In an interim final rule published on October 13, 2022, the US Commerce Department’s Bureau of Industry and Security (BIS) announced sweeping amendments to the Export Administration Regulations (EAR) that impose new controls designed to arrest advanced computing and semiconductor manufacturing development by the People’s Republic of China.
The controls include new item-based and end-use controls covering advanced computing integrated circuits (ICs), supercomputer components, and semiconductor manufacturing equipment; new foreign direct product rules restricting the provision to China of items made using US-origin components and technology; and new restrictions on “US person[s]” concerning items that are not themselves subject to the EAR and certain support activities that BIS has not traditionally regulated.
China’s semiconductor manufacturing capabilities are an estimated three generations behind those of the United States, but its progress has been accelerated through state support and a merging of commercial and military technologies, with consequences feared for the US national security. Together with enactment of the recent CHIPS Act (boosting US domestic capabilities), these new BIS restrictions (and others to come, per published BIS statements) target an expansive semiconductor/supercomputing supply chain in an effort to ensure that the United States can “maintain as large a lead as possible” in this space.
The new rule is currently in effect, although BIS will accept comments on the rule until December 12, 2022. This client alert highlights key aspects. (BIS published FAQs to clarify the new rule.)
New Controls on Advanced Computing and Semiconductor Manufacturing Items
The interim final rule introduces new Export Control Classification Numbers (ECCNs) and a corresponding license requirement for export to China for the following advanced computing and semiconductor manufacturing items and technologies:
- ECCN 3A090 for certain high-performance ICs that meet or exceed specified thresholds for data transfer rate and computation speed, with associated software and technology designated under ECCNs 3D001 and 3E001. Covered ICs include certain graphical processing units (GPUs), tensor processing units (TPUs), neural processors, in-memory processors, vision processors, text processors, co-processors/accelerators, adaptive processors, field-programmable logic devices (FPLDs), and application-specific integrated circuits (ASICs).
- ECCN 4A090 for commodities containing ICs classified under the new ECCN 3A090, with associated software and technology designated under ECCNs 4D090 and 4E001.
- ECCN 3B090, covering certain semiconductor manufacturing deposition equipment, such as for depositing cobalt or tungsten materials, or capable of fabricating certain metal structures or area selective deposition, with associated software and technology designated under ECCNs 3D001 and 3E001. These items and technologies are crucial for the fabrication and packaging of high-end semiconductor products, such as those controlled under the new ECCN 3A090.
These newly defined items are subject to a China-specific Regional Stability (RS) control, imposing a license requirement on exports, reexports, and transfers (in-country) to or within China, subject to limited license exceptions. Potentially impacting exporters of computers, game consoles, and other consumer items, this new RS control also applies to “mass market” encryption items classified under ECCN 5A992 or 5D992 if they meet or exceed the performance parameters of ECCN 3A090 or 4A090.
But this new RS control does not apply to the release or transfer of controlled source code or technology to Chinese nationals who are outside China (e.g., employees or contractors), also known as a “deemed export” or “deemed reexport.”
To minimize supply-chain disruption, a Temporary General License (TGL), valid through April 7, 2023, authorizes most companies[1] to export these items if ultimately destined to customers outside China.
New End-Use Controls for “Supercomputer” and Semiconductor Manufacturing
The interim final rule adds broad end-use controls to prevent certain US-origin items from advancing China’s supercomputing or semiconductor-manufacturing-related activities. The new “supercomputer”[2] end-use control constrains the transfer of a broad range of ICs and computing items (other than 3A090 or 4A090 items) that are subject to the EAR.
Under the new § 744.23, a license is required for the export of specified ICs or computing items[3], when the exporter has knowledge or reason to know that the item will be used:
(1) 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; or
(2) For the incorporation into, or the development or production of any component or equipment that will be used in, a supercomputer located in or destined to China.
This “supercomputer” end-use control applies to both high-end and low-end electronics and computing items, including even “mass market” encryption items under ECCN 5A992.
