US Drops New Export Controls on the Chinese Semiconductor, Advanced Computing, and Supercomputer Industries

The interim final rule can be found here.

While that was clearly the point of the new rule, we are expecting total chaos for a while. Also, we now fully understand why BIS’s Regulatory Policy team – those are the people who write the BIS regulations – have been so hard to reach over the last two weeks!

BIS is holding a public briefing on October 13, 2022, the same day that the new rules will be published in the Federal Register, from 9-10 am EDT (sorry West Coasters) to discuss the new export controls. If you have burning questions, you can submit them by 3 pm EDT on October 11, 2022, by email. BIS is also accepting comments regarding the interim final rule until December 12, 2022. Submit comments on the Federal rulemaking portal using the reference BIS-2022-0025.

Earlier in the day of October 7th, BIS also released an amendment to the Unverified List (UVL) regulation, which although it will likely have a significant impact on Chinese companies, is overshadowed by the sweeping new semiconductor, advanced computing, and supercomputer export controls. The new rule allows BIS to move a party from the UVL to the Entity List for certain reasons, including a “sustained lack of cooperation” by the government of the country in which an end-use check is to be conducted. As many companies in China have experienced, getting the Chinese Ministry of Commerce (MOFCOM) to participate in a BIS end use check is challenging to say the least, and very well could be interpreted as a sustained lack of cooperation by the Chinese Government.

There is a lot to unpack here, so here is a quick navigation guide for the larger rule:

• Summary
• New and revised Export Control Classification Numbers
• New and expanded Foreign Direct Product Rules (FDPRs)
• End user and end use rules
• Restrictions on US person activities
• Implementation dates, Savings Clause, and Temporary General License

New Export Controls

There are many ways to slice and dice the new controls. You can look at them by the three main industry areas impacted: semiconductor integrated circuits (ICs) and semiconductor manufacturing equipment, advanced computing, and supercomputers. Alternatively, you can look at them by the export control mechanisms, which makes us think of the 12 Days of Christmas, but without the presents:

• 4 new Export Control Classification Numbers (ECCNs) (and 2 amended ECCNs)
• 2.5 new Foreign Direct Product Rules (FDPRs) (one is an expansion of the Entity List FDPR)
• 2 new end user/end use rules and
• 1 new immense restriction on US person activities

Indeed, BIS has utilized all of the above types of export controls – new ECCNS, FDPRs, end user/end use rules, and US persons restrictions – to implement controls on each of the industry areas.

While directed primarily at the Chinese semiconductor manufacturing, advanced computing, and supercomputer industries, the combination of the new ECCNs, FDPR rules, and new end user/end use rules will require all companies that export, reexport, or transfer (in-country) to China items, including hardware, software, and technology related to these industries, including companies in China or with Chinese subsidiaries, to determine if some of their transactions will now require a license from BIS. The key takeaway: Virtually any company that uses computers, servers, and ICs in China and all exporters and reexporters, worldwide involved in the export of computers, servers, and ICs to China, will need to assess the new US export controls. Further, the new US person restrictions will make it very difficult, if not impossible, for US Persons (citizens, permanent residents, refugees, asylees) to work in engineering R&D or provide technical support for Chinese companies engaged in the semiconductor, advanced computing, and supercomputer fields.

Being true export nerds, we find it easier to look at the new controls by their mechanisms:

New and Revised ECCNs Requiring a License to China

BIS has implemented four new ECCNs and revised two ECCNS related to ICs and the computers and assemblies that contain them and specific semiconductor manufacturing equipment. We have a quick shortcut for reference and unpack the ECCNs below.

All of these ECCNs are controlled for Regional Stability (RS) reasons for China, meaning a license is required for the export, reexport, and transfer (in-country) to or within China (and embargoed countries).

• New ECCN 3A090 controls ICs:
  • that meet specific criteria[1] – think 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).
• New ECCN 3B090 controls semiconductor manufacturing equipment:
  • that was not already controlled by 3B001 and specially designed parts, components and accessories therefore. Only specified semiconductor manufacturing equipment is controlled. You need to check the list to be sure but it seems to the non-engineer to mainly be the equipment that deposits layers and fabricates various contacts in vacuum environments.
• New ECCN 4A090 controls computers, “electronic assemblies,” and “components” that contain ICs that exceed the limits in 3A090.a
• New ECCN 4D090 controls “software” “specially designed” or modified for the “development” or “production,” of ECCN 4A090 computers, assemblies and components.

