by Brian Egan
October 24, 2022
Biden administration, CFIUS, China, Department of Commerce, Diplomacy, export controls, Military, Technology, trade, Wassenaar Arrangement
by Brian Egan
October 24, 2022
The U.S. Commerce Department’s Bureau of Industry and Security (“BIS”) published a new, long-awaited export-controls rule (the “BIS Rule”) on Oct. 7, significantly expanding U.S. restrictions on exports to China of semiconductor and supercomputer manufacturing and testing equipment, components, and technologies. Although this BIS Rule was published with little fanfare in an advance notice posted on a Friday afternoon in the Federal Register pre-publication “reading room,” rumors of the rule have been circulating for months as the Biden administration consulted with key U.S. industry representatives on the rule’s scope and substance. The rule reflects one leg of an ambitious effort by the administration to use existing (and in some cases new) tools to counter China’s development of advanced technologies to address U.S. national security and foreign policy concerns.
U.S. export controls – normally a sleepy and technical aspect of the U.S. national security regulatory architecture – have been thrust into the spotlight this year. Far-reaching export controls have been arguably the most meaningful and punishing aspect of the Biden administration’s response to Russia’s invasion of Ukraine, as they have cut off many shipments of even low-level U.S. technologies to Russia by companies in the United States and abroad. The Oct. 7 BIS Rule cements export controls as a key tool that the Biden administration will use to address its national security and foreign policy concerns with China.
The BIS Rule explains that the new restrictions result from “extensive United States government consideration” of the impact of advanced computing semiconductors, computers using such semiconductors, and semiconductor-manufacturing equipment on “enabling military modernization, including the development of weapons of mass destruction (WMD), and human rights abuses.” Accordingly, the BIS Rule establishes five new categories of export controls targeted explicitly at hindering China’s ability to produce and use advanced semiconductors.
First, the rule establishes new export controls for China and certain already-embargoed jurisdictions (e.g., Iran) on semiconductor manufacturing equipment, items that could assist in the development of such equipment, high-performance integrated circuits (“chips”), computers containing such chips, and associated software and technology. While certain highly advanced manufacturing equipment, chips, and computers already had been subject to controls for China and numerous other destinations, the new rule effectively lowers the threshold expressly for exports to China.
Second, the rule establishes new requirements for a broad range of additional exports under the Export Administration Regulations (“EAR”) when the exporter has knowledge (including “reason to know”) that the exports will be used in certain advanced computers, or in developing or producing certain semiconductor chips, in China.
Third, the rule establishes a new licensing requirement for exports of many items destined for Chinese semiconductor-manufacturing facilities making chips meeting specified performance or engineering criteria.
Fourth, the rule expands the jurisdictional scope of the EAR through new “foreign produced direct product rules” targeting exports of foreign-made goods to China. In particular, the rule creates a licensing requirement for certain advanced computing items produced entirely outside the United States when those products are made from certain U.S. products or technologies and destined for China. The rule also creates a licensing requirement for a broader set of foreign-produced products and technologies when destined for any of 28 Chinese entities on the “Entity List,” a restricted party list maintained by BIS that imposes additional licensing requirements on shipments to listed parties.
Fifth, the rule restricts the ability of U.S. persons (including U.S. citizens and green card holders) to provide any “support” for the development or production of chips at certain semiconductor-manufacturing facilities in China without a license – regardless of whether the “support” includes the export of any products or technologies. This fifth category is hardly an export control at all, but it builds upon existing (and little-used) authority in the EAR to regulate certain U.S. person activity that is completely disconnected from export controls. Media reports suggest that this fifth category already has resulted in significant changes to semiconductor-manufacturing and research-and-development operations in China, with many manufacturers removing Americans from key positions.
According to U.S. National Security Advisor Jake Sullivan, these new export controls are only one element of the U.S. strategy to counter China by “maintain[ing] as large of a lead as possible” over China in technologies such as advanced logic and memory chips. Other elements of this strategy include a recent Executive Order issued by President Joe Biden, directing the Committee on Foreign Investment in the United States (“CFIUS”) to consider (among other things) whether a foreign investment in the United States under review by CFIUS will “impact U.S. technological leadership.” In addition, Sullivan indicated that new regulations for U.S. government review of outbound investments in sensitive technologies are under development within the administration. The Biden administration is also reportedly considering China-focused export controls in the areas of artificial intelligence and quantum computing.
While the BIS Rule will undoubtedly have a significant short-term impact on technology-related trade with China, its longer-term impact hinges in significant part on whether U.S. allies will follow the BIS Rule with their own parallel restrictions. Export controls traditionally have been most effective (and least prejudicial to U.S. industry) when they are coordinated across different countries’ export-control regimes through a multilateral regime like the Wassenaar Arrangement (a multilateral export-control regime covering conventional weapons and certain dual-use goods and technologies) or in direct coordination with key jurisdictions like the European Union or the U.K. Unlike the case with the restrictions on exports to Russia, the U.S. announced the Oct. 7 BIS Rule on its own. No corresponding sanctions or export-controls announcements were made by the EU, U.K., Canada, or U.S. allies in Asia or elsewhere. It is highly likely that such discussions are ongoing, particularly with allies with their own innate advanced semiconductor-manufacturing capabilities who could otherwise potentially step in and fill any gaps created by the Oct. 7 BIS Rule. The Biden administration’s export controls “diplomacy” will be critical in the coming weeks and months if it desires the broadest impact for the BIS Rule.
Biden administration, CFIUS, China, Department of Commerce, Diplomacy, export controls, Military, Technology, trade, Wassenaar Arrangement
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