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On October 25, 2023, the Department of Commerce’s Bureau of Industry and Security (BIS) published two significant Interim Final Rules updating the agency’s October 7, 2022, rulemaking that target support for China’s semiconductor manufacturing items, software, and technology and access to advanced computing. According to Commerce Secretary Gina Raimondo, these updated rules “will increase effectiveness of [U.S.] controls and further shut off pathways to evade our restrictions. These controls maintain our clear focus on military applications and confront the threats to our national security posed by the [Chinese] Government’s military-civil fusion strategy.”

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<a>These latest Interim Final Rules are intended to reinforce the October 7, 2022, controls appended to the Export Administration Regulations (EAR) to restrict China’s ability to both purchase and manufacture </a>certain high-end chips critical for military advantage. BIS notes that they take into consideration public comments and are necessary to maintain the effectiveness of the original October 7, 2022, controls and close loopholes. For additional background on the October 7, 2022 Interim Rule (“October 2022 Interim Rule”), see Thompson Hine’s International Trade Update of <a href="https://www.thompsonhine.com/insights/new-export-controls-target-support-for-chinas-advanced-computing-and-semiconductor-manufacturing/">October 31, 2022</a>.

<a></a><a>These new interim rules are technical, lengthy, and complex, and this bulletin provides only an overview of the major provisions of the revised export controls </a><a>targeting semiconductor manufacturing equipment, software, and technology and access to advanced computing</a>. Companies impacted by these two rules must review their scope and potential impact not only on U.S. production and U.S.-origin applications but also on the potential impact of the increased scope that includes foreign-produced items located outside the United States that are direct products of U.S.-origin software or technology.

Revised Export Controls on Semiconductor Manufacturing Items

One new Interim Final Rule addresses comments received by BIS in response to the section of the October 2022 Interim Rule regarding semiconductor manufacturing equipment (88 Federal Register 73424) (the “<a href="https://www.bis.doc.gov/index.php/documents/federal-register-notices-1/3368-88-fr-73424-sme-ifr-10-25-23/file">SME Interim Rule</a>”). The effective date for this rule is November 17, 2023. The deadline for public comments on these revisions is December 18, 2023.

Key changes made from the October 2022 Interim Rule included in this SME Interim Rule are:

(1) Removal of ECCN 3B090, which was implemented in the October 2022 Interim Rule and replaces and expands its provisions and controls in ECCNs 3B001 and 3B002. Specific changes to ECCNs 3B001, 3B002, 3D001, 3D002, 3D003 and 3E001 as well as information about the removal of ECCN 3B090 are described in detail in the text of this SME Interim Rule. BIS notes that export licenses issued for equipment that was classified under ECCN 3B090, but is now under ECCN 3B001, remain valid until expiration unless suspended or revoked.

(2) Revisions to various license exception restrictions to reflect the removal of 3B090 and other changes related to the availability of license exceptions for these SME items.

(3) Revisions to the national security license requirements and review policy to impose and describe new national security controls for certain semiconductor manufacturing equipment and associated software and technology for items moved from ECCN 3B090 to ECCNs 3B001 and 3B002. A license is now required for exports and reexports to either China, Macau, or destinations specified in Country Group D:5 (U.S. arms embargoed countries; 21 countries) of commodities specified in certain subcategories of ECCNs 3B001 and 3B002. These revisions also include new text on license application review policies. Regarding overall national security concerns, BIS noted that the items that are the subject of the SME Interim Rule “are not yet formally controlled under a multilateral regime, [thus] the urgency and criticality of the U.S. national security concerns described [in the interim rule] dictate control pending adoption through the Wassenaar Arrangement.”

(4) Revisions to the regional stability license requirements and license review policy to, among other things, remove references to ECCN 3B090 and expand the license requirement from “China and Macau” to “<a>Macau and destinations specified in Country Group D:5 of supplement no 1 to part 740</a>” of the EAR. The destinations described in <a>Country Group D:5</a> and Macau are those that BIS has previously identified as destinations of national security concern, weapons of mass destruction (WMD) developing countries, diversion countries of concern, or as countries subject to a U.S. arms embargo or sanction or United Nations Security Council sanction, or countries that the Secretary of State has classified as State Sponsors of Terrorism. BIS determined that adding a license requirement for destinations in Country Group D:5 will provide greater visibility into the flow of semiconductor manufacturing equipment, associated development and production technology and software, as well as specially designed parts, components, and assemblies therefor to other countries and their intended end uses.

