On October 25, 2023, the U.S. Department of Commerce Bureau of Industry and Security (BIS) published updated export controls on advanced computing items and semiconductor manufacturing equipment under the Export Administration Regulations (EAR). Specifically, BIS published two interim final rules that revise and expand on the restrictions implemented in the initial interim final rule issued on October 7, 2022 (October 7, 2022 rule).1
The first interim final rule covers restrictions on advanced computing items and supercomputers (available here)2, and the second interim final rule covers restrictions on semiconductor manufacturing equipment (available here)3. Both rules become effective on November 17, 2023. BIS is soliciting comments from industry by December 18, 2023. Just as BIS noted when issuing the October 7, 2022 rule, these controls are aimed at slowing China’s military modernization and surveillance capabilities, which are enabled by the efficient processing of huge amounts of data. Sidley’s insights regarding the October 7, 2022 rule are available here.
The new rules seek to strengthen and improve the controls imposed by the October 7, 2022 rule based on lessons learned over the past year. In particular, the new rules revise and expand controls on advanced computing items and semiconductor manufacturing equipment, implement new end-use restrictions and expand U.S. jurisdiction with revised foreign direct product (FDP) rules, and refine restrictions on specific U.S. person activities. These changes were in part motivated by the development of new advanced computing items that provide comparable artificial intelligence (AI) training capabilities as items controlled under the October 7, 2022 rule and the emergence of diversion and circumvention risks, such as Chinese entities accessing controlled technology through third countries or foreign subsidiaries. The changes also seek to address some of the unintended consequences for industry resulting from the October 7, 2022 rule.
Here are our key takeaways of these long and technical rules:
1. BIS expanded controls in response to industry developments over the past year.
BIS expanded on the October 7, 2022 rule in several areas to address recent developments, including the creation of new technology not covered by the October 7, 2022 rule and the emergence of diversion and circumvention risks that threaten the effectiveness of controls implemented under the October 7, 2022 rule.
a. New Technology Controls
BIS expanded the scope of items controlled under the October 7, 2022 rule by adjusting relevant performance parameters and adding items to the Commerce Control List (CCL). For advanced chips, BIS lowered the control criteria by adding a “performance density” factor to prevent companies from avoiding controls by aggregating the performance of many lower-level chips to replace restricted chips in highly advanced computing applications, such as training AI models. As noted below, certain of the newly restricted chips with lower performance capabilities are eligible for a new license exception when destined for certain countries. In parallel, BIS expanded controls on equipment used in the production of advanced chips.
b. New Destination Controls
BIS also expanded the destinations subject to license requirements in order to address diversion risks posed by third countries and to obtain greater visibility into the flow of sensitive items. The October 7, 2022 rule focused on exports to China (later expanded to China and Macau4), whereas these rules impose license restrictions on exports not only to China and Macau but also countries subject to U.S. arms embargoes and, in some cases, a broader group of countries based on risk of diversion (collectively, Restricted Countries)5. This geographical expansion will likely have the greatest impact in the Middle East. To further address diversion concerns, BIS expanded some controls worldwide to cover entities that are headquartered (or whose ultimate parents are headquartered) in Macau or countries subject to U.S. arms embargoes (including China) in any destination (Headquarters Restricted Entities).
Some controls are based on the sensitivity of the items exported, while others focus on the intended end use of the items. Licenses for controlled items destined to Macau and countries subject to U.S. arms embargoes or to Headquarters Restricted Entities will be reviewed with a presumption of denial, while licenses for items destined to other Restricted Countries will be reviewed with a presumption of approval.6
c. New Heightened Control for Advanced Lithography Equipment
In some cases, foreign-made items may be subject to the EAR, for example, when they contain controlled U.S. content. The semiconductor manufacturing equipment rule expands the application of this de minimis rule to certain advanced lithography equipment and related items destined for use in the production of advanced chips, specifying that there is no minimum U.S. content required for the EAR to apply. That is, any amount of U.S.-origin content (even a single screw) would subject the foreign-made equipment to the EAR. A limited exception is available where the item is made in another country with equivalent export controls (currently, only Japan). This exception appears to be aimed at encouraging U.S. allies to implement similar controls.
2. BIS narrowed controls on certain semiconductor manufacturing equipment and U.S. person activities based on industry feedback.
