On October 17, 2023, the U.S. Department of Commerce’s Bureau of Industry and Security (BIS) issued new controls aimed at further slowing China’s development of advanced AI technologies. These new controls, published in two interim final rules and one final rule, finalize and expand the landmark controls issued in October 2022 on advanced computing integrated circuits (ICs) for supercomputer and semiconductor end use, and on semiconductor manufacturing equipment. The final rule also adds 13 entities involved in the development of advanced computing ICs located in China to the Entity List.
These new controls are the latest move in the escalating trade war between the U.S. and China over the development of advanced computing capabilities. The October 2022 controls banned Chinese companies from buying advanced chips and chip-making equipment without a license; our discussion of those export controls is available here. In the months after the unveiling of the October 2022 controls, Japan and the Netherlands also adopted similar rules restricting exports of semiconductor equipment to China.
The new measures have a clear objective: preventing the circumvention of the previously issued October 2022 controls and ensuring that all advanced computing ICs are covered by these controls. The update significantly expands the previous controls, extending beyond China and Macau to encompass dozens of countries, to disrupt any attempts to bypass these export controls by diverting shipments through intermediary nations. This broadened scope is intended to safeguard against potential loopholes and bolster the effectiveness of the export regulations.
Despite BIS efforts to reduce complexity and improve clarity, these expanded regulations can be difficult to interpret and, thus, difficult to comply with. The controls also come at a time of increased enforcement by BIS and an emphasis by many agencies, including BIS, on the importance of submitting a voluntary self-disclosure when national security-related violations are identified.
Our recommended next steps that companies can take to ensure that they are in compliance with these new controls can be found here.
Interim Rule 1: Additional export controls on advanced computing items, supercomputer, and semiconductor end use (effective November 17, 2023)
The first interim final rule implements new export controls on a broader scope of advanced computing chips and computers, and extends the countries to which the export, reexport, and transfer of these items are restricted. These expanded controls are intended to address concerns related to China’s efforts to “use advanced computing ICs and supercomputing capacity in the development and deployment of these AI models to further its goal of surpassing the military capabilities of the United States and its allies.”
The key changes include: (1) the expansion of the set of ICs controlled under ECCN 3A090, (2) the addition of countries subject to Regional Stability (RS) controls, (3) the clarification of the scope of controls by adding new ECCN subparagraphs, (4) the creation of new License Exception Notified Advanced Computing (NAC), and (5) changes to the Foreign Direct Product Rules (FDPRs), U.S. person controls, and end-use restrictions to include new RS-controlled designations.
1. BIS expands ICs covered under ECCN 3A090, and computers and other related items covered by ECCN 4A090, by including a new performance density parameter.
Through this new rule, BIS expands the universe of ICs controlled under ECCN 3A090, and thus, the computers and related equipment and components controlled under ECCN 4A090, by introducing a performance density parameter in order to prevent workarounds. The revised ECCN controls ICs with one or more digital processing units having either:
(1) a ‘total processing performance’ of 4800 or more, or (2) a ‘total processing performance’ of 1600 or more and a ‘performance density’ of 5.92 or more (3A090.a).
OR
(1) a ‘total processing performance’ of 2400 or more and less than 4800 and a ‘performance density’ of 1.6 or more and less than 5.92, or (2) a ‘total processing performance’ of 1600 or more and a ‘performance density’ of 3.2 or more and less than 5.92 (3A090.b).
The previous calculation method of bits x TOPS was replaced by ‘Total processing performance’ (TPP) which BIS states includes clear, objective criteria.
In an effort to mitigate the impact of this newly expanded definition, BIS excludes from ECCN 3A090 ICs that: (1) are not designed or marketed for use in datacenters, and (2) do not have a ‘total processing performance’ of 4800 or more (see Note 2). BIS also creates a new license exception NAC, discussed below, for items not designed or marketed for use in datacenters and that have a ‘total processing performance’ of 4800 or more. In Note 3, the rule also clarifies that anything exempt from ECCN 3A090 also is exempt from the newly added .z ECCNs meant to cover dual controls, also discussed in more detail below.
