Higher Fences and an Increasingly Bigger Yard: Commerce Department Aims to Restrain Chinese Military Modernization by Tightening US Export Controls on Advanced AI Chips and Additional Semiconductor Manufacturing Items
On October 17, the U.S. Department of Commerce’s Bureau of Industry and Security (BIS) issued new rules amending its controls under the Export Administration Regulations (EAR) on advanced computing and semiconductor manufacturing items destined to countries of concern, including China. The new restrictions come roughly a year after BIS issued two rules on October 7, 2022 to counter China’s acquisition of certain semiconductor and supercomputer items that could be used to further its military modernization efforts (October 7 Rules). Notably, the restrictions now extend to additional types of chip manufacturing equipment and chips with fewer capabilities than those previously subject to BIS’ rules and apply to a broader range of countries.
Building upon the comments received after the October 7 Rules, BIS has updated its controls on semiconductor manufacturing equipment (SME), subjecting such equipment to a higher level of control, as well as clarifying certain available license exemptions and prohibited activities by U.S. persons. These actions were deemed necessary “to maintain the effectiveness of [such] controls, close loopholes, and ensure [controls] remain durable.” In addition, the new rules focus on advanced computing integrated circuits (IC), as well as artificial intelligence (AI), broadening the scope of such controls and creating a new License Exception. The addition of 13 new entities to the Entity List for their IC and AI capabilities further underscore BIS priorities.
The two interim rules are titled “Implementation of Additional Export Controls: Certain Advanced Computing Items; Supercomputer and Semiconductor End Use; Updates and Corrections” and “Export Controls on Semiconductor Manufacturing Items.”
- Performance Density Standard and the “Grey Zone”: BIS adopts performance density, as opposed to interconnect speed, as the new regulatory parameter. Chips that do not exceed the new performance density threshold but “contravene the original intention of the rule” may fall into a “gray zone,” require prior notification, and become subject to future licensing restrictions.
- Crackdown on Circumvention: BIS targets China’s use of transshipment points or firms to circumvent rules, effectively expanding licensing requirements to 43 countries, the D:1, D:4, and D:5 country designations.
- New Restrictions on Semiconductor Manufacturing Equipment (SME): BIS adds equipment used for fabricating certain chips under a 16-nanometer threshold in an apparent attempt to achieve parity with recent Japanese and Dutch restrictions. BIS also updates controls on U.S. persons, end uses and facilities, stating that the controls are “calibrated to address the national security concerns . . . without unduly undermining the ability of U.S. persons to work for companies headquartered in the United States and closely allied countries.”
- Additional Flexibility for Domestic and U.S.-Allied Semiconductor Suppliers: BIS adds new presumption of approval review policies for advanced semiconductor licenses for products subject to foreign competition, as well as two new Temporary General Licenses (TGLs) for SME and Advance Computing activities undertaken on behalf of companies headquartered in less sensitive locations.
- Expansion of the Entity List: BIS adds 13 entities involved in the development of artificial intelligence. The rules also restrict foundries, wherever located, from sending chips to listed parties.
Below, we explain these rule revisions, including the items that are subject to heightened controls (e.g., ECCNs with enhanced performance parameters meeting or exceeding those in ECCN 3A090 and 4A090); new license exceptions and changes to those which already exist; expansion and changes to end-use controls, country scope for SME and supercomputer-related controls, and the advanced computed Foreign Direct Product Rule (FDPR); additional “U.S. Person” activities restrictions; changes to license review standards; and new TGLs. Finally, we describe the additions to the Entity List.
1. Additional Items Now Subject To Heightened Control
- Revisions to Export Control Classification Number (ECCN) 3A090 and 3A991.p: BIS revised the control parameters for ECCN 3A090 to expand its scope to adequately capture items useful for training advanced AI for potential military applications.
- 3A090.a now covers control parameter with control integrated circuits (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.b now covers ICs with one or more digital processing units having either: (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.
BIS specifically excluded from ECCN 3A090 ICs that are not designed or marketed for use in datacenters and do not have a “total processing performance” of 4800 or more. However, such ICs may still require a license under another ECCN. Conforming changes were also made to 3A991.p.
