U.S. Regulations Can Raise Risks for Reshoring and Next-Generation Manufacturing

01 October 2014 Manufacturing Industry Advisor Blog
Authors: Gregory Husisian

More than a third of United States businesses are either bringing back or considering bringing back manufacturing activity to the U.S. through “reshoring.” Although one would think that bringing production back to the U.S. would minimize the impact of U.S. regulations of international conduct, in many cases the opposite is true.

The aggressive enforcement of U.S. law to the overseas sales and conduct of U.S. companies raises special considerations for companies engaged in reshoring of manufacturing. Although there are no special laws that apply to such companies, U.S. law has special resonance for companies engaged in this type of activity, because they need to establish new trading patterns that often emphasize collaborative relationships with affiliates and partner companies. The combination of changing patterns of trade and the need to share technical data in a collaborative fashion often changes the risk profile of the organization in a way that implicates U.S. controls on exports and overseas conduct.

Reshoring often involves not the abandonment of non-U.S. production, but rather the rationalization of production across the global footprint of the organization, with collaborative rationalization of production across a multinational production base. Generally, the firm looking to engage in reshoring will conclude that efficient production requires manufacture in multiple markets. Thus, many firms engaged in reshoring find that they often are still relying on foreign manufacturers for production, whether internally or based on sourcing from outside companies and partners. For this reason, reshoring actually can complicate the supply chain when compared to a prior situation where the U.S. firm might have entirely manufactured a product in a foreign location.

Centralizing production within the U.S. increases the impact of U.S. export controls and economic sanctions laws across a firm’s global operations. Although the U.S. Government can use aggressive theories of extra-territoriality to reach sales activities of even separately incorporated affiliates of U.S. companies, the focus is all the greater where U.S.-origin products are involved or where sales are occurring directly by U.S. persons. Firms must also consider the interaction of U.S. production with the de minimis rules of the Export Administration Regulations. Under the dual-use de minimis rules, U.S. jurisdiction generally ends if the level of U.S.-origin content falls below ten percent (in the case of sanctioned countries) or 25 percent (for all other countries). This means that the dual-use export controls generally no longer apply to downstream products that contain less than this level of U.S.-origin content, even if the downstream product is sold to a sanctioned country. Where the product is reshored, the higher level of U.S. content, as well as its sale directly by a U.S. company, means that U.S. jurisdiction over any sale is a certainty.

Companies that are engaged in reshoring often find that they need to look carefully at rules that govern what may be seemingly innocuous acts that can be deemed export activity. Reshoring often involves U.S. companies bringing non-U.S. persons to aid with the transition or to oversee new U.S. production. Even where this does not occur, the introduction of new manufacturing to the U.S. can create deemed export situations with existing, non-U.S. nationals. Because U.S. export controls “deem” the sharing of controlled technical data with a non-U.S. person to be an export to the home country of that person, increased manufacturing activity in the U.S., which may result in exposure of non-U.S. persons to controlled technical data, can draw into play these deemed export rules.

A related development that also impacts the application of U.S. regulations of exports and international conduct is the movement to next-generation manufacturing techniques. Although the use of this term is fluid, in general it involves decentralized production, using new and sometimes highly automated production techniques, often in smaller batches that allow for highly specialized output to satisfy market demand. The movement to next-generation manufacturing promises to complicate the task of adhering to U.S. regulations of international conduct. In the next-generation manufacturing environment, the sharing of technical data, which may be controlled under U.S. export control regulations, is common. Collaborative arrangements with affiliates or partners can lead to inadvertent violations, as companies that previously focused on the physical movement of products find that their internal controls pay insufficient attention to rules regarding the licensable transfer of technical data to destinations outside the U.S.

As a result, reshoring and next-generation manufacturing have attributes that place companies engaged in such activities at a high risk for potential violations. Companies that are engaged in reshoring or next-generation manufacturing initiatives carefully need to monitor the impact of such activities on the regulatory risk profile of the company.

The application of U.S. laws governing exports and international conduct to reshoring activities is complicated and generally fact-dependent. Concerns can arise under export controls laws, economic sanctions regulations maintained by the Office of Foreign Assets Controls, the Foreign Corrupt Practices Act (where dealings with foreign officials or persons who work for state-owned entities are concerned), and other laws. 

A comprehensive compliance guide that covers all of these laws, including their application in the re-shoring and next-generation manufacturing context, is available by contacting the author at ghusisian@foley.com or 202.945.6149.

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