Cost of ICTS Rule Could Go Beyond Dollars to Production Delays, Commerce Says
In a recent expansion on the cost of a rule on imports of computers, telecom equipment, robots, drones and other electronics, the Commerce Department estimated that the six nations named as foreign adversaries were responsible for more than half of U.S. imports of those goods. Commerce earlier estimated that the total cost of the regulation could be as high as $20 billion (see 2101150055), and that remains, but they broke it down into the cost to learn about the rule, the cost to develop a compliance plan, the cost for annual compliance, and the cost of compliance with investigations.
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Arent Fox, in a newsletter on the interim final rule, known as Securing the Information and Communications Technology and Services Supply Chain, said companies that import internet communications, telecom or software they should be prepared to review their transactions to consider which may fall under the rule. The government review under this ICTS regulation could delay or even stop the purchases, Arent Fox warned. “The Biden administration has reportedly paused the implementation of the rule to allow for a review, but a revised version is expected to be published for additional public comment,” Arent Fox said, and suggested that companies should submit comments on the ways “it might be unduly burdensome as written.”
On the other hand, though the rule is broad, not everything listed in the rule is going to get banned, said Peter Alfano, a lawyer with Squire Patton Boggs, in an interview Feb. 19. For example, the government is not going to look at switches going to military bases the same as a consumer wireless network router. “The professionals at Commerce were not intending to apply this to every widget used in telecom,” Alfano said.
Alfano's firm is working with both U.S. and Chinese companies on their possible regulatory vulnerabilities coming out of the rule. When they're talking to Chinese companies, their first thought is whether they export components that could be on the list and, if so, what percentage of sales that represents. “What can they proactively do to ensure they're not on the radar, so to speak,” he said. That depends on what they're selling, and what their ownership structure is like. And it's not just Chinese and American companies that need to worry, Alfano said. Companies that manufacture in Taiwan, Japan and Malaysia may also be affected if critical components are sourced from China and fall under the rule.
The Commerce analysis says the impact could go beyond the money that importers would have to spend to comply. If those companies have to find inputs from other sources than China, those inputs might be at a higher cost. Even domestic producers of the restricted import may end up raising their prices since they will have a higher demand.
“In addition, other firms in the same industry, even those which did not engage in transactions affected by the Rule, may face higher production costs as they compete for a reduced supply of available inputs. As these firms’ input costs increase, the prices of their products may also increase, resulting in fewer sales, a smaller quantity produced, and lower profits,” the new analysis said. So the entire industry could have lower profits, it concluded.
Products that include the inputs, imported or not, may become more expensive, the analysis said. And in satellite, telecom and other industries affected, companies may have to continue to use outdated systems because companies will have to spend more time evaluating whether imports could be banned unexpectedly, which would delay the completion of building a new system. A lot is still unknown, however, because it's not clear which ICT specific products will be included under the restrictions or bans. The U.S. Chamber of Commerce would like to see the Biden administration pause work on the rule (see 2101270058)