- Removal of ECCN 3B090 and Revisions to 3B001 and 3B002: BIS removed ECCN 3B090 and moved SME previously controlled under this ECCN to ECCN 3B001. ECCN 3B002’s heading was revised to add “inspection” to reflect the addition of inspection equipment to this ECCN. Other additions and revisions include the following:
- 3B001.a.4 (equipment designed for silicon, carbon doped silicon, silicon germanium (SiGe), or carbon doped SiGe epitaxial growth)
- 3B001.c (certain equipment designed for dry etching and certain equipment designed for wet chemical processing)
- 3B001.d (certain semiconductor wafer fabrication deposition equipment)
- 3B001.f.1.b (equipment with a light source wavelength equal to or longer than 193 nm meeting certain parameters)
- 3B001.k (equipment designed for ion beam deposition or physical vapor deposition of multi-layer reflector for Extreme Ultraviolet (EUV) masks)
- 3B001.l (equipment designed for coating, depositing, baking, or developing photoresist formulated for EUV lithography)
- 3B001.m (equipment for manufacturing EUV pellicles)
- 3B001.n (equipment designed for coating, depositing, baking, or developing photoresist formulated for EUV lithography)
- 3B001.o (semiconductor wafer fabrication annealing equipment with specified parameters)
- 3B001.p (three types of semiconductor wafer fabrication cleaning and removal equipment)
- 3B002.c (added to establish control of inspection equipment designed for EUV mask blanks or EUV patterned masks)
BIS undertook such revisions because it determined controls on SME should be aligned with similar equipment already specified under other ECCNs. Such an action is intended to assist the industry as well as the U.S. government in further compliance and enforcement measures.
- No De Minimis Level for 3B001.f.1.b.2.b Items: BIS also amended 15 C.F.R. § 734.4 to specify there is no de minimis level for lithography equipment described in ECCN 3B001.f.1.b.2.b if for the “development” or “production” of “advanced-node integrated circuits.” This means if U.S.-origin content controlled under this ECCN is incorporated into a foreign-made item, BIS will retain jurisdiction over the foreign-produced item and it may be subject to applicable licensing requirements. However, BIS did limit the reach of this licensing requirement if the country from which the foreign-made item will be exported or reexported maintains an equivalent control on such equipment.
The newly listed items within 3B001 and 3B002 (and the former 3B002.c redesignated as 3B002.b) are controlled for Regional Stability (RS) reasons if destined to Macau and other destinations identified as subject to a U.S. arms embargo (including China) (i.e., countries listed in Country Group D:5), as well as National Security (NS) and Anti-Terrorism (AT) reasons. ECCNs 3D001, 3D002, and 3E001 were also revised to impose similar NS and RS controls. Pre-existing subparagraphs of ECCN 3B001 remain controlled for NS:2 and AT reasons. In addition, BIS revised the available license exceptions under these ECCN subparagraphs to limit the eligibility of License Exception Shipments of Limited Value (LVS). Only license exceptions found in 15 C.F.R. § 740.2(a)(9) may be used.
Licenses for equipment previously classified as 3B090 will remain valid until they expire, are revoked, or are suspended.
2. Nine ECCNs Identified Where Performance Parameters Meet or Exceed Those in ECCN 3A090 and 4A090
BIS identified a list of nine additional ECCNs that have performance characteristics or functions that meet or exceed the performance parameters of ECCNs 3A090 or 4A090 and added new “item” level paragraphs to those ECCNs. This revision came after several public comments argued BIS’ previous catch-all provision deviated from the Commerce Control List (CCL)’s common structure and would have led to unnecessary confusion regarding the appropriate classification and control on such items.
First, BIS revised ECCNs 3A001, 4A003, 4A004, 4A005, 5A002, 5A004, 5A992, 5D002, and 5D992 to address overlapping controls and added a .z paragraph to each of the nine ECCNs designed to control items that meet the technical descriptions of a given ECCN but also meet or exceed the performance parameters in 3A090 or 4A090. These new .z paragraph items are subject to RS controls.
