Congress returns: National security and trade provisions to watch in the FY2027 NDAA

Congress is scheduled to return from its pre-election recess the week of November 9, and one of its largest pending items is the National Defense Authorization Act for Fiscal Year 2027 (“NDAA”). The House passed H.R. 8800 on July 22, 2026, by a vote of 216–212, and the Senate received it on September 14, 2026. The Senate has not passed either bill: a July 14 cloture vote on the motion to proceed to its companion bill, S. 4784, failed 50–46, and a motion to reconsider remains pending. Before the NDAA can become law, the Senate must act and the two chambers must agree on a single text, which is expected to come together in the lame-duck session. The House bill contains a number of provisions relevant to export controls, sanctions, supply chain security, software and technology, and foreign investment. These provisions may change, but they signal where policy is heading.

Key takeaways

• Section 1260H listing would trigger procurement exclusion reviews. Chinese military companies on the Chinese Military Companies List (“Section 1260H List”) would be referred to the Federal Acquisition Security Council, which would decide whether to recommend that the President issue government-wide exclusion orders reaching subsidiaries and affiliates.

• AUKUS export controls would loosen. Certain Missile Technology Control Regime (“MTCR”) items could become eligible for the AUKUS license exemption for transfers among Australia, the United Kingdom, and the United States.

• Foreign adversary technology would be pushed out of Department of War (“DoW”) supply chains. The DoW would be barred from buying or using specific technologies tied to China or other foreign adversaries, including humanoid robots, blockchain networks, semiconductors made on Chinese silicon carbide wafers, Chinese optical fiber, telecom contracts with entities that could be required to disclose DoW information to a foreign government, and Chinese financial apps on DoW devices. IT vendors that sell in, or have operations or personnel in, China, Iran, North Korea, or Russia would have to agree to share security vulnerabilities with DoW first to keep DoW contracts.

• Ownership and capital scrutiny would increase. DoW would track adversarial capital and beneficial ownership in the defense industrial base and review defense-supplier mergers and acquisitions. DoW would assess risks, recommend mitigation, and report to Congress, but the House bill does not give DoW new authority to block or unwind transactions.

Key provisions of the House bill

Section 1260H listing would carry direct procurement consequences. Section 1812 would require the Secretary of War, within 90 days of determining to add an entity to the Section 1260H List, to send the Federal Acquisition Security Council (“FASC”) a written referral recommending that the FASC recommend an exclusion order for covered articles the entity produces or provides. The FASC would have 270 days to review the referral and, if it decides to recommend an order to the President, 90 more days to transmit that recommendation, which would apply government-wide and include the subsidiaries and affiliates identified in the referral. Entities already listed without an exclusion order in effect would be referred within 90 days of enactment, and removal from the list would not automatically rescind an exclusion order.

The Section 1260H List would be extended and broadened. Sections 1243 and 1244 would extend the Section 1260H List through 2035, allow updates as the Secretary determines appropriate rather than on a fixed schedule, and define “assistance” (Chinese government benefits such as grants, loans, subsidies, tax benefits, sponsored research, and other preferential treatment) and “formal” and “informal association” with entities identified under Section 1260H(g)(2)(B)(i) (ranging from joint ventures and research collaborations to exhibitions and competitions). Section 353 would require DoW motor carrier cargo contractors, subcontractors, and owner-operators at all tiers to certify, to the best of their knowledge after reasonable inquiry, that they are not owned or controlled by, and have no significant business relationships with, Section 1260H-listed entities. Section 1099L would require the DoW to suspend or revoke the security clearance of any retired or separated service member or DoW civilian employee who engages in lobbying activities for an entity that is on both the Section 1260H List and Treasury’s Non-Specially Designated Nationals and Blocked Persons Chinese Military-Industrial Complex Companies (“NS-CMIC”) List, subject to waivers of up to 180 days with certification to Congress. Separately, Section 1060 would lengthen Section 1045 of the FY2018 NDAA’s existing post-separation lobbying restrictions on certain former military officers and DoW civilian employees in Section 1045 of the FY2018 NDAA, from two years to five years and from one year to three years, respectively.

