On October 7, 2022, the U.S. Department of Commerce, Bureau of Industry and Security (“BIS”) announced an interim final rule and a final rule imposing new export controls designed to restrict China’s ability to obtain advanced computing chips, develop and maintain supercomputers, and manufacture advanced semiconductors.  According to BIS, the rules, which reflected consultation with close allies and partners, as well as private industry, and are being issued pursuant to the Export Control Reform Act of 2018, are part of the U.S. government’s ongoing review of export control policies toward China and follow several other regulatory and enforcement actions announced earlier this year (e.g., implementing multilateral export controls on advanced semiconductor and gas turbine engine technologies, on which we wrote about here).

These new rules and related actions mark a significant change in the United States’ approach to restricting technology transfers to China, consistent with a September 16, 2022 speech by Jake Sullivan, the Biden administration’s national security advisor, and the administration’s recently released national security strategy.  BIS explained the basis of these new rules in the context of U.S. efforts to curtail China’s use of these technologies in the development of weapons of mass destruction, artificial intelligence- and supercomputer-enhanced war-fighting capabilities and technologies used to enable human rights violations.  The applications of these new rules are not, however, limited to these areas.  These U.S. actions are consistent with Biden administration’s goal of maintaining “as large a lead as possible” in respect of certain “foundational technologies,” such as advanced logic and memory chips, rather than previous U.S. policy, which was designed to keep the United States ahead in such technologies by a “couple of generations,” as outlined in the Sullivan speech.  These developments have already had practical effects, as U.S. and non-U.S. equipment manufacturers have ceased providing services and equipment to Chinese fabs and companies have ceased using U.S. persons to provide services to certain Chinese customers in these industries.  As discussed further below, the measures contained in these rules are being implemented in a phased rollout, but are in many aspects already effective.

First, the Implementation of Additional Export Controls: Certain Advanced Computing and Semiconductor Manufacturing Items; Supercomputer and Semiconductor End Use; Entity List Modification Interim Final Rule (the “ACSM Rule”) imposes new export controls on: (i) advanced computing semiconductor chips, transactions for supercomputer end-uses, and transactions involving certain entities on the Entity List; and (ii) semiconductor manufacturing items and transactions for certain integrated circuit end-uses.  In particular, the ACSM Rule:

  • adds certain advanced and high-performance computing chips and computer commodities that contain such chips, as well as certain semiconductor manufacturing equipment and related items, to the Commerce Control List under the Export Administration Regulations (“EAR”) by creating new Export Control Classification Numbers (“ECCNs”) and revising certain existing ECCNs;
  • adds new license requirements for items (some of which will be subject to a “presumption of denial”):
    • destined for a supercomputer or semiconductor development or production end-use in China;
    • destined for semiconductor fabrication facilities in China that fabricate integrated circuits that satisfy certain thresholds;[1] and
    • used to develop or produce semiconductor manufacturing equipment and related items;
  • expands the scope of the EAR over certain foreign-produced advanced computing items and certain foreign-produced items for supercomputer end-uses (through the EAR’s foreign direct product rules) when various China-related destination or end-use conditions apply, and expands the scope of the EAR over certain foreign-produced items subject to license requirements when one of, currently, 28 Chinese entities on the Entity List maintained by BIS are involved;[2] and
  • restricts U.S. persons[3] from supporting the development or production of integrated circuits at certain Chinese semiconductor fabrication facilities without a license.

The foreign direct product rules, which are being expanded through the ACSM Rule, are potentially far-reaching extensions of U.S. export controls extraterritorially, as they apply to certain items manufactured outside the United States that are considered the direct product of certain types of U.S.-origin software and technology under complex rules set forth in the EAR.  The U.S. previously applied its foreign direct product rules to Huawei through its inclusion on the Entity List and related rules (which we wrote about here).

The restrictions applicable to semiconductor manufacturing items became effective on October 7, 2022, whereas the restrictions on the ability of U.S. persons to support the development, production, or use of integrated circuits became effective on October 12, 2022, and the advanced computing and supercomputer controls, as well as the other changes in the ACSM Rule, will become effective on October 21, 2022.  To avoid disrupting supply chains, the ACSM Rule also includes a temporary general license authorizing certain companies that are not headquartered in China to engage in limited manufacturing related to items destined for use outside of China through April 7, 2023.  BIS is soliciting public comment on the ACSM Rule for a 60 day-period following the publication of the ACMS in the Federal Register (which occurred on October 13, 2022).

Second, the Revisions to the Unverified List; Clarifications to Activities and Criteria that May Lead to Additions to the Entity List Final Rule (the “UVL and Entity Lists Rule”):

  • adds 31 entities located in China to the Unverified List[4] maintained by BIS because BIS was unable to verify their bona fides (e., legitimacy and reliability relating to the end-use and end-user of items subject to the EAR) through the completion of an end-use check;
  • removes nine entities from the Unverified List after BIS was able to verify their bona fides; and
  • clarifies that a sustained lack of cooperation by the government of the country in which an entity is located that prevents an end-use check from being conducted may constitute a basis for adding a party to the Entity List.[5]

The UVL and Entity Lists Rule became effective on October 7, 2022.

Also, on October 7, 2022, the Assistant Secretary of Commerce for Export Enforcement issued the Addressing Foreign Government Prevention of End-Use Checks Memorandum, which announced amendments to the EAR that will address instances where a non-U.S. government prevents Export Enforcement from accomplishing its end-use checks, including through persistent scheduling delays by:

  • implementing a 60-day clock for the completion of end-use checks, after which processes will be initiated to add the entity to the Unverified List, and
  • implementing a second 60-day clock starting when an entity is placed on the Unverified List due to a foreign government’s prevention to timely complete end-use checks; at the end of this second 60-day clock, the entity will be moved from the Unverified List to the Entity List.

For entities on the Unverified List as of October 7, 2022 (including the above-referenced 31 additional Chinese entities added that day), this second 60-day clock began as of that date.

We will continue to monitor these and related developments.

[1] The relevant thresholds are:

  • Logic chips with non-planar transistor architectures (e., FinFET or GAAFET) of 16nm or 14nm, or below;
  • DRAM memory chips of 18nm half-pitch or less; and
  • NAND flash memory chips with 128 layers or more.

[2] Parties designated on the Entity List are subject to substantial restrictions on their ability to receive items subject to the EAR.

[3] U.S. persons for these purposes include legal entities created under the law of a U.S. jurisdiction, U.S. citizens and permanent resident aliens (“green card” holders).

[4] Exports and re-exports to parties designated on the Unverified List are not eligible for license exceptions under the EAR.  Also, parties are required to obtain a statement from parties designated on the Unverified List prior to proceeding with exports, reexports, and transfers (in-country) when the exports, reexports and transfers (in-country) are not subject to a license requirement.  Further, Electronic Export Information must be filed in the Automated Export System for all exports of tangible items subject to the EAR when a party to the transaction is designated on the Unverified List.

[5] All additions, removals, or revisions to the Entity List remain subject to the approval of the End-User Review Committee, which is made up of the U.S. Departments of Commerce, State, Defense, and Energy.