New U.S. Restrictions on Transfers to China for Semiconductor and Advanced Computing Uses

Two new rules announced by the U.S. Department of Commerce, Bureau of Industry and Security (BIS) strive to severely inhibit China’s progress in indigenously producing advanced semiconductors. Although advanced semiconductors are widely used for commercial applications, BIS cited serious concerns regarding China’s use of the technology for WMD and military applications, and enabling human rights violations or abuses. BIS' announcement follows remarks in September by the U.S. National Security Advisor signaling a shift in the U.S. export control strategy from one of maintaining a “relative” advantage over competitors in certain key technologies, to maintaining “as large a lead as possible.” It remains to be seen if U.S. allies key to the semiconductor supply chain will impose similar export restrictions on transfers to China. Following the announcement of the rules, BIS officials have underscored the importance of multilateral adoption of the new currently unilateral controls, describing engagement with allies as a “priority” for BIS.

A summary of key provisions of the new rules follows, along with the relevant implementation dates:

Introduction of New Unilateral Controls on Certain Semiconductors and Advanced Computing Items

• China-Specific Restrictions: BIS imposed new controls on the export, reexport, and retransfer to/within China of certain semiconductor manufacturing equipment (effective as of Oct. 7), semiconductors (effective Oct. 21), and other advanced computing items (effective Oct. 21) as well as related software and technology for each category of items. To impose these new restrictions, BIS created a new Regional Security control to limit transfers to China specifically, as opposed to entire groups of countries (though the items are also restricted to Russia, Belarus, and the U.S. embargoed territories).
• Other Controls: Additionally, BIS imposed controls on a separate, but less advanced, group of semiconductors and other advanced computing items (effective Oct. 21) as well as related software and technology. However, these items are only controlled to Russia, Belarus, and the U.S. embargoed territories, and not for transfer to China.
  

Implementation of Supercomputer and Semiconductor Manufacturing End Uses and End Users

BIS also introduced a new end use control that, in addition to any existing controls under the Commerce Control List (CCL), prohibits the export, reexport, or retransfer to or within China without a license of specified items if there “is knowledge” that the items are destined for the following prohibited end uses:

• Semiconductor Fabrication: Effective October 7, the EAR requires a license for the export, reexport, or retransfer of:
  

(i) any item subject to the EAR(e.g., including EAR99)when you know it will be for the development or production of integrated circuits (ICs) at a fabrication facility in China that fabricates:

- Logic ICs with a production node of 16/14 nm or less;
- Memory ICs with 128 layers or more; or,
- DRAM ICs using a production node of 18 nm or less.

(ii) any commodity, software, or technology, except equipment, controlled on the CCL (i.e., not EAR99), if you know it will be used for the development or production of ICs at a fabrication facility in China, but you do not know whether the facility fabricates ICs meeting the aforementioned requirements.

(iii) any item subject to the EAR (e.g., including EAR99) when you know it will be used for the development or production in China of any semiconductor manufacturing equipment parts, components, or equipment described on the CCL (even if not subject to the EAR).

• Supercomputers: Effective October 21, the EAR will require a license for the export, reexport, or retransfer to/within China of certain CCL-listed ICs as well as certain CCL-listed computers, electronic assemblies, or related components if you know it will be used for:

(i) Development, production, use, operation, installation, maintenance, repair, overhaul, or refurbishing of a supercomputer located in or destined to China; or

(ii) Incorporation into, or the development or production of any component or equipment that be used in a supercomputer located in or destined to China.

Both sets of new end use controls are also subject to an “informed by” provision, whereby BIS may inform individuals or entities, either through amendment of the EAR or via specific notice (including by oral notice, followed by a writing) that a license is required for a specific export, reexport, or transfer to/within China because it poses an unacceptable risk of use in, or diversion for, one of the prohibited end uses.

No license exception can overcome the end use restrictions. Additionally, BIS will apply a general policy of denial for license applications seeking authorization to conduct a transfer for one of the prohibited end uses, except it will consider on a case-by-case basis applications for IC production end uses in China by companies that are headquartered in the U.S. or a Country Group A:5 or A:6 country.

Expansion of U.S. jurisdiction over certain non-U.S. made products destined for China

Building on its recent extensions of U.S. jurisdiction to capture non-U.S. made items destined for Huawei and its affiliates, and more recently to Russian and Belarusian end users, BIS has further expanded the EAR’s reach to capture non-U.S. made items that are the direct products of U.S. origin technology or software. These rules are distinct from the de minimis rules, which capture non-U.S. made items that incorporate U.S. origin commodities or software, or are comingled with U.S. origin technology. Effective October 21, the newest “Foreign Direct Product Rules” (FDP Rules) capture the following:

1. • Entity List FDP Rule: Similar to the Huawei FDP Rule that BIS issued in 2020, this rule expands the EAR restrictions applicable to transactions with Chinese entities already on the Entity List by adding a footnote to their entry on the Entity List (the “Footnote 4” (“FN4”) entities). The EAR already prohibited the transfer of all items “subject to the EAR” to these FN4 entities. With this amendment, the EAR will also prohibit the transfer of non-U.S. made items that are: (i) the direct product of a range of CCL-listed U.S. technology or software related to microelectronics and computers, or direct products of equipment made from such U.S. technology or software; and (ii) there is knowledge the non-U.S. made item will be used in the production or development of any part, component, or equipment produced, purchased, or ordered by the FN4 entities, or a FN4 entity is a party to any transaction involving the non-U.S. item.