(5) Revisions to the de minimis provisions to add a 0% de minimis rule for items described in new ECCN 3B001.f.1.b.2.b (i.e., lithography equipment and “specially designed” items therefor) when destined for use in the “development” or “production” of “advanced-node integrated circuits,” except when the country from which the foreign-made item was originally exported or reexported has the item listed on its domestic export control list. BIS is adding a footnote with information concerning any countries that maintain an equivalent export control list.

(6) Revisions to and reformatting of the “U.S. persons” activities controls to better achieve the objectives of the October 2022 Interim Rule and improve clarity. This includes clarifying “whether knowledge of a violation is a requirement to trigger the license requirements” by noting that “if you know your export, reexport, or transfer (in-country) meets any of the specified activities described in [part 744.6 of the EAR (“Activities of U.S. person”)], then a license is required for shipping, transmitting, or transferring (in-country); facilitating [such activities]; or servicing (including installation) activities associated with any item, end use, or end user described” under part 744.6(c)(2). Further, BIS has added an exclusion to this section for the activities of U.S. persons who are natural “U.S. persons” employed or working on behalf of a company headquartered in the United States or a destination specified in Country Group A:5 or A:6 and not majority-owned by an entity that is headquartered in Macau or a destination specified in Country Group D:5. BIS notes that this new exclusion is “intended to ease the compliance burden and corresponding disincentive to employ U.S. persons in activities for which governments of closely allied destinations maintain or may establish appropriate controls.”

(7) Addition of two new defined terms to the EAR for “extreme ultraviolet” (EUV) and “advanced-node integrated circuits.”

(8) Addition of a new Temporary General License (TGL) to provide SME producers in the United States and Country Groups A:5 and A:6 additional time to identify alternative sources of supply outside of arms-embargoed countries, or to acquire individually validated licenses to continue manufacturing ‘front-end integrated circuit “production” equipment’ and related “parts” and “components” in such countries. This TGL is valid from November 17, 2023, through December 31, 2025.

Additional Export Controls on Certain Advanced Computing Items

The second October 25, 2023 Interim Final Rule addresses comments BIS received in response to a section of the October 2022 Interim Final Rule that controls advanced computing integrated circuits (ICs) and computer commodities that contain such ICs (88 Federal Register 73458) (the “<a href="https://www.bis.doc.gov/index.php/documents/federal-register-notices-1/3369-88-fr-73458-acs-ifr-10-25-23/file">AC Interim Rule</a>”) and, accordingly, amends the EAR to implement such controls more effectively. The effective date for this rule is November 17, 2023. The deadline for public comments is December 18, 2023.

Key additions from the October 2022 Interim Final Rule included in this AC Interim Rule are:

(1) Revising ECCN 3A090 to simplify its text by bifurcating it into two new ECCNs. Specifically, the newly established ECCN 3A090.a will control advanced computing ICs with one or more digital processing units having either: (i) a ‘total processing performance’ of 4800 or more, or (ii) a ‘total processing performance’ of 1600 or more and a ‘performance density’ of 5.92 or more. Meanwhile, the newly created ECCN 3A090.b will control ICs with one or more digital processing units having either: (i) a ‘total processing performance’ of 2400 or more but less than 4800, as well as a ‘performance density’ of 1.6 or more but less than 5.92, or (ii) a ‘total processing performance’ of 1600 or more and a ‘performance density’ of 3.2 or more but less than 5.92. The intent of this change is to “prevent technical workarounds” where a party could “simply purchas[e] a larger number of smaller datacenter AI chips which, if combined, would be equally powerful as restricted chips.”

(2) Adding new .z paragraphs for nine ECCNs to affirmatively capture items that BIS has determined have performance characteristics or functions that meet or exceed the relevant performance parameters of “Any commodity described in 3A001 that meets or exceeds the performance parameters in 3A090.” The nine ECCNs are 3A001.z, 4A003.z, 4A004.z, 4A005.z, 5A002.z, 5A004.z, 5A992.z, 5D002.z, and 5D992.z. This “positive list” of ECCNs has been determined to have performance characteristics or functions that meet or exceed the performance parameters of ECCNs 3A090 or 4A090.

