US Government Hurls Another Export Control Grenade at Huawei

This “foreign direct product rule” as it is known, imposed export controls on foreign-origin items that would fall under national security controls, but only if they were the direct product of a small set of very highly controlled technologies. And those controlled items only required a license when they were exported, exported, or transferred to a few countries.

What Does the New Rule Do?

The May 15 rule change vastly expands a very small corner of that rule in a fashion so labyrinthine that it could easily swallow up the Minotaur and then some. It creates two new categories of foreign direct products. These categories are far broader than the old one, but new foreign direct products only require a license when they are exported or reexported to entities on a new special subset of the Entity List, which includes Huawei, HiSilicon and many other Huawei affiliates.

View the List of Entities

The key takeaway is for companies that are fulfilling orders of foreign origin items that are specifically to meet a Huawei specification, design requirement, etc. (as opposed to standard catalog items sold as-is to many customers), you need to evaluate whether those items are made using US-origin technology, software or production equipment that falls under one of the ECCNs listed in the regulation (and noted below) and whether Huawei’s contribution to the design or production rises to the level to trigger the rule.

Put another way, the new control applies to foreign-produced items that meet two prongs. They are both the:

1. Brainchild of Huawei or one of the listed entities: the foreign direct product is either designed or produced by a designated entity listed on the Entity List under Supplement No. 4 to Part 744, or is the product of software or technology from one of those entities; and
2. Brainchild of certain US-sourced technology or software, or equipment that is the brainchild of certain US-sourced technology or software: the foreign direct product is also the direct product of technology or software that is subject to the EAR and falls in one of the ECCNs or is the direct product of a plant or a major component of a plant that direct product of US- origin “technology” or “software” that falls into a list of specific ECCNs.

The US ECCNs in scope represent a large swathe of US semiconductor, computing and telecommunications technology and software at both high level of control — ECCNs 3E001, 3E002, 3E003, 4E001, 5E001, 3D001, 4D001, 5D001 — but also very low level (anti-terrorism) control — 3E991, 4E992, 4E993, 5E991, 3D991, 4D993, 4D994, or 5D991. EAR99 technology in the semiconductor, computing, and telecommunications categories is omitted.

We explain how the rule works in detail in our section below "In the Weeds." We also have a “What Should I Do Next?” section.

When Is the New Rule Effective? Can I Comment?

The new rule is effective Friday, May 15, 2020, which is the date it appeared for public inspection in the Federal Register. Comments must be submitted on or before July 14, 2020.

The rule does, however, have a savings clause. Foreign origin items are not subject to the new rule if:

1. (for foreign direct product provision) they were on the dock for loading, on lighter, laden aboard an exporting or transferring carrier, or en route aboard a carrier to a port of export to the consignee or end-user on May 15, 2020, pursuant to actual orders;
2. (for the foreign direct plant provision only), they started “production” prior to May 15, 2020.

What Is the Purpose?

The new rule is intended to further cut off the supply of semiconductors and other items made outside the United States to Huawei and other companies on the Entity List that were not previously subject to the EAR.

What May Be Its Effects?

This rule will force non-US semiconductor development and manufacturing companies to choose between using US semiconductor technology and equipment and serving Huawei, HiSilicon, and the other listed Chinese entities as customers. It remains to be seen, however, what choice those non-US companies make. They could decide to stop producing chips for Huawei and HiSilicon. But where US engineering has non-US competitors, what is to stop their choice from being the elimination of US semiconductor design, engineering, and test equipment in at least some, or even all offshore facilities? And what if China decides to retaliate by putting US companies on their unreliable entity list? If these scenarios come to pass, is the juice of bringing more pressure to bear on Huawei worth the squeeze?