BIS also specifies that to be covered under ECCN 4A090, an item must be a general purpose computer. BIS further explains that, as examples, BIS does not classify network security appliances or DNA sequencing appliances in Category 4.
2. BIS adds additional destination controls for advanced ICs and associated software and technology.
The new rule significantly expands the countries that are subject to a license requirement for advanced ICs, related computers and equipment, and the associated software and technology, beyond China and Macau. The updated RS license requirements cover items going to or within destinations specified in Country Groups D:1, D:4, and D:5 of supplement no. 1 to part 740 of the EAR, excluding any destination also specified in Country Groups A:5 or A:6. The new controls were added to prevent firms from countries of concern securing controlled chips through their foreign subsidiaries and branches, and the list of countries includes countries such as the UAE, Oman, Pakistan, Saudi Arabia, Qatar, Jordan, Yemen, Egypt, and Armenia.
License applications will be subject to case-by-case review with a presumption of approval for license applications for destinations other than Macau and Country Group D:5 (which includes China), except for when the entity is headquartered in or whose ultimate parent company is headquartered in one of these destinations. License applications for items destined to Macau and Country Group D:5 will continue to be reviewed under a presumption of denial license review policy.
See this chart for a full list of destinations now requiring a license.
3. BIS clarifies dual controls by adding new ECCN subparagraphs.
In an effort to reduce the compliance burden on exporters, BIS adds new .z provisions to certain ECCNs to identify which other ECCNs might be subject to dual controls. In the October 2022 controls, BIS explained that items could both be controlled under ECCN 3A090 and another ECCN. Now, BIS focuses these dual controls by positively identifying those ECCNs in new .z paragraphs in ECCN 3A001, 4A003, 4A004, 4A005, 5A002, 5A004, 5A992, 5D002, and 5D992. All .z items require a destination control statement, and similar to ECCNs 3A090 and 4A090, these items are also subject to RS controls in addition to the other controls applicable to those items pursuant to the Commerce Control List (CCL).
4. BIS creates new license exception NAC and modifies license exception CCD.
In an effort to limit any unintended restrictions on the export, reexport, or transfer of ICs, the rule created a new license exception for Notified Advanced Computing (NAC). License Exception NAC covers consumer grade ICs with AI capabilities that meet the characteristics below:
When not designed or marketed for use in a data center: ICs meeting the performance characteristics listed in 3A090.a with (1) a ‘total processing performance’ of 4800 or more, or (2) a ‘total processing performance’ of 1600 or more and a ‘performance density’ of 5.92 or more.
OR
When designed or marketed for use in a data center: ICs meeting the performance characteristics listed in 3A090.b with (1) a ‘total processing performance’ of 2400 or more and less than 4800 and a ‘performance density’ of 1.6 or more and less than 5.92, or (2) a ‘total processing performance’ of 1600 or more and a ‘performance density’ of 3.2 or more and less than 5.92.
License Exception NAC permits the export, reexport, and transfer (in-country) of items described above whether classified in ECCN 3A090, 4A090, or any of the new .z subparagraphs.
The use of License Exception NAC requires:
- A Written Purchase Order (except in the case of commercial samples).
- Prior Notification: License Exception NAC also requires a notification via the BIS online application system, SNAP-R, for the export or reexport to destinations in Country Group D:5 or Macau. A notification is not required for in-country transfers. Once the notification is submitted via SNAP-R, BIS has 25 days to determine whether the transaction may proceed under the license exception or if it will instead require a license. BIS also encourages, but is not requiring, Commodity Classification requests for covered items. BIS believes that this notification will provide it and its interagency export controls partners with the opportunity to evaluate the national security risk posed by ICs that fall within this parameter. BIS intends to allow the submission of these notifications prior to the rule taking effect.
