Bureau of Industry and Security Releases Updated Semiconductor Export Controls

What Happened?

Semiconductors are part of everyday life. They are in cars, smart phones and appliances and also in advanced weapons systems that are critical to military capabilities. What the Bureau of Industry and Security (BIS) did this week is very significant in that regard. BIS issued two interim final rules that increase the effectiveness of existing semiconductor export controls released in October 2022:

• “Export Controls on Semiconductor Manufacturing Items Interim Final Rule (SME IFR)”

• “Implementation of Additional Export Controls: Certain Advanced Computing Items; Supercomputer and Semiconductor End Use; Updates and Corrections Interim Final Rule (AC/S IFR)”

The rules restrict exports of a greater range of semiconductors and semiconductor manufacturing equipment to China and expand licensing requirements to U.S. arms embargoed countries. The U.S. Government is concerned that certain semiconductors could be used for the purpose of training AI models for advanced warfare applications, including unmanned and autonomous systems, missile fusion, hypersonic platforms, and cyber-attacks. Through the updated rules, the U.S. Government aims to limit China’s access to U.S. technology needed to produce advanced semiconductors essential to China’s military modernization and surveillance efforts.  

Export Controls on Semiconductor Manufacturing Items Interim Final Rule (SME IFR)

In the SME IFR, BIS imposed controls on additional types of semiconductor manufacturing equipment, including advanced deep ultraviolet (DUV) lithography systems. DUV equipment is less advanced than the state-of-the-art extreme ultraviolet equipment (EUV) but can make chips nearly as advanced. The expansion of controls to include certain DUV equipment codifies the agreement to restrict exports on lithography equipment reached between the U.S., Dutch, and Japan governments in January 2023. The SME IFR included an exception when the lithography equipment is from another country that maintains an equivalent export control limitations (e.g., lithography equipment produced in Japan that was controlled by the Government of Japan in July 2023), meaning BIS does not need to impose additional controls. The SME IFR also:

• Refined the U.S. persons restrictions to ensure U.S. companies cannot provide support to advance China’s semiconductor manufacturing and codifies previously existing agency guidance:
  • Provides a list of activities that require a license for U.S. persons, including development or production of advanced-node integrated circuits and activities associated with certain semiconductor manufacturing equipment;Includes an exclusion for “U.S. persons” employed or working on behalf of a company headquartered in the United States or certain other countries and that is not majority-owned by an entity headquartered in the Special Administrative Region of Macau or a destination specified in countries subject to a U.S. arms embargo;
    • The exclusion is meant to ease the compliance burden and corresponding disincentive to employ U.S. persons in activities for which governments of closely allied destinations maintain or may establish appropriate controls;
    Expanded licensing requirements for semiconductor manufacturing equipment to 21 countries outside China that are subject to a U.S. arms embargo;
  • Added a new Temporary General License (TGL) to provide SME producers headquartered in the United States or certain countries (including SME producers in Japan, Korea, and the Netherlands) additional time to identify alternative sources of supply of semiconductor manufacturing equipment parts, components, or equipment outside arms-embargoed countries (including China), or to acquire individually validated licenses.

Implementation of Additional Export Controls: Certain Advanced Computing Items; Supercomputer and Semiconductor End Use; Updates and Corrections Interim Final Rule (AC/S IFR)

In the AC/S IFR, BIS expanded the parameters that determine whether an advanced computing chip requires a license and imposed new measures to address risks of circumvention of export controls by expanding controls to additional countries.

Key aspects of the AC/S IFR Parameter Changes

• Removed the “interconnect bandwidth” parameter based on public comments, recent technological developments, and analysis of the October 7 rule’s national security impact;
  • Restricted the export of chips if they exceed either of two parameters:
    • The performance threshold set in the October 7 rule or
    • A new “performance density threshold,” which is designed to preempt future workarounds Created a license exception for shipments of certain lower-performance chips (e.g., consumer chips used in laptops, smartphones, and gaming) under a new License Exception Notified Advanced Computing (NAC), which requires notification for exports and reexports to the Special Administrative Region of Macau and destinations subject to a U.S. arms embargo (including China)
    • The U.S. Government will determine within 25 days whether the transaction may proceed under the license exception or require a license;
  • Added a new TGL for advanced computing items for a limited number of items and end uses.

Key aspects of the AC/S IFR Circumvention Prevention

• Established a worldwide licensing requirement for companies headquartered in Macau or destinations subject to a U.S. arms embargo (including China), or whose ultimate parent company is headquartered in those countries, to prevent firms from countries of concern from securing controlled chips through their foreign subsidiaries and branches;
  • Created new red flags and additional due diligence requirements under the U.S. persons controls;
  • Expanded licensing requirements for exports of advanced chips to more than 40 additional countries, including Iran and Russia, that present risks of diversion to China.

What Does This Mean?

The interim final rules broaden the scope of semiconductors and semiconductor manufacturing equipment subject to the Export Administration Regulations and include new performance thresholds to curtail workarounds. Companies that rely on a substantial amount of revenue generated from manufacturing equipment or chip exports to China will need to evaluate financial impacts that are likely to result from halting certain exports to ensure compliance. As these export controls are expected to be updated annually, companies will need to stay engaged with BIS and other national security agencies to understand, prepare for, and comply with future rules. Since the controls are aimed at addressing national security threats posed by China’s military-civil fusion approach, affected companies will need to assess whether there are potential military applications associated with future product development. These controls also address risks related to diversion of items that are subject to the rules and enforcement of the export controls on third countries. Companies should review exports to third countries that may have AI commercial and research ties to China.

What’s Next?

Both interim final rules are effective November 17, 2023. The temporary licenses added to both rules are effective November 17, 2023 through December 31, 2025. The announcement provides guidelines for public comments on both interim rules and the semiconductor interim rule requests public comments on topics including infrastructure as a service (IaaS) providers, compliance guidance for foundries receiving chip designs, application of controls on deemed exports/reexports, and definitions of headquartered companies and supercomputer. These comments are due December 18, 2023.

What to Do?

Review for Potential Impact: With a 30-day effective date for both interim final rules,U.S. companies need to rapidly assess the potential impact of these restrictions on their R&D and production plans, licensing policies/approaches, current sales agreements, business operations, and revenue.

Provide Comments: Companies impacted by the increased restrictions should seriously consider submitting comments and engage with BIS to ensure compliance where there may be a need for further clarity.

Prepare: There is strong bipartisan support to continue tightening export controls on advanced semiconductors, particularly related to maintaining U.S. technological leadership, especially with respect to China, in areas like Artificial Intelligence and its applications. Affected businesses should begin preparing now:

• Identify impacts to R&D, production, business operations, and revenue as well as potential legal commitments/agreements (i.e., existing sales agreements to export items that are now restricted to China).
• Appropriately adjust R&D, production, and sales plans to ensure compliance, and consider alternatives.
• Modify internal compliance structures and update compliance training for U.S. and international staff.

The Chertoff Group can help you prepare for these requirements. Please contact us at info@chertoffgroup.com