On October 7, 2022, the US Commerce Department’s Bureau of Industry and Security (“BIS”) issued the much anticipated rules aimed at restricting China’s ability to obtain advanced computing chips, develop and maintain supercomputers, and manufacture advanced semiconductors (“Rule”) (87 FR 62186). In addition to formalizing the licensing requirements included in the recent BIS “is informed” letters issued to certain US companies on related matters, the Rule imposes a wide range of new and enhanced restrictions targeting China’s advanced computing and semiconductor sectors by, among other things:
- adding certain semiconductor manufacturing equipment, advanced chips, and commodities containing such chips to the Commerce Control List (“CCL”) of the Export Administration Regulations (“EAR”);
- adding new license requirements for certain items destined to China, including certain items for use in supercomputers, the development or production of semiconductors or semiconductor manufacturing equipment, and destined to semiconductor fabrication facilities (“fabs”) in China that produce certain advanced chips;
- restricting US persons from engaging in or facilitating activities supporting the development or production of certain integrated circuits (“ICs”) at fabs in China; and
- substantially expanding the scope of items that are “subject to the EAR” under the foreign direct product (“FDP”) rules to cover additional items in the advanced computing and semiconductor sector produced outside the United States.
US and non-US companies that provide advanced chips, commodities containing such chips, or items related to supercomputers and semiconductors to/for China should carefully review the Rule to assess the compliance implications and potential business impact. Provisions of the Rule took effect on October 7, October 12, and October 21. BIS held a public briefing on the Rule on October 13, 2022. BIS is accepting comments about the Rule until December 12, 2022.
I. Additions and Revisions to the Commerce Control List; New RS-China Controls
Effective October 7, 2022, the Rule establishes new Export Control Classification Number (“ECCN”) 3B090, which controls certain semiconductor manufacturing deposition equipment and specially designed parts, components, and accessories for such equipment for China-related regional stability reasons (“RS-China”) and anti-terrorism (“AT”) reasons. Associated software and technology controls in the CCL for items in ECCN 3B090 are found in ECCNs 3D001 and 3E001, respectively.
For items related to advanced chips and commodities containing those chips, effective October 21, 2022, the Rule adds certain new ECCNs, which are all controlled for RS-China and AT reasons. For example, new ECCN 3A090 covers certain ICs that (i) have or are programmable to have an aggregate bidirectional transfer rate over all inputs and outputs of 600 Gbyte/s or more to or from ICs other than volatile memories, and (ii) have or are one or more processors or primitive computational units having a processor performance rate of 4,800 TOPS under the metrics specified in subparagraphs a.1 – a.4. ECCN 3A090 includes graphical processing units, tensor processing units, neural processors, in-memory processors, vision processors, text processors, co-processors/accelerators, adaptive processors, field-programmable logic devices, and application-specific integrated circuits.
In addition, a number of ECCNs related to advanced chips and commodities containing those chips will be revised to reflect the new RS-China and AT reasons for controls, among other things.
Regional Stability (RS) Controls; Limited License Exceptions
Effective October 7, 2022, the new RS-China controls require a BIS license to export, reexport, or transfer within China items subject to the EAR and controlled under ECCNs 3B090, 3D001, and 3E001. On October 21, 2022, the new RS-China controls extended to items subject to the EAR and specified in ECCNs 3A090, 4A090, 5A992, and associated software and technology in ECCNs 3D001, 3E001, 4D090, 4E001, and 5D992.
This new RS-China controls license requirement does not apply to deemed export/reexport transactions. License applications will be reviewed by BIS with a presumption of denial, except that applications to export, reexport, or transfer (in country) semiconductor manufacturing items, such as semiconductor equipment, destined to end users in China that are headquartered in the United States or in a country in Country Groups A:5 or A:6 will be considered on a case-by-case basis.
Effective October 21, 2022, a license is required for the export from China to any destination of ECCN 3E001 technology developed by an entity headquartered in China that is the direct product of software subject to the EAR and is for the production of commodities identified in ECCNs 3A090, 4A090, or elsewhere on the CCL and that meet or exceed the parameters of ECCNs 3A090 or 4A090.
The Rule also limits the availability of most license exceptions for certain exports, reexports, or transfers to or within China.
