Commerce Commences Rulemaking for New Export Restrictions Rules for Foundational Technologies: Both Export Controls and CFIUS May Be Affected
Since 2018, the US Department of Commerce, Bureau of Industry and Security (BIS) has been required to identify and establish a system of controls for the export, reexport or in country transfer of "emerging" and "foundational" technologies under the Export Control Reform Act of 2018 (ECRA).1 Almost two years ago, BIS solicited comments on "emerging" technologies,2 but has yet to implement controls under this authority. While that effort is still ongoing, BIS last week published an advance notice of proposed rulemaking (ANPRM) to seek comments on the criteria for identifying "foundational" technologies that should or should not be subject to new export licensing requirements and controls under the Export Administration Regulations (EAR).3
The ANPRM could have a significant impact on US businesses. Unlike traditional export controls under the EAR, which generally flow from the specific capabilities and performance levels of particular hardware, software, technology, and equipment, controlling "foundational" technologies could result in wider array of controls over the technologies used to make the technologies that are currently subject to controls or that may be in the future. In other words, a control on a "foundational" technology (at the bottom of a particular current or future production or development pyramid) could cast a much wider shadow. Moreover, certain investments involving foundational technologies will also become subject to increased oversight by the Committee on Foreign Investment in the United States (CFIUS), as discussed below. Therefore, the outcome of what "foundational" technologies are ultimately controlled could result in a significant new alignment on how export controls and regulation of foreign investment impact cross-border trade and technology transfer. At the same time, since BIS received its congressional mandate to control both emerging and foundational technologies two years ago, and has yet to take any concrete action regarding "emerging" technologies despite asking for comments not long after ECRA passed, there may be a further pause before the contours of these new controls are clear.
Interested parties must submit comments on or before October 26, 2020. This provides only a short window of time to help inform BIS's process to develop controls that enhance national security without hampering the ability of the US commercial sector to keep pace with international advances in emerging fields. Of course, interested parties will also have to grapple with the strategic decision of whether to file comments at all—if they are concerned about new controls rather than in favor of them—because any comment about why a particular technology should "not" be controlled could have the effect of injecting those very technologies into the rulemaking process.
As part of the National Defense Authorization Act for Fiscal Year 2019 (NDAA), Public Law No. 115-232, the US government enacted the ECRA on August 13, 2018. The ECRA authorizes BIS to establish appropriate controls, including interim controls, on the export, re-export or in-country transfer of "foundational technologies," which the ECRA describes as technologies that are essential to US national security but are not currently export-controlled. Pursuant to the ECRA, the designation of foundational technologies will be determined by an interagency body that will consider both public and classified information as well as information from CFIUS and the US Department of Commerce's Emerging Technology Technical Advisory Committee (ETTAC). This process is anticipated to result in regulations for new Export Control Classification Numbers (ECCNs) on the Commerce Control List (CCL).
The ANPRM is the first step toward BIS adopting rules designating which technologies are subjected to additional US export controls as "foundational" to US national security. Under the ECRA, foundational technologies could cover a broad range of areas, including those that are essential to US innovation, particularly in the areas of science, technology, engineering, and manufacturing. The ANPRM builds on this definition to include any technology that "may warrant stricter controls if a present or potential application or capability of that technology poses a national security threat to the United States." The term foundational technology includes not only "technology" but also "commodities" and "software" as defined in the EAR.
The ANPRM suggests that foundational technologies may include items currently controlled for military end use or military end user reasons, such as semiconductor manufacturing equipment and associated software tools, lasers, sensors, and underwater systems. Additionally, foundational technology may also cover items utilized or required for developing conventional weapons, enabling foreign intelligence collection activities, or supporting weapons of mass destruction. Further, foundational technologies could also include items that have been the subject of "illicit procurement" attempts which may demonstrate foreign dependency on US technologies for activities that threaten US national security.
Pursuant to the ANPRM, BIS is requesting comments on:
- How to further define foundational technology to assist in identification of such items;
- Sources to identify such items;
- Criteria to determine whether controlled items identified in anti-terrorism ("AT") level Export Control Classification Numbers (ECCNs), in whole or in part, or covered by EAR99 categories, for which a license is not required to countries subject to a US arms embargo, are essential to US national security;
- The status of development of foundational technologies in the United States and other countries;
- The impact specific foundational technology controls may have on the development of such technologies in the US;
- Examples of implementing controls based on end-use and/or end-user rather than, or in addition to, technology based controls;
- Any enabling technologies, including tooling, testing, and certification equipment, that should be included within the scope of a foundational technology; and
- Any other approaches to the issue of identifying foundational technologies important to US national security, including the stage of development or maturity level of an foundational technology that would warrant consideration for export control.
It is also important to note that any foundational technologies identified by BIS may also be considered "critical" technologies for purposes of CFIUS review under recent changes enacted by the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA). Among other things, FIRRMA expanded CFIUS' jurisdiction to include review of certain investments by a foreign person (i.e., a noncontrolling investment that affords the foreign investor some specified access or influence over the target investment) in an US business that produces, designs, tests, manufactures, fabricates, or develops one or more "critical" technologies, including mandatory filings in some industries.4 Further, under a proposed rule, whether certain investments in US businesses involved in "critical" technologies are subject to mandatory CFIUS reporting and review would become determined not by industry but rather by whether an export license would be required with respect to transferring the technologies to involved parties in the transaction.5 Thus, the possible new controls on foundational technologies covered by this ANPRM illustrate that the interconnection between CFIUS and export controls continues to tighten.
The ANPRM provides interested parties a critical opportunity in the early stages to comment on Commerce's rulemaking on foundational technologies. Given the significance of the forthcoming regulations, any entities that may be affected by the regulations may wish to consider filing comments. As noted, comments are due by October 26, 2020.
Parties potentially affected by these new controls also should prepare for increased trade control by identifying US-origin technologies that may be targeted for control and evaluating the extent to which they intend to share those technologies with non-US persons, as well as whether they anticipate foreign investments that could be subject to CFIUS review.
© Arnold & Porter Kaye Scholer LLP 2020 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.
See BIS Invites Comment on Identifying Emerging Technologies Subject to New Export Controls and CFIUS, Arnold & Porter (Dec. 5, 2018).
SeeCFIUS Finalizes Rules Implementing Its Expanded Jurisdiction to Review Foreign Investment in US Businesses, Arnold & Porter (Jan. 17, 2020).
See CFIUS Proposes Rule to Align Certain Mandatory Filing Requirements With Export Control Regulations, Arnold & Porter (May 22, 2020).