AUKUS export controls would loosen for certain missile items. AUKUS is the security partnership among Australia, the United Kingdom, and the United States. The AUKUS exemption from U.S. arms export licensing for defense trade among the three countries currently excludes certain items controlled under the MTCR. Section 1736 would lift that exclusion for certain items, including complete rocket and drone systems, major rocket subsystems, and related software and technology, allowing these items to move among the three countries under the exemption rather than requiring a license, subject to the exemption’s limitations.

Other export control changes. The House bill would also:

• Require a joint State and Commerce report on easing Arms Export Control Act, International Traffic in Arms Regulations, Export Control Reform Act, and Export Administration Regulations restrictions that limit foreign-owned marine industrial base companies from participating in U.S. shipbuilding (Sec. 3664).

• Shift responsibility for supervising DoW export control activities to the Under Secretary for Acquisition and Sustainment (Sec. 901).

• Direct DoW’s Chief Digital and Artificial Intelligence Officer to coordinate with the Commerce Department’s Bureau of Industry and Security and other agencies to recommend changes to export control lists, end-use restrictions, and investment screening criteria to address AI-related threats (Sec. 240).

Software, AI, and IT vendors face new conditions. The House bill would:

• Bar DoW from awarding or renewing IT contracts with companies that sell in, or operate in, China, Russia, Iran, or North Korea unless they agree to disclose security vulnerabilities to DoW first (Sec. 1526).

• Require guidance on identifying covered AI companies and removing their AI from DoW systems (Sec. 1522), and voluntary guidance within 180 days on insider-threat and espionage risks for AI contractors (Sec. 813).

New technology bans would reach the supply chain. The House bill would restrict DoW procurement or use of:

• Humanoid robots (Sec. 163) that are produced by a foreign adversary, use its firmware, software, AI models, or cloud services, or are subject to its remote access or update authority.

• Blockchain and distributed ledger technology (Sec. 1822). The House bill would prohibit DoW procurement or use of equipment, systems, or services incorporating covered distributed ledger technology or blockchain equipment or services originating from a foreign adversary, including specified entities and their subsidiaries. The prohibition would apply where such technology constitutes a substantial or essential component or critical technology, take effect two years after enactment, and permit certain waivers of up to two years.

• Semiconductors on People’s Republic of China (“PRC”) silicon carbide wafers (Sec. 1848), other than commercially available off-the-shelf items, through a Defense Federal Acquisition Regulation Supplement (“DFARS”) revision.

• Optical fiber and cable (Sec. 1814) produced, manufactured, or assembled by entities owned by, controlled by, or subject to the jurisdiction or direction of the PRC, for usein DoW networks and communications systems, for contracts awarded on or after October 1 of the first fiscal year beginning after enactment.

• Telecommunications contracts (Sec. 1732) with entities whose foreign ownership, control, jurisdiction, or legal obligations could require disclosure of DoW information to a foreign government.

• Chinese Communist Party-linked financial apps (Sec. 1741) from PRC-linked broker-dealers, investment advisers, and payment providers on DoW devices.

• Other items, including connected vehicles tied to a foreign entity of concern on DoW property (Sec. 316, phased in after January 1, 2027, and January 1, 2029, once DoW certifies implementation is possible), payment processing contracts with retailers using equipment, systems, or services linked to a country of concern (Sec. 878, effective January 1, 2027), photovoltaic cells, modules, or inverters manufactured by a foreign entity of concern (Sec. 875), and data facility equipment in DoW enhanced use leases with significant components manufactured in, or by an entity domiciled in or subject to the jurisdiction of, China, Russia, Iran, or North Korea (Sec. 2825).