In the Cup Is (More Than) Half-Full Category

So this alert is not all gloom and doom, we want to point out that this rule could have been a whole lot worse for US engineering. What is not captured by the new rule is all the foreign products that are designed with US technology or software but Huawei, HiSilicon, or other listed entities are not in the design, development, or production picture. In other words, your design engineers come up with a great design (3E991) for a Taiwanese origin chip (3A991) that is made in Taiwan and is not subject to the EAR. Huawei and HiSilicon are not part of that design and the chip is not modified to meet their specifications. Now they want to buy it. The chip is not subject to the EAR and is not prohibited by the EAR from being exported from Taiwan to Huawei or HiSilicon.

So bottom line, if your company is not collaborating with Huawei, HiSilicon, or another designated company on the Entity List in the design or modification of your products, you do not have to redesign the compliance program or your foreign factory floors.

In the Weeds – How the Rule Works and Examples

This section should not be read without the benefit of caffeine or a stimulant of your choice.

The key part of the rule is contained in footnote 1 to Supplement no 4 to Part 744 on pages 38 and 39 of the rule. We have copied footnote 1 below for ease of reference.

The new rule applies to foreign-produced items destined to entities with a footnote 1 designation on the Entity List. Especially targeted are Huawei Technologies Co., Ltd. (Huawei), and its non-US affiliates.

Items that fall under of the following two categories cannot be reexported, exported from abroad or transferred to companies with a footnote 1 designation on the Entity List:

Category 1: Foreign Direct Product Provision (section a of Note 1)

The foreign produced item is:

i) Produced or developed by a company with a footnote 1 designation on the Entity List; and

ii) the direct product of “technology” or “software”

1. that is subject to the EAR; and
2. that falls into one of the following ECCNs: 3E001, 3E002, 3E003, 4E001, 5E001, 3D001, 4D001, 5D001, 3E991, 4E992, 4E993, 3E991, 4E992, 4E993, 5E991, 3D991, 4D993, 4D994, or 5D991.

Example:

Company A is located in Hong Kong and often collaborates with Huawei on developing new Integrated Circuit (IC) designs that Company A manufactures for Huawei. In conjunction with this process, Company A uses US origin 3D991 software to create the design layout for the Huawei IC. The products Company A manufacturers for Huawei are now subject to the EAR under the rule and require authorization to be sent to Huawei or any other company on the Entity List that are noted as having the new extra restriction.

Category 2: Foreign Direct Product Plant (section b of Note 1)

b) The foreign produced item is:

i. The direct product of “software” or “technology” produced or developed by an entity with a footnote 1 designation on the Entity List; and

ii. The direct product of a plant or “major component” of a plant located outside of the United States;

1. major component” of a plant located outside the United States means equipment that is essential to the “production” of an item, including testing equipment, to meet the specifications of a design specified in ii.
2. the plant or major component of a plant itself must be:
   1. a direct product of US- origin “technology” or “software” (note that the technology or software must be “US” NOT “subject to the EAR”); and
   2. the U.S origin technology or software must fall under ECCNs 3E001, 3E002, 3E003, 4E001, 5E001, 3D001, 4D001, or 5D001, 3E991, 4E992, 4E993, 5E991, 3D991, 4D993, 4D994, or 5D991 of the Commerce Control List in Supplement No. 1 to part 774 of the EAR.

Example:

An Entity on Entity list designs an IC that it asks Fab A in Taiwan to manufacture (i.e. the IC is the direct product of the Entity’s “technology”). Fab A uses Chinese recrystallizing equipment that was produced using US origin 3E991 technology. This crystallizing process is essential to the production of the IC. The ICs manufactured by Fab A using that equipment are now subject to the EAR under the rule and require authorization to be sent to Hi-Silicon or any other company on the Entity List that are noted as having the new extra restriction.

What about our existing Huawei licenses?

Some readers may have gone through the ring of fire and actually obtained a BIS license to share US technology with Huawei. These sturdy souls are either saying “ha ha ha, I already have a BIS license!” or, if they are more cautious, saying “dang, does my license cover this?” The short answer is the new regulation does not explicitly answer this question, and if your license covered technology exports but now the foreign product you are selling to Huawei is a foreign direct product as a result of this rule, the answer might technically be no, you have a technology license, not a hardware license.

