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In this article, the authors review a proposed rule that would implement a statutory provision that prohibits agencies from procuring certain electronic products or electronic services that include or contain covered semiconductor products or services.
The Federal Acquisition Regulatory (FAR) Council has issued a proposed rule1 to implement parts of Section 5949 of the James M. Inhofe National Defense Authorization Act (NDAA) for fiscal year (FY) 2023, which prohibits agencies from procuring certain electronic products or electronic services that include or contain covered semiconductor products or services. The proposed rule follows an advance notice of proposed rulemaking that the FAR Council issued in May 2024, which resulted in comments from 18 respondents. The proposed rule is the second and penultimate step in the FAR Council’s process to implement restrictions under paragraphs (a), (b), (c), and (h) of Section 5949. When these provisions take effect in December 2027, they will ban agencies from acquiring products or services that incorporate semiconductors produced, designed, or provided by specific Chinese companies or other entities determined to pose threats to U.S. national security.
The semiconductor prohibitions will take effect on December 23, 2027, with some exceptions. Products acquired by the U.S. government before the effective date will not be subject to the prohibitions, and that exception will extend throughout the products’ life cycles.
The proposed rule is the second step of the FAR Council’s process to implement the restrictions created under the NDAA. When issued, the final rule will require contractors at all levels to provide new certifications for covered semiconductor products or services and scrutinize electronic parts, products, or services provided to the government. The final rule could have far-reaching impacts on contractors’ supply chains and their compliance obligations, potentially resulting in substantial costs. As a result, contractors should begin diligence efforts to identify covered semiconductors in their supply chains and locate alternative sources in advance of the final rule and the prohibition’s effective date. Compliance may also require the redesign of products to replace prohibited semiconductors.
Section 5949 of the FY 2023 NDAA
Section 5949 of the FY 2023 NDAA prohibits agencies from procuring or obtaining products or services that contain or use “covered semiconductor products or services”—those designed, produced, or provided by Chinese companies Semiconductor Manufacturing International Corporation (SMIC), ChangXin Memory Technologies (CXMT), Yangtze Memory Technologies Corp (YMTC), their subsidiaries or affiliates, or an entity the U.S. government determines to be owned, controlled, or connected to the government of a country of concern.
Effective December 23, 2027, the proposed rule will prohibit agencies from procuring or obtaining (1) electronic products or electronic services that include covered semiconductor products or services, and (2) electronic products for use in critical systems identified by the government which contain electronics that include covered semiconductor products or services. The second prohibition extends beyond the first by addressing scenarios in which a product destined for a critical system incorporates another electronic product that contains a covered semiconductor—for example, a ground control station that controls an unmanned aircraft containing a covered semiconductor, or a control panel within a critical system that enables an Internet of Things device that includes a covered semiconductor product or service.
Section 5949’s restrictions reflect Congress’s continued focus on countering China’s growing semiconductor capabilities. The U.S. Intelligence Community has identified significant economic and national security risks arising from foreign adversaries’ potential disruption of electronic equipment through potential “backdoors” built into semiconductors used in U.S. defense, telecommunications, and energy systems, or other malicious firmware and software introduced during the semiconductor production process. Congress attempted to mitigate this risk by banning the use of semiconductors produced by the highest-risk Chinese entities in U.S. government-procured products and services.
The proposed rule acknowledges the implementation costs to the U.S. government and industry will be substantial—estimated at more than $1 billion over 10 years—but concludes that such measures are necessary to protect U.S. national and economic security.
The Proposed Rule
The proposed rule summarizes Section 5949 and implements its prohibitions by creating a new FAR section at FAR 40.20X, Prohibition on certain semiconductor products and services; a corresponding solicitation provision, FAR 52.240-XX, Certification Regarding Certain Semiconductor Products and Services; and contract clause, FAR 52.240-YY, Prohibition on Certain Semiconductor Products and Services
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Originally published by THE GLOBAL TRADE LAW JOURNAL
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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