The Situation: On October 7, 2022, the U.S. government announced new regulations aimed at restricting China's ability to manufacture advanced semiconductors, obtain advanced computing chips, and develop and maintain supercomputers.
The Result: The new export controls are significant in their reach and complexity, and apply to a wide range of individuals, entities, and technologies, creating new restrictions on activities of U.S. persons that relate to semiconductors and advanced computing.
Looking Ahead: Anyone involved directly or indirectly in U.S.-China trade or technology transfer should evaluate their practices and operations. The new regulations raise important considerations for U.S. persons, non-U.S. persons, and third parties dealing with them.
New Controls Relating to Semiconductors
The rule imposes strict limitations relating to equipment subject to U.S. export controls that can be used to make semiconductors. It creates a new classification for specified semiconductor manufacturing equipment capable of producing more advanced semiconductors (3B090) and expands classifications relating to software and technology associated with this equipment. The new and expanded classifications require a license before such equipment, software, or technology can be exported, reexported, or transferred (in country) to China. The rule also establishes a new end-use restriction that imposes a license requirement on any exports, reexports, or transfers of items if an entity is aware that the item will be used in the development or production in China of any parts, components, or equipment considered to be semiconductor manufacturing equipment.
The rule also establishes new restrictions focused on the development or production of semiconductors themselves. It does so by imposing a set of end-use restrictions implementing licensing requirements on a range of items when those items are destined for a Chinese semiconductor fabrication facility. At the more severe end, a license will be required for the export, reexport, or transfer (in country) of any items subject to the Export Administration Regulations ("EAR") (even items subject to the lowest levels of control under U.S. export controls, including common mass market commercial and industrial parts) if a person has knowledge (including reason to know, such as through conscious disregard or willful avoidance of facts) that the item will be used in the development or production of integrated circuits at a Chinese semiconductor fabrication facility that is capable of making high-end semiconductors. If a person does not know whether the Chinese semiconductor fabrication facility is capable of making these advanced semiconductors, then a license is still required for a more limited scope of items that are used in the development or production of integrated circuits.
New Controls Relating to Advanced Computing
The rule creates new classifications for high-performance computing chips (3A090) and for high-performance computer commodities (4A090) and expands classifications relating to software and technology associated with these items. Similar to the semiconductor controls, these new and expanded classifications require licenses before the items can be exported, reexported, or transferred (in country) to China. The rule also establishes a novel license requirement for certain technology associated with these items exported from China to anywhere when that technology was developed by a company headquartered in China.
The rule also creates new end-use restrictions around what the regulations term "supercomputers." The new regulations impose a license requirement when a person seeks to export, reexport, or transfer (in country) certain integrated circuits, computers, electronic assemblies, and components that the person knows: (i) will be used in the development, production, use, operation, installation, maintenance, repair, overhaul, or refurbishing of supercomputers in or destined for China; or (ii) will be incorporated into or used in the development or production of any component or equipment that will be used in a supercomputer in or destined for China.
Commerce also expands the scope of foreign-produced items that are subject to U.S. export controls in this rule. It includes three new foreign direct product rules that cause foreign-produced items to become subject to U.S. export controls in specified circumstances. The rule also creates new license requirements for certain foreign-produced items. Two of these new foreign direct product rules apply in the context of advanced computing (the third is discussed below). The first expands the jurisdiction of U.S. export controls over foreign-produced high-performance computing chips and computer commodities that are the direct product of specified U.S. technology or software when there is knowledge that the foreign-produced item: (i) is being exported, reexported, or transferred (in country) to or within China, or being incorporated into any part, component, computer, or equipment in or destined for China; or (ii) is technology for the production of a mask or a chip wafer or die developed by an entity headquartered in China. The second expands U.S. export controls to cover foreign-produced items that are the direct product of specified U.S. technology or software when there is knowledge that the foreign-produced item will be: (i) used in the design, development, production, operation, maintenance, repair, overhaul, or refurbishing of a supercomputer located in or destined for China; or (ii) 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 for China. Once an item is made subject to U.S. export controls pursuant to a foreign direct product rule, it is subject to the wide range of restrictions and license requirements that accompany those controls.
