On Friday, October 7, 2022, the Biden administration introduced significant new export controls targeting the People's Republic of China (PRC), aimed at countering military and technological modernization efforts of the PRC government. In two interim final rules issued by the Commerce Department's Bureau of Industry and Security (BIS), the U.S. government seeks to prevent the PRC from both acquiring and manufacturing high-end, sophisticated semiconductors (e.g., chips), supercomputers, and related components. As described in a press release issued by BIS on October 7th, the changes are intended to address U.S. government concerns that these items have dangerous applications in the Chinese military and defense sectors, including potentially in support of nuclear weapons development or human rights abuses. In addition to restricting exports and re-exports of U.S. semiconductors and related items, the new restrictions also significantly expand the reach of Commerce's "foreign direct product rule," which has previously been used to restrict Huawei's access to U.S. software and technologies. The changes aim to further minimize the risk of diversion of chips and related items made by U.S. inputs, wherever manufactured, to additional end-users and for additional end-uses in the PRC.
Implementing Additional Export Controls Related to Advanced Computing and Semiconductor Manufacturing
With the interim final rule, BIS amends the Export Administration Regulations (EAR) by publishing new export controls on advanced semiconductor chips, supercomputers that contain such chips, and items or equipment that can be used to manufacture these items. While the interim final rule makes too many changes to describe in detail in this alert, below we have summarized many of the most significant changes. In particular, the new rule:
- Expands the Commerce Control List (CCL) to cover
certain advanced computing chips, as well as the
"supercomputers," "electronic assemblies," and
"components" that contain them and associated
"software" and "technology." Through
the addition of a new "Regional Stability" (RS) control
in § 742.6(a)(6) of the EAR, the newly listed Export Control
Classification Numbers (ECCNs) 3A090, 4A090, and 4D090, and
pre-existing ECCNs including 3D001, 3E001, and 4E001, are
controlled for export, re-export, or transfer (in-country) to or
within the PRC and now will require a license from BIS. These new
license requirements do not apply to deemed exports or re-exports.
The term "supercomputer" is newly defined in §
772.1.
- Implements new controls on advanced semiconductor
manufacturing equipment by adding a new ECCN 3B090 to the
CCL. This ECCN is export-controlled for reasons of RS and
"Anti-Terrorism" (AT), with limited license exception
availability. Controls on associated "software" and
"technology" are found in ECCNs 3D001 and 3E001.
- Adds supplemental end-use and end-user controls for
"supercomputers" and "semiconductor end-uses"
under § 744.23 of the EAR. To supplement the new
CCL-based controls listed above, these controls further restrict
the export, re-export, and transfer (in-country) of specified items
when there is "knowledge" that the item is destined for
one of several proscribed "end-uses" in the PRC, such as
"development" or "production" of a
"supercomputer" located in or destined for the PRC; or
for the "development" or "production" of
integrated circuits at a semiconductor fabrication
"facility" located in the PRC that fabricates integrated
circuits of specified parameters; or for the
"development" or "production" of any items in
the PRC used in the "development" or
"production" of semiconductors. No license exceptions are
available to overcome these license requirements.
- Revises the Entity List Foreign-Direct Product (FDP)
Rule at EAR § 734.9(e), to cover 28 existing PRC-based
entities on the Entity List that are now identified on the List
under a new Footnote 4. Building off existing restrictions
on Huawei, this change imposes stringent new licensing requirements
on the export of certain foreign-made items that are produced with
specified U.S.-origin software and technology, when there is
knowledge that a Footnote 4-designated entity will use the
foreign-made item for development or manufacturing, or when there
is knowledge that the Footnote 4-designated entity is a party to
the transaction involving the foreign-made item. New license
requirements for Footnote 4-designated entities are found in the
new § 744.11(a)(2)(ii) of the EAR or in such entities'
entries in Supplement No. 4 to part 744.
- Expands the scope of the EAR over certain
foreign-produced advanced computing items and foreign-produced
items for supercomputer "end-uses," creating two new FDP
Rules – an Advanced Computing FDP Rule at EAR § 734.9(h)
and a Supercomputer End-Use FDP Rule at EAR §
734.9(i). License requirements associated with these
foreign direct products are found in § 742.6(a)(6) of the EAR,
as well as in the new § 744.23.
- Implements new restrictions on U.S. persons who support
the development or production of integrated circuits at certain
PRC-located semiconductor fabrication "facilities"
without an export license. Specifically, the rule revises
EAR § 744.6 (restrictions on specific activities of "U.S.
persons") to "inform" U.S. persons that activities
that enable the "development" or "production"
of advanced integrated circuits in the PRC could constitute
"support" for WMD and missile end-uses, as restricted in
§ 744.6(b), and are therefore subject to a license
requirement.
- Establishes a temporary general license (TGL) in Supplement No. 1 to Part 736 to reduce the short-term impact of the new controls on the semiconductor supply chain. With some exceptions, beginning October 21, 2022, through April 7, 2023, the TGL permits limited manufacturing activities related to items and associated software and technology covered by certain specified ECCNs destined for use outside the PRC.
Phased-In Effective Dates. The restrictions in the new interim final rule will be effective in tranches. The first tranche of restrictions covering semiconductor manufacturing items were effective upon publication, October 7, 2022. Restrictions on U.S. persons' abilities to support the development, production, or use of integrated circuits at certain PRC-located semiconductor fabrication "facilities" become effective on October 12, 2022. All other changes will become effective on October 21, 2022.
Public comments on the changes provided by the interim final rule may be submitted to BIS no later than 60 days from the rules' publication date, scheduled for October 13, 2022.
Revisions to BIS's Unverified List
In a second rule issued Friday, BIS updated its regulations related to the Entity List. Specifically, the agency issued clarifying changes to the EAR § 744.11 that a "sustained lack of cooperation" by a foreign government, which effectively prevents BIS from verifying the bona fides of companies on the Unverified List (UVL), can result in those parties being moved to the Entity List. BIS confirmed that all additions, removals, or revisions to the Entity List would still be subject to the approval of the End-User Review Committee. Pursuant to a new policy enforcement memorandum issued by BIS the same day, if an end-use check of a foreign entity cannot be completed within 60 days of request due to continued lack of cooperation by a foreign government to facilitate completion of the requested checks, the new policy adopted by BIS calls for adding the foreign entity to the Unverified List. If the requested end-use check is not completed within 60 days of the foreign entity's addition to the Unverified List, then BIS will then initiate the interagency review process to move the foreign entity onto the Entity List.
In addition, effective October 7, 2022, this rule adds 31 new foreign entities to the UVL and removes nine entities that satisfied relevant requirements. For all foreign entities that are currently on the UVL, the announcement initiates the start of the 60-day escalation requirement for end-use checks to be scheduled and conducted or the interagency process will be initiated to move those entities onto the Entity List.
There is significant change in store for the United States and global semiconductor industry in the coming months and years, and it is important to be ahead of the curve in understanding how the evolving regulatory environment will impact supply and affect U.S.-Sino relations.
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