The new rules do not only expand restrictions but in some cases in fact refine controls to target specific objectives and minimize unintended consequences.
In particular, BIS narrowed “overbroad” end-use controls on items used for the development and production of semiconductor production equipment. Previously, these controls imposed a license requirement for all items subject to the EAR to be used in the production of any semiconductor production equipment, components, parts, and accessories listed on the CCL. BIS narrowed this rule to cover only items on the CCL (i.e., not EAR99) to be used in the development or production of only certain front-end production equipment and related items on the CCL. This revision aims to exclude equipment that would not further China’s indigenization of front-end chip production equipment that could support production of advanced chips.
Likewise, BIS narrowed end-use controls on items used in the production or development of chips destined to advanced chip-making facilities to items being used in front-end chip production.
Additionally, BIS significantly revised U.S. person controls that are designed to ensure that U.S. individuals and companies cannot provide support for Chinese advanced semiconductor manufacturing. The most significant revisions to U.S. person controls relate to new exclusions that substantially narrow the coverage for U.S. person activities. First, BIS excluded U.S. persons employed by or working on behalf of companies headquartered in the U.S. or allied countries that are not otherwise owned by companies headquartered in Macau or countries subject to U.S. arms embargoes. This is a significant departure from the October 7, 2022 rule and appears to be aimed at allaying industry concerns about difficulties for U.S. person employees of foreign companies. Second, BIS excluded U.S. persons servicing advanced semiconductor manufacturing equipment at facilities that do not produce advanced chips in order to avoid unduly restricting U.S. person involvement in production of legacy chips.
3. BIS offered guidance to clarify existing controls and facilitate industry compliance.
BIS offered guidance for industry on complying with these restrictions. Such guidance included adding to BIS’s list of “red flags” in its “Know Your Customer” guidance.7 Red flags are descriptions of abnormal factual scenarios that indicate a transaction may violate the EAR. The new red flags include descriptions of customer behavior that may indicate that a transaction is restricted as well as descriptions of products likely to be controlled as direct products of U.S.-origin technology under FDP rules.
In addition, BIS broadened the applicability of the model certification created under the October 7, 2022 rule, which BIS encouraged industry to use to confirm compliance with certain FDP rules, to apply for all FDP rules and clarified that the certification can be provided by any entity in the supply chain. BIS expects that these revisions will enhance awareness among entities in the supply chain regarding the applicability of FDP rules and facilitate compliance with such rules.
BIS also offered guidance regarding the standard to be applied in determining whether a person has sufficient knowledge for a transaction to be subject to end-use and U.S. person controls. Here, BIS explained that industry is expected to evaluate information available in the normal course of business to determine when additional due diligence is warranted.
Finally, BIS also revised controls on advanced computing items created under the October 7, 2022 rule to address compliance concerns voiced by industry. Revisions include adoption of more objective performance parameters for identifying controlled chips and reorganization of the CCL to help industry more easily identify controlled items and applicable license requirements.
4. BIS revised policies on licensing and exceptions to the updated controls.
As a result of expanded controls, BIS is implementing new license exceptions to further tailor the new restrictions. Specifically, BIS created a new license exception and notification requirement for newly restricted lower-performance chips and higher performance chips that are not designed or marketed for use in datacenters, destined to the expanded list of Restricted Countries.8 New License Exception Notified Advanced Computing authorizes certain exports, reexports, and transfers (in-country) of such chips.9 For items destined to Macau and countries subject to U.S. arms embargoes, BIS must be notified 25 days in advance to allow BIS to evaluate the export.
BIS also revised the Temporary General License (TGL) that was implemented under the October 7, 2022 rule, issuing two new licenses for advanced computing items and semiconductor manufacturing equipment. Effective through December 31, 2025, the TGLs waive license requirements for some exports, reexports, and transfers but do not overcome certain restrictions such as controls on indigenous production of certain semiconductor manufacturing equipment in Macau and countries subject to U.S. arms embargoes. BIS intends for the revised TGLs to minimize the impact of the new rules on supply chains, including by giving parties the opportunity to identify alternative sources of supply outside restricted countries or acquire individual licenses.
