Commerce Department Rolls Out Measures to Strengthen Export Controls on China

The U.S. Department of Commerce's Bureau of Industry and Security (BIS) issued an interim final rule on Oct. 7, 2022, placing unilateral export controls on certain advanced computing items and semiconductor manufacturing items. The interim final rule is aimed at restricting China's ability to obtain advanced computing chips, develop and maintain supercomputers and manufacture advanced semiconductors.

The new rule aligns with the recent executive order mandating the Committee on Foreign Investment in the United States (CFIUS) to consider the effect of foreign investments on U.S. technological leadership in microelectronics, artificial intelligence (AI) and quantum computing. (See previous Holland & Knight alert, "New Executive Order Creates Roadmap of Heightened CFIUS Scrutiny for Cross-Border M&A," Sept. 20, 2022.) This new rule follows a trend by the Biden Administration to maintain U.S. technological leadership in these areas.

The rule makes the following key changes:

New Export Control Classification Numbers and License Requirements

BIS has imposed Regional Stability (RS) controls and a license requirement for exports, reexports and in-country transfers of identified items to or within China. BIS is adding new Export Control Classification Numbers (ECCNs) as noted below:

• ECCN 3A090 – certain high-performance integrated circuits (ICs)
• ECCN 3B090 – certain semiconductor manufacturing equipment and specially designed parts, components and accessories therefor
• ECCN 4A090 – computers, electronic assemblies and components containing ICs exceeding the limit in ECCN 3A090.a
• ECCN 4D090 – software specially designed or modified for the development or production of items controlled under ECCN 4A090

Additionally, BIS revises a couple of existing ECCNs – including ECCNs 3D001, 3E001 and 4E001 – to align the new RS controls for ECCNs 3A090 and 4A090 in the related "software" and "technology" ECCNs. The new RS controls are also added to the license requirement tables within ECCNs 5A992 and 5D992 to address circumstances when these ECCNs meet or exceed the performance parameters of ECCNs 3A090 and 4A090.

Importantly, the new license requirements do not apply to so-called "deemed" exports or "deemed" reexports. Therefore, a license is not required for the release or disclosure of controlled technology to Chinese persons located outside of China.

To minimize the short-term impact on the semiconductor supply industry for items that are ultimately destined to customers outside of China, the rule establishes a Temporary General License (TGL), effective until Apr. 7, 2023, that permits exports, reexports, transfers (in-country) and exports from abroad for items subject to the additional licensing requirements when destined to or within China by companies not headquartered in Country Groups D:1, D:5 or E for specific activities. The TGL applies to "items covered by ECCNs 3A090, 4A090, and associated software and technology in ECCN 3D001, 3E001, 4D090, or 4E001."

New Variants of the Foreign Direct Product (FDP) Rule

The foreign direct product (FDP) rule is intended to capture items manufactured outside of the United States that are produced using certain U.S. technology.

Entity List FDP Rule

BIS expands its FDP rule to apply to 28 China-based entities that were already on the Entity List. Specifically, non-U.S. exporters will require a license to export, reexport or transfer a foreign-produced item that is either:

• a "direct product" of "technology" or "software" classified as ECCNs: 3D001, 3D991, 3E001, 3E002, 3E003, 3E991, 4D001, 4D993, 4D994, 4E001, 4E992, 4E993, 5D001, 5D002, 5D991, 5E001, 5E002 or 5E991
• produced by any plant or "major component" of a plant when the plant or "major component" of a plant itself is a "direct product" of U.S.-origin "technology" or "software" specified in the ECCNs above.

Advanced Computing FDP Rule

The Advanced Computing FDP Rule applies if the individual or entity has "knowledge" that the foreign-produced item is: 1) destined for China or will be incorporated into any "part," "component," "computer" or "equipment" not designated EAR99 that is destined to China or 2) technology developed by an entity headquartered in China for the "production" of a mask or an IC wafer or die. Further, the foreign-produced item must be either:

• the "direct product" of "technology" or "software" subject to the EAR and specified in 3D001, 3D991, 3E001, 3E002, 3E003, 3E991, 4D001, 4D090, 4D993, 4D994, 4E001, 4E992, 4E993, 5D001, 5D002, 5D991, 5E001, 5E991 or 5E002 and
  • the foreign-produced item is specified in ECCN 3A090, 3E001 (for 3A090), 4A090 or 4E001 (for 4A090) or
  • the foreign-produced item is an IC, computer, "electronic assembly" or "component" specified elsewhere on the Commerce Control List (CCL) and meets the performance parameters of ECCN 3A090 or 4A090
• produced by any plant or "major component" of a plant that is located outside the United States, when the plant or "major component" of a plant, whether made in the United States or a foreign country, itself is a "direct product" of U.S.-origin "technology" or "software" that meets the requirements discussed immediately above.

