China hawks encounter powerful opponent: U.S. companies

The friction shows the difficulties the government faces in translating its national security agenda into the real world, where influential industries have developed deep ties to China over many years.

Congress and the Trump administration say the measures are necessary to lessen U.S. reliance on a strategic rival that could sabotage, hack or withhold important technology. Some U.S. companies argue that the restrictions will cost tens of billions of dollars and in some cases won’t improve national security.

“We are broadly supportive of the spirit” of a law imposing new restrictions for federal contractors, Wesley Hallman, head of strategy and policy at the National Defense Industrial Association, said in an interview, adding that “some suspicion of Chinese components” is warranted.

But “if you were to apply this law very broadly in the way it is written,” he said, “just about all contractors doing work with the federal government, they would have to stop.”

China hawks in Congress have raised alarms about the corporate pushback, accusing companies of putting profits before national security.

“Tech insiders are trying to gut provisions of the defense funding bill that would restrict use of Chinese tech products. Senate negotiators, don’t give in! This is not the time to go soft on #China,” Sen. Josh Hawley (R-Mo.) tweeted Oct. 1.

“Under no circumstances should we weaken or delay implementation of our laws banning the U.S. federal government and government contractors from using Huawei equipment,” Sen. Tom Cotton (R-Ark.) tweeted this summer, a position his office said he maintains. “That would be a gift to the Chinese Communist Party.”

The new restrictions have been proposed or enacted in a mix of bills, laws and executive branch actions affecting a range of industries.

Prohibitions adopted with bipartisan support in an annual defense-spending law are drawing particular industry ire.

As of Aug. 13, the National Defense Authorization Act banned the government from hiring contractors that use telecom or video-surveillance equipment or services from five Chinese companies: Huawei, ZTE, Hytera, Hikvision and Dahua. The goal of the ban is to prevent “the exfiltration of sensitive data from contractor systems,” the government said in regulations published in July.

The prohibition affects a broad range of companies that work for the government. Industry associations representing airlines, automakers, banks and IT contractors have broached the restrictions in meetings with lawmakers, according to lobbying disclosures compiled by the Center for Responsive Politics. Companies including Ford, FedEx and Honeywell have also lobbied on the provision, known as Section 889.

In a July letter, two dozen industry associations urged Congress to delay the ban, saying an imminent rollout would “jeopardize the federal government’s ability to procure the essential goods and services it needs to promote our nation’s well-being, while simultaneously placing added financial pressure on many industries that are struggling to rebound economically and keep the pandemic in check.”

The U.S. Chamber of Commerce also urged a delay of one year, arguing in a September letter to the Office of Management and Budget that “most firms that do business with the government have little to no certainty about how to comply with the regulation owing to a hurried process.”

The Chamber said that U.S. industry “shares policymakers’ national and economic security goals underlying section 889, including taking costly actions to limit the presence of [the Chinese companies] in its digital infrastructure.”

But it protested that the regulations as written are too broad and unclear and were rushed out a month before the ban took effect, giving industry little time to comply. The government has blamed the delay on the coronavirus crisis.

“Some 60 words in legislation resulted in an 86-page regulation that is estimated to cost government and industry tens of billions of dollars in compliance expenses,” the Chamber’s chief of staff, Christopher Roberti, and cybersecurity expert Matthew Eggers wrote.

Honeywell spokeswoman Megan McGovern said the company’s lobbying has focused on ensuring that lawmakers and government officials “understand the impact” on industry and develop “clearer implementation language.”

Ford spokeswoman Rachel McCleery said the company “focused on delaying implementation of the law to ensure the regulatory agencies had enough time to issue a workable set of rules to match the lengthy and complex supply chains of many U.S. multinational companies.”

The Pentagon appears to recognize the difficulties the ban created for some contractors. In recent weeks, the Defense Department requested and received a waiver from the Office of the Director of National Intelligence that will give it two more years to continue buying certain “low-risk” items from contractors that aren’t immediately able to certify whether they use the Chinese equipment.

