New Export Controls: Emerging Technologies

Dechert LLP

Key Takeaways

  • The U.S. government has implemented new national security export controls on “emerging” technologies that went into effect on October 5, 2020.
  • Companies operating in the semiconductor, digital forensics, and aviation industries are likely to be directly impacted by these new controls.
  • Many of the new controls impose worldwide licensing requirements and can impact existing supply chains. Companies that can conduct timely assessments will be able to implement appropriate controls minimizing business disruptions.

The U.S. Department of Commerce, Bureau of Industry and Security (“BIS”) on October 5, 2020, published a final rule implementing new export controls on six categories of emerging technology. In doing so, the U.S. government has implemented the latest annual update to the Wassenaar Arrangement – a multilateral export control regime in which 42 countries participate. The semiconductor, digital forensics, and aviation industries will feel the primary impact. These changes create new Export Control Classification Numbers (“ECCNs”) and modify existing ECCNs, applicable to silicon wafer production, computer numerically controlled (“CNC”) tools, computational lithography software, digital forensics tools, software that captures and analyzes communications and metadata, and suborbital aircraft. BIS also made corresponding changes to a license exception available for exports to closely allied countries.

Commodities captured by the new ECCNs are subject to stringent export control restrictions. Each of the new ECCNs is controlled for National Security reasons (under NS Column 1 or 2 of the Commerce Control List (“CCL”)) in addition to other reasons for control (e.g., Nuclear Non-Proliferation, Regional Stability and Anti-Terrorism). National Security controls can create significant challenges for global supply chains and export compliance programs, as they may impose a license requirement, or require the use of a license exception, for the export, reexport or transfer of subject commodities to all worldwide destinations except Canada.

Background

Section 1758 of the Export Control Reform Act of 2018 (“ECRA”), enacted as part of the National Defense Authorization Act for Fiscal Year 2019, instructs BIS to identify and establish controls on emerging and foundational technologies. The ECRA does not define “emerging” or “foundational” technologies, leaving BIS and its interagency partners responsible to identify them and implement appropriate controls. The ECRA also directs BIS to seek multilateral adoption of any such new controls, with the intent that U.S. companies that compete globally will not be unilaterally disadvantaged by new controls on their technologies.

This final rule is another step in BIS’ process to identify emerging technologies that began in 2018 with the issuance of an advanced notice of proposed rulemaking. BIS is following a similar path for the identification of foundational technologies, having issued an advanced notice of proposed rulemaking on August 27, 2020. For additional information on the foundational technology process, please see our previous client alert.

In issuing these new controls, BIS did not provide commentary on its previous requests for industry comments or address any comments presented by industry. Instead, BIS framed the rules as being implemented in furtherance of and as consistent with the U.S. obligations under the Wassenaar Arrangement and the December 2019 Wassenaar Plenary Meeting. The ECRA includes a statutory requirement that a notice and comment period must be included in the emerging and foundational technology review processes. However, BIS generally does not use notice and comment for implementation of Wassenaar Arrangement rules and did not do so here.

New Controls

BIS has imposed new controls on six categories of goods that it determines are “recently developed or developing” and are “essential to the national security of the United States.”1 These new controls are:

  • ECCN 2B001, Machine Tools. BIS added Note 4 to ECCN 2B001. This addition states that machine tools with additive manufacture capabilities in addition to turning, milling or grinding capabilities (which were previously controlled) must be reviewed against the ECCN 2B001 definitions.
  • ECCN 3D003, Computational Lithography Software. BIS revised the heading for 3D003 to include controls on emerging Electronic Design Automation (EAD) or computational lithography software developed for Extreme Ultraviolet (EUV) masks.
  • ECCN 3E004, Silicon Wafer Technology. BIS created ECCN 3E004 which governs technology for the production of substrates for high-end integrated circuits.
  • ECCN 5D001.e, Software Designed for Monitoring or Analysis. BIS created ECCN 5D001.e covering “specially designed” or modified for monitoring or analysis by law enforcement, subject to specified parameters. BIS also added ECCN 5E001.e technology for the “development”, “production” or “use” for items controlled by ECCN 5D001.e.
  • ECCN 5A004.b, Digital Forensics or Investigative Tools. BIS created ECCN 5A004.b to control items that circumvent authentication or authorization mechanics and extract raw data from a computer or communication device. BIS also made corresponding changes to ECCN 5D002, which controls encryption software.
  • ECCN 9A004, Sub-Orbital Craft. BIS amended ECCN 9A004 to include “sub-orbital craft.” Sub-orbital craft are those designed to operate above the stratosphere and land on Earth, without completing an orbit. While BIS differentiated sub-orbital craft from controlled “spacecraft,” it noted that the commodities warrant similar controls. Accordingly, BIS also amended ECCN 9A515.a to include sub-orbital craft and made corresponding changes to License Exception STA.

Effective Dates

BIS’ new controls apply to exports, reexports and transfers of the captured goods, technology and software as of October 5, 2020. However, commodities that were either not subject to control prior to October 5, 2020 (and therefore could be exported with no license required (“NLR”)) or were eligible for a pre-October 5, 2020 license exception can be exported NLR or under the terms of the then-in place license exception, provided that the export, reexport or transfer occurs before December 4, 2020. In order to utilize this savings clause, the shipment must have been on dock for loading, on lighter, laden aboard an exporting carrier, or en route aboard a carrier to a port of export, as of October 5, 2020 and the shipment must be pursuant to an actual order. All shipments that do not meet the above requirements, or that do and are not completed by December 4, 2020, are subject to BIS’ new licensing requirements.

Conclusion

BIS new controls create significant new restrictions with immediate effect. Companies that operate in the semiconductor, machining, digital forensics, and aerospace industries must understand and address these new and robust controls to ensure continuity of production and supply chains.

Footnotes

1) 85 Fed. Reg. 62583 (Oct. 5, 2020).

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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