The associated technology and software for these ECCNs, as well as some ECCNs that are typically controlled for Anti-Terrorism (AT) reasons only but now meet or exceed the performance levels of these new ECCNs, are also controlled for RS reasons to China. These are:

• Software in 3D001 associated with 3A090 or 3B090
• Technology in 3E001 associated with 3A090 or 3B090
• Technology in 4E001 associated with 4A090 or 4D090
• 5A992 items that meet or exceed the performance levels of 3A090 or 4A090
• 5D992 items that meet or exceed the performance levels of 3A090 or 4A090

The fact that certain 5A992 and 5D992 items may now be controlled for export, reexport, or transfer (in-country) to or within China under the new RS controls likely is going to confuse many. It might be better for exporters to simply reclassify those items under the appropriate new ECCN.

The RS controls will be implemented in two waves with the first set already effective on October 7^th (for ECCN 3B090 and associated software and technology in 3D001) and the second wave effective October 21, 2022 (for the remaining ECCNs above).

License applications related to items classified under the new ECCNs to China carry a presumption of denial except for exports to end users located in China that are headquartered in the United States or Country Groups A:5 or A:6. BIS will consider the latter exports and reexports on a case by case basis “taking into account factors including technology level, customers, and compliance plans.”

License exceptions for the new ECCNs are next to non-existent. They are limited to repairs and replacement and software updates (RPL and TSU) and government end users (GOV) for some of the new ECCNs, but only GOV is available for semiconductor manufacturing equipment controlled under ECCN 3B090 and associated software and technology in 3D001 and 3E001. In other words, you must obtain a license to repair or replace existing 3B090 semiconductor manufacturing equipment that is subject to the EAR in China.

The new rule also revised ECCNs 3A991 and 4A994 by adding two new subcategories:

• ECCN 3A991 – Revised to add .p for ICs that have either:
  • p.1. A processing performance of 8 TOPS[2] or more; or
  • p.2. An aggregate bidirectional transfer rate over all inputs and outputs of 150 Gbyte/s or more to or from integrated circuits other than volatile memories.
• ECCN 4A994 – Revised to add .l for computers, electronic assemblies, and components that contain ICs that exceed the limit in new ECCN 3A991.p

While ECCNs 3A991 and 4A994 still are controlled for AT reasons only – meaning they require a license to the terrorist-supporting countries identified in Part 746 – they are in the military end use and end user (MEU) rule, meaning that these new subcategories may now require licenses for export to MEUs and for MEU end uses in China, Burma, Belarus, Cambodia, and Venezuela , and (collateral damage) also to all end users in Russia and Belarus.

A special note about deemed exports and reexports: Licenses are only required if the technology or software release exceeds the scope of the technology or software to which the non-US person already had lawful access to prior this rule. As such, if on October 6^th a Chinese national employed by an MEU who already had lawful access to technology or software related to ECCNs 3A991.p or 4A994.l, no new license is required to continue receiving the same technology or software. However, a license is required for the release of EAR-controlled technology or software that is at all different from the technology or software already released.

BIS estimates these new controls will result in an additional 1,600 license applications per year.

Two Brand New FDPRs and an Expansion of the Entity List FDPR

As BIS knows, many of the newly controlled and soon to be controlled items made globally are not US-origin and are also not subject to the EAR because they contain less than de minimis controlled US content. Exercising what some may call excessive extraterritorial reach, BIS took care of this issue by creating two new FDPRs and expanding the Entity List FDPR. We don’t even want to think about the nightmare of enforcing these rules.

Expanded Entity List FDPR to Immediately Impact 28 Supercomputer Entities

Perhaps due to the lessons learned of the current Entity List FDPR that relates to “footnote 1” entities, namely Huawei and its subsidiaries, BIS has decided to further expand the Entity List FDPR to add “footnote 4” entities in a new § 734.9(e)(2). (The prior iteration of the Entity List FDPR that addresses “footnote 1” entities has now moved to § 734.9(e)(1).) BIS designated 28 parties[3] located in China that were already on the Entity List and designated them with footnote 4 because of their involvement in computing and WMD activities.