Further, these nine ECCNs will now be controlled (among other reasons) for regional stability purposes, and the corresponding license requirements imposed will be revised to reflect that a license for these nine ECCNs will be necessary if destined to any location listed in Country Groups D:1, D:4, and D:5 that are not also specified in Country Groups A:5 or A:6. Notwithstanding the expanded country scope, though, license applications made for items classified under one of these nine ECCNs will be reviewed on a presumption of approval when destined to (or within) places not specified in Country Group D:5 except Macau; however, end-users headquartered in—or whose ultimate parent company is headquartered in—a destination specified in Country Group D:5 or Macau will not also enjoy this presumption of approval.

(3) Inserting a new license exception for Notified Advanced Computing (NAC), which allows for the export, reexport, and transfer (in-country) of consumer-grade ICs falling below the above referenced restricted thresholds. However, exports and reexports to (or within) Macau and the destinations specified in Country Group D:5 must comply with additional notification requirements. Under this notification process, BIS must determine within 25 days whether the transaction may proceed under the license exception or instead require a license. The purpose of the notification process, which is only required for exports and reexports to Macau or destinations specified in Country Group D:5, is to provide BIS and its interagency export controls partners the opportunity to evaluate the national security risks.

(4) Similar to the SME Interim Final Rule, clarifying restrictions on specific activities of “U.S. persons” to indicate circumstances when such persons must secure a license when exporting, reexporting, or transferring an item that is known to be used in the “development” or “production” of ICs at a facility of an entity that is headquartered in—or whose ultimate parent company is headquartered in—either Macau or a destination specified in Country Group D:5.

(5) Expanding the end-use license requirements, including that a license must be obtained for an item classified under one of the nine new .z ECCNs listed above when, at the time of export, reexport, or transfer (in-country), the exporter, reexporter, or transferor has “knowledge” that the item is not destined to a place specified in Country Groups D:1, D:4, or D:5 (excluding any destination also specified in Country Groups A:5 or A:6) but will be sent to an entity that is headquartered in, or whose ultimate parent company is headquartered in, either Macau or a destination specified in Country Group D:5.

(6) Adding commodities described under ECCNs 3A991.p and 4A994.1 as eligible for the Consumer Communications Devices (CCD) License Exception.

(7) Augmenting the country scope of the advanced computing Foreign Direct Product (FDP) rule, specifically by removing references to “the People’s Republic of China or Macau” in favor of a broader country scope of coverage to destinations specified in Country Groups D:1, D:4, and D:5 that are not also specified in Country Groups A:5 or A:6.

(8) Clarifying that the model certificate published in the October 2022 Interim Final Rule may be used for all FDP rules.

(9) Introducing five new red flags to BIS’ “Know Your Customer” Guidance to promote compliance with these export controls. These additional due diligence requirements are intended to “help foundries identify restricted chip designs from countries of concern” and to “make it easier for foundries to assess whether foreign parties are attempting to circumvent the controls by illicitly fabbing restricted chips.”

(10) Adopting a new Temporary General License (known as “TGL – Advanced Computing Items”) that allows entities to continue or engage in integration, assembly (mounting), inspection, testing, quality assurance, and distribution of various advanced computing ICs and computer commodities that contain such ICs under very specific conditions when the recipient is located in a country of concern or related to an entity located in a country of concern. This TGL is valid from November 17, 2023, through December 31, 2025.

<a>On November 6, 2023, Assistant Secretary for Export Administration Thea D. Rozman Kendler conducted a public briefing on these two Interim Final Rules. A recording of that briefing is available </a><a href="https://www.bis.doc.gov/index.php/about-bis/newsroom/2082">here</a>.

As previously noted, public comments on these interim rules are due no later than December 18, 2023. Comments should be filed using the Federal rulemaking portal (<a href="file:///C:/Users/MandelAC/ND%20Office%20Echo/VAULT-FW3615IS/www.regulations.gov">www.regulations.gov</a>). The Docket ID No. for the SME Interim Rule is BIS-2023-0016; commenters should also reference RIN 0694-AJ23 in all comments. The Docket ID No. for the AIC Interim Rule is BIS-2022-0025; commenters should also reference RIN 0694-AI94 in all comments.

This advisory bulletin may be reproduced, in whole or in part, with the prior permission of Thompson Hine LLP and acknowledgment of its source and copyright. This publication is intended to inform clients about legal matters of current interest. It is not intended as legal advice. Readers should not act upon the information contained in it without professional counsel.

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Department of Commerce Issues Further Export Controls Targeting China’s Semiconductor Manufacturing and Advanced Computing

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