U.S. Expands China-Related Export Controls Regarding Semiconductors and Semiconductor Manufacturing Equipment – Orrick
10 minute read | October.26.2023
On October 17, 2023, the U.S. Commerce Department’s Bureau of Industry Security (BIS) issued revised export control regulations intended to impede China’s efforts to obtain and produce advanced semiconductors. The new steps build on October 2022 regulations and will intensify and complicate international trade challenges regarding China.
Affected companies should consider these steps:
The new regulations will expand semiconductor and semiconductor equipment restrictions related to China (including Macau) in a variety of ways. At the same time, the regulations will streamline the restrictions in some respects. Microelectronics companies may find they can proceed with some types of China-related business that were or appeared to be unavailable under prior rules.
A few elements of the new regulations take effect immediately. Here are some key dates:
Control List Expansions
The new regulations add a performance density parameter to also control semiconductors useful for training advanced AI with military applications. BIS intends the performance density parameter to address a workaround available in the October 2022 regulations. The workaround involved purchasing a larger number of smaller datacenter AI chips which, if combined, would be as powerful as restricted chips. The BIS implemented this change by expanding the control parameters in ECCN 3A090. It does not cover semiconductors that are not designed or marketed for use in datacenters and that do not have a total processing performance of 4800 or more.
The new regulations also extend the license requirement for 3A090 items to cover supply not just to China but also to a large group of restricted countries.
In the October 2022 rules, BIS imposed controls on items meeting or exceeding the control criteria set forth in ECCNs 3A090 (advanced semiconductors) or 4A090 (advanced computers). In response to concerns regarding this approach’s uncertainty and compliance burden, the new regulations create nine new ECCN subparagraphs (labelled “.z”). Those subparagraphs cover items having performance characteristics or functions that meet or exceed the performance parameters of ECCNs 3A090 or 4A090.
The new regulations expand controls on semiconductor manufacturing equipment (SME), semiconductor inspection equipment, equipment for manufacturing SME, “specially designed” components and accessories and associated software and technology. The new regulations extend controls to a variety of etch and deposition SME systems.
Modifications to End Use Controls
The October 2022 regulations imposed controls on the supply of items subject to the EAR when the supplier knows the items will be used in the development or production of supercomputers, advanced semiconductors, advanced computing items or SME. The new regulations expand those end-use controls in multiple respects.
Traditional international trade principles contemplate that the restrictions would not apply with respect to disposition of systems into which the exported item is incorporated. Normally, the end use of the item has been considered to be incorporation of the item into the system, at which time the item comes no longer to exist as a tradeable item.
Nonetheless, BIS has indicated that a supplier requires a license to supply an item to any destination worldwide if the supplier has “knowledge” (including reason to know) that the item will be incorporated into a non-U.S. made system devoted to a restricted end use in a country covered by the end use restrictions.
For purposes of the SME end use controls, back-end steps such as assembly, testing or packaging “that do not alter the integrated circuit technology level” are excluded from the definition of “production.” In effect, supply of items subject to the EAR for back-end production is not restricted by the special SME end use controls. Moreover, the scope of items subject to the SME end use control was scaled back from all items subject to the EAR to items subject to the EAR and specified on the Commerce Control List (i.e., excluding EAR99 items).
The October 2022 regulations tied China’s procurement and production of advanced semiconductors, SME and advanced computing items to weapons of mass destruction-related end uses. They also imposed restrictions on certain activities of U.S. persons relating to items not subject to the EAR. Under the October 2022 regulations, these support-activity restrictions applied only with respect to China. The new regulations expand the scope of these restrictions to China and other arms-embargoed countries.
In another respect, however, the new regulations reduce the scope of U.S. person controls in response to industry concerns regarding the impact on U.S. persons employed at non-U.S. semiconductor companies (and especially those of certain U.S. allies and partners). The new regulations establish that the support restrictions do not apply to natural U.S. persons (meaning U.S. citizens and permanent residents and persons located in the United States) who are employed or working on behalf of a company headquartered in the United States or a Country Group A:5 or A:6 country and not majority-owned by an entity headquartered in China or another arms-embargoed country.
The new regulations create two temporary general licenses valid through December 31, 2025.
Neither new temporary general license may be used for the development or production of semiconductor production, inspection or testing equipment in China or another arms-embargoed country if the development or production activity is performed at the direction of an entity headquartered in any such location.
The new regulations create License Exception Notified Advanced Computing (NAC). It covers supply of semiconductors within the newly expanded ECCN 3A090. It also covers computers and other electronic assemblies incorporating semiconductors meeting or exceeding the parameters in expanded ECCN 3A090 as well as devices falling within nine newly created ECCN subparagraphs covering devices meeting the parameters in revised ECCN 3A090.
Items are not eligible for License Exception NAC if they are designed or marketed for use in a datacenter, have one or more digital processing units and have a total processing performance of 4800 or more or a total processing performance of 1600 or more and a performance density of 5.92 or more.
