US expands export restrictions on advanced semiconductors

On Tuesday, October 17, 2023, the US Department of Commerce, Bureau of Industry Security (BIS) announced a new package of export control measures that update and expand existing restrictions on the export of advanced semiconductors and related manufacturing equipment to China and a number of other countries.  

In particular, the new package of rules refines and significantly tightens controls put in place almost exactly a year prior, on October 7, 2022, which, as discussed in our prior briefing, were intended to restrict China's ability to obtain advanced computing chips, develop and maintain supercomputers or manufacture advanced semiconductors. 

The new rules impose license or notification requirements on a broader scope of advanced computing chips and computers as well as the equipment used to manufacture certain advanced semiconductors. The rules are also explicitly meant to target efforts to circumvent the October 7, 2022 controls via export to or use in third countries for China's benefit.  

As detailed below, the new package includes three rules that dramatically expand both the substantive and geographic scope of the original restrictions:

1. the Advanced Computing and Supercomputing Chips Rule (AC/S rule);
2. the Semiconductor Manufacturing Equipment Rule (SME rule); and
3. new additions to the Entity List.

New additions to the Entity List became effective immediately on October 17, 2023. Both the AC/S rule and SME rule were released as interim final rules, and they will become effective on November 17, 2023 and are currently open for public comments.

These rules, alongside forthcoming outbound investment restrictions announced in August, will act as new tools in the Biden Administration's growing toolkit of national security-focused controls targeting China's key technology sectors. For companies operating in these sectors, the rules represent an expanded landscape of license and notification requirements, as well as US person restrictions, that companies will be forced to navigate.

Understanding the Advanced Computing and Supercomputing Chips Rule

The AC/S rule amends the Export Administration Regulations (the EAR) to impose license or notification requirements on a broader range of advanced and high-performance chips – in particular, AI-capable chips – and it makes existing and new restrictions applicable to a significantly broader range of countries.

In particular, the AC/S rule expands the performance criteria for integrated circuits (ICs) to be included in ECCN 3A090 (as well as computers and related equipment controlled under ECCN 4A090), by introducing a performance density parameter. BIS explains that the expanded criteria are intended to ensure that certain integrated circuits (ICs) used in the operation of powerful data centers or for artificial intelligence (AI) training are covered and controlled.

Thus, ICs that are now controlled under ECCN 3A090 include 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

(2) 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).

Notwithstanding the above, the new rule specifically excludes from 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. 

The AC/S rule also expands the geographic scope of export restrictions for items that fall under ECCN 3A090 from just China and Macau to all countries in Country Groups D:1, D:4 or D:5, unless the country is also included in Country Groups A:5 or A:6.¹ License applications for items destined for Macau and Country Group D:5 countries will be reviewed under a presumption of denial policy. By contrast, license applications for items destined for places other than Macau and the Country Group D:5 counties will generally be reviewed under a presumption of approval policy, except where the items are intended for an entity headquartered in, or whose parent is headquartered in, Macau or a Country Group D:5 country.

BIS explains that increasing the scope of the license requirement is intended to curb circumvention efforts to route controlled chips to China through third countries or use such chips in third countries for the benefit of a headquarters or parent company in China.

Some of the additional key changes introduced by the AC/S rule are as follows:

• Clarifying dual-use controls by adding ".z" paragraphs: BIS explained in the original October 2022 rules that certain items can be controlled in both ECCN 3A090 and other ECCNs. In order to assist exporters in identifying such items subject to dual controls BIS has now included ".z" paragraphs to the following ECCNs: 3A001, 4A003, 4A004, 4A005, 5A002, 5A004, 5A992, 5D002 and 5D992. Items meeting the .z paragraph requirements for those ECCNs meet both the criteria for the ECCN in which they are included as well as have performance characteristics or functions that meet or exceed the performance parameters of more tightly-controlled ECCNs 3A090 or 4A090.  
• License exception Notified Advanced Computing (NAC) and related notification requirement for arms embargoed countries: The AC/S rule creates a limited license exception for exports, reexports or transfers in-country of certain consumer-grade ICs with AI capabilities to countries in Country Groups D:1 [National Security], D:4 [Missile Technology] and D:5 [US Arms Embargoed Countries]. The AC/S rule creates a parallel notification requirement for exports or reexports to Macau and countries subject to a US Arms Embargo, as specified in Country Group D:5. Where a notification must be made, BIS has explained that, following notification, the US government will have 25 days to decide whether the transaction may proceed or if a license is required.
  
  Covered ICs are those that meet specified performance thresholds that vary depending on whether the IC is designed or marketed for use in a data center:
  • 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.
  • 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.

