Energy);7
- Critical minerals and other identified strategic materials, including rare earth elements (Department of Defense);8 and
- Pharmaceuticals and APIs (Department of Health and Human Services).9
The relevant agencies must issue reports and policy options to address immediate supply chain vulnerabilities in these four product categories within 100 days, or by June 4, 2021. According to a Fact Sheet accompanying the EO, the 100-day reviews "will identify near-term steps the administration can take, including with Congress, to address vulnerabilities in the supply chains for these critical goods." The order contemplates reports that include specific policy recommendations, including recommendations for "reshoring" of supply chains, cooperating with allies to identify alternative supply chains, and ensuring and enlarging stockpiles.10 Near-term steps that the Administration could take may include using the Defense Production Act (DPA) to build up strategic stockpiles or use of DPA Title III to create incentives to expand or preserve domestic manufacturing.11 Continuation or amplification of Trump Administration efforts in the WTO to modify US international procurement commitments currently allowing foreign access to federal procurement markets for pharmaceuticals and medical supplies could also feature in recommendations for short term action.
Sections 4 and 5 of the EO direct additional one-year reviews to be completed after the initial 100-day review of the four priority product categories is complete. In coordination with the APNSA and APEP, agencies are directed within one year to conduct broader "sectoral supply chain assessments" and issue reports covering the following sectors (with the listed lead agencies):
- Defense (Department of Defense)
- Public health (Department of Health and Human Services)
- Information and Communications Technology (Department of Commerce and Department of Homeland Security)
- Energy (Department of Energy)
- Transportation (Department of Transportation)
- Food supply (Department of Agriculture), and
- Any other sectors identified during the course of the review.12
These reviews must identify critical goods and materials within supply chains, the manufacturing or other capabilities needed to produce those materials, as well as a variety of vulnerabilities created by failure to develop domestic capabilities. The EO also directs agencies to identify the locations of key manufacturing and production assets, the availability of substitutes or alternative sources for critical goods, the state of workforce skills and identified gaps for all sectors, and the role of transportation systems in supporting supply chains and industrial bases.13 Notably, The EO leaves open the possibility that additional sectors may be identified and be brought into the review process.
The immediate impact of the EO is likely to be limited. Both the 100-day and one-year initiatives emphasize agency reviews of critical supply chains and subsequent reports on how to address risks and vulnerabilities. Nothing in the EO instructs further specific actions by the agencies beyond conducting assessments and making recommendations. Significant shifts in policy, such as tax incentives, manufacturing subsidies or major shifts in government purchasing and stockpiles would likely require bipartisan legislation to move forward. However, strengthening supply chains and bolstering domestic manufacturing has become a popular bipartisan talking point. The White House has signaled that the EO is just a starting point and we expect further action from both the White House and Congress. The reports required by the EO may help advance regulatory and legislative priorities to bolster domestic manufacturing, such as infrastructure investment or the CHIPS Act discussed below. Companies operating in the targeted industries are likely to face both opportunities and risks as policies are developed. In the shorter term, we also anticipate that bipartisan support could be found for actions that limit imports or at least reliance on single-foreign sources of imports—particularly imports from China. Broader domestic policy efforts such as worker training initiatives and incentives for domestic manufacturing are likely to face more opposition.
Sector Specific Implications
Semiconductors. Semiconductors supply shortages receives significant attention in President Biden's signing ceremony statement for this EO. The semiconductor supply chain has been an issue of concern for several years as the United States has seen a decline in new semiconductor fabrication plants.14 The pandemic also exposed vulnerabilities in this supply chain that are enhancing Congressional activity. The Creating Helpful Incentives to Produce Semiconductors (CHIPS) Act,15 which was first introduced in June 2020, authorized funding for a range of federal investments to advance US semiconductor manufacturing, including a $10 billion federal grant program and a 40% tax credit to incentivize new domestic semiconductor manufacturing facilities. The CHIPS Act was incorporated into the FY 2021 National Defense Authorization Act (NDAA) in December 2020.16 While the NDAA authorized the CHIPS Act, it did not appropriate funding for the bill.
Concerns with the semiconductor supply chain gained more attention recently, as shortages of semiconductors have forced US automakers to slow down production. In response to the shortage, a bipartisan group of 15 Senators sent a letter urging White House action on the semiconductor shortage in early February. But parts of the CHIPS Act—specifically the 40% refundable investment tax credit—has faced opposition from rank-and-file Democratic members. Perhaps reflecting the challenges in funding the CHIPS Act, the White House declined to commit to including CHIPS Act funding in the FY 2022 White House Budget. Even though CHIPS Act funding will likely not be included in the White House Budget, Majority Leader Schumer directed Democratic committee leaders to begin drafting a legislative package to bolster US semiconductor manufacturing for possible consideration in the Spring, which could help address the semiconductor shortage. Funding for the CHIPS Act or parts of the bill may be included as part of that effort.
The reports mandated by the EO may provide additional support for the effort to strengthen the domestic semiconductor industry, which could help build support for funding the CHIPS Act. One possible funding mechanism may be through a future reconciliation bill focused on infrastructure funding. But given the EO reporting deadlines and the congressional budget cycle, these efforts would fall within the FY 2022 budget cycle. As a result, congressional consideration would shift to the end of 2021 or 2022.
