Commerce Releases Long-Awaited Proposed Rulemaking for "Foundational Technologies" but Significant Questions Remain

4 min

On August 27, 2020, the U.S. Department of Commerce, Bureau of Industry and Security (BIS) issued a proposed rulemaking related to "foundational technologies" to be made subject to increased export controls under the Export Administration Regulations (EAR). BIS's release of the Advance Notice of Proposed Rulemaking was long awaited. The Export Controls Reform Act of 2018, enacted as part of the 2019 National Defense Authorization Act (NDAA), requires the Commerce Department to define and establish a system of controls for "emerging technologies" and "foundational technologies" identified through an interagency process as essential to the national security of the United States. Although BIS had released a proposed rulemaking for "emerging technologies" in November 2018, the agency had yet to release any proposed rule with respect to "foundational technologies" – until now.

The Export Controls Reform Act indicated that "foundational technologies" are those essential to U.S. innovation, particularly in the areas of science, technology, engineering, and manufacturing. In this latest Advance Notice of Proposed Rulemaking, BIS describes "foundational technologies" as those "that may warrant stricter control if a present or potential application or capability of that technology poses a national security threat to the United States." The term includes not only "technology" but also "commodities" and "software," as these terms are defined in EAR administered by BIS.

Nevertheless, in the proposed rulemaking BIS declines to suggest an actual definition for the term or propose many further details about its scope. BIS instead requests industry input for crafting a definition for the term. The agency does inquire whether the term should include items currently controlled for military end use or military end user reasons; items utilized or required for developing conventional weapons, enabling foreign intelligence collection activities or supporting weapons of mass destruction (WMD) applications; or items that have been subject to "illicit procurement attempts" that indicate a foreign dependency on U.S technologies.

The Export Controls Act was primarily focused on growing risks to national security posed by the People's Republic of China and its "Made in China 2025" strategic plan to expand and develop domestic high-tech manufacturing sectors. While China largely goes unmentioned in the Advance Notice of Proposed Rulemaking, BIS's focus on items that are currently subject to control for military end use or military end user reasons, such as semiconductor manufacturing equipment, suggests that the agency's attention remains fixed on China's efforts to expand its domestic capabilities to develop military technology (and on similar efforts by Russia, Venezuela, and others). This mirrors the U.S. government's increased focus on China in related areas, from Hong Kong to Huawei.

Once finalized, the definition of "foundational technologies" will be especially significant with respect to reviews conducted by the interagency Committee on Foreign Investment in the United States (CFIUS) and the changes made under the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA). As discussed in past alerts, in its review of foreign investment transactions into the United States, CFIUS now scrutinizes whether a transaction involves a "TID U.S. business," which includes U.S. businesses involved with "critical technology" (a term that includes both "foundational technologies" and "emerging technologies"). With the ongoing dearth of guidance from BIS regarding the nature and scope of "foundational technologies," companies continue to lack clarity in this area that would be helpful in assessing whether to file a disclosure with CFIUS or, more importantly, whether a filing is now mandatory under FIRRMA.

BIS is accepting comments on its Advance Notice of Proposed Rulemaking for 60 days, until October 26, 2020. The agency is requesting comments, in particular, on:

  1. How to further define foundational technology to assist in identification of such items;
  2. Sources to identify such items;
  3. Criteria to determine whether controlled items identified in AT level Export Control Classification Numbers (ECCNs), in whole or in part, or covered by EAR99 categories, for which a license is not required to countries subject to a U.S. arms embargo, are essential to U.S. national security;
  4. The status of development of foundational technologies in the United States and other countries;
  5. The impact specific foundational technology controls may have on the development of such technologies in the United States;
  6. Examples of implementing controls based on end-use and/or end-user rather than, or in addition to, technology-based controls;
  7. Any enabling technologies, including tooling, testing, and certification equipment, that should be included within the scope of a foundational technology; and
  8. Any other approaches to the issue of identifying foundational technologies important to U.S. national security, including the stage of development or maturity level of a foundational technology that would warrant consideration for export control.

If you have any questions as to how this proposed rule could impact your operations, or if you are interested in submitting comments to BIS in response to the Advance Notice of Proposed Rulemaking, please reach out to Venable's International Trade Group for guidance.