Trade Compliance Flash: Biden Administration Issues New Export Controls Rules Targeting China's Semiconductor and Advanced Computing Sectors
On October 7, 2022, the U.S. Department of Commerce's Bureau of Industry and Security (BIS) announced a new export controls rule targeting the advanced computing and semiconductor sectors of the People's Republic of China (the BIS Rule). In a separate but related rule issued on the same day (the BIS Restricted List Rule), BIS added several dozen Chinese entities to its Unverified List (UVL) and modified the criteria for making additions to the Entity List — which will make it easier to impose additional restrictions (i.e., licensing requirements) on Chinese entities. BIS later published some guidance on these new rules in the form of several frequently asked questions (FAQs) on October 28, 2022.
These measures represent a significant escalation by the U.S. government regarding the provision of technology, equipment, and components related to semiconductors and advanced computers to China. By creating technological and supply chokepoints on China, these new restrictions reflect the U.S. government's renewed efforts to stymie the development of China's semiconductor and supercomputing industries.
We'll provide an overview of the major components of the new restrictions and some initial thoughts on what U.S. and global firms should prepare for in the wake of these new restrictions.
Addition of New Items to Commerce Control List (CCL) for Regional Stability and Anti-Terrorism – and Creating a Related See-Through Rule
Regional Stability Controls
The new BIS Rule targets China's ability to access certain advanced computing and semiconductor equipment by establishing an array of new controls within export control classification numbers (ECCN) 3A090, 3B090, 3D001 (for 3A090 or 3B090) and 3E001 (for 3A090 or 3B090), 4A090, 4D090, or 4E001 (for 4A090 or 4D090). As detailed within the Export Administration Regulations (EAR) § 742.6(a)(6), these items are controlled for Regional Stability (RS) reasons and are subject to strict license requirements when exported, reexported, or transferred (in-country) to or within China. However, these requirements do not apply to deemed exports/reexports.
BIS will generally apply a licensing policy of denial to most license applications submitted for these items, except a case-by-case basis applies to when "destined to end users located in China that are headquartered in the United States" or countries generally considered more cooperative with the U.S. (i.e., Country Group A:5 or A:6). Additionally, the BIS Rule also severely restricts the availability of license exceptions under the EAR for these types of items.
Anti-Terrorism Controls for Lower-Level Computing Integrated Circuits (ICs) and Computer Commodities That Contain Them
New restrictions have been also imposed on certain lower-level computing ICs, computer commodities that contain them, and certain associated software and technology.
These new restrictions have been added to ECCN 3A991 under new paragraph 3A991.p and by revising ECCN 4A994 to add 4A994.l (controlling computers and related items that are not elsewhere specified and contain ICs in 3A991.p). Items classified under these revised ECCNs, as well as the controlled software and technology associated with these items, are now controlled for Anti-Terrorism (AT Column 1).
With respect to these new controls, the BIS Rule states that deemed exports and reexports of technology and software that now requires a license but did not previously will only require one if the release exceeds the scope of the technology or software that the foreign national already had lawful access to prior to the new rule.
See-Through Rule Controls
One highly notable feature of these new rules is that ECCN 4A090.a controls computers, "electronic assemblies," and components when "containing any integrated circuits, any of which exceeds the limit in 3A090.a." Traditionally, the CCL does not contain so-called "see-through" controls, where one looks to see if a component or other element of the item is independently controlled elsewhere on the list. As such, exporters and manufacturers will need to undergo a more extensive review to determine whether computers, "electronic assemblies," or components contain "any integrated circuits, any of which exceeds the limit in 3A090.a." The same review applies to ECCN 4A994.l.
Encryption Related Changes
When an encryption item controlled by ECCN 5x002 meets the performance levels of ECCNs 3A090 or 4A090, then license exception ENC no longer applies for use to China. Also, when a mass market encryption item controlled by ECCN 5x992 meets the performance levels of ECCNs 3A090 or 4A090, that item will now require a license for China.
New and Expanded Foreign Direct Product (FDP) Rules
BIS has added two new FDP Rules that specifically concern China and has expanded an existing FDP rule that BIS created in 2020. These rules target foreign-made items, causing them to become subject to U.S. export controls and thus requiring a license of such items to China and/or certain listed parties. Depending on the item and circumstances, such licensing may be subject to a policy or presumption of denial.
