On October 7, 2022, the US Department of Commerce Bureau of Industry and Security (BIS) released two rules implementing new export controls on advanced computing and semiconductor manufacturing items in addition to new end-use controls on those items. The new rules, which focus on items exported to and certain technology re-exports from the People’s Republic of China (PRC) and other highly controlled countries and regions (such as Cuba, Iran, North Korea, Syria, Russia, Belarus and the restricted regions of Ukraine), are specifically aimed at curbing China’s access to these items. They come a few months after BIS reportedly sent notices to some US producers of certain artificial intelligence (AI) processor chips, restricting exports of those items to China.
BIS published the new rules on October 13 and gave a public briefing on the implementation of the new controls. Generally, the new controls and restrictions related to advanced computing and Integrated Circuits (ICs) activities and exports were effective immediately on October 7, and those impacting supercomputers and associated items went into effect on October 21.
In addition, a new licensing requirement for US person support of Chinese development and production of certain ICs became effective on October 12.
In general, the new rules—described below—will have a sweeping impact on companies headquartered in China (or controlled by Chinese entities) and their ability to access certain items, technology and software necessary for IC and supercomputer manufacturing. The new rules will also affect potential investment by Chinese entities into US companies due to the effect of such controls, as critical technology, on investments subject to review by the Committee on Foreign Investment in the United States (“CFIUS” or the “Committee”).
1. New Controls on Advanced Computing Integrated Circuits and Supercomputers
- New ECCNs and Restrictions
The rule added certain advanced computing chips and the computers, “electronic assemblies,” and “components” that contain them to the Commerce Control List (CCL). The rules created the following new Export Control Classification Numbers (ECCNs):
- ECCN 3A090 controls specified high-performance ICs. Under ECCN 3A090.a, this includes ICs that have or are programmable to have an aggregate bidirectional transfer rate over all inputs and outputs of 600 Gbyte/s or more to or from integrated circuits other than volatile memories and any of the following:
- a.1. One or more digital processor units executing machine instructions having a bit length per operation multiplied by processing performance measured in TOPS, aggregated over all processor units, of 4800 or more;
- a.2. One or more digital ‘primitive computational units,’ excluding those units contributing to the execution of machine instructions relevant to the calculation of TOPS for 3A090.a.1, having a bit length per operation multiplied by processing performance measured in TOPS, aggregated over all computational units, of 4800 or more;
- a.3. One or more analog, multi-value or multi-level ‘primitive computational units’ having a processing performance measured in TOPS multiplied by 8, aggregated over all computational units, of 4800 or more; or
- a.4. Any combination of digital processor units and ‘primitive computational units’ whose calculations according to 3A090.a.1, 3A090.a.2 and 3A090.a.3 sum to 4800 or more.
- ECCN 4A090 controls computers, “electronic assemblies,” and “components” containing ICs in ECCN 3A090.
- ECCN 4D090 controls software associated with the items controlled in ECCN 4A090.
The new ECCNs are controlled for regional stability (RS) reasons for exports or reexports specifically applicable to China and for anti-terrorism (AT) reasons. RS controls are maintained in support of US foreign policy, while AT controls target Cuba, Iran, North Korea and Syria, which are subject to US embargo. Both are unilateral US controls, meaning they are not adopted by multilateral regimes comprising allied countries, as is the case for other types of export controls.
BIS also revised the CCL so that associated “software” and “technology” controls on the CCL for the items controlled in ECCNs 3A090 and 4A090 are now found in ECCNs 3D001, 3E001, 4D090 and 4E001. BIS aligned the new RS for China license requirement to ECCNs 3D001, 3E001 and 4E001, and added the RS for China license requirement to ECCNs 5A992 and 5D992 to address circumstances when these ECCNs meet or exceed the performance parameters of ECCN 3A090 or 4A090 but remain controlled for encryption reasons.
The newly added unilateral RS control imposes a license requirement for exports, reexports and transfers (in-country) of identified items to or within China. However, this does not apply to deemed exports or reexports, referring to in-country technology releases to foreign nationals. In other words, a US company employing a Chinese national present in the country on a temporary work visa will not be impacted by this rule. There are very narrow limited license exceptions available for exports or reexports under the new ECCNs, such as:
- Servicing and replacement of parts and equipment (RPL) under § 740.10
- Governments, international organizations, International Inspections Under the Chemical Weapons Convention and the International Space Station (GOV), restricted to eligibility under the provisions of § 740.11(b)(2)(ii) (exports, reexports and transfers (in-country) made by or consigned to a department or agency of the United States Government); and
- Technology and Software Unrestricted (TSU), under the provisions of § 740.13(a) and (c).
