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Advanced textile manufacturers often are new participants in young markets, so the regulatory hurdles can be challenging or unexpected. To succeed in the international market, newcomers must learn to navigate the various regulatory issues related to global trade compliance, such as government contracts, export controls and international regulations.
Unlocking government contracts
An advanced textiles customer often is the military or another government entity because selling to governments can be lucrative. The U.S. government annually spends billions of dollars on procurement, making it an attractive market; however, selling to the government comes with its own set of challenges. Particularly in the U.S., federal procurement rules can feel like a barrier to entry, creating burdens for companies with cross-border supply chains.
Among these challenges are the U.S. government’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).
Under the BAA, in many situations, the U.S. government must purchase only “domestic end products.” The BAA applies when 1) the procurement is intended for public use within the U.S. 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 satisfactory quality. Generally,
that’s an item that is manufactured in the U.S. and the cost of its U.S.-origin components exceeds 55% of the cost of all components.
Consider an advanced textile used in government 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% of the total component cost. This component-level analysis can be complex and requires careful tracking of the supply chain and costs.
As with any rule, there are some exceptions to the BAA. One is a U.S. Department of Defense (DOD) exception for commercially available off-the-shelf items, which are treated as domestic regardless of the origin of their components. Additionally, BAA requirements can be waived under certain circumstances, such as nonavailability, public interest and urgent requirement.
Other important exceptions are provided by the Trade Agreements Act. 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 the TAA operationalizes. Products from these countries are treated as domestic for procurement purposes.
There currently are more than 120 TAA-designated countries, so this is a 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 the idiom “the devil is in the details.” Only contracts exceeding certain thresholds (which vary according to the 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
The BAA and TAA primarily affect imports, but advanced textile manufacturers must also consider regulations governing exports. Advanced textiles are often made or used with advanced technology, with potential national security or foreign policy implications. U.S. government 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).
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 National Institute of Justice (NIJ) Type IV
- Category X(a)(2): Personal protective clothing, specially designed to protect against or reduce detection by radar, infrared or other sensors at wavelengths greater than 900 nanometers
- Category XIII(e)(5): Composite armor with an Em elasticity measurement greater than 1.4 and meeting or exceeding NIJ Level III
Manufacturers unsure about whether their product is described on the USML can request a commodity jurisdiction determination from the Directorate of Defense Trade Controls. Commodity jurisdiction requests are particularly useful when product development has been funded by the Department of Defense because many of the USML categories involve DOD-funded items.
In short, companies that manufacture ITAR-controlled items must register with the Directorate of Defense Trade Controls regardless of whether they export those items. Companies that do export such items (if no exceptions apply) need a license from the Directorate of Defense Trade Controls. ITAR also mandates certain record-keeping and reporting of ITAR-controlled activities.
One step down from International Traffic in Arms Regulations, the Export Administration Regulations control “dual-use” items—products that have 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. Although Export Administration Regulations are less strict than International Traffic in Arms Regulations, they still sometimes require exporters to get a license from the Bureau of Industry and Security, depending on the product, end user and end destination.
It is important to note that companies should review the United States Munitions List before looking at the CCL because ITAR takes precedence over EAR. Even if companies are certain their product is not a “military” item, it is advised to document an analysis in case the government has questions later.
Regulating foreign investment
The Committee on Foreign Investment in the United States (CFIUS) is another hurdle advanced textile manufacturers may face. For the same reasons that the U.S. government regulates the export of advanced textiles, the government also regulates foreign investment into the industry.
The committee has jurisdiction over foreign investments into U.S. businesses involved with “critical technologies,” which include:
- Items controlled under ITAR
- Certain items controlled under EAR for national security, chemical and biological weapons, nuclear nonproliferation, and missile technology, for 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) are among the sectors reviewed by CFIUS.
Clearing the 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 not only can avoid costly mistakes but also position themselves as trusted partners in both the public and private sectors, driving growth and innovation in the industry.
Andrew Tuggle is in the International Trade and National Security group of the Womble Bond Dickinson LLP law firm. Womble Bond Dickson LLP is an affiliate ATA member. Tuggle is based in Huntsville, Ala.