1. • Advanced Computing FDP Rule: This amendment will capture non-U.S. made high-performance ICs, computers, electronic assembly or related technology meeting the technical parameters of the newly created ECCNs if: (1) the item is destined to China or will be incorporated into any CCL-listed item destined to China, or is technology developed by a China-headquartered company for the production of masks or an IC wafer or die; and (2) is the direct product of certain U.S. origin CCL-listed technology or software related to microelectronics and computers, or the direct product of equipment made from such U.S. technology or software; and (3) the non-U.S. made item meets the technical parameters of the newly established semiconductor and advanced computing items CCL entries. Given the substantial effect of the provision on parties outside the United States, BIS has provided a sample certification to assist transferors in conducting due diligence as to the permissibility of a proposed transaction, though BIS officials have since emphasized the certificate alone would not generally constitute sufficient diligence.

1. • Supercomputer FDP Rule: This change will capture non-U.S. made items that are the direct products of certain U.S. origin CCL-listed technology or software related to microelectronics and computers, or the direct product of equipment made from such U.S. technology or software, if there is “knowledge” that the non-U.S. made item will be used for one of the restricted supercomputing end uses destined for China, discussed above.

Restrictions on U.S. Person Services 

In another significant broadening of the EAR, effective October 12, the new rule follows earlier EAR amendments that captured “support” by U.S. persons for military intelligence end users, even with respect to items not subject to EAR jurisdiction. The concept is akin to the concept of “defense services” under the International Traffic in Arms Regulations (ITAR), which has long captured U.S. person activity related to items controlled on the U.S. Munitions List, regardless of the items’ country of origin. Under the new amendments, U.S. persons cannot ship, transfer, or service, or facilitate the shipment, transfer, or servicing of items not subject to the EAR but which would have required a license if they were subject to the EAR because they were being used in connection with semiconductor fabrication or supercomputers.  The rule also prohibits the provision of such “support” by U.S. persons in relation to certain non-U.S. items if the items will be used in China in an IC fab, but the U.S. person is unable to confirm whether the fab produces advanced ICs meeting the end use restrictions.

Temporary General License

To avoid disruptions of the IC supply chain, BIS has also announced a temporary general license (TGL), effective October 21, 2022 through April 7, 2023, allowing exports, reexports, or retransfers from abroad to or within China by companies not headquartered in an U.S. arms embargoed or sanctioned cy to allow for activity in China involving advanced IC and computer parts now covered by the new controls. The TGL does not authorize transactions with end users or ultimate consignees in China, nor does it allow activities with Entity Listed parties.

Unverified List Additions & Rule 

In a separate publication on October 7, BIS added 31 Chinese headquartered entities to the Unverified List (UVL) on the grounds that the Chinese government has not allowed the end user and pre-license checks that have long been standard for BIS. Notably, BIS added one of China’s fastest growing chip manufacturers, YMTC.

• Unverified List Restrictions: License exceptions may not be used to transfer items subject to the EAR to entities on this UVL, and in addition, exporters must file an Automated Export System (AES) record for all exports to parties listed on the UVL and obtain a UVL statement, meeting the elements set forth in the EAR, from such parties prior to transferring any item subject to the EAR not subject to a license requirement.

• 60 Day Review Period: Significantly, this move now also starts a 60-day clock for BIS to successfully conduct end-user checks without interference from China, or the entities may be added to the Entity List. The rule clarified criteria the End-User Review Committee (EUC) considers as justification for adding certain UVL entities to the Entity List. In tandem, BIS’s Office of Export Enforcement (OEE) issued a policy memo articulating criteria BIS will consider in determining a host government to be interfering so as to effectively prevent BIS from completing bona fides checks on foreign parties to an export transaction. The memo outlines an aggressive timeline in cases where BIS determines the host government causes the bona fides checks to be unsuccessful.

BIS will accept comments on the interim final semiconductor and advanced computing rule through December 12, 2022. Because BIS implemented the rule without allowing for notice and comment, it is likely to issue a subsequent corrections and clarifications rule informed by industry comments reflecting unintended or collateral consequences of the new requirements. BIS officials have also noted their plans to issue Frequently Asked Questions on the BIS website, reflecting their consideration of industry questions, and likely requests for clarification from U.S. allies, on a rolling basis.