Supply chain exclusion and sourcing rules would change. Before excluding a domestic source or an entity not identified as operating under foreign ownership, control, or influence on supply chain risk grounds, agencies would have to give the entity notice and 30 days to respond, subject to an exception for imminent national security threats (Sec. 1801). The FASC could also have exclusion orders issued through the Secretary of Homeland Security, the Secretary of War, or the Director of National Intelligence, against sources of concern and companies that use them (Sec. 1804). DoW could not procure covered critical materials sourced from, by, or through China, Russia, Iran, or North Korea at any contract tier (Sec. 1803). For Tier 2 materials, the share that must be sourced outside those countries would phase in from 25% in 2028 to 100% in 2031, and the Tier 2 rules would not apply to solicitations issued or contracts awarded before January 1, 2028 (Sec. 1803).

Foreign investment and ownership scrutiny would increase. Section 1816 would designate a DoW office to assess and mitigate risks from “adversarial capital” in the national technology and industrial base (the bill defines adversarial capital as loans or other forms of financial assistance provided to entities in the “national and technological industrial base”), including by developing procedures to identify beneficial ownership of subcontractors at any tier and suppliers. Section 1838 would require a triennial review of merger and acquisition activity involving major defense suppliers, with the first report due December 31, 2027. Section 2829 would require DoW to report on risks from real property transactions near military installations and other defense-sensitive sites, including how it coordinates with the Committee on Foreign Investment in the United States (“CFIUS”).

Sanctions and export control history would affect maritime eligibility. Under the SHIPS for America Act of 2026 (Title XXXVI), a “foreign entity of concern” would include Specially Designated Nationals and Blocked Persons List parties and parties alleged by the Attorney General to have been involved in activities for which a conviction was obtained under the Arms Export Control Act, Export Control Reform Act of 2018, or International Emergency Economic Powers Act, among other statutes. Under Section 3569, a vessel of an entity subject to foreign ownership, control, or influence would not be a qualifying U.S. vessel unless the entity operates under an approved Maritime Special Security Agreement, which the Maritime Administrator could approve only if the entity certifies that no citizen of a country of concern holds, directly or indirectly, a controlling interest or other disqualifying influence.

The Defense Production Act would be extended. Section 1735 would extend the Act’s expiring authorities from 2026 to 2031 by amending Section 717(a) (50 U.S.C. 4564(a)).

What is next

Fiscal Year 2027 began on October 1 without an enacted NDAA. Congress is scheduled to return the week of November 9, after the November 3 election. To become law, the NDAA must clear the Senate, and both chambers must pass identical text. The expected path is a compromise negotiated by the Armed Services Committee leaders during the lame-duck session, competing for floor time with government funding that expires December 11. Many of the provisions above could be narrowed, expanded, or dropped in the final bill.

Recommended steps

• Screen counterparties, suppliers, and research partners against the Section 1260H List, applying the broader “assistance” and “association” concepts, and note any overlap with the NS-CMIC List.
• Map supply chains and software stacks for the restricted technologies above, and if you sell IT to DoW with customers, operations, or personnel in a country of concern, prepare for the vulnerability-disclosure memorandum of agreement requirement.
• Assess ownership structures, financing sources, and beneficial ownership disclosures if you supply the defense industrial base, and factor DoW scrutiny into mergers and acquisitions and CFIUS planning.
• Review export classification and licensing assumptions for AUKUS and maritime programs, including whether MTCR-controlled rocket, missile, and unmanned aerial vehicle items could move under the AUKUS exemption if Section 1736 is enacted.
• Monitor NDAA developments through the lame-duck session, including the final compromise text and any implementing DFARS rules, guidance, and lists, and consider engagement while the text is still open.

Reed Smith regularly advises clients on export controls, sanctions, supply chain security, government contracts, and foreign investment matters. Please contact your Reed Smith relationship partner for assistance.

This alert is for general informational purposes only and does not constitute legal advice.