License Exception NAC cannot be used for certain prohibited end-uses or end-users, including military end-use and end-users.
The rule also introduces changes to License Exception Consumer Communication Devices (CCD), which permits the export of chips for consumer applications, to make clear that ECCNs 3A991.p and 4A994.l are eligible.
5. BIS further expands the Foreign Direct Product Rules and related controls on U.S. person activities and restricted end uses.
The rule revises the Foreign Direct Product Rules (FDPRs), including the Advanced Computing FDPR, to expand the scope of countries covered. The previous FDPR had subjected items to EAR control only when destined to China or Macau, but now the new controls include items that are destined to or for a Country Group D:1, D:4, or D:5 (except A:5 or A:6) country, and globally with respect to a product destined to or for any company headquartered, or whose ultimate parent company is headquartered, in any Country Group D:5 destination or Macau.
The rule incorporates guidance provided by BIS in a previously issued FAQ to confirm that the definition of “major component” includes testing equipment. BIS also makes some minor changes to ensure that language was consistent throughout this paragraph. The rule also clarifies that the model certificate included in this section, which is intended to assist exporters in analyzing whether an item is subject to the EAR for future transactions, may be used for any of the FDP rules, which is key given the increased focus on red flags and due diligence.
BIS makes similar destination-related changes to the controls on U.S. person activities and end-use controls concerning supercomputers and advanced computing items. BIS clarifies that these controls anticipate that U.S. persons conduct due diligence which includes but is not limited to the review of publicly available information, capability of items to be provided, proprietary market data, and end-use statements.
BIS also clarifies that the U.S. person controls do not extend to “U.S. persons” conducting administrative or clerical activities (e.g., arranging for shipment or preparing financial documents) or otherwise implementing a decision to approve a restricted shipment, transmittal, or in-country transfer, or to activities of “U.S. persons” that are not directly related to the provision or servicing of specific items to the “development” or “production” of “advanced node integrated circuits.”
6. BIS identifies new red flags to help foundries identify restricted chip designs from countries of concern.
BIS identifies a number of red flags for exporters, reexporters, and transferors, listing out scenarios in which additional due diligence is required, including for recognizing “direct products” under the FDP rules, to assess whether foreign parties are attempting to circumvent the regulations. The red flags are:
- A customer’s website or other marketing materials indicate that the company had advertised or otherwise indicated its capability for “developing” or “producing” “advanced-node integrated circuits.”
- The customer makes representations that the items in question are not intended for use in the “development” or “production” of “advanced-node integrated circuits,” but the items that are being requested to be exported, reexported, or transferred (in-country) to this customer are typically exclusively or predominantly used for the production of “advanced-node integrated circuits.”
- The customer is “known” to “develop” or “produce” items for companies located in Macau or a destination specified in Country Group D:5 that are involved with supercomputers.
- The exporter has “knowledge” indicating this customer intends to “develop” or “produce” “supercomputers” or restricted ICs in the future.
- The exporter has “knowledge” that it is or seeks to be producing at a facility where “production” of “advanced node ICs” occur, for a company headquartered in either Macau or a destination specified in Country Group D:5, an integrated circuit, or a computer, “electronic assembly,” or “component” that incorporate (A) more than 50 billion transistors and (B) high-bandwidth memory (HBM).
7. BIS adds new Temporary General License (TGL).
The rule establishes a new TGL authorizing parties to continue or engage in integration, assembly (mounting), inspection, testing, quality assurance, and distribution of certain advanced computing items when the ultimate end use of such items (1) is outside of the expanded destinations now subject to license requirements and (2) by entities not headquartered, or whose ultimate parent is not headquartered, in those destinations. The TGL is valid through December 31, 2025.
