On October 7, 2022, the Bureau of Industry and Security (“BIS”) under U.S. Department of Commerce announced a series of new export control rules against China under the Export Administration Regulations (“EAR”). The new regulations involve the addition, adjustment, or update, of multiple Export Control Classification Numbers (“ECCNs”), three foreign-direct product (FDP) rules, two restrictions on end users and end uses, 31 Unverified List (“UVL”) and a mechanism for transferring a party from the UVL to the Entity List. This is the largest revision to the EAR since 28 April 2020. From relevant regulations and business practices, its impact on Chinese enterprises is far greater than the revisions to the rules related to China’s military end-users and military end uses that made on April 28, 2020. In particular, according to the announcement on the revision, the new regulations obviously target the advanced computing chips and supercomputers to comprehensively restrict China’s semiconductor industry, especially its ability to build domestic advanced process. Furthermore, given the close ties between the semiconductor industry and other related sectors, the impact is expected to spread to smart cars, data centers, and cloud computing, among others. In this article, we will, based on our years of experience on U.S. export control policies, discuss the possible impact of the revision on Chinese enterprises, hoping that they can have a clear understanding of the new regulations and make a correct judgment in their development.
In addition to the adjustment of the UVL, the new export control policy for the semiconductor industry can be summed up as “4321” policy: the addition of four ECCNs, three FDP rules, two restrictions on end users and end uses, establishment of a new Temporary General License (“TGL”), and adjustment of supporting regulations on reason for control, license policy and license exception. Each major modification and its impact, however, are not as simple as they appear:
1. The scope of control for newly added ECCNs
The four newly added ECCNs, i.e., 3A090, 4A090, 3B090 and 4D090 correspond to advanced computing chips, computers equipped with advanced computing chips and related equipment, and specific semiconductor manufacturing equipment respectively. The specific descriptions are as follows:
BIS imposes Regional Stability (RS) controls on the items under the above four ECCNs, in addition to Anti-Terrorism (AT) controls. It also provides a new subsection under § 742.6 (a) and (b) of the EAR to impose requirements for the export, re-export and other movements of China’s semiconductor production-related items involving RS controls and specify the corresponding license policies. Specifically, an export license is required when items under the above ECCNs are exported to China. Most license applications for such items controlled will be reviewed under a presumption of denial. The exception to the presumption of denial is for license applications for semiconductor manufacturing items destined to end users located in China that are headquartered in the U.S. or in a country in Country Group A:5 or A:6, license applications involving such end users will be considered on a case-by-case basis, taking into account factors including technology level, customers and compliance plans. This means that in future business, Chinese entities will find it difficult to obtain relevant items, and BIS may also control and restrict the capacity expansion of relevant foreign-invested semiconductor enterprises in China by controlling the power to approve licenses on a case-by-case basis.
Notably, under the new rule, the above items controlled for RS reasons are not limited to those covered by the newly added four ECCNs. In the description of the rule, BIS makes it clear that the items associated with the relevant ECCNs, such as the technology and software classified under ECCNs 3D001, 3E001 and 4E001, as well as the items not included in the relevant ECCNs but with the relevant technical parameters reaching the equivalent standards of 3A090 and 4A090, such as the controlled items classified under ECCNs 5A992 and 5D992 that were originally governed by the mass market standards and allowed to enter China without a license, will also be subject to RS control based on the same standard. In other words, the items that could have been sold to China without an export license may not be exported to China without the license in the future.
Under the new § 740.2(a)(9) of the EAR, the only license exceptions available for the controlled items for RS reasons for China’s semiconductor industry are: Servicing and replacement of parts and equipment (RPL) (excluding the items under 3B090 and the associated software and technology, such as those under 3D001 and 3E001); 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); and Technology and Software Unrestricted (TSU), under the provisions of § 740.13(a) and (c). This means that there are very limited circumstances in which a license is not required for exporting, re-exporting or transferring (in-country) relevant items to China.
The new rule also revises ECCN 3A991 by adding a new paragraph 3A991.p and revises ECCN 4A994 by adding a new paragraph 4A994.l to cover other high-performance ICs and computer-related items that fail to meet the performance standards in 3A090 and 4A090. Related items will be associated with technologies and software under ECCNs 3D991, 3E991, 4D994 and 4E992. Although no special control is imposed on the export of the items under 3A991.P and 4A994.l to China so far, the associated technology and software involved will be connected to the FDP rules issued in the new rule. In particular, BIS expressly stated in the announcement that the related technology and software will be subject to the export control, and any subsequent communication involving the related technology and software in any form (which, according to BIS, applies to technology and software that is different from the released technology and software) will also be subject to the EAR.