II. New End Use and US Person “Support” Activity Controls
(a) Semiconductor Manufacturing and Supercomputer End Use Controls (EAR Section 744.23)
The Rule added new EAR Section 744.23, which includes end use-based license restrictions.
- Perhaps most notably, a BIS license is required for exports, reexports, or transfers of any item subject to the EAR when there is “knowledge” that the item is destined for end use in the development or production of ICs at a fab in China that fabricates ICs meeting any of the following criteria (i) logic ICs using a non-planar transistor architecture or with a “production” technology node of 16/14 nm or less; (ii) NAND memory ICs with 128 layers or more; or (iii) DRAM ICs using a “production” technology node of 18 nm half-pitch or less (“Advanced Technology ICs”).
- A BIS license is also required for items subject to the EAR and controlled under an ECCN in Product Groups B, C, D, or E in Category 3 of the CCL when there is “knowledge” that the item will be used in the development or production of ICs at any fab located in China, but where the exporter does not know whether such fab produces Advanced Technology ICs.
- A BIS license is required for any item subject to the EAR when there is “knowledge” that the item is destined for end use in the development or production in China of any parts, components, or equipment specified under ECCNs 3B001, 3B002, 3B090, 3B611, 3B991, or 3B992.
- This new licensing requirement is a particular challenge for companies in the semiconductor manufacturing equipment industry, as the provision requires a license for the export, reexport, or transfer (in-country) of any item subject to the EAR (even EAR99 items) if there is “knowledge” that the item will be used in the development or production of most semiconductor manufacturing or testing equipment. Companies that engage contractors in China to manufacture parts and components for their semiconductor manufacturing or testing equipment in particular should pay close attention to this new licensing requirement. In the public briefing on October 13, BIS stated that, for purposes of the above end use-based controls, “a fab in China that fabricates ICs” means the facility where the production at the specified technology levels occurs. Subsequent production steps that do not alter the technology levels are not covered.
- As related to “supercomputers,” a BIS license is required for ICs subject to the EAR and specified in ECCNs 3A001, 3A991, 4A994, 5A002, 5A004, or 5A992; or computers, electronic assemblies, or components subject to the EAR and specified in ECCNs 4A003, 4A004, 4A994, 5A002, 5A004, or 5A992, when there is “knowledge” that an item will be (1) 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 (2) 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.
- The term “supercomputer” means “[a] computing ‘system’ having a collective maximum theoretical compute capacity of 100 or more double-precision (64-bit) petaflops or 200 of more single-precision (32-bit) petaflops within a 41,600 ft3 or smaller envelope.”
There is a presumption of denial for applications to export, reexport, or transfer (in-country) items described in EAR Section 744.23, except for items controlled under paragraph (a)(2)(iii) of EAR Section 744.23 for end users in China that are headquartered in the United States or in a Country Group A:5 or A:6 country, which will be considered on a case-by-case basis taking into account factors including technology level, customers, and compliance plans. No license exceptions are available.
(b) US Person “Support” Activities (EAR Section 744.6)
Pursuant to EAR Section 744.6, the Rule informs that a license is required for US persons who “support” semiconductor manufacturing and related activities in China, not involving items subject to the EAR. The restricted activities include:
- Shipping, transmitting, or transferring (in-country) to or within China, facilitating any of the foregoing, or servicing, any item not subject to the EAR with “knowledge” that the item will be used in the development or production of Advanced Technology ICs;
- Shipping, transmitting, or transferring (in-country) to or within China, facilitating any of the foregoing, or servicing, any item not subject to the EAR and meeting the parameters of any ECCN in Product Groups B, C, D, or E in Category 3 of the CCL with “knowledge” that the item will be used in the development or production of ICs at any fabs located in China, where the US person does not know whether the fab fabricates (produces) Advanced Technology ICs; or
- Shipping, transmitting, or transferring (in-country) to or within China, facilitating any of the foregoing, or servicing, any item not subject to the EAR and meeting the parameters of ECCN 3B090, 3D001 (for 3B090), or 3E001 (for 3B090) regardless of the end use or end user.
