On May 15, 2020, the U.S. Commerce Department’s Bureau of Industry and Security (BIS) announced that it was amending the U.S. Export Administration Regulations (EAR) to further restrict the ability of Chinese telecom and IT company Huawei and its affiliates to use U.S. technology and software to design and manufacture its semiconductors abroad. In May 2019, BIS had designated Huawei and over 100 of its affiliates on the BIS Entity List and prohibited exports, reexports and transfers of U.S. origin goods, technology and software to the designated entities.
The latest rule change expands those prohibitions to also include the provision of certain foreign-made items to Huawei and its designated affiliates. As a result, non-U.S. companies manufacturing and providing goods, technology and software related to semiconductor design and manufacturing for Huawei will face new U.S. export licensing requirements, prohibitions and scrutiny from U.S. regulators. The new rule will became effective immediately upon issuance, but as explained below, BIS is allowing for a limited transition period for some covered transactions. BIS is also simultaneously seeking industry comment on the new rule.
Prior to the latest rule change, the EAR’s foreign-produced direct product rule prohibited the reexport and export from abroad of certain foreign-produced direct products of U.S. technology and software to certain countries considered to pose risks to U.S. national security (including the People’s Republic of China) and countries that were found to support terrorist activities. In general, a foreign-made item is defined as a “direct product of U.S. technology” when it is the “direct product of technology or software that requires a written assurance as a supporting document for” authorization from the BIS (such as through licenses or license exceptions) and when it was subject to national security (NS) controls on the Commerce Control List (CCL). This prohibition also applied to a limited set of foreign-made items that were the direct product of a complete plant or any major component of a plant.
Because foreign-made products were considered to be a “direct product” of U.S. technology only when they were based on certain U.S.-origin technology that was controlled for NS reasons on the Commerce Control List (CCL), some companies took the position that they could lawfully continue to provide foreign direct products of non-NS controlled U.S. technologies to Huawei and its affiliates notwithstanding their Entity List designations.
The new rules will largely prevent such practices going forward by tightening export controls on two sets of foreign-produced items. The first set includes “[i]tems, such as semiconductor designs, when produced by Huawei and its affiliates on the Entity List . . . , that are the direct product of certain . . . CCL . . . software and technology.” The second set includes “[i]tems, such as chipsets, when produced from the design specifications of Huawei or an affiliate on the Entity List . . . , that are the direct product of certain CCL semiconductor manufacturing equipment located outside the United States.” Among the “direct products” thus restricted are the foreign direct products of U.S. technology or software classified under Export Control Classification Numbers (ECCN) 3E001, 3E002, 3E003, 4E001, 5E001, 3D001, 4D001, 5D001, 3E991, 4E992, 4E993, 5E991, 3D991, 4D993, 4D994 and 5D991.
This new rule became effective on May 15, 2020 immediately upon publication of the “pre-publication” version of the rules in the Federal Register. However, BIS has provided a limited grace period for industries to comply in an effort to “prevent immediate adverse economic impacts on foreign foundries utilizing U.S. semiconductor manufacturing equipment that have initiated any production step” for these two sets of items. This subset of foreign-produced items can be exempted from the new licensing requirements before September 14, 2020. Any such items not exported from abroad, reexported or transferred (in-country) before midnight Eastern Standard Time on September 14, 2020, will be subject to the new direct product rule and will require a license from BIS.
The latest export control changes are another reminder of the aggressive U.S. stance toward perceived national security threats posed by Huawei and other designated Chinese entities. Companies in the semiconductor and related industries should carefully review the latest rules and their potential impact on existing business and supply chains.