Interim Rule 2: Export controls on semiconductor manufacturing equipment (effective November 17, 2023)
The second interim final rule amends the EAR to expand and more effectively implement the semiconductor manufacturing controls published last October. The rules acknowledge that the “advanced computing integrated circuits (ICs), semiconductor manufacturing equipment (SME) essential to producing advanced-node ICs, and items used to further supercomputing capacity… have profound implications for the future of international security.” The new regulations state that China’s advancements “will result in future challenges to the United States’ and partners’ militaries as China pushes towards its goal of fielding a military by 2027 designed to deter U.S. intervention in a future cross-Strait crisis.”
The key changes are:
1. BIS expands controls on Semiconductor Manufacturing Equipment (SME) and restructures Category 3B to remove ECCN 3B090 and reclassify those items to ECCNs 3B001 or 3B002.
BIS adds new types of SME to ECCNs 3B001 and 3B002 in the CCL that BIS believes are key to the production of “advanced-node integrated circuits.”1 The United States has unilaterally imposed controls on these new items, as they are not currently approved under the Wassenaar Arrangement.
ECCNs 3B001 and 3B002 also have been expanded to include the former ECCN 3B090, an ECCN added last October, which controlled certain semiconductor manufacturing deposition equipment and specially designed parts, components, and accessories for such equipment that were destined for China. Conforming changes have been made to the associated software and technology ECCNs, 3D001, 3D002, 3D003, and 3E001. Current licenses for items previously classified under ECCN 3B090 and related software and technology are still valid until expiration.
2. BIS expands the license requirement for semiconductor manufacturing equipment to an additional twenty-two other countries but issues a Temporary General License for producers located in some countries.
Items controlled under certain subparagraphs of ECCNs 3B001, 3B002, 3D001, 3D002, 3E001 will require licenses for export to Macau and all countries specified in Country Group D:5, including China.2 Previously, the licensing requirements for some of these entries, including those originally classified under ECCN 3B090, only applied to shipments to China and Macau. License applications for exports to Macau and Country Group D:5 countries, including China, will be subject to a presumption of denial, except: (1) if the exporter can demonstrate that there is a foreign-made item not subject to the EAR that performs the same function; or (2) the end-user is headquartered in the United States or a Country in Country Group A:5 or A:6 that is not majority-owned by an entity in Macau or Country Group D:5. Such licenses will be reviewed with a presumption of approval.
In order to allow semiconductor manufacturing equipment producers in the United States and in Country Groups A:5 and A:63 to locate alternative sources of supply for the items affected by these changes to the Category 3 ECCNs, the rule adds a new Temporary General License, valid through December 31, 2025.
3. BIS refines restrictions on “U.S. persons” to ensure that U.S companies cannot provide support to advanced semiconductor manufacturing in China.
Like the other rules that address advanced computing items, supercomputer, and semiconductor end use, this rule also places additional restrictions on U.S. person activities. Many of the changes in this section are intended to clean up the restriction rather than make substantive changes.
In order to ease the compliance burden and any disincentive to employ U.S. persons for governments of friendly countries that maintain or may establish appropriate controls, the U.S. person controls include an exclusion for 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.
4. BIS provides further guidance on the definition of covered facilities.
The new rule also more clearly defines the types of facilities subject to both end-use and U.S. person controls. The regulations now leverage existing definitions of production and facilities. A facility is defined as “a building or outdoor area in which people use an item that is built, installed, produced, or developed for a particular purpose.” Production includes “all production stages, such as: product engineering, manufacture, integration, assembly (mounting), inspection, testing, quality assurance.”
Under this new definition BIS emphasizes that the end-use and U.S. person restrictions apply to facilities that may maintain multiple production lines with varying levels of production technology nodes. Additionally, BIS clarifies that all stages of “production” including late-stage engineering and testing are similarly covered in the restrictions. However, BIS does specify that the term “production” does not include “back-end” production, such as assembly, test, or packaging that do not alter the integrated circuit technology level from the SME controls. Thus, manufacturers can provide items that do not impact the key characteristics of the controlled products to these back-end production facilities.
