Commerce Moves to Curb Chinese Technology Advancements
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Commerce Moves to Curb Chinese Technology Advancements

Brownstein Client Alert, Oct. 13, 2022

Over the last several weeks, the Bureau of Industry and Security (BIS) has telegraphed sweeping, new controls on U.S. exports to the People’s Republic of China (PRC) pertaining to tools and technologies that support advanced semiconductor production, AI, and supercomputing. As a package, the rules announced on Friday, Oct. 7, 2022, are a significant escalation in export control policy with respect to China because they not only seek to control the proliferation of technology to specific end users of concern, but also aim to contain the PRC’s overall ambitions to dominate global markets with domestically manufactured and produced advanced semiconductors, AI, and supercomputing capability and capacity.

Alan Estevez, the undersecretary of BIS, stated concurrent to the release of these rules that “my north star at BIS is to ensure that we are appropriately doing everything in our power to protect our national security and prevent sensitive technologies with military applications from being acquired by the People’s Republic of China’s military, intelligence, and security services.” These new rules are a necessary step according to Thea Kendler, BIS assistant secretary for export administration, stating, “The PRC has poured resources into developing supercomputing capabilities and seeks to become a world leader in artificial intelligence by 2030. It is using these capabilities to monitor, track, and surveil their own citizens, and fuel its military modernization.”

Jake Sullivan, President Biden’s national security advisor, in a recent speech to the National Security Commission on Artificial Intelligence laid out the administration’s policy more broadly, claiming that “on export controls, we [the U.S.] have to revisit the longstanding premise of maintaining ‘relative’ advantages over competitors in certain key technologies. We previously maintained a ‘sliding scale’ approach that said we need to stay only a couple of generations ahead. That is not the strategic environment we are in today. Given the foundational nature of certain technologies, such as advanced logic and memory chips, we must maintain as large of a lead as possible.”

Below is a detailed explanation of BIS’s actions with respect to export controls aimed at the PRC.

 

Unverified List

  • The Commerce Department’s Bureau of Industry and Security (BIS) added 31 Chinese entities to the Unverified List (UVL), which requires further due diligence from U.S. exporters.
    • This rule comes after repeated attempts by U.S. embassies to conduct end-user checks in-country to confirm the bona fides of these entities. If the PRC’s Ministry of Commerce (MOFCOM) allows the U.S. government access to conduct these checks, entities may be removed from the UVL.
    • On the other hand, BIS explicitly stated that continued lack of access could result in companies being moved from the UVL to the Entity List, effectively banning them from receiving U.S. exports.
    • This rule is effective immediately. PRC flash memory maker Yangtze Memory Technologies Corp (YMTC) was added to the UVL today.

Semiconductor Controls and Expanded Foreign Direct Product Rules

  • BIS announced a multipart rule that will broaden the U.S. government’s (USG) visibility into exports of semiconductor-related technologies to China, especially those that can contribute to AI and other forms of advanced computing. These rules include:
    • Advanced Tooling Equipment: This new rule imposes controls on the sale of U.S.-origin tools or tools made with U.S. technology or components to companies that support Chinese semiconductor manufacturing and high-end production in memory and logic chips. Certain semiconductor equipment and advanced computing chips have been added to the Commerce Department Control List, requiring a license for U.S. exports.
      • Additionally, companies would need to seek a license to export any items to PRC firms producing:
        • Logic chips using non-planar architecture (FinFET and GAAFET) at 16nm/14nm or below. This is intended to impact Semiconductor Manufacturing International Corporation (SMIC) in China.
        • DRAM memory chips at 18nm half-pitch or below. This is intended to impact ChangXin Memory Technologies, Inc. (CXMT) in China.
        • NAND flash memory (storage) chips at 128 layers or above. This is intended to impact YMTC in China.
      • All of these licenses will have a presumption of denial. However, for exports to foreign companies operating in China (e.g., SK Hynix and Samsung), licenses will be reviewed on a case-by-case basis for supply chain activities or sales supporting customers outside of China.
      • Impact: These licensing policies are designed to stifle the PRC’s development of advanced semiconductor manufacturing and supercomputing capabilities and will likely be adjusted in the future as more data is collected.
        • This part of the rule is effective immediately.
    • Expansion of Extra-Territorial Controls: Effective Oct. 21, BIS will expand foreign direct product rules (FDPRs) for:
      • Targeted restrictions on chips or items containing chips that can be used for AI technology.
      • Controls on supercomputers or chips and other items used in supercomputers destined for China.
      • Expanded controls for 28 Chinese entities already on the Commerce Department’s Entity list involved in supercomputing.
      • Impact: These extraterritorial controls resemble the FDPR restrictions placed on global exports to Huawei in 2020 and restrict the shipment to specified entities of foreign-produced items that have U.S. inputs. The U.S. government will expect all countries to comply and is actively working with allies and partners to enact similar controls of their own accord.
  • Restrictions on U.S. persons: Effective Oct. 12, BIS will restrict U.S. persons from supporting the development, production or use of integrated circuits at certain PRC foundries without a license.
    • This rule is intended to prevent the transfer of human capital technology, or “know how,” through direct interaction with PRC semiconductor enterprises.

More information regarding BIS’s rulemaking is here and the Federal Register notice can be found here.

The PRC government was not supportive of the Biden administration’s policy changes.  In a statement, Chinese Ministry of Foreign Affairs Spokesperson Mao Ning declared “The U.S. has been abusing export control measures to wantonly block and hobble Chinese enterprises … It will not only harm Chinese companies’ legitimate rights and interests, but also hurt the interests of U.S. companies.”

Despite this, it appears unlikely that the Biden administration will change its aggressive stance towards China any time soon. On the same day BIS’s economic restrictions were rolled out, the White House announced a new Artic strategy that is widely viewed to be a security and economic check on China’s presence in the region. To stay up to date on the continued evolutions on U.S.-Chinese relations and what organizations could be affected, please contact Brownstein’s foreign relations team.

 

THIS DOCUMENT IS INTENDED TO PROVIDE YOU WITH GENERAL INFORMATION REGARDING BIS EXPORT CONTROLS. THE CONTENTS OF THIS DOCUMENT ARE NOT INTENDED TO PROVIDE SPECIFIC LEGAL ADVICE. IF YOU HAVE ANY QUESTIONS ABOUT THE CONTENTS OF THIS DOCUMENT OR IF YOU NEED LEGAL ADVICE AS TO AN ISSUE, PLEASE CONTACT THE ATTORNEYS LISTED OR YOUR REGULAR BROWNSTEIN HYATT FARBER SCHRECK, LLP ATTORNEY. THIS COMMUNICATION MAY BE CONSIDERED ADVERTISING IN SOME JURISDICTIONS.

 

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