“US persons” include (1) any individual who is a citizen of the United States, a permanent resident alien of the United States, or a protected individual as defined by 8 U.S.C. 1324b(a)(3), wherever located or employed; (2) any juridical person organized under the laws of the United States or any jurisdiction within the United States, including foreign branches of US entities; and (3) any person in the United States, regardless of nationality. Although the term “facilitating” is not defined, it could potentially cover a broad range of activities as the term is understood for purposes of compliance with US trade sanctions administered by the Office of Foreign Assets Control (e.g., US person supervision, approval, or guarantee of prohibited transactions).
A licensing policy of a presumption of denial applies, except for end users in China that are headquartered in the United States or a country in Country Groups A:5 or A:6, which will be considered on a case-by-case basis, taking into account factors including technology level, customers, and compliance plans. No license exceptions are available.
III. New FDP Rules
Effective October 21, 2022, the Rule expands the scope of items that are “subject to the EAR” under the FDP rules to cover additional items produced or developed outside the United States. Similar to the pre-existing FDP rules applicable to entities on the Entity List designated with footnote 1 (applicable to Huawei Technologies Co., Ltd. and many of its affiliates), both the product scope as well as the end-user/end-use/destination/country scope (requiring “knowledge” as defined under the EAR) need to be met for the foreign-made item to be subject to the EAR, and thus trigger the relevant licensing requirements.
(a) Footnote 4 Entity List FDP Rules (EAR Section 734.9(e))
The product scope of the footnote 4 Entity List FDP rules covers foreign produced items that are (1) a direct product of technology or software subject to the EAR and specified in ECCNs 3D001, 3D991, 3E001, 3E002, 3E003, 3E991, 4D001, 4D993, 4D994, 4E001, 4E992, 4E993, 5D001, 5D002, 5D991, 5E001, 5E002, or 5E991; or (2) produced by any plant or major component of a plant when the plant or major component of a plant, including essential equipment, is itself a direct product of US-origin software or technology specified in the same group of ECCNs, regardless of where the plant or major component of a plant was made.
The end-user scope of the footnote 4 Entity List FDP rules is met where there is “knowledge” that either: (1) the item will be incorporated into, or used in the production or development of, any part, component, or equipment produced, purchased, or ordered by any footnote 4 entity, or (2) any footnote 4 entity is party to any transaction involving the item.
The footnote 4 Entity List FDP rules essentially correspond to the pre-existing FDP rules applicable to entities on the Entity List designated with footnote 1 — i.e., Huawei Technologies Co., Ltd. and many of its affiliates — except that two additional ECCNs are within the scope (i.e., 5D002 and 5E002). Footnote 4 parties include 28 entities in China, all of which were already on the Entity List.
(b) New Advanced Computing FDP Rules (EAR Section 734.9(h))
The product scope of the new Advanced Computing FDP rules covers foreign-made items that are: (1) specified in ECCNs 3A090, 3E001 (when involving technology for 3A090 items), 4A090, or 4E001 (when involving technology for 4A090 items), or are an IC, computer, electronic assembly, or component specified elsewhere on the CCL that meets the performance parameters of ECCNs 3A090 or 4A090; and (2) either the direct product of software or technology subject to the EAR and specified in ECCNs 3D001, 3D991, 3E001, 3E002, 3E003, 3E991, 4D001, 4D090, 4D993, 4D994, 4E001, 4E992, 4E993, 5D001, 5D002, 5D991, 5E001, 5E002, or 5E991, or produced by a plant or major component of a plant that is itself the direct product of US-origin technology or software specified in the same ECCNs.
The destination or end-use scope of the Advanced Computing FDP rules is met where there is “knowledge” that either the item is: (1) destined to China or will be incorporated into any non-EAR99 part, component, computer, or equipment that is destined for China; or (2) technology developed by a China-headquartered entity for the production of a mask or an IC wafer or die.
In EAR Section 734.9(h), a new paragraph (h)(3) (Certification) is added to assist exporters, reexporters, and transferors in determining whether the items being exported, reexported, or transferred (in-country) are subject to the EAR based on the advanced computing FDP rules at EAR Section 734.9(h). Although not a requirement under the EAR, a model certificate is included in new Supplement no. 1 to Part 734, which is provided by BIS “to assist exporters, reexporters, and transferors with the process of resolving potential red flags regarding whether an item is subject to the EAR” based on the new advanced computing FDP rules at EAR Section 734.9(h).