2. The impact of new FDP rules on upstream supply
The new rule creates two new FDP rules and expands an existing FDP rule. Since the U.S. revised FDP rules under the EAR for the first time in May 2020 to introduce the FDP rules for specific entities, compared to the De Minimis rule, which can also be applied to control products produced outside the U.S., the U.S., in its revisions of export control rules, has been increasingly inclined to use the FDP rules to ensure the effectiveness of control over overseas items in recent years. In the first half of this year alone, the U.S. has successively introduced the Russia FDP rule for Russia and the Russia Military End User FDP rule targeting Russian-specific entities. The new FDP rules launched this time continue to follow the past logic of imposing controls on upstream technologies, a product’s technical characteristics, and the destination, end user or end use of the product. The specific contents are as follows:
For items that also meet the above FDP rules, their exports, re-exports and transfers (in-country) are subject to the relevant license or license exceptions of BIS, and the relevant licensing policies are set out in § 742.6, §744.11 and §744.23 of the EAR as follows:
According to the above analysis, the content of the current Entity List FDP rule (footnote 4) is basically identical to the original Entity List FDP rule (footnote 1). However, the Entity List FDP rule (footnote 4) is more restrictive than the Entity List FDP rule (footnote 1) in terms of the scope of upstream technology, as well as licensing policies. Therefore, the Entity List FDP rule may have a greater impact on the twenty-eight Entity List companies that are added to footnote 4.
For the items subject to the advanced computing FDP rule, in principle, its will be controlled in such a way that deemed as if it were added to the ECCNs control items. However, it is important to note that:
1) The determination of controlled items will be based on technical parameters instead of the applicable ECCNs, and
2) For companies headquartered in China, the transfer of their fabrication technology out of China will also be restricted. This is also clearly stated in the announcement of the legislative rules[2].
The above regulations mean that under the existing semiconductor supply chain system, Chinese FABLESS manufacturers seeking overseas foundries for conduct high-performance chip tape out will be strictly restricted, even if the chip does not fall into the scope of 3A090. If the technical parameters of the chip meet the specific parameters of 3A090, it will also be affected. Meanwhile, in order to strengthen the control of the concerned items, BIS has set up certification requirements in § 734.9 (h) (3) of the EAR, requiring exporters to assert whether the items transferred by them are subject to the control of the EAR. If the exporter is not certified, the exporter is obligated to perform due diligence to confirm whether the items handled fall under the control of the advanced computing FDP rule. This means that the exporter has a potential obligation to apply for an approval to export from BIS for the downstream recipient of the item. In summary, for items that fall under the control of the advanced computing FDP rules, the subsequent traceability and transaction management will inevitably face enhanced regulatory compliance requirements.
For the items subject to the “Supercomputer” end-use FDP rule, the restriction requirements and control framework are completely different from the previously described control based on chip performance as an indicator. It will be subject to the latest end user and end use restrictions under § 744.23 of the EAR.
3. Different scope of restrictions on certain end users and end uses
In this revision of the EAR, BIS has also added a new subsection (c) to § 744.6 and a new section § 744.23 of the EAR, which places strict restrictions on the participation of U.S. persons in integrated circuits development activities in China and China-related semiconductor manufacturing end uses. The summary as follows:
For the Chinese semiconductor industry, these restrictions on end users and end uses may have the most profound impact.
First, although the logic of U.S. export controls focus on the items subject to EAR, but this new regulation breaks through traditional regulatory framework. Under the Export Control Reform Act of 2018 (ECRA), the United States shall control U.S. person activity related to nuclear explosive devices, missiles chemical or biological weapons, etc. The new regulation has already imposed some of these controls in the EAR. But these controls generally only apply when the U.S. persons have knowledge that their activities are contributing to prohibited end uses or end users. So long as U.S. persons are involved in the relevant restricted activities, such kind of activity will also be strictly limited by BIS, even if the items involved are not subject to EAR. The definition of a U.S. person under U.S. export controls, as defined in EAR Section 772, is very broad and includes：
1) Any individual who is a citizen of the U.S.;
2) A permanent resident alien of the U.S.;
3) A protected individual (such as refugees);
4) Any juridical person organized under the laws of the U.S., including foreign branches; and
5) Any person in the U.S.
All individuals and entities falling within the above definitions will be subject to the new rule, which means for Chinese companies engaged in the advanced manufacturing processes as outlined in the new regulations, the U.S. R&D and procurement staff they employ, and the R&D centers set up by Chinese companies in the U.S., will have a huge impact. In addition to the transfer of items, restrictions on U.S. persons include facilitation and services, which may include a range of activities, as defined in § 736.2 of the EAR:
- Providing funds;
- Assisting with the placement of orders;
- Providing warehousing;
- Providing loans;
- Shipment;
- Freight forwarding
Therefore, U.S. persons who are involved in semiconductor business activities in China, need to pay careful attention to the potential non-compliance risks to avoid incurring administrative or even criminal liability if they are involved in any of the activities described above.
Second, it is worth noting that the technical parameters for semiconductor manufacturing processes in China subject to the restrictions on end users and end uses do not overlap with the aforementioned technical parameters for advanced computing chips. This would means that if Chinese semiconductor manufacturers process capabilities meet the advanced process parameters specified in such restrictions, they will still be subject to the restrictions of the new rule on end users and end uses, even if they do not produce the advanced computing chips specified in ECCN 3A090 subject to the new rule. The impact of the new rule actually goes far beyond the scope of advanced computing chips, which will greatly affect the improvement of the advanced process capabilities of Chinese semiconductor manufacturers.