The rule also establishes a new semiconductor manufacturing end-use control for any item subject to the EAR that may be used for the development or production of certain ICs or semiconductor equipment in China. A license is required for an item destined for China if the exporter has knowledge or reason to know that the item will be used:
(1) For IC development or production at a facility in China that fabricates ICs (packaged or unpackaged) meeting any of the following criteria (the “IC Criteria”):
(A) Logic integrated circuits using a non-planar transistor architecture or with a “production” technology node of 16/14 nanometers or less;
(B) NOT AND (NAND) memory integrated circuits with 128 layers or more; or
(C) Dynamic random-access memory (DRAM) integrated circuits using a “production” technology node of 18 nano meter half-pitch or less;
(2) For IC development or production at any semiconductor fabrication facility in China, even when the exporter does not know whether such facility fabricates ICs that meet any of the IC Criteria above, if the item is classified in ECCN 3B, 3C, 3D, or 3E (i.e., electronics-related equipment, materials, software, or technology); or
(3) For development or production in China of any semiconductor manufacturing equipment or components specified under ECCN 3B001, 3B002, 3B090, 3B611, 3B991, or 3B992.
The Chinese end users impacted by the semiconductor manufacturing end-use control include manufacturing facilities, universities, and research labs with at least moderately advanced fabrication processes. By these controls, the US government aims to arrest China’s IC fabrication capabilities, estimated to be about three generations behind today’s US IC technology.
No license exception is available to overcome these new end-use controls.
New Foreign Direct Product (FDP) Rules
The interim final rule expands the scope of EAR jurisdiction by revising an existing FDP rule and adding two new FDP rules:
- “Footnote 4” Designation – § 734.9(e). BIS revised the Entity List FDP rule with a new product scope and end-user scope for entities on the Entity List that are identified with a new “footnote 4,” while tagging 28 existing Chinese entities with this new designation. Without altering the existing Entity List FDP rule as applied to entities designated with footnote 1 on the Entity List, the footnote 4 provision makes certain foreign-produced items subject to the EAR if the exporter has knowledge or reason to know that any such item is destined for certain activities involving a footnote 4 designated entity.
- Advanced Computing FDP rule – § 734.9(h). This new rule extends EAR jurisdiction and a license requirement to certain foreign-produced items that are the direct product of US-origin technology or software (or of a complete plant or major component of a complete plant that is such a direct product) and described under the new advanced computing ECCNs, or that meet the performance parameters of ECCN 3A090 or 4A090, if there is knowledge or reason to know that the foreign-produced item is destined for China, either directly or after incorporation into a non-EAR99 item, or is technology developed by an entity headquartered in China for the production of a mask or an IC wafer or die.
To assist with the implementation of the Advanced Computing FDP rule, BIS provided a model certificate (Supp. No. 1 to Part 734 of the EAR) for soliciting affirmation from an upstream supplier of an item that: (1) based on the supplier’s “knowledge,” could and would be subject to the EAR if the destination criteria of the Advanced Computing FDP rule are met; and (2) is committed to comply with the EAR. The certification is optional and obtaining it does not relieve the exporter of its legal obligations, but it may be the bare minimum for compliance with the Advanced Computing FDP rule.
- “Supercomputer” FDP rule – § 734.9(i). This new rule extends EAR jurisdiction and a license requirement to certain foreign-produced items that are the direct product of US-origin technology or software (or of a complete plant or major component of a complete plant that is such a direct product) if there is knowledge or reason to know the item will be used for China’s supercomputer-related activities.
Restrictions on US-Person “Support” Activities
The new rule imposes a license requirement on a range of “US person”[4] activities that “support” the development or production of certain ICs or semiconductor equipment in China, even where the items in question are not themselves subject to the EAR. Barred activities within the definition of “support” include the shipping to or transferring within China (or the facilitation of such activity) of any item with knowledge or reason to know it is destined for IC development or production at a semiconductor fabrication facility in China that fabricates ICs meeting any of the IC Criteria above. This new rule pushes the EAR far beyond its traditional boundaries, seemingly borrowing the expansive “facilitation” concept from the US economic sanctions laws administered by the Office of Foreign Assets Control, US Department of the Treasury.
The rule takes one step further still for items not subject to the EAR but which meet the parameters of any ECCN in Product Groups B, C, D, or E in Category 3 of the Commerce Control List (i.e., electronics-related equipment, materials, software, or technology), barring US persons from “support” (as described) if they have reason to know the item will be used for IC development or production at a semiconductor fabrication facility in China, even when it is unknown whether such facility fabricates ICs meeting the IC Criteria above.
