Commerce Department Rolls Out Measures to Strengthen Export Controls on China | Insights – Holland & Knight

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