License Exception NAC is available for exports, reexports and transfers of eligible items to or within China and a large group of restricted countries, with different requirements applicable to China or another arms-embargoed country. For exports and reexports to China or another arms-embargoed country, a company must meet notification requirements to qualify for the new license exception. The purpose of the notification process reportedly is to provide BIS and its interagency export controls partners the opportunity to evaluate the national security risk posed by semiconductors within this parameter.
Exports or reexports are covered by License Exception NAC only if they are either made pursuant to a written purchase order or are commercial samples. License Exception NAC generally may not be used for exports, reexports or (in-country) transfers subject to licensing requirements associated with any EAR end use or end user restrictions (including U.S. person restrictions), EAR embargoes or other EAR special controls. License Exception NAC may be used, however, to forgo licensing requirements associated with advanced computing items end use restrictions involving destinations outside of China and a large group of restricted countries and a recipient entity that is headquartered in, or whose ultimate parent is headquartered in, China or another arms-embargoed country.
Effective October 17, BIS added two Chinese semiconductor producers and their subsidiaries (a total of 13 entities) to the Entity List and designated each of the 13 entities with footnote 4 to the Entity List, meaning that the Entity List Foreign Direct Product Rule applies with respect to foreign-made items sent to the entities. BIS has determined that the 13 entities are involved in the development of advanced computing semiconductors and have engaged in activities contrary to U.S. national security and foreign policy interests.
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Harry is experienced in areas such as CFIUS/Exon-Florio examinations of foreign investment, military and “dual use” export control regulations (ITAR/EAR), economic sanctions administered by the U.S. Treasury Department (OFAC), customs regulations, the Foreign Corrupt Practices Act, anti-money laundering rules, anti-boycott requirements and defense industrial security requirements. He executes internal corporate investigations regarding trade and investment rules and advises on such rules in the context of corporate transactions.
Additionally, Harry has extensive experience with government contracting matters. His government contracting work has included, for example, design and implementation of U.S. Defense Department renewable energy projects. He also represents broad industry coalitions on major trade litigations and international negotiations. His experience in these areas includes a leading role in what is often considered the largest-ever international trade dispute: the controversy regarding unfair softwood lumber imports from Canada. It has involved myriad administrative proceedings before federal agencies, NAFTA panel appeals, WTO dispute proceedings, judicial proceedings and international settlement agreements.
Harry has represented a coalition of major U.S. oil companies in antidumping and countervailing duty litigation. As a related matter, he pursues policy issues with congressional and executive branch officials and advises on international trade rules (e.g., GATT, WTO agreements and NAFTA).
Chambers 2022 recognizes Harry as a leader in the field of export controls and economic sanctions (Chambers Global and Chambers USA), as well as CFIUS (Chambers USA). Previous editions have also recognized Harry’s achievements regarding his work related to the Foreign Corrupt Practices Act. Clients note that Harry provides “accurate, straightforward guidance incredibly efficiently” and “he has an ability to translate complex legal requirements and rules into business-friendly jargon.”
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Jeanine’s clients include major U.S. and foreign financial institutions, and pharmaceutical, technology, telecommunications, energy, and natural resources companies.
Examples of Jeanine’s experience include:
Jeanine is ranked in both the CFIUS Experts and Export Controls & Economic Sanctions categories by Chambers USA in 2019, 2020, 2021, and 2022. An interviewee had this to say of their experience working with Jeanine, “I am continuously impressed by her extensive knowledge, excellent communication skills and her ability to wrap her subject matter expertise around the details of the matter and then drive conclusions or recommendations for next steps.”
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Elizabeth’s experience includes work on internal investigations, voluntary disclosures, commodity jurisdiction requests and developing and implementing compliance programs. She also advises clients on government contracting matters.
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Greg assists in a variety of regulatory and investigatory activities relating to the Committee for Foreign Investment in the United States (CFIUS), export controls, economic sanctions and anti-boycott regulations, including the preparation of CFIUS Notices, voluntary disclosures, internal audit documentation and compliance policies and procedures. He also actively participates in corporate transaction due diligence related to Trade Controls and the Foreign Corrupt Practices Act, as well as internal investigatory activities.
With over 20 years’ experience in antidumping and countervailing duty investigations (and consequent administrative reviews) of unfairly-traded goods, Greg has been centrally involved in the statistical, economic and financial analysis of the confidential pricing, logistical, marketing and accounting information submitted by parties in such cases, as well as supporting the drafting and review of briefs and other pleadings filed by parties in the cases. Among the unfair trade cases in which he has participated are those involving crystalline solar voltaic panels, softwood lumber, warmwater shrimp, wooden bedroom furniture, outboard motors and various flat-rolled steel products.
Greg has frequently presented litigation-related testimony before the International Trade Administration and actively participates in representing firm clients before the U.S. Department of Commerce, the International Trade Commission, the Court of International Trade, the Court of Appeals for the Federal Circuit and the World Trade Organization.
Greg actively participated in the negotiation of a major international trade agreement involving billions of dollars of trade, and the subsequent monitoring of that agreement. In binding arbitration emerging from that agreement, he developed a damages estimate adopted by the U.S. Government and accepted by the arbitral panel.
Greg also supports a variety of litigation efforts requiring data analysis, and has developed and analyzed damages estimates for various arbitration and litigation matters.
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