(c) New Supercomputer End-Use FDP Rule (EAR Section 734.9(i))
The product scope of the new Supercomputer End-Use FDP rules covers any foreign-made item that is (i) the direct product of software or technology subject to the EAR and specified in ECCNs 3D001, 3D991, 3E001, 3E002, 3E003, 3E991, 4D001, 4D993, 4D994, 4E001, 4E992, 4E993, 5D001, 5D002, 5D991, 5E001, 5E002, or 5E991, or (ii) produced by a plant or major component of a plant that is itself the direct product of US-origin technology or software specified in the same ECCNs.
The country and end-use scope is met if there is “knowledge” that the foreign-produced items will be: (1) used in the design, development, production, operation, installation (including on-site installation), maintenance (checking), repair, overhaul, or refurbishing of a “supercomputer” located in or destined to China; or (2) incorporated into, or used in the development or production of any part, component, or equipment that will be used in a “supercomputer” located in or destined to China.
IV. Savings Clause and Temporary General License
Savings Clause
The Rule provides a standard saving clause for shipments en route aboard a carrier to a port of export on October 7, 2022, so long as they have been exported, reexported, or transferred (in-country) before November 7, 2022.
Further, the savings clause provides that deemed exports and reexports of technology and software source code related to ECCNs 3A991.p and 4A994.l that previously did not require a license, but now require a license because of the controls implemented by the Rule, will only require licenses if the technology or software release exceeds the scope of the technology or software that the foreign national already had access to prior to the implementation of controls in the Rule.
Temporary General License
The Rule includes a Temporary General License (“TGL”) that authorizes from October 21, 2022 through April 7, 2023 exports, reexports, transfers, and exports from abroad destined to or within China by companies not headquartered in countries in Country Groups D:1, D:5, E:1, or E:2 to continue or to engage in integration, assembly (mounting), inspection, testing, quality assurance, and distribution of items covered by ECCNs 3A090, 4A090, 3D001 (for 3A090 or 4A090 items), 3E001 (for 3A090 or 4A090 items), 4D090, or 4E001 (for 3A090 or 4A090 items), or items specified elsewhere on the CCL that meet or exceed the performance parameters of ECCNs 3A090 or 4A090.
In short, the TGL sets out a temporary authorization to enable limited manufacturing activities in China with respect to covered items that are destined for use by parties outside China. The TGL does not overcome the license requirements applicable to prohibited end uses or users, including those identified with footnote 4 designations on the Entity List. According to BIS, the TGL is designed to minimize short term disruption of semiconductor supply chains related to items ultimately destined to customers outside China. This means before the TGL expires in April 2023, and assuming it is not extended, US-based and other companies headquartered outside China (and other restricted countries) will need to find alternative fabs for their ICs.
V. Considerations from a Chinese Law Perspective
The Rule was issued against the backdrop of China’s continued efforts to strengthen its trade countermeasures. These include, among others, the Anti-Foreign Sanctions Law (“AFSL”) that aims to counteract the enforcement of “discriminatory” foreign trade against Chinese companies, and the newly implemented data protection regime that restricts the sharing of certain “important data” with overseas parties for purposes including trade due diligence required by foreign trade laws.
Due to the strategic importance of the Chinese semiconductor industry, suspending or terminating supplies of critical semiconductor products, technologies, or equipment to Chinese trade partners, for the sole purpose of complying with the Rule, may involve risk of triggering countermeasures under the AFSL. Hence, it is essential for the companies to fully assess and, if possible, proactively mitigate the relevant legal, political, and commercial ramifications, in connection with supply chain decisions triggered by the new US export restrictions.
It is also important to note that, since some of the new restrictions under the Rule are established based on the end use/user of the semiconductor items at issue, compliance with these restrictions may entail additional due diligence efforts to clarify the end use or end user of the items destined for China. In the context of the semiconductor industry, the information needed for such due diligence could involve certain “important data,” for e.g., the potential supercomputer capability of the relevant Chinese facilities. As a result, the obligations under the Chinese law to comply with the cross-border data transfer restrictions should also be factored into consideration.
Frank Pan is a partner of FenXun Partners who is a premier Chinese law firm. FenXun established a Joint Operation Office with Baker McKenzie in China as Baker McKenzie FenXun which was approved by the Shanghai Justice Bureau in 2015.