Advanced Computing FDP Rule
Under the new Advanced Computing FDP Rule within EAR § 734.9(h), it covers certain foreign produced items that are (a) specified in the new ECCNs 3A090 (i.e., certain high performance ICs), 3E001 (i.e., certain related technology), 4A090 (i.e., certain computers, "electronic assemblies," and "components," containing ICs in ECCN 3A090), or 4E001 (i.e., certain related technology); or (b) ICs, computers, "electronic assemblies," or "components" specified on the CCL that meet or exceed the limit in the performance parameters of ECCNs 3A090 or 4A090.
The Advanced Computing FDP Rule is triggered if there is any "knowledge" (including reason to know) that an item is (a) destined for China, including incorporation into certain items destined for China, or (b) constitutes technology developed by a China-headquartered entity for the "production" of certain items related to ICs. A foreign-produced item may be subject to the EAR under this rule if it is (a) a "direct product" of certain "software" or "technology" that is subject to the EAR,1 or (b) the product of a plant or "major component" of a plant outside the U.S. that itself is the "direct product" of certain U.S.-origin "technology" or "software" classified under the Advanced Computing FDP ECCNs.
To minimize the short-term impact of this rule on supply chains, this new FDP rule expressly allows exporters to obtain written certifications from suppliers asserting that an item would be subject to the EAR under the advanced computing rule if a future transaction entails a covered destination or end use. BIS created a model certificate as a template for providing the information required to evaluate the item under the rule. If such a certificate cannot be obtained, the rule states that due diligence "needs" to be conducted to determine if the item falls within the scope of this rule. Notably, this certificate does not relieve a party of other due diligence expectations (e.g., those related to identifying compliance red flags, etc.).
Supercomputer FDP Rule
Finally, another new FDP rule within EAR § 734.9(i) concerns foreign-produced items that will be used in, or for certain activities relating to, "supercomputers" located in or destined for China. The term "supercomputer" is defined as "a computing 'system' having a collective maximum theoretical compute capacity of 100 or more double-precision (64-bit) petaflops or 200 or more single-precision (32-bit) petaflops within a 41,600 ft3 or smaller envelope."
The Supercomputer FDP Rule is triggered if there is "knowledge" (including reason to know) that an item will be (a) used in certain activities such as design or operation (among others) of a "supercomputer" located in or destined for China, or (b) incorporated into or used in the "development" or "production" of certain items (e.g., "parts," "equipment," etc.) to be used in a "supercomputer" located in or destined for China. A foreign-produced item may be subject to the EAR under this rule if it is (a) the "direct product" of certain "technology" or "software,"2 or (b) the product of a plant or "major component" of a plant that itself is a "direct product" of certain U.S. origin "technology" or "software" (regardless of whether the plant or major component was made in the U.S. or elsewhere) classified under the Supercomputing FDP ECCNs.
Expanded Entity List FDP Rule
BIS has added a specific footnote to 28 parties already on the Entity List that are in China's technology or research sectors, primarily based on their actual or potential efforts in furtherance of China's advanced computing capabilities.
Under this new "Entity List FDP Rule: Footnote 4" within EAR § 734.9(e)(2), covered foreign-produced items are subject to the EAR if there is "knowledge" (including reason to know) that (a) a Footnote 4 entity is a party to a transaction involving the item, or (b) the items will be used in the "development" or "production" of certain items produced, purchased, or ordered by a Footnote 4 entity. Such foreign-produced items are covered by this rule if they are (a) the "direct product" of certain "technology" or "software" subject to the EAR,3or (b) the product of a plant or "major component" of a plant that itself is a "direct product" of certain U.S. origin "technology" or "software" classified under the Footnote 4 ECCNs.
End-Use Export Controls
The new BIS Rule also places further restrictions on China's access to and ability to develop or manufacture ICs, supercomputers, and semiconductors by imposing new controls for specific end-uses. These function by requiring a license to export (including reexport or transfer) certain items subject to the EAR when a person has "knowledge" at the time of export, reexport, or transfer that the controlled item is destined for a prohibited end-use described in the BIS Rule and as reflected within EAR § 744.23.
For "Development" or "Production" of ICs at Certain China Semiconductor Fabrication Facilities
One broad end-use restriction targets China's semiconductor fabrication facilities by imposing a license requirement for the export of any items subject to the EAR when the exporters knows, for example, that they will be used for the "development" or "production" of ICs meeting any one of the following three detailed performance criteria at a semiconductor fabrication "facility" located in China:
- Logic ICs using a non-planar transistor architecture or with a "production" technology node of 16/14 nanometers or less
- NAND memory integrated circuits with 128 layers or more
- Dynamic random-access memory ICs using a "production" technology node of 18 nanometer half-pitch or less (the Specified IC Criteria)
Notably, the items at issue are not required to be used to fabricate ICs that meet the Specified IC Criteria – the rule is targeted at end use in certain kinds of facilities that may produce such ICs.
