New US Export Control Rules Targeting Advanced Computing and Semiconductor Products for China

Background

On 7 October 2022, the U.S. Commerce Department, Bureau of Industry and Security (“BIS”) announced a sweeping set of export control rules aimed at restricting China's ability to obtain advanced computing chips, develop and maintain supercomputers, and manufacture advanced semiconductors. The new rules, titled the Implementation of Additional Export Controls: Certain Advanced Computing and Semiconductor Manufacturing Items; Supercomputer and Semiconductor End Use; Entity List Modification (full text can be found here), follow several regulatory and enforcement actions taken over the past few months and is a part of the ongoing review of BIS's export control policies towards China.

New Rules – Key Features:

1. adds certain advanced and high-performance computing chips, computer commodities that contain such chips and semiconductor manufacturing equipment and related items to the Commerce Control List ("CCL"; which sets forth the license requirements for each controlled product) of the Export Administration Regulations (“EAR”) and expands existing items listed on CCL to encompass software and technology associated with the newly added items. Items listed on CCL require an export license from the U.S. Department of Commerce; 
2. expands the scope of the EAR to cover certain advanced computing items and items for supercomputer end uses produced outside the U.S.; 
3. adds new license requirements for certain chips and computer commodities listed on the CCL for export to and from China, including items destined to a semiconductor fabrication “facility” in China that fabricates integrated circuits (“ICs”) meeting specified thresholds; 
4. adds new license requirements to export items to develop or produce semiconductor manufacturing equipment and related items; and
5. restricts the ability of U.S. persons to "support" the development, or production, of ICs at certain semiconductor fabrication “facilities” located in China without a license.

Importantly, the new rules limit the availability of most license exceptions for certain exports, reexports, or transfers to or within China. License applications will be reviewed by BIS with a presumption of denial, with limited exceptions (e.g., applications to export, reexport, or transfer items subject to the EAR to end users in China that are headquartered in the U.S.) to be considered on a case-by-case basis.

Temporary General License

Taking into account a potential disruption to the global semiconductor supply chain involving China, BIS also included in the new rules a Temporary General License to temporarily (from 21 October 2022, through 7 April 2023) allow specific, limited manufacturing activities related to items destined for use outside China.

Effective Date

The restrictions on semiconductor manufacturing items became effective immediately upon the announcement of the new rules on  7 October 2022; the restrictions on U.S. persons’ ability to support the development, production, or use of ICs at certain semiconductor fabrication “facilities” in China became effective on 12 October 2022; and the advanced computing and supercomputer controls, as well as the other changes in the EAR, have come into effect on 21 October 2022.

Unverified List

The new rules further introduced revisions to the Commerce Department’s Unverified List (“UVL”), which identifies parties for which BIS has been unable to confirm their bona fides. The new rules added 31 Chinese technology companies/entities (including China's top memory chipmaker YMTC) to the UVL while removing nine Chinese companies/entities previously on the list. No license exceptions may be used for exports, reexports, or transfers to entities on the UVL, and certain outbound export filing requirements also apply to these entities.

BIS Entity List

Separate from the UVL, BIS clarified with the new rules criteria that may lead to the addition of an entity to the Entity List, including a sustained lack of cooperation by the host government that effectively prevents BIS from determining compliance with the EAR. Compared to the UVL (which denies license exceptions to entities listed there), entities on BIS' Entity List are subject to specific license requirements for the export, reexport and/or transfer (in-country) of specified items. 

China's Reactions

In response to the expansive export controls imposed by BIS, China criticized the U.S. for politicizing tech and trade issues and destabilizing global supply chains. While China has not yet widely enforced any of its previously adopted and broadly-worded countermeasures (e.g., the Countering Foreign Sanctions Law) against private companies, we may witness a response from the Chinese government by way of additional rules or even enforcement measures. On the other hand, the Chinese government has sought to empower its Export Control Law that took effect on December 1, 2020, by publishing detailed interim implementation rules for public consultation in April this year. We may expect to see more vigorous enforcement of the Export Control Law in response to the new U.S. export control rules in the near future. 

Risk Factors and Risk Mitigation

These expansive export control measures will further accelerate the U.S.-China decoupling and will likely result in increased and focused enforcement actions targeting Chinese entities. While the new rules seem to impose heightened knowledge standards and diligence requirements on parties subject to U.S. jurisdiction, given the complexity, breadth and vagueness (in some key definitions) of the new rules, companies may confront challenges, not only as to what can be exported to China, but how their business must adapt to meet the new requirements under U.S. laws. 

Relying on limited available guidance and evolving industry standards, we believe that Chinese and international companies could consider the following risk factors and utilize the following risk mitigation measures:

Risk factors:

• The new rules expanded the reach of the EAR to a wider group of products and entities. Entities and individuals not previously subject to U.S. export control regulations may now fall within the ambit of the regime. 
• Especially, the new rules seek to expand BIS' jurisdiction to non-U.S. companies. This means that companies manufacturing entirely or in part outside of the U.S. will not be immune to these restrictions.
• The new rules have also imposed broad restrictions on the "support" by U.S. persons of certain development or production activities at Chinese semiconductor fabrication facilities. Yet the rules lack clear guidance on what activities constitute "support."  On an individual level, this may pose difficulties for U.S. citizens and "green-card holders" working in the technology industry in China. On a business level, equipment suppliers are obligated to find out about whether their Chinese customers are producing products subject to the new rules. This may lead to U.S. and Western suppliers cutting ties with Chinese chip factories.

Risk mitigation measures:

• Companies operating in or with a nexus to advanced computing, supercomputing, and semiconductors should carefully review the new rules and take measures promptly, including enhancing existing end user and end use diligence processes. 
• Given the broad restrictions on the "support" by U.S. persons of certain development or production activities discussed above, companies should carefully review their own business activities against the rules and make risk-based analyses of their compliance exposure. 
• Proper compliance would require enhanced measures and procedures, experienced team (or reliance on outside counsel) and commitment from the management.
• Companies may want to consider whether to submit license applications under the new rules. We understand, but cannot comment due to confidentiality, that some major semiconductor manufacturers have already obtained temporary licenses.
• In the mid- to long-term, technology companies may need to explore the option of moving their manufacturing sites outside of China. Chinese companies should also look into increasing investments in the research and development of advanced chips, supercomputing and semiconductor products in order to shift away from reliance on foreign technology.

We hope you find this summary helpful. If you have any questions about any specific element of the new rules or their application, please do not hesitate to contact us.

Authors: Alexander Dmitrenko, Partner; and Vicki Tang, Associate.