What is the impact of a company or organization being a footnote 4 entity? Because these companies were already on the Entity List, they were already subject to stricter licensing requirements. The big difference here is for companies selling non-US origin products that contain less than de minimis controlled US-origin content, which, prior to the Entity List Footnote 4 FDPR going into effect later this month, could transact with these 28 Footnote 4 entities. The rule relates to 18 ECCNs[4] spanning technology and software used to produce or develop semiconductors and related materials, production and processing equipment and their parts and components; some computers and related software that gets computers working; and telecommunications equipment and their parts can components; and information security (encryption) software and technology. Interestingly, the Entity List Footnote 1 FDPR does not include these encryption software and technology, which vastly expands the foreign products that are subject to the amended rule.

Under the new Entity List FDPR non-US items that are the direct product of certain technology or software subject to the EAR are now subject to the EAR and thus require a license to Footnote 4 entities. Also, and perhaps the more critical component of the FDPR, is that non-US items that are produced by a plant or a major component of a plant that is the direct product of certain technology or software subject to the EAR are now also subject to the EAR. In English: if your chip is being made on equipment that is the direct product of one of the 18 ECCNs of US technology or software, sending that chip to a Footnote 4 entity is a violation of US law.

It’s worth noting that the FDPR covers more than just the recipient; rather it applies if a Footnote 4 entity is any party to the transaction, including, for example, the purchaser, intermediate consignee, ultimate consignee, or end-user. Moreover the FDPR applies if the non-US product will be incorporated into, or will be used in the “production” or “development” of any “part,” “component,” or “equipment” produced, purchased, or ordered by a Footnote 4 entity. Now, you have to have “knowledge” that a Footnote 4 entity is involved in the transaction – knowledge under the EAR is not just actual knowledge, but also arguably covers most head in the sand situations.

Advanced Computing FDPR

While the Entity List FDPR does not limit the scope of what the non-US produced item is, the Advanced Computing FDPR does. In the case of the Advanced Computing FDPRs, the product scope applies only if the non-US item is specified in the new ECCN 3A090 or is an IC, computer, electronic assembly, or component listed elsewhere on the CCL that meets performance parameters of the new ECCNs (3A090 or 4A090).

As most FDPRs, the non-US item must also be produced with software or technology of the relevant ECCNs, or be produced by a plant or major component of a plant that was produced with the relevant software or technology. The Advanced Computing FDPR has the same ECCNs of technology and software as the Entity List Footnote 4 FDPR,[5] namely semiconductors, computers, telecommunications, and information security, plus one more, ECCN 4D090, just to keep everyone on their toes.

Let’s say you’ve now concluded that the non-US item you sell falls within the product scope and is the non-US direct product of one of these ECCNs. Does that mean you can’t send it to China? On the face of the rule, not quite, but the end use scope is pretty broad in two ways. If the exporter has “knowledge” (remember, no head in the sand) that the non-US item is destined to China (even if not directly) or will be incorporated into a non-EAR99 part, component, computer, or equipment, the transaction requires a license. In addition, if the non-US item is technology developed by an entity headquartered in the China for the “production” of a mask or an integrated circuit wafer or die, it is also captured.

BIS has provided some help here by offering an optional template certification to assist in resolving potential red flags of whether the Advanced Computing FDPR applies. Essentially a specific end use statement, the certification, now at Part 734, Supplement 1, requires the recipient to acknowledge that the non-US item could be subject to the EAR if the non-US item goes to China (for the rest of time that product exists) and affirm its commitment to comply with the EAR.[6]

And how far should this diligence go? If a customer cannot provide a certification, BIS indicates the exporter should keep going down the supply chain, and indeed “a BIS authorization may be required for the next set of recipients in the supply chain.” Remember when the Huawei FDPR happened? Remember how long it took to figure out supply chains?? Further, a certificate alone may not be sufficient to mitigate a violation: “[w]hile BIS expects that this certificate will be useful in facilitating understanding the application of the EAR to an item, BIS does not view use of this certificate alone to be a comprehensive due diligence process.”

Supercomputer FDPR

BIS also implemented a new Supercomputer FDPR. To provide some clarification, BIS has now defined “supercomputer” in § 772, 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.[7]

In no surprise, the product scope includes the same ECCNs as the Advanced Computing and new Entity List variation FDPRs.[8] However, the end use scope of this FDPR focuses on supercomputers, requiring that the non-US produced item be (1) used in the design, “development,” “production,” operation, installation, maintenance, repair, overhaul, or refurbishing of a supercomputer or (2) incorporated into or used in the “development” or “production” of any part, component, or equipment that will be used in a supercomputer. In either case, the country scope is of course if the non-US produced item is located in or destined to China. Like all FDPRs (so far), there is a knowledge requirement.

