Podcast: U.S. Economic Relationship with China and Reshoring Manufacturing Capabilities

Dan Sennott: Thank you very much for joining us. I'm Dan Sennott of the National Security Practice Group here at Holland & Knight, and this is the Eyes on Washington podcast. This is the second in a series of podcasts we are doing on the National Defense Authorization Act, or NDAA. I'm joined today by two of my partners from the Public Policy & Regulation Team here at Holland & Knight first Nasim Fussell. Nasim, you joined the firm about a year ago from Senate Finance Committee, where you were the chief international trade counsel. Could you tell us a little bit about your practice?

Nasim Fussell: Sure. Thanks, Dan. I help clients navigate the intersection between trade law and trade policy, and that really runs the gamut. I do a lot of Capitol Hill facing work, helping to craft strategic plans to address trade legislation, trade negotiations. I also provide legal advice on the gamut of trade issues ranging from customs, all things tariffs, export control, sanctions and forced labor, among other issues.

Dan Sennott: Thanks, Nasim. And we also have with us today, Chris DeLacy. Chris, can you tell us a little bit about your practice? I know you've been with the firm for many years.

Chris DeLacy: Yeah, sure. Thank you, Dan. So I have been with the firm for going on 20 years, and my practice is pretty diverse. I represent all sorts of different clients, but I have a particular focus on technology issues. And lately there has been a lot of my work that's focusing on trade and competition issues. So glad to be part of the discussion today and look forward to chatting.

Brief Background: Economic Competition with China

Dan Sennott: Great. Well, we have a great podcast today. We'll be discussing provisions in the FY22 NDAA related to China and efforts to build a substantial U.S. semiconductor manufacturing capability. Over the last few years, there has been a lot of bipartisan concern over the U.S.'s reliance on China and how China's actions will impact our national security. In addition, there's continuing concern over China's record on human rights. So first, let's talk about how we got here. Nasim, how did we find ourselves in an economic competition with China in the first place?

Nasim Fussell: That is a great question, Dan. In the interest of time, let's just start at the end of the last century, do just a brief overview. There's a lot that has happened, but in general, there has been sort of a shift in what our goals are vis a vis China. In the late 70s and 80s. The overarching connection sort of grounding our relationship was that we were each trying to counter the Soviet Union, and that was sort of a binding situation for us, bringing us together, at least on this significant geopolitical issue. But with the collapse of the Soviet Union, you know, we needed to find a new connection here for our relationship. And under President Clinton, there started to be a real significant focus on China's entry into a market based world order. In 2000, President Clinton granted with Congress China Permanent Normal Trade Relations. And this is what paved the way for China to enter the World Trade Organization. So China enters the World Trade Organization with a lot of fanfare. This is now 20 years ago, with the expectation that they would live up to the commitments of this rules-based trading system. And, you know, live up to the expectations of its trading partners to abide by this system and really enter into this global market with a commitment to market principles. However, over the years, that has disappointed many to say the least. You know, just quickly ticking through some key points in this timeline. Despite this healthy dose of skepticism that a company and as an entry into the WTO, it was broadly welcomed, I think with this notion that it was going to lift many out of poverty. This also this understanding that there were a significant number of the world's customers in China, such a populous country.

The overarching connection sort of grounding our relationship was that we were each trying to counter the Soviet Union, and that was sort of a binding situation for us, bringing us together, at least on this significant geopolitical issue. But with the collapse of the Soviet Union, you know, we needed to find a new connection here for our relationship.

But by 2006, what we started to see was a little bit more of a focus on China, on this concept of indigenous innovation, more so than following WTO rules by the time President Xi took office in 2013, things had shifted even more. Xi announced the Belt and Road Initiative and then in 2015, announced the Made in China 2025 initiative. Put together, these two were a significant amount of industrial policy that we saw coming out of China, an increasing number of cases being filed against China at the WTO for failure to live up to its commitments and significant effort by China to expand its economic influence and power across the world. And so by the time we got to 2017 and President Trump taking office, we started to see from the United States in particular, a significant number of unilateral actions and a shifting political mindset across both parties on China. And so that brings us to today. And that's quite a swing in 20 years, but that's a brief history of how we find ourselves in an economic competition with China today and looking at some of the policies we're looking at here in the United States to address that.

By the time we got to 2017 and President Trump taking office, we started to see from the United States in particular, a significant number of unilateral actions and a shifting political mindset across both parties on China.