No license exceptions overcome the above-described restrictions on US persons.
And for any item not subject to the EAR that meets the parameters of ECCN 3B090, 3D001 (for 3B090), or 3E001 (for 3B090), a US person cannot ship or transfer the item, or facilitate its shipment or transfer, to or within China, or service the item in China, regardless of end use or end user.
Potential Impact of the Rule Changes
BIS has deployed multiple layers of protection around advanced computing and semiconductor manufacturing technologies to thwart China’s advancing capabilities in this space. The rule eliminates most license exceptions, while license applications for items subject to these new controls will generally be denied (except that exports to end users in China that are headquartered in the United States or in Country Groups A:5 or A:6[5] will be considered on a case-by-case basis).
The compliance burden and specific challenges for the regulated public and their counsel are substantial.
Companies or individuals in the relevant field should reevaluate their products against the performance parameters of ECCNs 3A090 and 4A090, although even items that are classified under other ECCNs but meet the performance parameters may be subject to the new RS control.
Companies planning export of the newly controlled items but which qualify for case-by-case review should submit license application(s) as early as possible, as BIS expects an increase of 1,700 license applications per year.
Any transaction that might be part of a semiconductor supply chain touching China calls for enhanced diligence. For example, if any party to an export transaction owns or operates a semiconductor manufacturing facility or is involved in the development or production of ICs or semiconductor equipment in China (or may support directly or indirectly such facilities or activities), the exporter should evaluate all available information to determine whether the end use of any export item is subject to the new license requirement under § 744.23.
Similarly, the new restrictions on “US person” “support” activities should broaden the scope of diligence to all US persons with a role in the semiconductor supply chain. These new restrictions will call into question whether any US citizen or permanent resident may lawfully continue their employment in the Chinese semiconductor industry.
The US Government appears determined to maintain a technological advantage by shutting down all avenues by which China might access advanced computing and semiconductor manufacturing technologies.
If you would like additional information about the issues addressed in this client alert, please contact Rich Matheny, Jacob Osborn, Charles Li, or the Goodwin lawyer with whom you typically consult.
[1] Companies not eligible for the TGL are those headquartered in Country Groups D:1, D:5, or E, which currently include Afghanistan, Armenia, Azerbaijan, Belarus, Burma, Cambodia, Central African Republic, China, Congo, Cuba, Cyprus, Eritrea, Georgia, Haiti, Iran, Iraq, Kazakhstan, Kyrgyzstan, Laos, Lebanon, Libya, Macau, Moldova, Mongolia, North Korea, Russia, Somalia, South Sudan, Sudan, Syria, Tajikistan, Turkmenistan, Uzbekistan, Venezuela, Vietnam, Yemen, and Zimbabwe.
[2] A “supercomputer” is a computing “system” having a collective maximum theoretical compute capacity of 100 or more double-precision (64-bit) petaflops or 200 or more single-precision (32-bit) petaflops within a 41,600 ft3 or smaller envelope.
[3] The specified items include: (1) ICs specified in ECCN 3A001, 3A991, 4A994, 5A002, 5A004, or 5A992; and (2) computers, electronic assemblies, or component specified in ECCN 4A003, 4A004, 4A994, 5A002, 5A004, or 5A992.
[4] The EAR defines “US person” broadly to include: (i) any US citizen, permanent resident, or “protected individual”; (ii) any entity organized under US laws or US jurisdiction (including any foreign branches); and (iii) any person in the United States.
[5] Country Groups A:5 and A:6 currently include: Albania, Argentina, Australia, Austria, Belgium, Bulgaria, Canada, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, India, Ireland, Israel, Italy, Japan, Latvia, Lithuania, Luxembourg, Malta, Mexico, Netherlands, New Zealand, Norway, Poland, Portugal, Romania, Singapore, Slovakia, Slovenia, South Africa, South Korea, Spain, Sweden, Switzerland, Taiwan, Turkey, and United Kingdom.
Contacts
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Richard L. Matheny III
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Jacob R. Osborn
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