Pentagon Plans to Nearshore Supply Chains

Tweet

Nov. 11, 2024
By: Chaney A. Finn

It has been common practice over the past several decades for U.S. entities to outsource and offshore operations overseas to benefit from lower labor costs and advantageous access to resources. The result is a complex web of global supply chains facilitated by U.S. foreign policy, economic and national security interests, and free trade agreements.

However, some companies and governments have perceived this dynamic as having shifted so that the benefit of outsourcing has become outweighed by the cost of unfair international trade practices and outright trade agreement violations. In this view, some foreign countries have engaged in illegal subsidies, currency manipulation, dumping practices, as well as failure to enforce environmental regulations, cyber espionage, and predatory investments and acquisitions. Consequently, there have been several developments incentivizing reshoring domestic production through infrastructure, subsidies, government mandates, and increased tariffs.

The consequence of offshoring also has government agencies feeling the pinch and adjusting their supply chains accordingly. The Defense Department (DoD) released its National Defense Industrial Strategy Implementation Plan for fiscal year 2025. The plan reflects the Pentagon’s desire to reshore defense supply chains to reduce risk and cost. The plan is to reshore the supply chains of “critical parts and materials” and specifically identify “adversarial sourcing risks and propose policy adjustments to further reduce the risk of adversarial sourcing, particularly relating to the People’s Republic of China and the Russian Federation.”

The plan also states that the U.S. must generally revitalize the domestic manufacturing strength. The Department is already increasing investments to expand domestic capacity and capabilities by diversifying supply chains through domestic investment. Like many U.S. companies, the Defense Department relies on adversaries for sourcing of critical commodities which poses economic and national security risk as tensions with China, Russia, and Iran have been escalating over the last decade.

In addition to reshoring to the U.S., the plan also includes promoting nearshoring operations out of China into other Indo-Pacific countries where the U.S. has closer diplomatic ties. As we have covered, this would be facilitated through the Indo-Pacific Economic Framework for Prosperity, which mostly pertains to promoting robust supply chains and economic resilience for commercial consumer goods. The IPEF will expand with the establishment of the multilateral Partnership for Indo-Pacific Industrial Resilience (PIPIR), for the development and production of military technologies, such as missiles, uncrewed systems, and advanced manufacturing capabilities.

Part of this requires the DoD to eliminate barriers for small and medium-sized businesses to enter the industrial base through policy changes to the Federal Acquisition Regulation (FAR). These changes would pertain to costing requirements, accounting and pricing methodologies, and more equitable contracting opportunities for small businesses. This is intended to reduce dependance on China for products, but will also fortify military readiness with U.S. allies in the region.

Reshoring the defense industrial base also provides security to the supply chain and improved ability to prepare and respond to disruptions as they arise to meet production requirements. Improved supply chain visibility facilitates the elimination of vulnerability, allowing the DoD to support robust inventory management and stockpiling of critical materials and minerals. This begins by assessing threats from its Supply Chain Risk Management Threat Analysis Center (SCRM-TAC) to then provide counterintelligence threat assessments and establish guidelines that enable DoD to make safer mission-critical acquisitions. This will adhere to its Prohibited Sourcing Policy which requires the DoD to identify adversarial sourcing risks and propose policy adjustments to further reduce the risk of adversarial sourcing. This type of vetting is vital as entities could have ties to adversarial actors, even if that entity is outside of an adversarial country.

For example, the DoD would be able to identify entities established by U.S. adversaries that would produce counterfeit or substandard items. In the digital space, these entities could use unsecure computing “backdoors” that could serve as hostile intelligence pathways into DoD systems to access critical information or gain control of certain systems. Identifying these entities before engaging in contract agreements refines the sourcing pool and allows the department to better assess strategy to secure the necessary production. This ultimately strengthens the U.S. ability to identify, deny, and disrupt adversarial foreign intelligence and insider threats, while securing reliance and capacity for national security-related supply chains.

Additionally, the DoD is standardizing its weapons systems and platforms throughout all military branches, and consequently, the product specifications for suppliers to produce, such as batteries and semiconductors. This allows inventory to be secured by providing flexibility to scale production across multiple suppliers to adjust for capacity, quality, or disruptions. The DoD is also investing in technology to enhance data sharing and collaboration with industry and monitor the flow of products and materials.

Supply chain visibility will continue to be a vital component to the U.S.’s national security strategy and military operations generally. While Federal agencies have higher risk of and greater impact to physical and digital supply chain disruptions because of its role in global security and the nature of its industry, the threat pertains to all entities, including public and private commercial sectors. Preemptive measures to increase supply chain visibility allow vulnerabilities to be addressed accordingly to increase product quality, shorten lead time, increase efficiency, develop best-practices, and ultimately shape policy pertaining to manufacturing.

Should you have any questions pertaining to tariffs, trade agreements, or any other trade-related questions, do not hesitate to contact any attorney at Barnes Richardson and Colburn.