Legislative and Non-Legislative Efforts to Address Competition with China

Dan Sennott: And there's no shortage of legislation that seems to try to address that economic competition and national security competition with China. And the NDAA, this past year, has had several provisions that we'll highlight but straight off the bat, I think one that's interesting is there's a provision that requires the SecDef in consultation with SecState to develop and implement a plan to reduce reliance on services, supplies or materials obtained from sources located in China. So that seems to, Nasim, go right at that the issues that you've been talking about?

Nasim Fussell: Yes, definitely. I would agree with that. And you know, I think that's certainly how Congress is thinking about this is just looking at what's happened over the last 20 years and trying to make sure that the U.S. is in a position to proactively address where we are now and where we may be headed vis a vis China, rather than being in a position of having to respond after the fact in a sort of emergency fashion. You know, it's interesting, though, that there have been other mechanisms outside of legislation, other attempts to deal with this growing economic influence exerted by China. And one example of that dating back to 2008 is the talks that the United States entered with a bunch of Pacific Rim countries became the Trans-Pacific Partnership negotiations and now a comprehensive and progressive Trans-Pacific Partnership agreement. This was an attempt really to counter through a trade agreement with multiple parties so that it was not a unilateral action any particular country was taking to counter China's growing economic and trade influence. But it was also considered very much a foreign policy tool. And in 2009, when President Obama took office and decided to continue talks that the Bush Administration had started. Secretary of State Clinton at the time framed the discussions as you know, this significant U.S. strategic pivot to Asia and there is a significant geopolitical strategic security thinking there as well. So, you know, it's interesting since we're talking about the NDAA today, defense security, there has been thought for some time now about ways to counter China. You know, as many of our listeners probably know by now in 2017, when President Trump took office, he made the decision to withdraw the United States from the TPP. And so we are now not members. And instead, there is this heavy focus on legislation and in a new initiative, which I may touch on later, but heavy focus on legislation and trying to find a way to counter this growing influence.

It's interesting since we're talking about the NDAA today, defense security, there has been thought for some time now about ways to counter China.

Dan Sennott: So, the TPP initiative was outside of the WTO. Is that right?

Nasim Fussell: That's right.

Dan Sennott: And it seems to me that now we're seeing, as you, as you said, sort of the rise of Congress being very concerned on a bipartisan basis about competition with China and therefore it is moved more to legislating on this issue. Is that is that right?

Nasim Fussell: That's what we've been seeing and certainly what we saw more over the course of the last four years, as well as some unilateral actions on the part of the Trump Administration in the form of tariffs and sanctions. In fact, the Trump Administration launched an investigation under the United States Trade Representative's office into the non-market practices, trade practices of China, and produced a report that targeted many of these issues that U.S. companies were increasingly facing in China. Top of that list being forced technology transfers and intellectual property rights violations and decided as a result of that report under authority it has under the law, to impose a significant amount of tariffs on Chinese imports into the United States. At the same time, the administration was focused heavily on, as you noted Dan, alleged human rights violations, as well as sanctions as a tool to address some of those alleged violations and other issues, Huawei being key, which in the interest of time I won't delve into today. But yeah, so all of that, I think, did create a little bit of tension with some of our allies. This perception by some of our allies that we were working alone on an issue that was really confronting many of us. So what's interesting that the Biden Administration has done now is to take that feedback and to, rather than rejoin the TPP, as many expected or hoped that we would do, given that Biden was Vice President championing TPP under Obama. What this administration is now doing and just launched is this concept of an Indo-Pacific framework which will not take the form of a traditional trade agreement as we are used to. And it's a concept that I think is very much still in development with a combination of initiatives to focus on supply chains, digital trade and notably will not have to go to Congress for approval. We have to work in that lane by the administration and then a lot of work in Congress to try to deal with China in a number of different ways, many of which I know you are going to discuss throughout this podcast, Dan.

In fact, the Trump Administration launched an investigation under the United States Trade Representative's office into the non-market practices, trade practices of China, and produced a report that targeted many of these issues that U.S. companies were increasingly facing in China. Top of that list being forced technology transfers and intellectual property rights violations and decided as a result of that report under authority it has under the law, to impose a significant amount of tariffs on Chinese imports into the United States.

Will the U.S. Ever Rejoin the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP)?

Dan Sennott: Just to pull that string a little bit more, the Trump decision to pull out and sort of the rise of populist views, that was the main reason why we pulled out of TPP. Do you see a scenario in the future where we rejoin?