• Expanded Foreign Direct Product Rules: the AC/S rule revised the 2022 FDRP rules to expand the export restrictions from just China and Macau to any country in Country Group D:1, D:4 or most countries in Country Group D:5. The restrictions also now extend to any item that meets the FDRP criteria that is destined to, regardless of destination country, to any company headquartered or whose ultimate parent company is headquartered, in any Country Group D:5 country or Macau. 
• Addition of new temporary general license: The AC/S rule establishes a new temporary general license (TGL) that authorizes, through December 31, 2025, parties to 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.
• New red flags and due diligence requirements: the AC/S rule also specifies additional red flags and expands due diligence requirements in order to help semiconductor manufacturers and exporters identify and prevent attempted circumvention.

Understanding the Semiconductor Manufacturing Equipment Rule

The SME rule expands the 2022 restrictions and notification requirements on semiconductor manufacturing equipment to additional types of semiconductor manufacturing equipment and related technology and software, and, like the AC/S rule, makes existing and new restrictions applicable to a broader range of countries. 

The SME rule also amends the 2022 rule's restrictions on certain activities of US persons related to SME. The SME rule reinforces and clarifies the requirement under the EAR for US persons to obtain a license in order to be involved in the movement of items not subject to the EAR (i.e. non-US items) in certain circumstances where such items may provide or support the manufacture of advanced chips for end users in China.

In particular, some of the key changes introduced by the SME rule include:

• Expanded controls for equipment and related technology and software: The SME rule adds new types of SME that BIS believes to be significant to the production of "advanced-node integrated circuits" to ECCNs 3B001 and 3B002. The SME rule also expands ECCNs 3B001 and 3B002 to items formerly controlled under ECCN 3B090 (an ECCN which was added in 2022 and which has now been removed). The SME rule also correspondingly, updates the controls associated with related technology and software under ECCNs 3D001, 3D002, 3D003 and 3E001. Items added under the SME rule are considered highly advanced ICs, referred to as "advanced-node integrated circuits."² These newly-added items, therefore, will be controlled for both National Security (NS) and Regional Stability (RS) reasons.
• Expanded geographic scope: The SME rule expands the license requirement for the equipment and technology and software it covers from "China and Macau" to Macau and all countries in Country Group D:5. 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. However, certain of these restrictions will be mitigated by the TGL which is currently valid through December 31, 2025.
• Zero percent de minimis Rule for specified lithography equipment: The SME rule revises the EAR's de minimis provisions to add a zero percent de minimis rule that applies in certain circumstances for specified lithography equipment under ECCN 3B001.f.1.b.2.b that is destined for use in the development or production of advanced-node integrated circuits.

Clarifying US persons restrictions

The AC/S and SME rules help clarify the US persons restrictions put in place by the October 7, 2022 regulations. However, the new rules also expand the geographic scope of the US persons restrictions to Macau and all D:5 countries.

As discussed in our prior briefing, the 2022 regulations created a requirement for US persons, with limited exceptions, to obtain a license in order to be involved in shipping, transmitting or transferring (in-country); facilitating the shipment, transmission or transfer (in-country); or servicing (including installation) activities for exports, re-exports or transfers (in-country) of specified items not subject to the EAR bound for certain end uses or end users in China and Macau. 

The new rules clarify that these restrictions only apply where the person knows that the underlying export, reexport or in-country transfer is associated with any of the following:

• Items in or destined for China and Macau that are not subject to the EAR and that will be used in the development or production of ICs at a facility of an entity headquartered in China or Macau where production of advanced-node integrated circuits occurs;
• Items in or destined for China and Macau that are not subject to the EAR and that meet the parameters of any ECCN in Product Groups B, C, D or E in Category 3 of the CCL that will be used in the development or production of ICs at a facility of an entity headquartered in China or Macau where production of advanced-node integrated circuits occurs;
• Items in or destined for Macau or a D:5 country that are not subject to the EAR and that meet the parameters of certain ECCNs under 3B001, 2B002, 3D002 or 3E001, regardless of end user.

New entity list designations

BIS also added 13 entities who are involved in the development of advanced computing ICs to the Entity List. All added entities are also subject to a "footnote 4" designation. This means that, in addition to needing a license in order to export, reexport or transfer (in-country) US items controlled by the EAR to these newly listed entities, the "footnote 4" Entity List Foreign Direct Product Rule (FDPR) also applies, such that many non-US items that are the direct product of US-origin software and technology will also be considered controlled.

Our team will continue to monitor this space and provide additional updates as appropriate. Should you have any questions about how these expanded and revised rules impact you, please do not hesitate to reach out to our team.