The RS control also imposes a license requirement for the export from China to any destination worldwide of technology controlled under 3E001 (for 3A090 purposes), (i) which has been developed by an entity headquartered in China, (ii) is the “direct product” of certain software subject to the Export Administration Regulations (EAR) and (iii) is for the “production” of certain advanced computing integrated circuits and computers or assemblies containing them (aligned with the scope of the Advanced Computing FDP rule described below). This requirement went into effect on October 21, 2022.
BIS stated that these requirements were issued to address the “historic precedent” of chips designed by Chinese entities being diverted for use in China to support China’s military modernization efforts and the associated risks of that occurring with advanced computing chips.
BIS also added new unilateral AT controls on the export of certain high-performance ICs, and associated software and technology items. These ICs are controlled under ECCNs 3A991p and 4A994.l (and their corresponding software and technology controls under ECCNs 3D991, 3E991, 4D994 and 4E992). ECCNs 3A991p now covers ICs that have either a processing performance of 8 TOPS or more, or 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.l now covers computers, “electronic assemblies,” and “components” containing integrated circuits, any of which exceeds the limit of ECCN 3A991.p, and includes “digital computers,” “hybrid computers,” and analog computers. Exports, reexports and transfers of the described items to Iran, North Korea and Syria now require an export license.
2. New Controls on Semiconductor Manufacturing Items
BIS highlighted that as of October 7, the impacted semiconductor manufacturing equipment is now controlled for RS reasons in order to address China’s “demonstrated intent and ability to use the specified items for activities of US national security and foreign policy concern.”
- New ECCNs and Restrictions
The rule created the new ECCN 3B090, which controls certain advanced semiconductor manufacturing equipment for RS and AT reasons with limited license exception availability. References to the new ECCN under the related “software” and “technology” controls are under ECCNs 3D001 and 3E001.
License applications for semiconductor manufacturing items or equipment destined to end users in China that are headquartered in the United States or in a country in Country Group A:5 or A:6 will be considered on a case-by-case basis. BIS noted that it will take the technology level, customers and compliance plans into account when reviewing applications. There are limited license exceptions available for items controlled under ECCN 3B090 (and the associated software and technology in ECCNs 3D001 and 3E001).
3. New End-Use Controls
The rule also established new end-use controls and license restrictions under § 744.23. These controls apply to non-US persons as well, and the jurisdictional hook is an item being subject to the EAR. No license exceptions overcome the semiconductor manufacturing end-use license requirements described below.
- Any item subject to the EAR when the exporter, reexporter or transferor knows the item is for (i) “development” or (ii) “production” of ICs (packaged or unpackaged) at a semiconductor fabrication “facility” located in China that fabricates ICs that meet the following criteria (described in § 744.23(a)(2)(iii)):
- Logic integrated circuits using a non-planar transistor architecture or with a “production” technology node of 16/14 nanometers or less;
- NOT AND (NAND) memory integrated circuits with 128 layers or more; or
- Dynamic random-access memory (DRAM) integrated circuits using a “production” technology node of 18 nanometer half-pitch or less; or
- Items subject to the EAR controlled in Category 3 of the CCL under Product Groups B, C, D or E where there is knowledge that at the time of export, reexport or transfer that the item will be used, directly or indirectly, for the development or production of integrated circuits at any semiconductor fabrication “facility” located in China, but where an entity does not know whether such semiconductor fabrication facility fabricates integrated circuits that meet any of the criteria described above (and in § 744.23).
- Any item subject to the EAR where there is knowledge that the item is destined for end-use in the development or production in the PRC of any parts, components or equipment specified under ECCN 3B001, 3B002, 3B090, 3B611, 3B991 or 3B992.
All end-user and end-use license applications will be reviewed under a presumption of denial; however, BIS noted that it will consider license applications for semiconductor manufacturing items destined to end users in China that are headquartered in the United States or in certain closely allied nations listed in Country Groups A:5 and A:6 on a case-by-case basis.
- US Persons “Support” Activities
The rule also established that certain specific activity by US persons to support the development or production of ICs in China, that meet certain criteria, will trigger the general prohibitions under § 744.6(b) of the EAR thus require a license.