Finally, in parallel with these interim final rules, BIS also revised the Validated End User (VEU) list, which allows specified entities to receive approved items without obtaining individual licenses. In a final rule issued on October 17, 2023, BIS revised the VEU to authorize Samsung China Semiconductor Co. Ltd. and SK hynix Semiconductor (China) Ltd. to receive all items subject to the EAR except certain extreme ultraviolet equipment and items related to the development or production of NAND memory.10 The VEU program formalizes and replaces the individual authorization letters these companies received after implementation of the October 7 2022 rule.
5. BIS requested industry input to further refine controls.
As noted above, BIS is accepting comments on the new interim final rules until December 18, 2023. In addition to general feedback, BIS has identified specific topics on which it seeks industry input, including the following:
- Controls on deemed exports: BIS seeks comments on the potential industry impact of license requirements for deemed exports and reexports based on the new controls as well as comments on current practices related to the protection of U.S. technology and foreign person employees.
- Risks posed by IaaS solutions: BIS is evaluating how to address concerns that China can undermine the effectiveness of new controls by using infrastructure-as-a-service (IaaS) solutions that allow them to offload workloads to computers located outside of China, effectively bypassing the U.S. export controls on supercomputers. BIS has pointed to Know Your Customer requirements for IaaS providers as a potential solution and is soliciting feedback from IaaS providers, in particular, on the feasibility of complying with such requirements.
- Further refinement of controls on highly advanced chips: BIS seeks industry input to refine controls on chips so as to cover only those items used in training large-scale AI models while excluding chips not for use in data centers and that do not present the same national security concerns. BIS also seeks comments on possible technical solutions that would limit the use of certain controlled items in large-scale AI-training applications such that these items could be exempted from relevant controls in the future.
- Definition of key terms: BIS seeks industry input to define key terms under the new controls, including “supercomputer” and companies that are (or whose parents are) “headquartered in” either Macau or other country subject to a U.S. arms embargo.
In summary, the new rules make significant changes to the controls implemented under the October 7, 2022 rule, and companies should carefully consider how the expanded restrictions and new exclusions impact their operations. Our team is continuing to monitor developments related to the new rules and would be happy to answer your questions.
1 Implementation of Additional Export Controls: Certain Advanced Computing and Semiconductor Manufacturing Items; Supercomputer and Semiconductor End Use; Entity List Modification, 87 Fed. Reg. 62,186 (Oct. 13, 2022) (effective date Oct. 7, 2022).
2 Implementation of Additional Export Controls: Certain Advanced Computing Items; Supercomputer and Semiconductor End Use; Updates and Corrections, 88 Fed. Reg. 73458 (Oct. 25, 2023).
3 Export Controls on Semiconductor Manufacturing Items, 88 Fed. Reg. 73424 (Oct. 25, 2023).
4 The addition of Macau does not indicate a specific regulatory concern about Macau but rather an effort to cover China comprehensively. Just as Hong Kong is a Special Administrative Region (SAR) of China, so too is Macau. In response to 2020 modifications to national security laws affecting Hong Kong, BIS in effect folded Hong Kong into China for dual-use export control purposes.
5 Specifically, this includes countries listed in Country Groups D:1 (national security), D:4 (missile technology), and D:5 (U.S. arms embargoed countries) in Supplement No. 1 to Part 740 of the EAR. Countries appearing on these lists that are also listed in Country Groups A:5 and A:6 are excluded.
6 License applications to Country Groups D:1 and D:4 will be reviewed with a presumption of approval provided the item is not intended for an entity itself headquartered in or whose parent is headquartered in Macau or a country subject to a U.S. arms embargo (Country Group D:5). In such cases, the license will be reviewed under a presumption of denial.
7 BIS’s “Know Your Customer” Guidance is available here.
8 See supra note 2.
9 As noted above, this includes countries listed in Country Groups D:1 (national security) and D:4 (missile technology), in Supplement No. 1 to Part 740 of the EAR. Countries appearing on these lists that are also listed in Country Groups A:5 and A:6 are excluded.
10 Existing Validated End-User Authorizations in the People’s Republic of China: Samsung China Semiconductor Co. Ltd. and SK hynix Semiconductor (China) Ltd., 88 Fed. Reg. 71478 (Oct. 17, 2023).
This post is as of the posting date stated above. Sidley Austin LLP assumes no duty to update this post or post about any subsequent developments having a bearing on this post.