Second, BIS amended the export clearance-related requirements for .z paragraph items. Shipments of .z items to China, regardless of dollar value, require an Electronic Export Information (EEI) filing, and exporters must identify such items in their EEI filings.
3. Introduction of New License Exception and Changes To Certain License Exception Eligibility
BIS also issued a new license exception called “License Exception Notified Advanced Computing” (NAC) which authorizes eligible items to any destination specified in Country Groups D:1, D:4, or D:5, subject to certain requirements and restrictions such as prohibited end users and end uses.
Any export or reexport (but not in-country transfers) authorized under License Exception NAC must be made pursuant to a written purchase order, except for commercial samples which are not subject to this purchase order requirement. For exports or reexports to Macau or a destination specified in Country Group D:5, BIS must be notified upon which the U.S. government will have 25 days to determine whether the license exception may be used or if a specific license must be obtained.
BIS also acknowledged the inadvertent exclusion of License Exception Temporary Imports, Exports, Reexports, and Transfers (in-country) (TMP) when implementing the October 7 Rules. Therefore, BIS amended 15 C.F.R. § 740.2 to include License Exception TMP so that eligible companies can temporarily send foreign produced advanced computing items for inspection, test, calibration, or repair purposes to Macau or destinations specified in Country Group D:5.
4. Expansion of and Changes to End-Use Controls
BIS imposed an end-use control that applies to any “technology” subject to the EAR and specified in ECCN 3E001 (for 3A090) “technology” when the technology meets all of the following:
- The technology is developed by an entity headquartered in or whose ultimate parent company is headquartered in Macau or a destination specified in Country Group D:5
- The technology is subject to the EAR pursuant to the FDPR in §§ 734.9(h)(1)(i)(B)(1) and (h)(2)(ii) of the EAR
- The technology is for the reexport or transfer (in-country) from or within Macau or a destination specified in Country Group D:5 to any destination worldwide
- The technology is for the “production” of commodities or software specified in ECCN 3A001.z, 3A090, 4A003.z, 4A004.z, 4A005.z, 4A090, 5A002.z, 5A004.z, or 5A992.z
These expansions were adopted by BIS “to capture PRC operations outside of China in light of ongoing national security concerns related to diversion and misuse of items subject to the EAR.”
BIS also revised restrictions applicable to SME-related end use controls. The restrictions were narrowed for items subject to the EAR and specified on the CCL and front-end IC production equipment and other items specified in 3B ECCNs. Masks and other items specified in ECCNs 3B001.g, 3B001.h, 3B001.j, and 3B991.b.2 were excluded, and BIS also made conforming changes in light of ECCN redesignations. In addition, BIS added an exclusion for “back-end” production steps, such as assembly, test, or packaging steps, that do not alter the technology level of an IC consistent with its guidance provided in a Frequently Asked Question (FAQ).
5. Country Scope Expansions for SME and Computing Use Controls
BIS also revised restrictions applicable to SME and supercomputer controls by expanding the country scope to cover not only Macau and China, but also other Country Group D:5 countries, as well as making conforming changes in light of ECCN redesignations.
Certain changes to license exception eligibility and license requirement exclusions were also made:
- BIS added an exclusion for natural “U.S. persons” employed or working on behalf of a company headquartered in the U.S. or a destination specified in Country Group A:5 or A:6 that is not majority-owned by an entity headquartered in Macau or a destination specified in Country Group D:5.
- The rule excludes servicing of items in a facility that does not produce “advanced-node integrated circuits” to avoid restricting servicing (including installation) at legacy-node facilities.
- BIS added an exclusion for “back-end” production steps that do not alter the technology level of an integrated circuit, consistent with a prior FAQ.
For advanced computing-related restrictions, BIS expands the country scope even further to include Country Groups D:1, D:4, and D:5. Under this new rule, a license will be required for items subject to the EAR and specified in ECCN 3A001.z, 3A090, 4A003.z, 4A004.z, 4A005.z, 4A090, 5A002.z, 5A004.z, 5A992.z, 5D002.z, or 5D992.z. if exported, reexported, transferred (in-country) to or within any destination not specified in Country Groups D:1, D:4, or D:5, excluding any destination also specified in Country Groups A:5 or A:6, when the exporter, reexporter, or transferor has “knowledge” at the time of the export, reexport, or transfer (in-country) that the item is destined for any entity that is headquartered in, or whose ultimate parent company is headquartered in, either Macau or a destination specified in Country Group D:5.
