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29 May 2020
What does the new rule do?
When is the new rule effective and when are comments due?
What is the new rule's purpose?
What effect will the new rule have?
Are they any positives?
How does the new rule work?
What about existing Huawei licences?
On 15 May 2020 the Department of Commerce and the Bureau of Industry and Security (BIS) revised an arcane export control rule that imposes US export controls on foreign-origin products (hardware, software and technology) that are a direct product of certain US technologies.
Prior to its revision, this foreign direct product rule imposed export controls on foreign-origin items that would fall under national security controls, but only if they were the direct product of a small set of highly controlled technologies. Further, those controlled items required a licence only when they were exported, re-exported or transferred to a few countries.
The recent rule change creates two new categories of foreign direct product. These categories are far broader than the old one, but new foreign direct products require a licence only when they are exported or re-exported to entities on a new special subset of the Entity List, which includes Huawei, HiSilicon and many other Huawei affiliates.(1)
The key takeaway for companies that are fulfilling orders of foreign-origin items that must meet a Huawei specification or design requirement (as opposed to standard catalogue items sold as-is to many customers) is to evaluate whether those items are made using US-origin technology, software or production equipment that falls under one of the export control classification numbers (ECCNs) listed in the regulation (and noted below).
Put another way, the new control applies to foreign-produced items that are:
The US ECCNs in scope represent a large swathe of US semiconductor, computing and telecoms technology and software at both a high level of control (ie, ECCN 3E001, 3E002, 3E003, 4E001, 5E001, 3D001, 4D001 and 5D001) but also a low level of control (anti-terrorism) (ie, ECCN 3E991, 4E992, 4E993, 3E991, 4E992, 4E993, 5E991, 3D991, 4D993, 4D994 and 5D991). EAR 99 technology in the semiconductor, computing and telecoms categories is omitted.
The new rule took effect on 15 May 2020, which is the date on which it appeared for public inspection in the Federal Register. Comments must be submitted on or before 14 July 2020.
However, the rule does have a savings clause. Foreign origin items are not subject to the new rule if they:
The new rule aims to further cut off the supply of semiconductors and other items made outside the United States to Huawei and other companies on the Entity List that were not previously subject to the EARs.
This rule will force non-US semiconductor development and manufacturing companies to choose between using US semiconductor technology and equipment or serving Huawei, HiSilicon and other listed Chinese entities as customers. However, it remains to be seen what choice those non-US companies will make. They could stop producing chips for Huawei and HiSilicon. But where US engineering has non-US competitors, what is to stop them from eliminating US semiconductor design, engineering and test equipment in at least some if not all offshore facilities? And what if China retaliates by putting US companies on its unreliable entity list? If these scenarios come to pass, will putting more pressure on Huawei be worth it?
This rule could have been a lot worse for US engineering. The new rule does not capture all of the foreign products that are designed with US technology or software where Huawei, HiSilicon and other listed entities are not in the design, development, or production picture. As an example, design engineers come up with a great design (3E991) for a Taiwanese origin chip (3A991) that is made in Taiwan and is not subject to the EARs. Huawei and HiSilicon are not part of that design and the chip is not modified to meet their specifications. Huawei and HiSilicon then want to buy the design. The chip is not subject to the EARs and is not prohibited by the EARs from being exported from Taiwan to Huawei or HiSilicon.
Ultimately, if a company is not collaborating with Huawei, HiSilicon or another designated company on the Entity List in the design or modification of its products, it need not redesign its compliance programme or foreign factory floors.
The key part of the rule is contained in Footnote 1 of Supplement 4 to Part 744 of the rule (Pages 38 and 39).(2)
The new rule applies to foreign-produced items destined to entities with a Footnote 1 designation on the Entity List. Especially targeted are Huawei Technologies Co, Ltd (Huawei) and its non-US affiliates.
Items that fall under of the following categories cannot be re-exported, exported from abroad or transferred to companies with a Footnote 1 designation on the Entity List.