The rule notes that this revision is consistent with the scope of the new semiconductor manufacturing end-use restrictions for items subject to the § 744.23(a)(2)(iii), as described above. Here, “support” is defined to cover activities, including, but not limited to, shipping, transmitting or transferring (in-country) items not subject to the EAR; facilitating such shipment, transmission or transfer (in-country); or servicing items not subject to the EAR.
The new paragraphs added to § 744.6(c) outline that the following are now subject to a license requirement:
- the shipment, transmission or transfer (in-country) of certain items not subject to the EAR that meet specific technical parameters set forth on the CCL;
- facilitation of such shipment, transmission or transfer (in-country); or servicing of such items to or within China when such activity would assist the “development” or “production” of ICs, but the entity cannot determine the technical parameters of those ICs requires a license;
- activities involving shipping, transmitting or transferring (in-country) or facilitating the shipment, transmission or transfer (in-country) to or within China of any item not subject to the EAR and meeting the parameters of ECCN 3B090, 3D001 (for 3B090) or 3E001 (for 3B090) regardless of end use or end user; or
- servicing any item not subject to the EAR located in China and meeting the parameters of ECCN 3B090, 3D001 (for 3B090) or 3E001 (for 3B090), regardless of end use or end user.
There are no available licenses exceptions that can be used to overcome the license requirements under § 744.6(b)(1) through (4) or (c)(2).
This type of control is broad and unusual under the EAR as it is focused on US person activity rather than what is being exported—acting more in line with US sanctions regimes by covering services and transactional behavior despite whether the item itself is subject to the EAR.
4. Foreign Direct Product Rule Expansion
BIS also created two new Foreign Direct Product (FDP) rules related to advanced computing and supercomputers and expanded its existing FDP rule for certain entities listed on the Entity List. Historically, the FDP rule has extended the jurisdictional reach of the EAR over a boarder range of specific foreign-produced items, even when they do not incorporate US-origin content, when they are produced directly from covered US-origin technology or software. Notably, the US has used the FDP rule to target Huawei, limiting Huawei’s access to US-origin items. Most recently, the FDP rule was used to curb similar access by Russian and Belarussian military and intelligence users (under Section 734.9 of the EAR).
Now, this expansion of the FDP rule applies to any item (including EAR99) made abroad, regardless of US content, where certain direct product triggers are met and there is knowledge that the item is going to certain entities (as described below) or regions.
BIS revised its Entity List FDP rule (under § 734.9(e)) to add a new product scope and end-user scope for entities on the Entity List identified with a new footnote 4 and adds new paragraphs § 734.9(h) (Advanced Computing FDP rule) and § 734.9(i) (“Supercomputer” end-use FDP rule) to the EAR.
BIS expanded the existing product scope of the Entity List FDP rule for footnote 4 entities to cover foreign-produced items that are:
- a direct product of technology or software classified under the following ECCNs: 3D001, 3D991, 3E001, 3E002, 3E003, 3E991, 4D001, 4D993, 4D994, 4E001, 4E992, 4E993, 5D001, 5D002, 5D991, 5E001, 5E002 or 5E991; or
- directly produced by any plant or major component of a plant (including essential equipment) when that plant or component is itself a direct product of US-origin software or technology in the ECCNs identified above.
The Entity List FDP rule states that any foreign-produced item is subject to the EAR and associated license requirements if:
- it meets either Entity List FDP rule product scope conditions, and
- where there is knowledge that (i) the item will be incorporated into, or used in the production or development of, any part, component or equipment produced, purchased or ordered by any footnote 4 entity, or (ii) any footnote 4 entity is party to any transaction involving the item.
- Advanced Computing FDP Rule
Under the new Advanced Computing FDP Rule (§ 734.9(h)), any foreign-produced item is subject to the EAR if it meets the product scope (described in § 734.9(h)(1)) and destination scope (described § 734.9(h)(2)).
The new product scope covers foreign-made items that meet either of the two categories below:
- (i) “direct product” of “technology” or “software” subject to the EAR and specified in ECCNs 3D001, 3D991, 3E001, 3E002, 3E003, 3E991, 4D001, 4D090, 4D993, 4D994, 4E001, 4E992, 4E993, 5D001, 5D002, 5D991, 5E001, 5E991 or 5E002; and
- specified in ECCN 3A090, 3E001 (where technology for 3A090 items is involved), 4A090 or 4E001 (where technology for 4A090 items is involved), or
- an IC, computer, “electronic assembly,” or “component” specified elsewhere on the CCL which meets or exceeds the limit in the performance parameters of ECCN 3A090 or 4A090
- (ii) items specified in ECCN 3A090 or 4A090 or other specified above that are products of a complete plant or a “major component” of a plant (made in either the US or a foreign country), that itself is a direct product of certain specified US-origin technology or software.