BIS drafted this additional end-use control to ensure Macau, China, and other Country Group D:5 entities are not able to set up cloud or data servers in other countries to circumvent the rules.
6. Broadening the Country Scope of Advanced Computed FDPR
BIS also broadened the country scope of the advanced computing FDPR to include any “destination specified in Country Groups D:1, D:4, or D:5, excluding any destination also specified in Country Groups A:5 or A:6.” In the rule, BIS clarified the requirements apply when any of the companies headquartered in or whose ultimate parent company is headquartered in these jurisdictions are a party to the transaction involving the foreign-produced item. The interim rules also specify that the model certificates BIS had provided for the advanced computing FDP rule may be used for other FDP rules as well.
7. “U.S. Person” Activities Restrictions
BIS consolidated Section 744.6(c) and clarified that “knowledge” of a violation is required to trigger the license requirements. BIS also revised restrictions regarding semiconductor “development” and “production” activity to clarify the types of end users captured by the controls. First, BIS replaced the phrase “that fabricates” with “where ‘production’ … occurs” to leverage the existing defined term “production.” Second, BIS removed the qualifying phrase “semiconductor fabrication” in front of “facility.” These modifications keep the focus on facilities (i.e., buildings) at locations that may have multiple production lines with different production technology nodes but cover instances where production may occur beyond a fabrication facility.
8. Changes to License Review Standards
BIS revised license review standards, clarifying what presumptions will be given to the new rules. BIS adopted a license review standard of presumption of approval when 3A090, 4A090, and related items (including .z items) are destined to destinations not specified in Country Group D:5 (except Macau), unless the export, reexport, or transfer (in-country) is to an entity headquartered in, or whose ultimate parent company is headquartered in, either Macau or a destination specified in Country Group D:5.
For end-use controls under § 744.23, BIS revised the license review standards for license applications intended for Macau or other destinations specified in Country Group D:5. Such applications will be reviewed under a presumption of denial. BIS will review an application with a presumption of approval (1) if there is a foreign-made item available that is not subject to the EAR and has the same function as the item subject to the EAR or (2) it is for end users headquartered in the U.S. or a destination in Country Group A:5 or A:6 that are not majority-owned by an entity headquartered in either Macau or a destination specified in Country Group D:5.
BIS also amended its license review policy in Section 744.6(c) of the EAR to indicate it will review applications with a presumption of denial when they include destinations in Macau and destinations in Country Group D:5, except when there is a foreign-made item available that is not subject to the EAR and has the same function as an item subject to the EAR, which will be reviewed with a presumption of approval. Other license applications will be reviewed on a case-by-case basis.
9. New TGLs
BIS provided the following two new TGLs, effective October 17, 2023 through December 31, 2025.
TGL for SME: The rule removes the TGL provided under the October 7 Rules and adds a new TGL for companies headquartered in the U.S. or a destination specified in Country Group A:5 or A:6. Under the new TGL, items controlled for AT-reasons only may be sent to recipients “developing” or “producing” parts, components, or equipment of certain Category 3B ECCNs if it is not at the direction of an entity that is headquartered in either Macau or a destination specified in Country Group D:5.
The purpose of this TGL is to allow “SME producers in the United States and Country Groups A:5 and A:6 countries additional time to identify alternative sources of supply outside of arms-embargoed countries, or to acquire individually validated licenses.” The TGL does not overcome the licensing requirements of Sections 744.11 or 744.21 when an entity listed in Supplements No. 4 or 7 to Part 744 is a party to a transaction or if there is knowledge of any other prohibited end user or end use. The new TGL cannot be used for the indigenous “development” or “production” of Category 3B tools in either Macau or a destination specified in Country Group D:5, i.e., where the “part,” “component,” or “equipment” is “developed” or “produced” at the direction of an entity that is headquartered in either Macau or a destination specified in Country Group D:5. All exports, reexports, or in-country transfers and exports from abroad shipped under the TGL are subject to recordkeeping requirements.
