Industry groups urge lawmakers to cut China-based semiconductor ban for federal contracts from defense policy bill

By Sara Friedman  / November 29, 2022

A coalition of industry groups is pushing for Senate Armed Services Committee leadership to drop an amendment from the fiscal year 2023 defense authorization bill that would extend the current ban on federal contractors using equipment and services from Huawei and ZTE to include three Chinese semiconductor companies.

The amendment from Majority Leader Charles Schumer (D-NY) and Sen. John Cornyn (R-TX) is in the Senate version of the legislation. It’s unclear when the massive policy bill will be considered on the Senate floor.

The amendment bans federal contractors from using semiconductor products and services designed or produced by the Semiconductor Manufacturing International Corporation (SMIC), ChangXin Memory Technologies (CXMT) or Yangtze Memory Technologies Corp (YMTC). It also leaves the door open for the defense secretary to add companies if there is reasonable belief that the entities are owned or controlled by the government of a foreign country.

“As currently crafted, and despite industry attempts to provide feedback on very short notice, the amendment is not fixable in the limited time available to the Senate to consider the" defense authorization bill, the coalition says in a Nov. 22 letter.

The amendment is an update to Section 899 of the FY-19 National Defense Authorization Act which instituted a two-part ban on the use of Huawei and ZTE equipment and services. Part A applies to internal government use and Part B extends the requirement to federal contractors.

“Left unaddressed, adding the covered semiconductors to part B of section 889 would harm federal agencies’ ability to procure the essential goods and services they need to promote our nation’s well-being, while putting added financial pressure on businesses that are operating in an inflationary economy,” the coalition writes.

The letter identifies “key problems” related to Part B and the coalition urges lawmakers to leverage to Federal Acquisition Security Council to develop a “more workable approach” for the government’s supply chain security needs.

The coalition is led by the U.S. Chamber of Commerce and letter signees include the Aerospace Industries Association, Alliance for Digital Innovation, Competitive Carriers Association, CompTIA, CTIA, Information Technology Industry Council, National Defense Industrial Association, NCTA-The Internet & Television Association, NTCA-The Rural Broadband Association, Professional Services Council, Telecommunications Industry Association and USTelecom.

The letter expresses concern over the term “use” in the FY-23 amendment and notes that Part B of Section 889 was released as an interim final rule in 2020 but never finalized.

“Semiconductors are small subcomponents found in every system with electronics—such as a toaster containing a couple of semiconductors to a vehicle containing hundreds of semiconductors," the letter says. "Including semiconductors in part B would make policy design and implementation unquestionably vague, overly inclusive, and not risk based.”

If the amendment is passed as written, the letter says, “many businesses with international and domestic operations would be forced to halt their work providing key products and/or services to U.S. agencies.”

The coalition argues U.S. contractors would face “many difficulties” in determining whether covered semiconductors are used in third-party systems including payroll, accounting, logistics and travel.

“The identity of a semiconductor producer is unlikely to be apparent and could require tracing throughout the entire supply chain. Interpreted broadly, expanding part B to cover semiconductors could require entities that do business with the U.S. government to trace their entire supply chain -- perhaps down to the component level -- regarding every item of equipment used anywhere in a contractor’s enterprise,” according to the letter.

The coalition emphasizes potential negative impacts for small and medium-size businesses as well as compliance burdens for government contractors and grant or loan recipients when it comes to identifying every single electronic device in their systems.

The letter proposes using the Federal Acquisition Security Council instead of creating a new ban for semiconductors to address national security threats from foreign semiconductors, and says the approach will allow decisions to be adjusted over time depending on the current threat environment.

“Rather than using the blunt, permanent prohibition that part B entails, Congress has purposefully created the FASC to improve executive branch coordination, foster supply chain information sharing, and initiate actions to address supply chain risks, including specific semiconductors,” the letter says.

The coalition explains, “The FASC -- composed of senior officials with expertise in supply chain risk management, acquisitions, or information and communications technology (ICT) -- was established a few years ago to perform functions comparable to part B, including calling for the removal of ‘covered articles’ (e.g., ICT) from agency information systems.”

However, they emphasize that “any new FASC legislation should be addressed separately from the amendment.”