BIS also states that it would attempt to add entities meeting these criteria to the Entity List as they were identified.
5. De minimis level adjusted to 0% for certain lithography equipment.
The new regulations eliminate the ability to use the standard 25% de minimis threshold for lithography equipment (1) classified under ECCN 3B001.f.1.b.2.b4, and (2) that is destined for use in the development or production of certain “advanced node integrated circuits.” For items caught by this ECCN and end-use, any U.S.-controlled content in the equipment will automatically subject the item to control under the EAR. BIS will permit the normal de minimis level to remain when the country from which the item will be exported has an export control in place that mirrors the controls in the United States, such as Japan.
6. Emphasis on due diligence.
As under the first rule, BIS emphasizes that exporters cannot self-blind to avoid any of these license requirements. Exporters must evaluate all of the information that it obtains during the normal course of business to determine if it has “knowledge” that the item is ultimately destined for use in a prohibited activity.
Final Rule: Entity List Additions
Over the last few years, BIS has added hundreds of Chinese companies to the Entity List in an effort to restrict exports of items, technology, and software to these end-users. The Entity List consists of foreign end-users viewed by BIS to be engaged in activities contrary to U.S. national security and/or foreign policy interests, or otherwise pose an unacceptable risk of diverting U.S. exports and related technology to alternate destinations. Accordingly, exports, reexports, or transfers of any item subject to the EAR, including foreign-produced items subject under the de minis rule or FDPRs, destined to those entities require a license.
In this final rule, BIS identifies two companies and their subsidiaries, for a total of 13 entities, which are “involved in the development of advanced computing integrated circuits” that “can be used to … further development of weapons of mass destruction, advanced weapons systems, and high-tech surveillance applications that create national security concerns.” In view of BIS, these entities are added to the Entity list because their activities are related to the controls in the two interim rules published above.
Conclusion: What Steps Should I Take?
As noted above, the effective dates for the two interim final rules described above is November 17, 2023, 30 days from the date of publication in the Federal Register. The final rule adding the thirteen entities to the Entity List is effective as of October 17, 2023.
In light of these updated export regulations, it is imperative to be proactive and well-prepared for their forthcoming implementation. To ensure compliance, we advise the following next steps:
- Confirm classifications: Determine whether the new or revised ECCNs capture any of your Company’s items or technology. Pay particular attention to the new “performance density” threshold and semiconductor manufacturing equipment classifications included, for example, in ECCN 3B001 and 3B002.
- End-user locations: In addition to customers located in China, check for customers headquartered or located in countries outlined in the revised RS list (Country Groups D:1, D:4, D:5 that are not also listed in Country Group A:5 and A:6) for non-SME items and Macau and D:5 countries for SME items.
- Review License Exceptions: Determine whether a license exception applies or an export license is needed for your shipment. Consult with the Wilson Sonsini team to confirm.
- General Due Diligence: Review publicly available information, assess new red flags, and obtain end-use statements where recommended to ensure compliance with the evolving regulatory landscape.
For more information or any questions on these changes, please contact any member of the export control and sanctions practice at Wilson Sonsini Goodrich & Rosati.
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Expanded List of Countries Controlled for Regional Stability (RS) |
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[1]“Advanced-node integrated circuits” is a newly defined term and includes logic ICs with non-planar transistor architecture or with a production technology note of 16/14 nanometers or less, NOT and (NAND) memory integrated circuits with 128 layers or more; or DRAM integrated circuits using a production technology node of 18 nanometer half-pitch or less.
[2]For a list of the new countries, see Country Group D:5.
[3]See Country Groups A:5 and A:6.
[4]This covers “Align and expose step and repeat (direct step on wafer) or step and scan (scanner) equipment for wafer processing using photo-optical or X-ray methods and having a maximum ‘dedicated chuck overlay’ value great that 1.50 nm but less than or equal to 2.4 nm.