Furthermore, although the end-user and end-use restrictions mainly point to the manufacture capacity of specific advanced manufacturing processes, but also clear, in the case of restrictions will still be imposed on the equipment, materials, software and technologies closely related to the production, design and manufacture of semiconductors (items in Product Groups B, C, D, or E in Category 3 of the CCL) when it is unable to determine whether the relevant product lines involve advanced manufacturing processes. However, in the actual production process of the semiconductor industry, there is usually no mature process nodes line independent of the advanced process nodes line, and the relevant product lines are usually downward compatible (i.e., an advanced process product line can also produce mature process chips). This means that the relevant restrictions may not only have an impact on enterprises’ production capacity of advanced process products, but also on the production capacity of mature process products.
Finally, the restrictions on the end-use of semiconductor production in China also include the production of semiconductor manufacturing equipment. This means that the end-use restrictions will affect not only Chinese chip manufacturers such as foundries and packaging and circuit probing, but also Chinese semiconductor equipment manufacturers.
4. The cushioning effect that TGL can bring is limited
In order to mitigate the impact of the new rule on the whole industry, BIS has established a special supply chain temporary general license (TGL) in the supplement to § 736 of the EAR. It allows relevant enterprises to engage in partial wind-down. According to this TGL, BIS authorizes, from October 21, 2022 through April 7, 2023, companies not headquartered in Country Groups D:1 or D:5 or E to continue or engage in integration, assembly (mounting), inspection, testing, quality assurance, and distribution of the following items:
1) Items covered by ECCN 3A090, 4A090, and associated software and technology in ECCN 3D001, 3E001, 4D090, or 4E001; or
2) Any item that is a computer, integrated circuit, electronic assembly or component and associated software and technology, specified on the CCL, which meets or exceeds the performance parameters of ECCN 3A090 or 4A090.
This TGL does not authorize the export from abroad to end-users or ultimate consignees in China, nor does it apply to the relevant restrictions on end users and end uses. Given the precedent of BIS past TGL releases, this TGL may be extended after it expires in April next year. However, as China is in Country Groups D:1 and D:5, this TGL actually has limited significance for China enterprises.
5. What are the possible directions for Chinese enterprises
Despite the unprecedented scale of the new U.S. export control critical revision, it is not unexpected considering a series of legislative processes and measures taken by the government. The U.S. emphasized in the 100-day Supply Chain Review in 2021 that export control policies should be adopted to ensure the leading edge of the U.S. semiconductor manufacturing and packaging technologies. Similarly, in its Final Report of 2021, the U.S. National Security Commission on Artificial Intelligence (“NSCAI”) states that, in order to remain a global leader in the semiconductor industry, the U.S. must contain China’s semiconductor industry. To that end, the U.S. should seek to prevent China from importing cutting-edge chip-production equipment such as lithography machines, and consider “coordinating” with the Netherlands and Japan to develop a “presumption of denial” policy to prevent them from exporting semiconductor manufacturing equipment, especially lithography equipment, to China. It also recommends legitimatizing long-standing regulatory practices into U.S. policies. These policies are aimed at limiting China's semiconductor industry to such a level that it is two generations behind the U.S. If we sort out the changes in the past, we understand that the new policies in question are simply a gradual implementation of the U.S. pre-program.
If Chinese companies pay attention to these potential policy risks from the outset and factor them into their long-term business planning for the next 3-5 years, much of the impact can be mitigated. As we have always emphasized, given the current international landscape, corporate compliance should not stop at the preliminary stage such as the establishment of systems. Instead, potential compliance risks should be integrated with business decisions to guard against systematic business and policy risks. As a matter of fact, the recent U.S. legislative plans indicate that the new export control rules will not be the final blow. For semiconductor industry chain enterprises, how to balance the distribution and personnel deployment for overseas and domestic business will be a matter of great urgency in the future. Meanwhile, downstream industries of the semiconductor industry chain, such as unmanned driving, data centers, cloud computing and other application fields, shall pay close attention to the ripple effect of relevant policies on their business. In addition, other key industries on the radar of the U.S. besides the semiconductor industry, such as high-capacity batteries, pharmaceuticals, advanced materials and other industries mentioned in the 100-day Supply Chain Review, should also take the current restrictions on the semiconductor industry as a warning and accelerate the adjustment of their own business plans.
We hope that the above analysis will assist you in your decision making and we will keep closely monitoring on future legislative developments of the export regulations. Please do not hesitate to contact us if you have any queries.
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In accordance with Part 772 of the EAR, “Supercomputer” is defined as 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.
Entities outside of the PRC that receive 3E001 for 3A090 technology from China should consider confirming that a license was obtained to export such technology from China. If no such license was obtained, General Prohibition 10 (§ 736.2(b)(10) of the EAR) prohibits any person from taking any further action with respect to such technology that has been exported without a required BIS license.