For "Development" or "Production" of ICs at Any China Semiconductor Fabrication Facility
Another end-use restriction targeting China's semiconductor fabrication facilities requires a license for the export of any items subject to the EAR classified under an ECCN in Product Groups B (Test, Inspection, and Production Equipment), C (Materials), D (Software), or E (Technology) in Category 3 (Electronics) of the CCL when, for example:
- The exporter knows the items will be used in the "development" or "production" of ICs at any semiconductor fabrication facility located in China, but
- The exporter does not know whether such semiconductor fabrication facility fabricates ICs that meet any of the Specified IC Criteria.
For the "Development" or "Production" in China of Certain Items for the Manufacture of Semiconductors and Related Items
Another broadly applicable end-use restriction aimed at restricting China's access to equipment used for manufacturing semiconductors and related items requires a license for the export of any item subject to the EAR when the exporter knows, for example, that it will be used for the "development" or "production" in China of any "parts," "components," or "equipment" specified under ECCNs 3B001, 3B002, 3B090, 3B611, 3B991, or 3B992.
For Certain Activities Concerning Supercomputers in China
Finally, an end-use restriction aimed at restricting China's access to items used in supercomputers requires a license for exports of the following items when destined for certain end uses:
- ICs subject to the EAR classified under ECCN 3A001, 3A991, 4A994, 5A002, 5A004, or 5A992
- Computers, "electronic assemblies," or "components" subject to the EAR classified under ECCNs 4A003, 4A004, 4A994, 5A002, 5A004, or 5A992
This license requirement applies only when the exporter has knowledge that the items, for example:
- Will be used in the "development," "production," "use," operation, installation (including on-site installation), maintenance (checking), repair, overhaul, or refurbishing of a supercomputer located or destined to China, or
- Incorporated into or used to develop or produce any "component" or "equipment" that will be used in a supercomputer located in or destined to China
New Restrictions on Activities by U.S. Persons
Controls under the EAR generally pertain to items rather than services. However, the EAR does contain a few restrictions on certain activities conducted by U.S. persons, regardless of their location, which the BIS Rule has now expanded to cover certain activities primarily relating to ICs. "U.S. persons" for purposes of this rule is defined to include U.S. citizens, U.S. permanent residents, entities organized under U.S. laws including their foreign branches, and any person located in the U.S.
The activities subject to these new restrictions seemingly involve development or production of ICs and other advanced semiconductor technology for merely commercial uses. Nevertheless, BIS has noted that further restrictions on activities by U.S. persons related to these items are warranted because of China's military-civil fusion efforts. The BIS Rule notes that this civil-military fusion makes it difficult to determine if ICs or other technology may at some point be shared with – or actually intended for – China's military for certain restricted end uses.
The BIS Rule restricts the ability of U.S. persons to engage in certain activities that "support" the "development" or "production" of ICs at certain semiconductor fabrication "facilities" located in China without a license. The notice lists nine specific, detailed instances where U.S. person activities may constitute "support" subject to these restrictions including, for example, shipping, transmitting, or transferring (in-country) certain items not subject to the EAR; facilitating such shipment, transmission, or transfer (in-country); or servicing certain items not subject to the EAR.
Temporary General License
In tandem with the new restrictions, BIS issued a temporary general license (TGL) that will expire on April 7, 2023, authorizing limited activities in China with respect to covered items when they are destined for use by parties outside of China.
The TGL authorizes "exports, reexports, in-country transfers, and exports from abroad destined to or within China" by companies headquartered in most, but not all, countries to "continue or engage in integration, assembly (mounting), inspection, testing, quality assurance, and distribution" of certain items now controlled under the BIS Rule. BIS hopes that this TGL will help avoid disrupting the supply chains for these controlled items that are ultimately destined to customers outside China, so the export, reexport, transfer, or export from abroad to "end-users" or "ultimate consignees" in China is not authorized under the TGL.
In addition, the BIS Rule notes that deemed exports and reexports of technology and software classified under ECCNs 3A991.p and 4A994.l will only require licenses if the technology or software release exceeds the scope that the foreign national already had access to prior to the implementation of the new BIS Rule.
Unverified List (UVL) Additions and Entity List Criteria Modifications
BIS has added 31 Chinese entities to the UVL that did not satisfactorily complete an end-use check required by BIS. These includes several key research institutions and technology companies. As a result, the use of any license exceptions for exports (including reexports and transfers) to any of these 31 entities is suspended. Additional record keeping, information collection, and filing requirements also apply to persons engaging in exports where persons on the UVL are parties to a transaction.
