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Navigating global trade compliance

Opportunities await companies that address complex regulatory issues.

Features | September 18, 2024 | By: Andrew Tuggle

ID 334929518 © Dzmitry Auramchik | Dreamstime.com

Manufacturers of advanced textiles often are new entrants in young markets, so the regulatory hurdles can feel high—or invisible, until you hit them. This article highlights three regulatory issues related to global trade compliance, which advanced textile manufacturers must navigate to succeed in the international market.

Unlocking government contracts

The customer for advanced textiles often is the military or another government entity. Selling to governments can be very lucrative. The U.S. government (USG) spends billions of dollars annually on procurement, making it an attractive market; however, selling to the government comes with a unique set of challenges. Particularly in the U.S., the rules of federal procurement can feel like a barrier to entry—and the rules create particular burdens for companies with cross-border supply chains.

Among these challenges are the USG’s preferences for buying goods from domestic sources or certain approved trading partners. Some of these preferences are codified in statutes, such as the Buy American Act (BAA) and the Trade Agreements Act (TAA), and their implementing regulations.

Buy American Act 

Under the BAA, in many situations the USG must purchase only “domestic end products.” BAA applies when (1) the procurement is intended for public use within the United States; and (2) the items to be procured or the materials from which they are manufactured are present in the U.S. in sufficient and reasonably available commercial quantities of a satisfactory quality. But what constitutes a domestic end product? Generally, it’s an item that is manufactured in the U.S., and the cost of its U.S.-origin components exceeds 55 percent of the cost of all components.

For example, consider an advanced textile used in military uniforms. If the fabric is woven in the U.S. using mostly imported fibers, it might not qualify as a domestic end product, if the cost of the imported fibers exceeds 45 percent of the total component cost. This component-level analysis can be complex and requires careful tracking of your supply chain and costs.

As with any rule, there are some exceptions to the BAA. One important exception is the U.S. Dept. of Defense’s exception for commercially available off-the-shelf (COTS) items, which are treated as domestic regardless of the origin of their components. Additionally, waivers to BAA requirements are available under certain circumstances, which include nonavailability, public interest, and urgent requirement.

Trade Agreements Act 

Other important exceptions are provided by the TAA. Specifically, the TAA waives BAA requirements in some situations for products from TAA designated countries. The list of TAA designated countries is determined by the underlying trade agreements which the TAA operationalizes. Products from these countries are treated as domestic for procurement purposes.

There are currently more than 120 TAA designated countries, so this is a very significant exception. These provisions can be a game-changer for advanced textile manufacturers with international supply chains or production facilities in TAA-designated countries. However, it’s crucial to remember that the devil is in the details. Only contracts exceeding certain thresholds (which vary according to the particular underlying agreement) qualify for treatment under the TAA. Manufacturers must carefully review their contractual terms to ensure compliance with BAA and TAA requirements.

Export controls

BAA and TAA primarily affect imports. But advanced textile manufacturers must also navigate complex regulations governing exports. Advanced textiles are often made or used with advanced technology, with potential national security or foreign policy implications. USG regulations control the export of such products. The two regulations that are most important for the advanced textiles industry are the International Traffic in Arms Regulations (ITAR) and the Export Administration Regulations (EAR).

International Traffic in Arms Regulations

ITAR controls “defense articles” that are listed on the United States Munitions List (USML). Several categories of the USML describe articles that might relate to advanced textiles, including:

  • Category X(a)(1): Body armor providing a protection level equal to or greater than NIJ Type IV
  • Category X(a)(2): Personal protective clothing, specially designed to protect against or reduce detection by radar, IR, or other sensors at wavelengths greater than 900 nanometers
  • Category XIII(e)(5): Composite armor with Em greater than 1.4 and meeting or exceeding NIJ Level III

Manufacturers unsure about whether their product is described on the USML (and thus subject to ITAR) can request a Commodity Jurisdiction (CJ) determination from the Directorate of Defense Trade Controls (DDTC). CJ requests are particularly useful when product development has been funded by the DOD. That’s because many of the USML categories are expressly directed to DOD-funded items.

ITAR compliance is a complex field beyond the scope of this article. But, in short, if you manufacture ITAR-controlled items, then you must register with DDTC—regardless of whether you export those items or not. Additionally, if you do export such items (and if no exceptions apply), then you will need a license from DDTC to do so. ITAR also mandates certain record keeping and reporting of ITAR-controlled activities.

Export Administration Regulations

One step down from ITAR, the EAR controls “dual-use” items—i.e., products having both civilian and military applications. While most items are technically subject to EAR, many are not highly controlled. Controlled items are listed on the Commerce Control List (CCL) under Export Control Classification Numbers (ECCNs).

For the advanced textiles industry, relevant ECCNs might include 1A613, 1B613, 1D613, and 1E613, which relate to armored and protective equipment, including personal protective equipment. Though EAR is less strict than ITAR, it still sometimes requires exporters to get a license from the Bureau of Industry and Security (BIS), depending on the particular product, end-user, and end-destination.

It is important to note that one should always start with the USML before looking at the CCL. ITAR takes precedence over EAR. Even if you are certain that your product is not a “military” item, document your analysis in case USG has questions later.

Regulating foreign investment

The Committee on Foreign Investment in the United States (CFIUS) is yet another hurdle that advanced textile manufacturers can face. For the same reasons that the USG regulates the export of advanced textiles, it sometimes regulates foreign investment into the industry.

CFIUS has jurisdiction over foreign investments into U.S. businesses involved with “critical technologies.” These are defined to include:

  • Items controlled under ITAR
  • Certain items controlled under EAR for national security, chemical and biological weapons, nuclear nonproliferation, missile technology, or regional stability reasons 
  • “Emerging and foundational technologies” as defined under Section 1758 of the Export Control Reform Act (sometimes called “Section 1758 technologies”).

The CFIUS process is triggered when a foreign person acquires or invests in a U.S. business involved with critical technologies. The review process can be complex and time-consuming, potentially impacting deal timelines, so, it’s important to identify as soon as possible whether CFIUS has jurisdiction over the transaction. Both the buyer and seller must work together on any CFIUS filings.

According to the 2023 CFIUS Annual Report to Congress, several industries relevant to advanced textiles saw regulated foreign-investment activity. For instance, NAICS code 3252 (Resin, Synthetic Rubber, and Artificial Synthetic Fibers and Filaments Manufacturing) and 3328 (Coating, Engraving, Heat Treating, and Allied Activities) were among the sectors reviewed by CFIUS.

Clearing the regulatory hurdles

As the advanced textiles industry continues to innovate and expand globally, manufacturers must be prepared to clear increasingly complex regulatory hurdles. Compliance requires careful planning, detailed record-keeping, and expert guidance, but great opportunities await companies that address these issues. Such companies will have significant competitive advantages for accessing lucrative government contracts and expanding into new international markets.

The key to success lies in staying informed, implementing robust compliance programs and being proactive in addressing regulatory requirements. By doing so, advanced textile manufacturers can not only avoid costly mistakes, but also position themselves as trusted partners in both the public and private sectors, driving growth and innovation in this exciting industry.

Andrew Tuggle is in the International Trade and National Security group of the Womble Bond Dickinson (US) LLP law firm (Affiliate ATA member). He is based in Huntsville, Alabama. https://www.womblebonddickinson.com/us/people/andrew-tuggle

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