On February 3, 2022, the Commerce Department’s Bureau of Industry and Security (“BIS”) published a final rule reorganizing, clarifying, and correcting the traditional and Entity List foreign-direct product rules (“FDP Rules”) in the Export Administration Regulations (“EAR”). This rule does not change the substantive scope of the FDP Rules, but provides certain helpful clarifications. We previously blogged about the FDP Rules here.
Reorganization: Consolidation of the FDP Rules into EAR Part 734.9
The FDP Rules were formerly found in § 736.2(b)(3) (“General Prohibition 3”) (the traditional FDP Rule) and footnote 1 to the Entity List (Supplement No. 4 to EAR Part 744) (the Entity List FDP Rule, currently targeting Huawei entities). This final rule moves both FDP Rules to Part 734 (“Scope of the EAR”) to clarify that they are used to determine if a foreign-produced item is subject to the EAR as a jurisdictional matter.
In new § 734.9, the FDP Rules are organized into four paragraphs: the National Security FDP Rule (the new name for the traditional FDP Rule mentioned above); the 9×515 FDP Rule; the “600 Series” FDP Rule; and the Entity List FDP Rule. This division does not change, but is intended to facilitate understanding of, the differing product and country scopes between the FDP Rules.
In addition, the definition of “major component” (as “equipment” that is essential to the “production” of an item, including testing “equipment”) is moved to the definition paragraph of § 734.9 to make clear that the definition applies to all the FDP Rules, not just in the context of the Entity List. The preamble also clarifies that any equipment that is involved in any of the production stages is considered essential.
The final rule moves the license requirement, license review policy, and license exception applicability for Entity List parties to § 744.11(a)(2). This provision is where the overall license requirements for Entity List parties are provided.
Clarification: Additions to the FDP Rules to Improve Understanding
The final rule clarifies the FDP Rules by making a few additions. First, it adds double quotation marks around the defined terms from EAR Part 772. This is in response to requests to BIS for additional guidance about the scope of production equipment under the Entity List FDP Rule and to help the public better understand the Entity List FDP Rule.
Second, the final rule clarifies in revised General Prohibition 3 that foreign-direct products subject to the EAR are not necessarily subject to a license requirement. Instead, license requirements for foreign-direct products that are subject to the EAR must be determined based on an assessment of the classification, destination, end user, and end use of the items.
Lastly, the final rule clarifies when the “600 Series” FDP Rule applies to items described in ECCN 0A919, which states that it includes the foreign-direct product of “600 series” technology or software. General Prohibition 3 had not explicitly included ECCN 0A919 items when describing the application of the “600 Series” FDP Rule. The cross reference in ECCN 0A919.a.3 is also replaced as a conforming edit.
Correction: Amendments to Relieve Confusion Caused by an Earlier Revision to General Prohibition 3 as to Direct Products of “U.S.-origin” Technology or Software
This rule corrects an earlier revision to General Prohibition 3. In May 2020, in a rule published to add the Entity List FDP Rule, BIS removed the word “U.S.” from General Prohibition 3’s heading where it had been placed in front of “technology and software.” This was done at the time to reflect the fact that the new Entity List FDP Rule applied also to the direct products of technology or software subject to the EAR, not solely to “U.S.-origin” technology or software. Removing “U.S.” from the heading caused confusion as to whether the revision was intended to change the product scope of all the (non-Entity List) FDP Rules, because the term “U.S.” had only been in the heading and not in the other FDP Rules’ product scope descriptions. For that reason, the final rule states in each (non-Entity List) FDP Rule that it relates to U.S.-origin technology or software.