The destination scope under § 734.9(h)(2) is met where there is knowledge that the foreign-produced item is being exported, reexported or transferred (in-country) to or within China, or being incorporated into any “part,” “component,” “computer” or “equipment” destined for China.
The new rule provides a model certification for exporters, reexporters and transferors to request from a supplier that asserts whether an item being provided would be subject to the EAR if future transactions meet the scope definitions in the new Advanced Computing FDP rule. BIS provided a model certificate at EAR Part 734, Supp. No. 1.
BIS noted that while the certifications will be a useful tool for companies seeking to understand the application of the EAR to prospective items, certificates are not the only due diligence step that should be taken by the company. And while not required, absent a certification, companies will need to undertake appropriate due diligence to compensate for the lack of one.
- Supercomputer End-Use FDP Rule
Under the Supercomputer End-Use FDP Rule (§ 734.9(i)), any foreign-produced item is subject to the EAR if it meets the product scope (described in § 734.9(i)(1)) and end-use and country scope (described § 734.9(i)(2)).
The product scope is met where the foreign-produced item is:
- (i) “direct product” of “technology” or “software” subject to the EAR and specified in ECCNs 3D001, 3D991, 3E001, 3E002, 3E003, 3E991, 4D001, 4D090, 4D993, 4D994, 4E001, 4E992, 4E993, 5D001, 5D002, 5D991, 5E001, 5E991 or 5E002, or
- (ii) the products of a complete plant or a “major component” of a plant (made in either the US or a foreign country), that itself is a direct product of certain specified US-origin technology or software.
The country and end-use scope is met when there is knowledge that the foreign-produced items will be:
- (i) used in the design, development, production, operation, installation (including on-site installation), maintenance (checking), repair, overhaul or refurbishing of a supercomputer located in or destined to China; or
- (ii) incorporated into, or used in the development, or production, of any part, component or equipment that will be used in a supercomputer located in or destined to China.
Related to this new FDP rule, BIS amended § 772.1 of the EAR adding a definition for “supercomputer”:
“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.”
5. Temporary General License
BIS established a six-month temporary general license to minimize short-term impact on the semiconductor supply chain from this rule. The general license will run from October 21, 2022 to April 7, 2023, and allows for exports, reexports, in-country transfers and exports from abroad destined to or within China by companies not headquartered in Country Groups D:1 or D:5 or E to continue or to engage in integration, assembly (mounting), inspection, testing, quality assurance and distribution of items covered by ECCN 3A090, 4A090 and associated software and technology in ECCN 3D001, 3E001, 4D090 or 4E001; or items on the CCL that meet or exceed the performance parameters of ECCN 3A090 or 4A090. However, this TGL does not authorize the export, reexport, in-country transfer or export from abroad to end users or ultimate consignees in China. The intent is to provide temporary relief to non-Chinese companies who use contract manufacturers and other outsourced semiconductor assembly and test (OSAT) services providers in China, and then ship their finished products to a third country.
6. Additional Implications – Foreign Investment Scrutiny
While the new rule extends controls over products and items related to advanced computing, supercomputers and semiconductors, the implications of the new license requirements and necessary export authorizations could spill over into the reviews of foreign investment or acquisitions undertaken by CFIUS—an inter-agency committee on which Commerce sits.
Under the CFIUS regulations, the Committee has jurisdiction to review transactions where a foreign person acquires control in any US company (regardless of the nature of that company’s business) or over transactions where a foreign person acquires a non-controlling interest coupled with certain additional rights if the company has US operations that involve various potentially sensitive activities.
Specifically, this applies if the US business is involved in the production, design, testing, manufacturing, fabrication or development of one or more “critical technologies.” For CFIUS purposes, the term “critical technologies” includes items controlled by the EAR where an export authorization would be required to transfer the technology (even if theoretical) to a foreign person that is a party to the transaction or certain parties in the ownership chain of the foreign person. If, as a result of its investment, a foreign investor is granted a board seat or observer rights, access to material, nonpublic technical information or involvement in substantive decision-making in that company, CFIUS jurisdiction will apply.
Therefore, these new export license requirements issued under the new BIS rules could bring additional foreign investments into US businesses into scope for a national security review by CFIUS. Investments involving critical technologies can also trigger a mandatory filing requirement under the rules, which will likely result in most Chinese investments into companies involved in any of these newly controlled categories being subject to a mandatory review.