"Supercomputer" FDP Rule

The Supercomputer FDP rule expands the scope of the Export Administration Regulations (EAR) to certain items destined for China whenever the exporter has "knowledge" that the foreign-produced item will be 1) used in the design, "development," "production," operation, installation (including on-site installation), maintenance (checking), repair, overhaul or refurbishing of a "supercomputer" (as defined in the EAR) 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. Further, the foreign-produced item must be either:

1. the "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, 5D991, 5E001, 5E991, 5D002 or 5E002
2. produced by any plant or "major component" of a plant that is located outside the United States, when the plant or "major component" of a plant, whether made in the United States or a foreign country, itself is a "direct product" of U.S.-origin "technology" or "software" that is specified in the ECCNs 3D001, 3D991, 3E001, 3E002, 3E003, 3E991, 4D001, 4D994, 4E001, 4E992, 4E993, 5D001, 5D991, 5E001, 5E991, 5D002 or 5E002. 

"Supercomputers" is defined as "A computing 'system' having a collective maximum theoretical computer capacity of 1090 or more double-precision (64-bit) petaflop or 200 or more single-precision (32-bit) petaflops within a 41600 cubic feet or smaller envelope."

End-User/End-Use Controls

Additionally, the new rules impose end-user and end-use controls based upon an individual or entity's knowledge that certain items subject to the EAR are destined for a supercomputer or semiconductor development or production end-use in China. These prohibitions include:

1. any item subject to the EAR from being used in the "development" or "production" of ICs at a semiconductor fabrication "facility" located in China that fabricates certain ICs such as advanced logic, NAND and DRAM ICs;
2. any item subject to the EAR when such items will be used for the "development," "production," "use," "operation," installation (including on-site installation), maintenance (checking), repair, overhaul or refurbishing of a "supercomputer" located in or destined to China; and
3. any item subject to the EAR that will be used in the "development" or "production" in China of any "parts," "components" or "equipment" specified under ECCNs 3B001, 3B002, 3B090, 3B611, 3B991 or 3B992.

U.S. Person Activities

In a broad expansion with sanctions-like restrictions, U.S. persons are prohibited from engaging in certain activities, even when the items are not subject to the EAR (e.g., non-U.S. origin items). Accordingly, BIS will require a U.S. person to obtain a license to engage in (or facilitate) shipping, transmitting, transferring or servicing:

• items not subject to the EAR that the individual or company knows will be used in the "development" or "production" of ICs at a semiconductor fabrication "facility" located in China that fabricates certain ICs, including advanced logic ICs, NAND memory ICs or DRAM ICs;
• items 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 that the individual or company knows will be used in the "development" or "production" of integrated circuits at any semiconductor fabrication "facility" located in China, for which the individual or company does not know whether such semiconductor fabrication "facility" fabricates certain ICs, including advanced logic ICs, NAND memory ICs or DRAM ICs; and
• items not subject to the EAR but meeting the parameters of ECCN 3B090, 3D001 (for 3B090) or 3E001 (for 3B090) regardless of end use or end user.

Public Briefing

During the public briefing held in conjunction with the issuance this rule, BIS noted that, while some terms may be undefined, it would not define additional terms during the comment period, which will end on Dec. 12, 2022. However, BIS will provide frequently asked questions and answers on a rolling basis.

Considerations

In light of these new rules, it would be prudent for companies to engage in proactive steps which may include:

• export classification – confirm appropriate classification for ICs and semiconductor manufacturing equipment (and related parts, components and accessories);
• enhanced diligence – review and bolster internal procedures meant to identify end use in China, particularly as it relates to supercomputers or semiconductor development or production; and
• third-country activities – assess manufacturing activities outside of the United States to determine whether any items being shipped to China tie to advance computing or supercomputers.

If you would like assistance submitting a public comment in response to the BIS interim final rule or seek guidance in evaluating how novel export controls, including how these new rules may affect your business, please contact the authors or another member of Holland & Knight's International Trade Group.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.