But in point of fact, BIS and the US agencies who reviewed your license application have already determined that it should be granted. Therefore we are hopeful that BIS will fill this gap by stating that the existing Huawei license covers both the technology and software and the hardware that is the foreign direct product of that technology and software.

What do I do next?

Ask your engineering and plant operations teams the following three questions, preferably over (virtual) coffee and doughnuts:

1. Ask first, do we design anything with Huawei, HiSilicon (including adapting my products designs to Huawei’s products) or produce anything that Huawei has designed or provided me technology or software to design or produce? (Chances are good you already answered this question when Huawei was first put on the Entity List.)

If the answer to that question is yes, then you need to map out each and every Huawei related project based on the products and the facilities producing those products and ask two more questions:

1. Are the products we are making or designing for or with Huawei the direct product of “technology” or “software” that
   1. is subject to the EAR; and
   2. falls into one of the following ECCNs: 3E001, 3E002, 3E003, 4E001, 5E001, 3D001, 4D001, 5D001, 3E991, 4E992, 4E993, 3E991, 4E992, 4E993, 5E991, 3D991, 4D993, 4D994, or 5D991.
2. Are the products you are making or designing for or with Huawei the direct product made in a plant where either the whole plant or any “major component” is:
   1. a direct product of US - origin “technology” or “software” (note that the technology or software must be “US” NOT “subject to the EAR”); and
   2.  the U.S origin technology or software must fall under ECCNs 3E001, 3E002, 3E003, 4E001, 5E001, 3D001, 4D001, or 5D001, 3E991, 4E992, 4E993, 5E991, 3D991, 4D993, 4D994, or 5D991 of the Commerce Control List in Supplement No. 1 to part 774 of the EAR?

Question 3 will require you to map out the production steps and the equipment and software used at each step to see if it is a major component and if it is the direct product of US technology or software that falls into one of these ECCNs.

Footnote 1 to Supplement no 4 to Part 744

Footnote 1

Items subject to the EAR that are controlled for NS reasons or specified in certain ECCNs when destined to designated entities. You may not re-export, export from abroad, or transfer (in-country) without a license or license exception any foreign-produced item specified in paragraph (a) or (b) of this footnote when there is “knowledge” that the foreign-produced item is destined to any entity with a footnote 1 designation in the license requirement column of this Supplement.

1. Direct product of “technology” or “software” subject to the EAR and specified in certain Category 3, 4, or 5 ECCNs.
   The foreign-produced item is produced or developed by any entity with a footnote 1 designation in the license requirement column of this Supplement and is a direct product of “technology” or “software” subject to the EAR and specified in Export Control Classification Number (ECCN) 3E001, 3E002, 3E003, 4E001, 5E001, 3D001, 4D001, or 5D001; of “technology” subject to the EAR and specified in ECCN 3E991, 4E992, 4E993, or 5E991; or of “software” subject to the EAR and specified in ECCN 3D991, 4D993, 4D994, or 5D991 of the Commerce Control List in Supplement No. 1 to part 774 of the EAR.
2. Direct product of a plant or major component of a plant. The foreign-produced item is:
   1. 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 itself is a direct product of US- origin “technology” or “software” that is specified in Export Control Classification Number (ECCN) 3E001, 3E002, 3E003, 4E001, 5E001, 3D001, 4D001, or 5D001; of US-origin “technology” that is specified in ECCN 3E991, 4E992, 4E993, or 5E991; or of US-origin “software” that is specified in ECCN 3D991, 4D993, 4D994, or 5D991 of the Commerce Control List in Supplement No. 1 to part 774 of the EAR; and

      Note to paragraph (b)(1) of footnote 1: A major component of a plant located outside the United States means equipment that is essential to the “production” of an item, including testing equipment, to meet the specifications of a design specified in (b)(2).

   2. A direct product of “software” or “technology” produced or developed by an entity with a footnote 1 designation in the license requirement column of the Entity List.