On February 4, 2022, the U.S. House of Representatives passed the America Creating Opportunities for Manufacturing, Pre-Eminence in Technology, and Economic Strength Act of 2022 (H.R. 4521), known as the COMPETES Act, the companion legislation to the $250 billion United States Innovation and Competition Act (USICA), which cleared the Senate with bipartisan support in 2021. The expansive omnibus bill is designed to bolster domestic manufacturing and technology capabilities, including in semiconductor production, supply chains, and renewable energy. Like USICA, the goal of the COMPETES Act is to strengthen U.S. economic competitiveness with the People's Republic of China (PRC) and other nations.
Nestled within the 2000+ pages of COMPETES is the text of the National Critical Capabilities Defense Act (NCCDA), a proposed framework to establish an interagency Committee on National Critical Capabilities (Committee) to screen and review outbound transactions by U.S. businesses that could offshore important "national capabilities" to competitor nations like China. Similar in concept to the Committee on Foreign Investment in the United States (CFIUS) but different in the particulars, the new Committee would be chaired by the U.S. Trade Representative, with participation from the Departments of Commerce, Treasury, Defense, Homeland Security, and State, among others. The Committee would be authorized to review and recommend presidential and congressional action on certain "covered transactions." As defined, "covered transactions" would include those by U.S. businesses that shift or relocate to a "country of concern," or transfer to an "entity of concern," the "design, development, production, manufacture, fabrication, supply, servicing, testing, management, operation, investment, ownership, or any other essential elements involving one or more national critical capabilities," or that "could result in an unacceptable risk to a national critical capability."
Key provisions under the framework as now proposed include the following:
- "Country of concern" includes any foreign government or person "engaged in a long-term pattern or serious instances of conduct significantly adverse to the national security of the United States or security and safety of United States persons," including a non-market economy country. An "entity of concern" is a foreign entity that is domiciled in or controlled by a foreign person having a "substantial nexus" with a country of concern. Practically speaking, the definition targets the PRC.
- "National critical capabilities" are defined broadly as those "systems and assets, whether physical or virtual, so vital to the United States that the inability to develop such systems and assets or the incapacity or destruction of such systems or assets would have a debilitating impact on national security or crisis preparedness," including medical supplies, materials related to "critical infrastructure" and natural disaster recovery, articles related to military or intelligence operations, and more.
- U.S. businesses engaged in "covered transactions" would be required to submit a written notification to the Committee, which would review and take action (e.g., notify the president or Congress) within 60 days if the Committee concludes that the transaction poses an "unacceptable risk" to national critical capabilities or national security. The Committee would also retain the authority to review non-notified transactions.
- The Committee's review would be based on several enumerated factors, including "the long-term strategic economic, national security, and crisis preparedness interests of the United States," the "distortive or predatory trade practices" of each country of concern, the "control and beneficial ownership of each foreign person" in the transaction, and the impact of the transaction on domestic industry.
As proposed, this outbound review process has the potential to regulate a significant portion of current U.S. foreign investment in China. Critics like the National Committee on U.S.-China Relations assert that NCCDA would stifle the competitiveness of U.S. companies, including those with existing operations in China. Many questions remain as to how this broadly worded proposal would be implemented, especially in relation to new filing and reporting requirements for U.S. businesses. Of course, if the proposed general framework is enacted, the Committee will be supplementing it with additional regulations and guidance, likely in consultation with relevant stakeholders and businesses.
The bill's legislative prospects are still uncertain. While the Biden administration has signaled support, as have some members of Congress from both parties, Senators Casey (D-PA) and Cornyn (R-TX) failed in their efforts last summer to include the NCCDA in USICA, in large part because of pushback from the U.S. business and investment community.
Over the coming weeks, we will be following events to see whether the NCCDA provision in the COMPETES Act survives the markup process in conference committee, where the House and Senate will be reconciling the differences between their two bills. Given the significant potential impact on U.S.-China trade, we will be closely monitoring the trajectory of the COMPETES Act, for NCCDA and other important matters affecting trade and logistics, such as the Ocean Shipping Reform Act (OSRA).
