28 August 2020

BIS Issues Long-Awaited Notice on Controls on Foundational Technologies, Adds New Entities to Entity List

The U.S. Department of Commerce, Bureau of Industry and Security (BIS) published an advance notice of proposed rulemaking (ANPRM) soliciting comments to identify foundational technologies essential to U.S. national security by October 26, 2020 (the Foundational Technologies ANPRM). The ANPRM is only one step in a multiyear process through which the U.S. government transforms the regulations restricting the availability of U.S.-sourced technology in the global marketplace.

This long-awaited ANPRM launches an intra-agency review process required under Section 1758 of the Export Control Reform Act of 2018 (ECRA), which Congress passed in the National Defense Authorization Act for Fiscal Year 2019 (2019 NDAA). ECRA directed BIS to identify and establish controls on the export, reexport, or transfer (in country) of emerging and foundational technologies essential to the national security of the United States. On November 19, 2018, BIS issued an ANPRM on identification of emerging technologies (the Emerging Technologies ANPRM), indicating that a separate notice for foundational technologies was forthcoming.

Today’s Foundational Technologies ANPRM can be found here. Sidley’s prior updates on ECRA and the Emerging Technologies ANPRM can be found here.1 Here we summarize five key takeaways from today’s notice.

Key Takeaways

(1) No new controls have been implemented yet. The Foundational Technologies ANPRM does not impose any new export controls on specific items or provide a preliminary list of items that could be subject to future controls. With this ANPRM, BIS solicits public feedback on how to identify foundational technologies and establish appropriate controls under ECRA. BIS has provided 60 days for public comment on the Foundational Technologies ANPRM. At a minimum, any export controls on foundational technologies issued through this process will apply to countries such as China that are subject to a U.S. embargo, including an arms embargo. According to BIS, the process is anticipated to result in new control levels for items (including technology, commodities, and software) currently not sufficiently controlled under the Export Administration Regulations (EAR), that is, certain items controlled only for only for antiterrorism (AT), crime control (CC), or short supply (SS) reasons, subject to United Nations (UN) embargoes, or designated as EAR99. BIS also clarifies that it does not intend to expand jurisdiction over technologies not currently subject to the EAR (e.g., “fundamental research” under EAR § 734.8).

(2) The Foundational Technologies ANPRM differs in approach from the Emerging Technologies ANPRM. Unlike the Emerging Technologies ANPRM, in which BIS proposed a list of 14 “representative technology categories” for public comment, the Foundational Technologies ANPRM does not outline any categories of potential foundational technologies essential to U.S. national security. Instead, BIS is seeking industry assistance in identifying the kinds of technology that should be captured by additional controls, particularly examples of “any enabling technologies, including tooling, testing, and certification equipment, that should be included within the scope of a foundational technology.” This difference reflects the unique challenges inherent in the application of new controls to foundational technologies.

(3) Controls on foundational technologies will affect the scope of CFIUS jurisdiction. The Foreign Investment Risk Review Modernization Act (FIRRMA), also part of the 2019 NDAA, considers that items controlled as “emerging and foundational technologies” under ECRA constitute “critical technologies.” FIRRMA expanded the jurisdiction of the Committee on Foreign Investment in the United States (CFIUS) to review certain foreign investments in U.S. businesses involved in the production, design, testing, manufacturing, fabrication, or development of “critical technologies,” even when such investments do not give the foreign investor control over the U.S. business. In certain cases, CFIUS filings are mandatory for investments in such companies. Foreign investors should monitor any new controls on foundational technologies, as such controls may affect the scope of CFIUS jurisdiction and mandatory filing requirements.

(4) The Foundational Technologies ANPRM signals potential expansion of controls on items currently subject to military end-use and end-user restrictions. The Foundational Technologies ANPRM indicates that foundational technologies could include items already controlled for military end-use or to military end-users under Supplement No. 2 to EAR Part 744, which was significantly expanded on June 29, 2020. Though it is not clear whether the foundational technology review process will lead to broader technology-specific controls that would apply countrywide, BIS appears to be exploring how to implement “controls based on end-use and/or end-user rather than, or in addition to, technology based controls.” In the Foundational Technologies ANPRM, BIS signals that technologies that may be subject to such controls include those (i) tied to indigenous military innovation efforts in China, Russia, and Venezuela (such as semiconductor manufacturing equipment and associated software, tools, lasers, sensors, and underwater systems); (ii) used or required for innovation in developing chemical weapons, enabling foreign intelligence collection activities, or weapons of mass destruction applications; or (iii) subject to illicit procurement attempts for the purpose of furthering military or intelligence capabilities in countries of concern. While the expansion of current military end-use and end-user requirements into technology-based, countrywide licensing restrictions could substantially curtail current export flows, it would likely impose a less significant due diligence and compliance burden on exporters than the broader application of end-user and end-use controls.

(5) Any new controls resulting from this rulemaking process will not be imminent. Following the 60-day comment period, BIS will analyze industry feedback and is expected to ultimately issue one or more proposed rules, with further public comment periods before implementing any final rule imposing new controls on items defined as foundational technologies. This scoping process will likely be lengthier than the process for identifying emerging technologies (a likelihood underscored by the fact that this initial call for comments was released 21 months after the Emerging Technologies ANPRM). Whereas emerging technologies are considered to cover technologies that have not yet become fully marketable, foundational technologies are those that have achieved a higher level of maturity and are already in commerce, making new controls disruptive to existing supply chains. Moreover, the ongoing identification of emerging technologies over the last nearly two years suggests that the identification of foundational technologies may also be an iterative process, with items being designated foundational on a rolling basis in coordination with agreement from strategic allies, such as the group of developed economies participating in the Wassenaar Arrangement.

New Entity List Designations

On the same day that BIS issued the Foundational Technologies ANPRM, BIS added 60 entities to the Entity List. BIS has increasingly used the Entity List as a foreign policy tool against China, and the most recent additions include 24 entities that were added due to the U.S. government’s understanding of their role in helping the Chinese military build and militarize artificial islands in the South China Sea. BIS reported that since 2013, the Chinese Communist Party has dredged and constructed more than 3,000 acres across seven features in the South China Sea, which include air defense and antiship missile features.

BIS also made designations based on more traditional diversion concerns, designating entities in France, Hong Kong, Indonesia, Malaysia, Oman, Pakistan, Russia, Switzerland, and the United Arab Emirates for activities including shipping illegal exports to Iran, submitting false information to BIS, and participating in Russian biological weapons programs. BIS will require parties to obtain licenses for exports to all 60 companies for all items subject to the EAR and will not allow the use of more generally applicable license exceptions.

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