Nasim Fussell: I do. You know, I think there is hope alive, at least on my part, that this is something that we can do in the future. And I will just emphasize that I think it is something we should do. I'm very pleased to see that we are at least talking about a framework, particularly on digital trade. But I think going back to the original concept, the original goals to counter a growing economic and trade influence from China, CPTPP would very much still achieve that. And what's notable now is that in the last few months, China has sought to join the CPTPP. So now imagine a world where you know, this initiative that was intended to counter China's growing influence would include China and would exclude the United States. So I don't think that's a tenable option. And I think that, that pressure is going to be felt and there are plenty in Congress who believe that it is the right thing to do to join. But the politics of the situation right now are such that there are some very strong views, I think, on the opposite ends of each party that there would have to be significant changes updates made to the CPTPP to make it politically feasible for the U.S. to implement and join. So it's going to take a while. No doubt, but it is something that I think should very much remain on the table for the United States because we cannot afford to be left out of such a significant organization.

The politics of the situation right now are such that there are some very strong views, I think, on the opposite ends of each party that there would have to be significant changes updates made to the CPTPP to make it politically feasible for the U.S. to implement and join.

Dan Sennott: And I think the interesting thing to bring it back to the FY22 NDAA, you had mentioned before human rights, and it seems that there are provisions in this year's NDAA that are both focused on very specific issues. There is a provision in there that requires contractors and subcontractors to disclose if they have employees working any part of a DoD contract in China. There's another one that prohibits the DoD from purchasing from China personal protective equipment like masks, face shields, gloves, gowns, etc. So we have those specific prohibitions, but then we also have more strategic level, and human rights is the one that you had mentioned a prohibition in this year's bill and using any DoD funds to knowingly procure any products or materials that are mined or manufactured in the Uyghur Autonomous Region. And that kind of is one provision that is extended then in a bill that was passed December 23rd, the Uyghur Forced Labor Prevention Act, much more extensive legislation that establishes a rebuttable presumption there pretty much anything that's manufactured in the Uyghur Autonomous Region will be prohibited from entering into the U.S. Now, there's some ways of establishing or overcoming that presumption, but having that in place is really something that I'm sure our listeners and anyone who's involved in manufacturing would be interested in.

Semiconductor Manufacturing and the CHIPS Act

Dan Sennott: So I now want to transition over. The NDAA was used as a vehicle this past year to pass the CHIPS Act, and we've talked about in the past about the NDAA passes every year, it's must-pass legislation so you'll often find provisions and other initiatives that are not directly defense related that end up in the NDAA and one of them was the CHIPS Act, and that authorizes billions in funding to develop the U.S. semiconductor manufacturing industrial base. Now, the authorization was passed, but there was not any funding actually appropriated against the CHIPS Act. And there's been quite a bit of activity this year on legislation outside of the NDAA that would both refine and fund, the CHIPS Act and then build semiconductor manufacturing capability in the U.S. So, I want to turn to Chris now. Chris, why are semiconductors a national security issue?

Chris DeLacy: Thank you, Dan. So I think anyone who's watched the news lately is aware that we have issues with our supply chain and semiconductors are an important part of that story right now. Industries like the auto industry and several others are experiencing delays because there is not enough chip capacity. So this has become an area of focus for the government, for the executive branch, for the Congress. Everyone is searching for ways to resolve this issue. In addition to industries like the auto industry, semiconductors are essential for the technology industry and for reasons of national security. And so the fact that the U.S. has lost leadership in this space over the past decades has suddenly come to the attention of the government writ large, and it has become a stated policy goal, a bipartisan policy, goal to enact policies that will put the United States back at the forefront of semiconductor industry and semiconductor manufacturing and development. And certainly, when it comes to China, there is an awareness that China is attempting to do the exact same thing. And so it's a bit of a race. The U.S. has a significant lead right now, but China wants to catch up and ultimately surpass the United States. So this has become a policy goal of the U.S. government to make sure that we maintain this advantage and reshore some of the capabilities that have left the United States and gone overseas over the past decade or so.

It's a bit of a race. The U.S. has a significant lead right now, but China wants to catch up and ultimately surpass the United States. So this has become a policy goal of the U.S. government to make sure that we maintain this advantage and reshore some of the capabilities that have left the United States and gone overseas over the past decade or so.