In practice, you need to know a few things to properly eliminate this FDPR, and like the Huawei FDPR it is most impactful for subtiers making really basic stuff. Because of the very broad swaths of ECCNs covered, non-US produced items that are pretty boring but very functional and can be used in a variety of items will be caught by the rule. As such, it would be prudent to know if at any point in the future the item will be incorporated into a supercomputer or used in the development or production of any part, component, or equipment that will be used in a supercomputer, including various subassemblies that could be used in a variety of items.

Diligence will need to mirror that conducted for the Huawei FDPR and exporters should carefully assess any red flags.

Two New End User / End Use Rules – Supercomputer and Semiconductor Manufacturing

BIS added supercomputer and semiconductor end use controls in new § 744.23 for any item subject to the EAR for the “development” or “production,” of ICs at certain semiconductor manufacturing “facilities” located in China. The exporter or reexporter must have “knowledge” at the time of export, reexport, or transfer (in-country) that the item at issue will be used, directly or indirectly, in a newly prohibited end use.

The supercomputer end use rule is fairly specific, but the semiconductor manufacturing end use controls are very far-reaching, arguably putting Chinese companies that develop and produce ICs that meet certain criteria or semiconductor manufacturing equipment in a similar position to entities on the Entity List without actually having to list them. A license is now required to export, reexport, or transfer (in-country) any item subject to the EAR to these Chinese semiconductor manufacturing companies.

As a result of the supercomputer end use rule, ICs specified in ECCNs 3A001, 3A991, 4A994, 5A002, 5A004, or 5A992 and computers, electronic assemblies, or components specified in ECCNs 4A003, 4A004, 4A994, 5A002, 5A004, or 5A992 require a license for the export, reexport, and transfer (in-country) to or in China if the item (1) will be used in the development, production, use, operation, installation, maintenance, repair, overhaul, refurbishing, or incorporation of a supercomputer or (2) incorporated into or used in the development or production of any component or equipment that will be used in a supercomputer.

In application: Are you exporting, reexporting, or transferring (in-country) items subject to the EAR in any of these ECCNs? Make sure it is not going to a supercomputer end use in China.  

By contrast, the semiconductor manufacturing end use controls are even far more expansive in their product scope and end use scope (and have much less discussion in the preamble). Further, it is more complicated as there are three separate subrules. A license is required if you have knowledge at the time of export, reexport, or transfer (in-country) that item is subject to the EAR and will be used for both really specific and really broad potential end uses. Let’s clarify the prohibitions:

The licensing policy is a presumption of denial for applications, except for certain end users in China that are headquartered in the United States or in Country Groups A:5 or A:6 will be considered on a case-by-case basis. This strict license review standard applies even if the items subject to these end use control already require a license to China and those controls have a more favorable licensing policy. No license exceptions are available (not even RPL!!!).

The new § 744.23 also includes an “is informed” provision that operates like other Part 744 end use controls. BIS can give any party notice that it cannot export, reexport, or transfer (in-country) a Chinese end user because of an “unactable risk of use in, or diversion to,” a prohibited semiconductor or supercomputer end use.

BIS estimates this will result in 25 additional license applications a year, presumably because they think companies will just get discouraged and give up.

“Public Notice” of Restrictions US Person Activity

The interim final rule also informs US Persons (citizens, permanent residents, asylees, and refugees) that supporting the development or production of ICs in China now requires a license. The general licensing policy will be one of denial, but it provides for a case-by-case review of exports for end users in China headquartered in the United States or in Country Groups A:5 or A:6.

Under the Export Control Reform Act of 2018, the Commerce Department was mandated to control certain US Person activity that was related to WMDs and military intelligence services. While BIS has already implemented some of this mandate, the October 7^th rule goes significantly further. It asserts that China’s military-civil fusion effort makes it difficult to distinguish between restricted and non-restricted end uses, setting up the context for the expansive controls on US Person activities related to ICs and China. Specifically, US Persons cannot “support” certain (and numerous) activities to or within China if such activity would assist the “development” or “production” of ICs meeting certain parameters. For your reference, the specific prohibitions.