Increased Restrictions Relating to the Entity List
In the rule, Commerce also tightens the controls already in place on 28 Chinese entities previously designated on the Entity List, a list of entities around the world to which the export, reexport, or transfer of items subject to the EAR are either partially or entirely restricted. The rule adds a footnote 4 to the designations of these entities that implements an additional foreign direct product rule. This rule expands the scope of items subject to U.S. export controls to include certain foreign-produced items that are the direct products of specified U.S. technology or software. This foreign direct product rule is triggered when there is knowledge that any of the entities with the new footnote 4 designation will be involved in activity or transactions concerning the foreign-produced item. The new restriction requires an entity to obtain a license before it reexports, exports from abroad, or transfers (in country) any foreign-produced item that is subject to U.S. export controls as a result of this foreign direct product rule.
Restrictions on Activities of U.S. Persons
The rule also imposes prohibitions on U.S. persons' activities that support the development or production of specified integrated circuits and semiconductor production equipment in connection with China. These prohibitions apply in connection with items that are not subject to U.S. export controls—essentially those items that are not captured by the other portions of the rule. Broadly speaking, the new regulations prohibit, absent a license, activities involving shipping, transmitting, or transferring specified items to or within China, facilitating any of these activities, or servicing specified items. The rule divides this prohibition into three parts. First, it applies the prohibition where a U.S. person knows that any item will be used in the development or production of integrated circuits at a Chinese semiconductor fabrication facility that fabricates high-end semiconductors. Second, it applies the prohibition where a U.S. person knows that certain items will be used in the development or production of integrated circuits at a Chinese semiconductor fabrication facility and the person does not know whether the facility can fabricate high-end semiconductors. Third, it applies the prohibition where a U.S. person would be engaging in any of the activities in connection with items in or destined for China that are high-performance computing chips or computer commodities or that are software or technology associated with these items.
Considerations for U.S. Operations
The effects of the semiconductor and advanced computing export controls will be sweeping and will likely apply to all aspects of global organizations. With respect to the U.S. operations of businesses, close attention should be paid to semiconductor and advanced computing items (including parts, software, and technology) made in the United States that have a direct or indirect connection to China as the new rule will almost certainly be relevant. U.S. operations also should develop or augment diligence methods used to check for end users or end uses that might trigger the new restrictions or requirements. The trend in both export controls and sanctions has been toward screening and end-use analysis, so strength in this area will provide a solid return on investment. In addition, U.S. operations should examine their involvement (including U.S. person personnel) in activities involving semiconductors, advanced computing, and China from a broad perspective, as the new rules reach further than ever before and include the regulation of U.S. persons' actions even absent items that are subject to U.S. export controls.
Considerations for Non-U.S. Operations
The above considerations also are important for operations outside of the United States, especially considering that export controls follow commodities, software, and technology wherever they go. With these new rules, however, additional attention must be paid to foreign-produced items. Due to the new foreign direct product rules, many items that would not be subject to export controls restrictions now fall within their jurisdiction. As such, supply chains involving or relating to China should be closely examined to determine if prior analysis needs to be revisited given the changes in this area. Further, to the extent that operations outside of the United States involve U.S. persons, their role in any activities involving semiconductors, advanced computers, and China should be reviewed to ensure that they do not fall within the new restrictions relating to U.S. person activities.
Considerations Regarding Third Parties
The new rule also necessitates consideration of how a business works with third parties. Commerce took pains in developing the new rule to address how the requirements might be affected by the use of third parties (and to insert provisions guarding against evasion). As such, it is rife with references to prohibitions relating to indirect connections and ultimate end uses of products. Given this, diligence on counterparties to a transaction is more important than ever. While this can raise many difficult questions concerning distributors, resellers, and business partners, companies need to consider risk-adjusted approaches to ensure they are taking appropriate steps to evaluate their exposure and risk in this new environment. Screening third partners remains essential. In addition, the new requirements call into focus the need to conduct diligence regarding a company's supply chain, customers, and intermediaries.
Four Key Takeaways
- The new rule has broad and far-reaching implications for both U.S. and non-U.S. companies with ties to the semiconductor industry or China generally.
- The end-use prohibitions contained in the new rule implement prohibitions aimed at limiting the ability of entities in China from being able to develop or produce high-end semiconductors, advanced computers, and the equipment to make these items.
- New restrictions on the activities of U.S. persons go beyond the scope of traditional export controls to prohibit involvement in certain activities relating to the Chinese semiconductor industry.
- New foreign direct product rules could significantly expand the universe of foreign-produced goods, software, and technology now considered subject to U.S. export control laws and regulations.