On May 19, the US Commerce Department’s Bureau of Industry and Security (“BIS”) published an interim final rule effective on May 15, 2020 amending the Export Administration Regulations’ (“EAR”) General Prohibition Three (the “foreign-produced direct product rule”) and Entity List to impose new controls on the reexport, export from abroad, and transfer (in-country) of certain foreign-produced semiconductor-related items when such items are the direct product of certain designated US technology or software and are destined to Huawei Technologies Co. Ltd. and 114 of its non-US affiliates designated on the BIS Entity List (collectively, “Huawei”). BIS is seeking comments on the interim final rule, which must be submitted on or before July 14, 2020.
Concurrently, effective May 15, BIS issued a final rule extending through August 13, 2020 the validity of the Temporary General License (“TGL”) authorizing certain transactions involving the export, reexport, and transfer of items subject to the EAR to Huawei. BIS noted in the final rule that it is in the process of reviewing submissions received in response to its request for comments on future extensions of the TGL, which may be submitted until April 22, 2020. Please see our prior blog posts on the initial designation of Huawei and sixty-eight of its non-US affiliates to the Entity List on May 16, 2019 here; on the issuance of the original TGL on May 20, 2019 here; on the designation of forty-six additional non-US affiliates of Huawei to the Entity List and on the TGL updates issued on August 19, 2019 here; on BIS’s publication of Huawei-related FAQs on September 9, 2019 here; on BIS’s previous extensions of the TGL here and here; and on BIS’s request for comments on future extensions here and here.
The Expanded Foreign-Produced Direct Product Rule in General Prohibition Three
The final rule expands General Prohibition Three’s existing controls on foreign-produced items that are the direct products of certain designated US technology or software by adding a new control in § 736.2(b)(3)(vi). This new control prohibits the reexport, export from abroad, or transfer (in-country) of (1) certain foreign-produced items controlled under the new footnote 1 to the Entity List (2) when there is “knowledge” (as defined in the EAR) that the foreign produced item is destined for an entity on the Entity List with a footnote 1 designation. Currently, the footnote 1 designation has been added to the Entity List entries for Huawei and its listed affiliates only.
The new footnote 1 to the Entity List imposes a licensing requirement for the reexport, export from abroad, or transfer (in-country) by any person of foreign-produced items destined for a footnote 1 Entity List party when the foreign-produced item is either:
- The direct product of designated “technology” or “software” (as defined in the EAR) subject to the EAR, i.e., the foreign-produced item is both:
- produced or developed by an entity with a footnote 1 designation on the Entity list, and
- a direct product of designated “technology” or “software” that is “subject to the EAR” (note that such a direct product can include designated technology that is itself newly subject to the EAR through the new control, such as a design developed by an entity with a footnote 1 designation from designated technology or software that is subject to the EAR); or
- The direct product of a plant or major component of a plant, i.e., the foreign-produced item is both:
- produced by a plant or major component of a plant that is itself a direct product of designated U.S.-origin “technology” or “software”, and
- a direct product of “technology” or “software” produced or developed by an entity with a footnote 1 designation on the Entity list, regardless of whether such “technology” or “software” is itself subject to the EAR.
The interim rule clarifies that a “major component of a plant located outside the United States” means “equipment that is essential to the ‘production’ of an item to meet the specifications of any design produced or developed by the designated entities, including testing equipment.”
Designated “technology” and “software” is the “technology” or “software” specified in Export Control Classification Numbers (“ECCN”) 3E001, 3E002, 3E003, 4E001, 5E001, 3D001, 4D001, or 5D001; “technology” specified in ECCN 3E991, 4E992, 4E993, or 5E991; or “software” specified in ECCN 3D991, 4D993, 4D994, or 5D991. In other words, this targeted expansion of the rule applies not only to “technology” or “software” controlled for National Security (NS) reasons, but also to “technology” or “software” controlled under the designated Anti-Terrorism (AT) ECCNs.
The new control captures, for example, a foreign-produced integrated circuit that is produced by a third party pursuant to designs developed by Huawei using designated technology or software, such as Electronic Design Automation software, subject to the EAR. One important effect of the new control may be its application to items produced by foreign companies outside the United States using equipment subject to the EAR pursuant to designs developed by Huawei. For example, as noted by BIS in the Federal Register Notice, integrated circuits produced in a foundry outside the United States through the use of equipment, which is subject to the EAR and essential to the production of the integrated circuit, will be subject to the new control if the design of the integrated circuit is produced or developed from Huawei “technology” or “software.” In that scenario, there is no additional requirement that the Huawei-developed technology or software must be subject to the EAR. As such, the new control will likely have a significant impact on US semiconductor equipment manufacturers as well as their foreign semiconductor manufacturer customers.
The interim final rule provides that foreign-produced items, which are the direct products of designated “technology” or “software” subject to the EAR (i.e., items falling within the scope of the first category of covered items above), that were in transit on May 15, 2020 pursuant to actual orders for exports from abroad, reexports, or transfers (in-country) to a foreign destination or to the consignee/end-user, may proceed to that destination under the previous license exception eligibility or without a license.
In addition, the interim final rule provides that foreign-produced items in production prior to May 15, 2020, which are the direct products of a plant or major component of a plant (i.e., items falling within the scope of the second category of covered items above), are not subject to the new control and may proceed as not being subject to the EAR, if applicable, or under the previous license exception eligibility or without a license, so long as they are exported from abroad, reexported, or transferred (in-country) by midnight on September 14, 2020. BIS described this savings clause as a measure intended to prevent adverse economic impacts on foreign foundries utilizing US semiconductor manufacturing equipment that may have initiated production for items based on Huawei design specifications as of May 15, 2020.
The Response from China
The Ministry of Commerce of the People’s Republic of China (“MOFCOM”) raised objection to the new BIS rule targeted at Huawei in a media interview on May 17, 2020. Huawei also made an announcement on the next day and mentioned that it expected to work with customers and suppliers to reduce the adverse impact brought by this “discriminatory” rule. Some Chinese news media commented that the Chinese government was ready to put US companies on an “unreliable entities list,” as part of countermeasures in response to the new limits on Huawei. Having said that, at this moment, whether and how the Chinese government would take countermeasures remains unclear and uncertain. Since MOFCOM announced the introduction of an “unreliable entity list” regime on May 31, 2019, little progress has been made in terms of the implementing rules such as the list itself and relevant restrictive measures. Understandably, the issuance of the “unreliable entities list” may have substantial implications on not only multinational companies but also Chinese companies, and could be very controversial in the international community. Having said that, it is possible that the Chinese government may tighten up enforcement actions against US-headquartered multinational companies in response to the new control on other grounds, e.g., violation of antitrust law, cybersecurity law and national security law, etc.
Authors acknowledge the assistance of Vivian Wu in the preparation of this blog post.