USICA and the America Competes Act

Dan Sennott: So we mentioned the CHIPS Act just a bit ago and understand that while the act has passed, there are some tweaks to CHIPS Act that are in the pending legislation. And then of course, there's the funding piece that is going to need to be taken care of. And that's really coming through in two competing bills. You have USICA on the Senate side and then America Competes on the House side. Can you tell us a little bit about what these two bills do?

Chris DeLacy: Sure. So USICA passed the Senate this past summer. It is a massively bipartisan bill. I understand that Majority Leader Schumer has renamed it and so instead of USICA, he wants to call it, Make it in America. At one point, it was called the Endless Frontiers Act, which is my personal favorite. But this legislation has been awaiting House action for some time. And recently, the House did respond. They passed the America Competes Act, and now Congress is working on a path forward to resolve differences between the two bills and send a final product to the president. Unlike the Senate bill, the House bill is not bipartisan. I think there was one House Republican that voted for the bill. And there's also some extraneous, arguably extraneous provisions that are included in the House bill that don't have corollaries in the Senate bill. And so those types of issues are being worked out now. I think the Senate had hoped to avoid a formal conference and perhaps work in a pre-conference fashion in order to save time. But it appears there will be a formal conference. We expect conferees will be named in the near future. Right now, those decisions are being worked out. Also, we understand that the paperwork from the House has not been sent over to the Senate, so that technical detail needs to be resolved. And then the Senate will have to go through a procedural vote in order to head to conference on the bill. But all indications are that the goal is to complete action on the legislation before Memorial Day. I spoke to Senator Todd Young last week. He's one of the primary proponents of the bill in the Senate. He said that was still the goal, so that's not a lot of time to get this work done. But there does seem to be a commitment in both chambers and at the White House to accomplish this so that's the plan at this point. But there's a lot of details that still need to be worked out.

How the Department of Commerce Plans to Administer the CHIPS Act

Dan Sennott: And you had the opportunity to work with a few clients now who are interested in using CHIPS Act, USICA in order to grow that capability within the United States to manufacture semiconductors. In your conversations with Department of Commerce, what is your understanding of how they're going to administer, let's say, the CHIPS Act?

Chris DeLacy: Yeah, so some of those details are still being worked out. There's a request for information that is out right now, where the department has asked for input on how to do just that. Behind the scenes, they have been working for months now, taking meetings and talking with industry to determine how best to implement this program. This is a dramatic change for the department. We're talking about $52 billion that they're going to be doling out as part of the CHIPS Act. This is the department that has a roughly $15 billion annual budget, so this is a significant departure from the normal mission of the department. It is going to be NIST, The National Institute of Science and Technology, that's going to be actually administering the program. But this is a program that's more on par with something the Department of Defense would typically do. You know, a massive industrial base program. So I think commerce, to their credit, has been taking meetings and trying to determine how best to implement this program. I think the RFI responses will be some of the final pieces that they put in place as they put the finishing touches on their plans. But they have been meeting for months on this topic, and I think we'll be ready if and when Congress provides the funding, which is included in both the USICA bill and the America Competes Act. It is an emergency appropriation, so it received special budget status because of that and prioritizes that funding. The rest of the bill simply authorizes appropriations for additional programs that portion, the CHIPS Act portion, which, as you alluded to make some very minor tweaks to the program, is providing the funding as an emergency appropriation. So it prioritizes that funding and it should be available much sooner than it otherwise would be.

Behind the scenes, they have been working for months now, taking meetings and talking with industry to determine how best to implement this program. This is a dramatic change for the department.

Dan Sennott: And related to this area, I think what's interesting in the National Defense Authorization Act for FY22, there is already a statutory restriction that prohibits DoD from acquiring printed circuit boards from China that perform a mission critical function. Now, there are some exemptions for commercial off the shelf, etc. And this was supposed to take effect on January 1st of 2023. In the FY22 NDAA however, the implementation has been delayed to January 1st of 2027, and it further narrows the types of printed circuit boards that are restricted. So it seems to me that there is definitely an evolution of working with industry and trying to work with the businesses who are supplying many of the goods and services to the Department of Defense and to the rest of the government about how can we responsibly implement these things without having the economy grind to a halt.

So it seems to me that there is definitely an evolution of working with industry and trying to work with the businesses who are supplying many of the goods and services to the Department of Defense and to the rest of the government about how can we responsibly implement these things without having the economy grind to a halt.

Closing Thoughts: Will the U.S. Decouple from the Chinese Economy

Dan Sennott: And so I'll end on this question from both Nasim and Chris. Do we think that the U.S. is attempting to decouple from the Chinese economy? Nasim, what's your view on that?