Our questions (feel free to send us others):

• What kind of ICs are involved? Logic integrated circuits using a non-planar architecture or with a “production” technology node of 16/14 nanometers or less; NOT-AND (NAND) memory ICs with 128 layers or more; and dynamic random-access memory (DRAM) ICs using a “production” technology node of 18 nanometer half-pitch or less.
• What if you are not sure if the item not subject to the EAR falls into the IC parameters? Don’t guess. A license is required for US Person activities that “support” any ECCN in Category 3, Product Groups B, C, D, or E to a semiconductor facility even if you do not know whether such semiconductor fabrication facility fabricates the relevant ICs.
  • Wait a minute, isn’t knowledge required? The rule essentially switches the burden of proof on the knowledge standard: a US Person now needs to find out that the fab does NOT produce those specific ICs and cannot rely on lack of knowledge of what the fab is producing. Thus, the rule does not technically cover all IC fabs in China, but one has to wonder how to conduct sufficient diligence on proving this negative.
• What ECCNs are relevant? The rule requires a license for US person activities involving “support” to or within China, regardless of end user or end use, if the item not subject to the EAR would be controlled under the new ECCNs 3B090, 3D001 (for 3B090), or 3E001 (for 3B090) if subject to the EAR. And, as noted above, if you don’t know if a relevant IC is fabricated at the semiconductor fabrication facility, then Category 3, Product Groups B, C, D, and E.
• Why do you keep saying not subject to the EAR? I thought only things subject to the EAR were controlled? Good observation, these activities do not involve items that are “subject to the EAR.” This means that the items could be 100% Chinese, but the US Person cannot transmit or transfer items subject to the above restrictions to a Chinese fab. These prohibitions will make it very difficult for US Persons to be key R&D personnel in Chinese fabs without a license. However, it may be possible for US Persons to own the fabs and if so, it may be possible to obtain a license, particularly if the ICs are being exported from China.
• Now I am curious, what exactly constitutes support? Not shockingly, a wide array of activities are covered, and of course, it is not definitive. Per § 744.6(b)(6), support includes shipping, transmitting, or transferring (in-country) items not subject to the EAR, facilitating such shipment, transmission, or transfer (in-country); servicing items not subject to the EAR;[9] you know may assist or benefit any of the relevant end uses or end users, which in this case is anyone and everyone in China and every possible end use.
• Are any license exceptions available? No.
• Surely there is a carveout for subsidiaries of US and Country Groups A:5 or A:6? Yes! Well, sort of. End users in China headquartered in the United States or in Country Groups A:5 or A:6 do have a carveout, but it’s only that those types of licenses will be considered on a case-by-case basis.

Implementation Dates, Savings Clause, and a Temporary General License (to avoid Supply Chain Disruption, Ha ha ha!)

BIS attempted to soften the impact of the rule by having it go into effect in four stages:

• October 7, 2022: The new license requirement for semiconductor manufacturing items controlled in the new ECCN 3B090 and associated software and technology in ECCNs 3D001 (for 3B090), 3E001 (for 3B090)) that are exported, reexported, or transferred in country in China, and associated license exception restrictions. Also, the semiconductor manufacturing end use contained in § 744.23 went into effect on October 7^th.
• October 12, 2022: Prohibitions on activities by US persons related to the development or production of ICs in China.
• October 21, 2022: Everything else…BUT
• April 7, 2023: BIS has issued a Temporary General License (TGL) (Part 736, Supplement No. 1, new paragraph (d)) purportedly to avoid disruption of supply chains. The TGL, applicable from October 21, 2022, through April 7, 2023 (with the possibility of renewal?), only applies to companies not headquartered in Country Groups D:1, D:5, or E. It authorizes exports, reexports, transfers (in-country), and exports from abroad destined to or within China to continue or to engage in integration, assembly (mounting), inspection, testing, quality assurance, and distribution of items covered by ECCNs 3A090, 4A090, and associated software and technology in ECCNs 3D001, 3E001, 4D090, or 4E001; or any item that is a computer, IC, electronic assembly, or component and associated software and technology on the CCL that meets or exceeds the performance parameters of ECCNs 3A090 or 4A090. This TGL has a very large condition on it however: it is intended to avoid disruption to supply outside of China.  Indeed, it does not authorize “the export, reexport, in-country transfer, or export from abroad to ’end-users’ or ’ultimate consignees’ in China.” BIS has invited comments on the TGL. We recommend the first one should be whether the TGL is available if a company that integrates a newly controlled IC and then tests it, thereby making it into another product, is an ultimate consignee or end user if the company then exports, reexports, or transfers (in-country) that downstream product.

The savings clause applies only if a now controlled item was on a dock or en route on October 7, 2022, if exported, reexported, or transferred (in-country) before November 7, 2022.

Good luck and Godspeed.