Category 1: foreign direct product provision (Section A of Note 1)
The foreign produced item is:
Company A is located in Hong Kong and often collaborates with Huawei on developing new integrated circuit (IC) designs that Company A manufactures for Huawei. In conjunction with this process, Company A uses US-origin 3D991 software to create the design layout for the Huawei IC. The products that Company A manufacturers for Huawei are now subject to the EARs under the rule and require authorisation to be sent to Huawei or any other company on the Entity List that is noted as having the new extra restriction.
Category 2: foreign direct product plant (Section B of Note 1)
The foreign produced item is:
'Major component' of a plant located outside the United States means equipment that is essential for the production of an item, including testing equipment, to meet the specifications of a design specified in point two above.
The plant or major component of a plant itself must be:
An entity on the Entity List designs an IC that it asks Fab A in Taiwan to manufacture (ie, the IC is the direct product of the entity's technology). Fab A uses Chinese recrystallising equipment that was produced using US-origin 3E991 technology. This crystallising process is essential to the production of the IC. The ICs manufactured by Fab A using that equipment are now subject to the EARs under the rule and require authorisation to be sent to Hi-Silicon or any other company on the Entity List that is noted as having the new extra restriction.
Some companies may have obtained a BIS licence to share US technology with Huawei and are wondering what this means. The new regulation does not explicitly answer this question; if a licence covered technology exports but the foreign product being sold to Huawei is a foreign direct product as a result of the new rule, the licence might be a technology licence, not a hardware licence.
However, BIS and the US agencies which reviewed an existing licence application will have already determined that it should be granted. Therefore, BIS will hopefully fill this gap by stating that an existing Huawei licence covers both the technology and software and the hardware that is the foreign direct product of that technology and software.
Companies should ask their engineering and plant operations teams whether:
If the answer is yes, the company will need to map out each Huawei-related project based on the products and the facilities producing those products and further ask the following questions:
The second question will require companies to map out their production steps and the equipment and software used at each step to determine whether it is a major component and the direct product of US technology or software that falls into one of the above ECCNs.
For further information on this topic please contact Kay C Georgi, Regan K Alberda or Sylvia G Costelloe at Arent Fox LLP by telephone (+1 202 857 6000) or email (email@example.com, firstname.lastname@example.org or email@example.com). The Arent Fox LLP website can be accessed at www.arentfox.com.
(1) The Entity List is available here.
Items subject to the EAR that are controlled for NS reasons or specified in certain ECCNs when destined to designated entities. You may not re-export, export from abroad, or transfer (in-country) without a license or license exception any foreign-produced item specified in paragraph (a) or (b) of this footnote when there is "knowledge" that the foreign-produced item is destined to any entity with a footnote 1 designation in the license requirement column of this Supplement.
1. Direct product of "technology" or "software" subject to the EAR and specified in certain Category 3, 4, or 5 ECCNs.
The foreign-produced item is produced or developed by any entity with a footnote 1 designation in the license requirement column of this Supplement and is a direct product of "technology" or "software" subject to the EAR and specified in Export Control Classification Number (ECCN) 3E001, 3E002, 3E003, 4E001, 5E001, 3D001, 4D001, or 5D001; of "technology" subject to the EAR and specified in ECCN 3E991, 4E992, 4E993, or 5E991; or of "software" subject to the EAR and specified in ECCN 3D991, 4D993, 4D994, or 5D991 of the Commerce Control List in Supplement No. 1 to part 774 of the EAR.
1. Produced by any plant or major component of a plant that is located outside the United States, when the plant or major component of a plant itself is a direct product of US- origin "technology" or "software" that is specified in Export Control Classification Number (ECCN) 3E001, 3E002, 3E003, 4E001, 5E001, 3D001, 4D001, or 5D001; of US-origin "technology" that is specified in ECCN 3E991, 4E992, 4E993, or 5E991; or of US-origin "software" that is specified in ECCN 3D991, 4D993, 4D994, or 5D991 of the Commerce Control List in Supplement No. 1 to part 774 of the EAR; and
Note to paragraph (b)(1) of footnote 1: A major component of a plant located outside the United States means equipment that is essential to the "production" of an item, including testing equipment, to meet the specifications of a design specified in (b)(2).
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