DoD issues guidance as ban on Chinese companies takes effect

The first phase of the Pentagon’s effort to eliminate Chinese military-linked companies from the defense industrial base supply chain takes effect this week, barring defense contractors from working directly with companies on the department’s blacklist. 

Section 805 of the fiscal 2024 defense authorization bill prohibits the Defense Department from entering into, renewing or extending a contract for the procurement of goods, services or technology with firms designated by the Pentagon as Chinese military companies under its Section 1260H list. This “direct” ban went into effect June 30.

In 2027, however, the rules will get much stricter — the legislation requires the Defense Department to stop buying goods, services and technology from companies that are indirectly involved with firms blacklisted by the Pentagon by June 30, 2027. Cutting ties with those companies can be far more challenging than just avoiding Chinese businesses on the 1260H list.

“There are a lot of firms that are doing business, either knowingly or unknowingly, with firms that are connected to 1268H firms, we need to illuminate those challenges, those connections. We need to connect with the programs and the firms that are likely affected by this, and we need to make a direct effort to go ahead and remove them,” Michael Cadenazzi, assistant secretary of defense for industrial base policy, said last year.

The Defense Department updates its 1260H List annually — this year, the department significantly expanded its blacklist, adding dozens of subsidiaries and affiliates as well as companies that span key industries including artificial intelligence, consumer electronics, e-commerce, energy and semiconductors. The Pentagon published the most recent version of the list in June.

China hawks on Capitol Hill have long pushed to expand the consequences of being placed on the Pentagon’s blacklist, including barring DoD from working with companies that retain consultants lobbying on behalf of designated Chinese military companies. That ban has already taken effect.

To help defense contractors comply with new and upcoming restrictions, the Defense Department launched a website outlining the implementation timeline, compliance requirements and waiver process.

“People need to get ahead of it, because if you’re starting to ask for a waiver starting in 2027, I think that’s going to be a painful process for everyone,” Cadenazzi said.  

To receive a waiver, contractors must provide a “compelling justification for the additional time to implement the requirements,” as well as a phase-out plan to eliminate goods, services, or technology produced or developed by companies on the Section 1260H list. 

“We’d rather you go ahead and start early and get ahead of it, and there’s plenty of great commercial supply chain tools that are out there that you can subscribe to, that you can go ahead and get insights on these issues. You should do that. You should take advantage of all this information at scale. If you have questions, you should reach out to our office. We think it’s going to be a great opportunity for us to shift investment into domestic firms and increase the amount of demand,” Cadenazzi said.  

The Chinese government has imposed trade restrictions on dozens of United States firms in response to the Pentagon blacklisting certain companies. Tech giant Alibaba, which was placed on the most recent list, has already filed a lawsuit against the Defense Department over its designation as a Chinese military-linked company.

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