Modifications to Entity List Criteria
In addition, BIS has modified the criteria that may lead to an entity's inclusion on Entity List by changing the language in 15 C.F.R. § 744.11 so that entities determined to be "at significant risk" of acting contrary to U.S. foreign policy and national security interests may be added to the Entity List. Importantly, an entity may now be considered to pose this "significant risk" due to circumstances it cannot control, such as where a company's host government prevents an end-use check from being conducted. This modification is expected to facilitate the addition of more Chinese entities given the difficulty BIS has had in undertaking end-use checks in China.
- These new export controls represent a profound change in the U.S. government's approach towards trade with China as it relates to semiconductors and advanced computing and pave the way for further restrictions that target additional Chinese entities and persons.
- The breadth of items subject to further restrictions alone will mean certain global companies that have traditionally partnered with or supplied these now controlled items (or foreign-made direct products of these items) to companies in China will effectively be cut off from the Chinese market. In particular, the breadth of the foreign direct product rules and the new end-use restrictions means that these new restrictions can reach numerous upstream segments of the supply chains that touch on the development and production of semiconductors, advanced computers, and supercomputers. Given this new regulatory landscape, it would be prudent for companies that operate in the broader semiconductor and advanced computing ecosystem to determine their potential exposure to Chinese entities (e.g., as customers, suppliers, or vendors) and determine how what additional licensing requirements may apply to their operations going forward.
- The new FDP rules create significant burdens on foreign companies to determine whether the items they are dealing with are considered subject to the EAR at all may implicate the various new license requirements imposed under the EAR. This means that foreign companies engaging in sales of various semiconductor-, advanced computing-, and supercomputer-related items in China will need to have much more clarity on their supply chains and product inputs as well as their exposure to Chinese entities or related Chinese economic sectors that may be targeted by these new rules. Conducting these types of analyses can be time- and resource-intensive.
- "U.S. persons" should also be cognizant of the restrictions that go beyond controls on items and restrict activities that support semiconductor production facilities. These restrictions may impact not only U.S. companies but also foreign branches of U.S. companies and U.S. person employees of companies around the world. The applicability of these restrictions concerns a broad swath of industries – not simply manufacturing or sales of semiconductors. U.S. persons in seemingly unrelated industries could potentially be subject to the restrictions, particularly under the provisions prohibiting the "facilitation" of certain restricted activities. Again, understanding one's exposure to the targeted Chinese sectors and companies operating in these sectors, will be critical to avoiding inadvertent compliance risks.
- We expect that in the near-term, companies operating in this space will have to make significant adjustments to their operations and relationships with China-based partners. This may involve renegotiating contracts, restructuring supply chains, and, in some cases, reassigning U.S. personnel providing various services to China-based companies and facilities.
For more information, please contact:
1These include direct products of "technology" and "software" subject to the EAR classified under ECCNs 3D001, 3D991, 3E001, 3E002, 3E003, 3E991, 4D001, 4D090, 4D993, 4D994, 4E001, 4E992, 4E993, 5D001, 5D002, 5D991, 5E001, 5E991, or 5E002 of the CCL (the Advanced Computing FDP ECCNs).
2These include direct products of "technology" and "software" subject to the EAR classified under ECCNs 3D001, 3D991, 3E001, 3E002, 3E003, 3E991, 4D001, 4D993, 4D994, 4E001, 4E992, 4E993, 5D001, 5D991, 5E001, 5E991, 5D002, or 5E002 of the CCL.
3These include direct products of "technology" and "software" subject to the EAR classified under ECCNs 3D001, 3D991, 3E001, 3E002, 3E003, 3E991, 4D001, 4D993, 4D994, 4E001, 4E992, 4E993, 5D001, 5D991, 5E001, 5E991, 5D002, or 5E002 of the CCL (the Footnote 4 ECCNs).
The information contained in this communication is not intended as legal advice or as an opinion on specific facts. This information is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. For more information, please contact one of the senders or your existing Miller & Chevalier lawyer contact. The invitation to contact the firm and its lawyers is not to be construed as a solicitation for legal work. Any new lawyer-client relationship will be confirmed in writing.
This, and related communications, are protected by copyright laws and treaties. You may make a single copy for personal use. You may make copies for others, but not for commercial purposes. If you give a copy to anyone else, it must be in its original, unmodified form, and must include all attributions of authorship, copyright notices, and republication notices. Except as described above, it is unlawful to copy, republish, redistribute, and/or alter this presentation without prior written consent of the copyright holder.