“Small businesses represent a large constituency within these low-risk [products], and the waiver allows this community and all stakeholders time to understand and take appropriate actions to comply with the requirement,” Pentagon spokeswoman Jessica Maxwell said.

“The waiver received is not for our major weapon systems or any support activity related to them. Instead, it covers items that are considered a low risk to national security such as food, clothing, maintenance services, construction materials that are not electronic,” she said.

Gordon Bitko, senior vice president of policy at the Information Technology Industry Council, a trade association for Big Tech, said his members want to see the prohibitions narrowed and more sharply defined.

For example, his group has asked, if a company working for the government also provides IT services to a commercial customer that uses the Chinese equipment and is required to access the internal networks of that customer, is that a violation of the rules?

“We would like to see there be, in an ideal rule, a more clear scoping of who is covered,” said Bitko, a former top FBI official who has been meeting with lawmakers and the Pentagon to press the industry’s case.

Another section of the Senate’s latest NDAA bill is causing a similar panic among U.S. companies because it requires them to stop using printed circuit boards made in China, Iran, North Korea and Russia by fiscal 2033. The Senate recently approved the bill with bipartisan support, while the House adopted a bill containing a similar prohibition.

The bills are now being merged in conference, where industry lobbyists are pushing for changes, a campaign that prompted Hawley to urge Senate staff members not to “give in” to the pressure.

Technology and defense companies including Microsoft and Honeywell have been pushing particularly hard against the provision known as Section 808, according to legislative staff members who spoke on the condition of anonymity to discuss sensitive meetings. The Aerospace Industries Association has also emerged as an opponent, they said.

Microsoft and the AIA declined to comment.

McGovern, Honeywell’s spokeswoman, said the company and trade associations have proposed “the setup of a trusted supplier or design verification program to better protect national security.”

Printed circuit boards are a key component of most electronics, from computer servers to fighter jets. The panels hold semiconductors and other components in place and connect them to one another. “If you’ve ever broken your alarm clock or phone, that green board that the chips stick to, that is the PCB,” said John Mitchell, chief executive of IPC, an industry group representing U.S.-headquartered PCB makers and other electronics companies.

Twenty years ago, about 30 percent of the world’s PCBs were produced in the United States, but that number is only 5 percent today, after manufacturing migrated to China and other Asian nations, Mitchell said.

In a 2018 report, the Pentagon called this reliance on foreign suppliers a security risk, saying that strong domestic production of PCBs is “essential to U.S. defense and essential civilian needs.”

“The U.S. printed circuit board sub-sector is aging, constricting, and failing to maintain the state of the art” technology, the report said.

Hawley, who introduced the measure in the Senate, has said the Chinese government could “sabotage” PCBs destined for the Pentagon or “sever DoD’s access to Chinese PCBs altogether.”

Mitchell said his group supports the legislation’s push to return more PCB manufacturing to the United States.

“The proponents say if we really want to have a resilient supply chain here in the U.S., we’ve got to start drawing some lines in the sand,” he said.

But many other tech- and defense-industry groups are fighting the measure, saying it would hurt a vast array of electronics companies without necessarily improving security.

“There is little evidence that a malicious actor is restricted by geography. To the contrary, determined adversaries will always use every opportunity to advance their interests — anywhere in the world,” Neil Bradley, the Chamber of Commerce’s chief policy officer, wrote in a Sept. 29 letter to the Senate and House armed services committees. “No company is immune to disgruntled employees, rogue vendors, or malicious actors exploiting security vulnerabilities to insert spyware or carry out other malicious modifications.”

He added that the rules would be challenging to implement for producers of common, low-risk products such as calculators, audio speakers and desk telephones.

Mitchell agreed that reshoring PCB manufacturing would increase costs for electronics companies and the Pentagon. “But would you rather have a cost increase or not have the ability to make electronics in times of crisis?” he asked.

Legislative staff members said they have tried to be sensitive to companies’ complaints and have given them more than a decade to phase out the Chinese PCBs. “From the companies’ standpoint, it boils down to cost considerations,” one staff member said. “They just don’t want to do it. They’re so focused on their bottom lines that they’re willing to leave our military dependent on Chinese PCBs.”