Nasim Fussell: You know, I do think that there are some steps we're taking that may certainly cause it to appear as though we're trying to do that, but I really do believe that there is a recognition that a significantly important recognition both within the administration and in Congress, maybe not every corner, but it's there that this is a large economy and we cannot simply decouple, right? I think that there are some areas where obviously there are some very stringent measures being put in place. We talked about forced labor and in particular the Uyghur Forced Labor Prevention Act, which creates this rebuttable presumption. One could argue that is effectively congress' message to companies to just leave, right, because the burden will be so heavy to work through this law and comply. On the other hand, you could say that this is really a serious recognition of, you know, some serious human rights violations that we cannot simply let go by the wayside. More broadly speaking, I think that these guardrails are being set up for us to almost reinvent this relationship, if you will. I think that USICA and Competes are an effort to do that by making us competitive in some areas where there has been recognition over these past 20 years that we are not doing what we should be to ensure that competitiveness. And I hate to say I think there's going to be some growing pains through this process as we try to figure out what exactly is the right amount of push and pull is going to be. But no doubt there will be more measures coming. There is going to be a growing number of bills. At the same time, I think there is an understanding that we have to work together. As I noted earlier in the podcast, we have a large number of customers for U.S. products in China, and that is something that the U.S. does not lose sight of. And I think we're just trying to find the right balance for competition and a way to coexist in this new economic order vis-a-vis China.

More broadly speaking, I think that these guardrails are being set up for us to almost reinvent this relationship, if you will. I think that USICA and Competes are an effort to do that by making us competitive in some areas where there has been recognition over these past 20 years that we are not doing what we should be to ensure that competitiveness.

Dan Sennott: And parting thoughts, Chris?

Chris DeLacy: Yeah. So, when Nasim was talking about the PNTR vote in 2000, I was thinking back to that and I was working in the House at the time. I was actually in the chamber when that vote occurred, and I remember the concerns, as I recall, were with losing jobs similar to some of the debate regarding NAFTA , you know, was the U.S. going to lose jobs and the concerns were about China's treatment of its workers. I don't think there was a lot of discussion about a true economic competition between the United States and certainly not a national security competition between the U.S. and China. Back then, at least not that I recall. And so it's interesting that we've come this far. And I think that from the U.S. government's perspective, it has completely woken up to the economic challenge that China presents. I think you could argue that several years ago, perhaps there was a lack of awareness and now we find ourselves with the government being hyper aware of these issues. And I think there is the possibility for an overreaction in some cases.

I think that from the U.S. government's perspective, it has completely woken up to the economic challenge that China presents. I think you could argue that several years ago, perhaps there was a lack of awareness and now we find ourselves with the government being hyper aware of these issues.

I think that the politics has become a little bit overheated on this topic and perhaps is pulling the policy a little bit further than it needs to go. We'll have to see. I mean, that's obviously a delicate balance to strike, but I think clearly there are some folks within the U.S. government that would like to completely decouple the two economies. As Nasim stated, I don't think that's possible, and I don't think that's in the interest of either country at this point. But certainly for some folks, that is that is the answer, and that's the path that they would like to hit. So hopefully the right balance will be achieved here. I think that's much easier said than done. I think this legislation the USICA legislation is a very tangible example of how united the U.S. government is currently. I think that the FIRRMA rewrite from a couple of years ago related to the CFIUS process is another very tangible example. We're living in an era where there's not all that much bipartisan agreement, but on the topic of China, there does seem to be bipartisan agreement, a general agreement between the Congress and the executive branch. So it's a unique moment in time. Like I said, I hope the rhetoric doesn't become too overheated because there are a lot of benefits to having economic ties between the two governments. But the U.S. is certainly very, very focused on this topic and I think when we get a final product between the House and Senate on the USICA and Competes Act, that will be just the latest installment, the latest tangible example of that focus currently. So we'll see what the next chapter has for us. But I am sure there are more efforts to come on this topic as we proceed down the road.

I hope the rhetoric doesn't become too overheated because there are a lot of benefits to having economic ties between the two governments.

Dan Sennott: What an excellent discussion today about the NDAA and the U.S. economic relationship with China. I want to thank Nasim Fussell and Chris DeLacy for joining me. We'll have more NDAA related podcasts come, so watch out for those. As always, if you have any questions about the material covered in today's podcast or how it may impact your business, please reach out to our Holland & Knight attorneys. Thanks for joining and have a great day.