Large Capacity Batteries. In his signing statement, President Biden emphasized the importance of securing the clean energy technology supply chain as a component of the administration's efforts to combat climate change. The EO notes as "we take action to tackle the climate crisis, we know that will lead to a large demand for new energy technologies like electric vehicle batteries."17 China currently dominates the market for electric vehicle batteries at a time when US automakers are rapidly increasing production of electric vehicles. However, recent investment in US production could stand to gain further momentum, given the efforts to bolster domestic supply chains.18 Using the EO to highlight supply chain risks and identify opportunities to increase US jobs in a clean-tech industry like vehicle batteries, may help marshal political support for President Biden's broader plans to accelerate the decarbonization of the US economy, including the transportation sector.
Critical Minerals and Rare Earth Elements. In recent years, heavy dependence on foreign sources, like China, for rare earth minerals has driven bipartisan concerns about strategic vulnerability. China is the world's dominant producer of rare earth minerals—with the United States importing more than 80% of its rare earth elements from China. A report by the Trump Administration's Department of Commerce declared that "an extended supply disruption could cause significant shocks throughout US and foreign critical mineral supply chains." 19 In response, then-President Trump issued an executive order aimed at reducing reliance on imports of critical minerals from China and increasing domestic production of critical minerals and rare earth elements.20 We expect the Biden Administration to expand collaboration with allies, in particular, Australia, Canada, the European Union, Japan, and South Korea to work on building diversified critical minerals supply chains to counter China's dominance. While policies to block critical mineral imports from China have been politically popular, the current dependence on such imports by key industries could make tariffs or other trade restrictions politically difficult.
Pharmaceutical Industry. As a candidate, President Biden issued a proposal to expand domestic manufacturing of pharmaceuticals. Members of both parties in Congress have proposed legislation to achieve this objective, as well, such as the Strengthening America's Supply Chain and National Security Act introduced in March 2020 and the US Pharmaceutical Supply Chain Review Act introduced in June 2020 that would have required interagency review of US reliance on China for pharmaceuticals. We expect the Biden Administration to move toward using some domestic preferences in procurement to increase domestic pharmaceutical manufacturing. We also believe that there will be support for financial incentives to build or expand domestic pharmaceutical infrastructure.21 In addition, the Biden Administration is likely to focus trade policy efforts on reducing reliance on China through engagement with allies.
We also expect the Food and Drug Administration (FDA) to take steps to increase scrutiny and enforcement with respect to high-risk foreign supply chains. Under Section 3112 of the CARES Act, manufacturers are required to develop redundancy risk management plans that assess the risk to supply chains. The CARES Act empowers FDA to analyze these plans in their inspections. FDA can use the information contained in these plans to assign risk levels to products. FDA could use these risk scores to increase the inspection frequency over products that it regards as having problematic supply chains. Increased agency scrutiny could lead to a greater chance of post-market compliance actions and delays in product approvals.
The White House signaled that the EO is just the Biden Administration's first effort to address supply chain vulnerabilities. The reports flowing from this EO will provide policy recommendations that could shape key domestic policy actions, including Biden Administration approaches to trade policy, government procurement, multilateral cooperation with allies on China, and cybersecurity. We anticipate that efforts directed at procurement, curtailing imports, and limiting reliance on China are more likely to receive broad political support than steps requiring funding for domestic policy initiatives. Companies with interests in these industries can weigh in during the agency studies—the EO directs agencies to seek public input.22 Early in the study process, companies in affected sectors should convey their concerns to lead agencies developing the reports as well as their congressional allies.
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For example, in March 2020 Senators Elizabeth Warren (D-MA) and Marco Rubio (R-FL) introduced the Strengthening America's Supply Chain and National Security Act, aimed at reducing US reliance on China for pharmaceutical products. And, in June 2020 Rubio and Warren introduced the US Pharmaceutical Supply Chain Review Act that would have required interagency review of US reliance on China for pharmaceuticals. Likewise, in June 2020 Senators Mark Warner (D-VA) and John Cornyn (R-TX) introduced the Creating Helpful Incentives to Produce Semiconductors (CHIPS) for America Act, aimed at reducing US reliance on Chinese semiconductor production.
See EO Chapeau ("More resilient supply chains are secure and diverse — facilitating greater domestic production, a range of supply, built-in redundancies, adequate stockpiles, safe and secure digital networks, and a world-class American manufacturing base and workforce. Moreover, close cooperation on resilient supply chains with allies and partners who share our values will foster collective economic and national security and strengthen the capacity to respond to international disasters and emergencies."); Fact Sheet: Securing America's Critical Supply Chains, ("The E.O will build on bipartisan Congressional action and leadership on this issue, and the Administration will remain in close touch with Congress to solicit recommendations during the review.").
Utilizing the DPA to address near-term semiconductor shortages has already been called for by a bipartisan group of Senators and Representatives in a recent letter to President Biden. Letter from Sens. Marco Rubio (R-FL) and Chris Coons (D-DE) to President Biden.
H.R. 6395 (Became Pub. L. 116-283).
In addition to the supply chain assessment called for in this executive order, the Biden Administration has previously issued an Executive Order initiating an assessment of the vulnerability of the supply chain for medical products needed in pandemics. Section 3101 of the CARES Act of 2020 also directed that HHS contract with the National Academies of Sciences, Engineering, and Medicine to perform a comprehensive assessment of the security of the medical product supply chain. That study is underway.
EO Section 2 ("In implementing this order, the heads of agencies should, as appropriate, consult outside stakeholders — such as those in industry, academia, non-governmental organizations, communities, labor unions, and State, local, and Tribal governments — in order to fulfill the policy identified in section 1 of this order.").