What's China to Do When the Chips Are Down? BIS Implements New Export Controls Restricting China's Access to U.S. Semiconductor Technology

7 min

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.
  • Provides notice that U.S. persons' activities relating to "development" or "production" of certain integrated circuits at semiconductor fabrication "facilities" in the PRC constitute "support" for WMD and missile end-uses and require a 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, 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. If you have questions as to how these proposed export control updates may impact your business, please reach out to Venable's International Trade and Logistics Group for assistance.