TGL for Advanced Computing Items: BIS also provided a new TGL for advanced computing items. To rely on such items, the recipient must be located in, but not headquartered in or whose ultimate parent company is not headquartered in, a destination specified in Country Groups D:1, D:4, or D:5 that is not also specified in Country Groups A:5 or A:6. The end-use scope authorizes eligible entities to continue or engage in integration, assembly (mounting), inspection, testing, quality assurance, and distribution of items covered by items specified above, provided the items are for ultimate end use (1) outside of destinations specified in Country Groups D:1, D:4, or D:5, excluding destinations also specified in Country Groups A:5 or A:6 and (2) by entities that are not headquartered in, or whose ultimate parent company is not headquartered in, Macau or Country Group D:5. Items eligible are those subject to the EAR that are specified in the following ECCNs:
- 3A001.z; 3A090; 3D001 (for “software” for commodities controlled by 3A001.z, 3A090)
- 3E001 (for “technology” for commodities controlled by 3A001.z, 3A090)
- 4A003.z; 4A004.z; 4A005.z; 4A090; 4D001 (for “software” for commodities controlled by 4A003.z, 4A004.z, and 4A005.z)
- 4D090; 4E001 (for “technology” for commodities controlled by 4A003.z, 4A004.z, 4A005.z, 4A090 or “software” specified by 4D001 (for 4A003.z, 4A004.z, and 4A005.z), 4D090)
- 5A002.z; 5A004.z; 5A992.z; 5D002.z; 5D992.z; 5E002 (for “technology” for commodities controlled by 5A002.z or 5A004.z or “software” specified by 5D002 (for 5A002.z or 5A004.z commodities))
- 5E992 (for “technology” for commodities controlled by 5A992.z or “software” controlled by 5D992.z)
New Entity List Designations
In parallel to the new rules, BIS also added 13 entities to the Entity List because their activities with advanced computing ICs could be used to provide AI capabilities to further develop weapons of mass destruction, advanced weapons systems, and high-tech surveillance applications, which pose serious national security concerns and run contrary to U.S. foreign policy.
The thirteen entities are:
- Beijing Biren Technology Development Co. Ltd.
- Guangzhou Biren Integrated Circuit Co. Ltd.
- Hangzhou Biren Technology Development Co. Ltd.
- Light Cloud (Hangzhou) Technology Co. Ltd.
- Moore Thread Intelligent Technology (Beijing) Co. Ltd.
- Moore Thread Intelligent Technology (Chengdu) Co. Ltd.
- Moore Thread Intelligent Technology (Shanghai) Co. Ltd.
- Shanghai Biren Information Technology Co. Ltd.
- Shanghai Biren Integrated Circuit Co. Ltd.
- Shanghai Biren Intelligent Technology Co. Ltd.
- Superburning Semiconductor (Nanjing) Co. Ltd.
- Suzhou Xinyan Holdings Co. Ltd.
- Zhuhai Biren Integrated Circuit Co. Ltd.
All items subject to the EAR require a license to be exported, reexported, or transferred (in-country) to a designated entity. This includes foreign-produced items subject to the EAR pursuant to § 734.9(e)(2), Entity List FDPR: Footnote 4, because BIS added a footnote 4 designation to each of the 13 entities. All licenses related to these entities will be reviewed under a presumption of denial. However, there is a limited “savings clause” available for all shipments of items removed from eligibility which were en route aboard a carrier to a port of export, reexport, or transfer (in-country) of items on October 17. Those shipments may proceed without a license as long as they occur prior to November 16.
The new rules also give insight into areas of future concern for BIS. In particular, BIS requested public comments on the possible circumvention of existing controls via the cloud or remote access and deemed exports and reexports. This suggests BIS may seek to limit or control such activity in the future.
These new restrictions will not be effective for 30 days, or until November 16. This does not include the Entity List restrictions, as described above, and the TGLs, which are effective immediately. Companies in the related sectors should carefully review the implications of these new controls for their business. In addition, interested parties may wish to consider submitting comments during the 60-day comment period.
© Arnold & Porter Kaye Scholer LLP 2023 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.