On November 6, 2023, the U.S. Department of Commerce’s Bureau of Industry and Security (BIS) hosted a public briefing to address questions and further clarify its recently announced rules on October 17, 2023. The new measures are intended to further restrict the People’s Republic of China (PRC)’s access to U.S. semiconductor technology, a critical component of supercomputers used to build artificial intelligence (AI) platforms. BIS added thirteen new entities to the Entity List,^[1] and published the following two Interim Rules: (1) the Advanced Computing Chips Interim Final Rule and (2) the Expansion of Export Controls on Semiconductor Manufacturing Items Interim Final Rule.

These rules modify and expand upon the restrictions placed on certain advanced computing items introduced last year,^[2] as BIS aims to close perceived loopholes in existing export controls on semiconductors. The rules set tighter parameters on existing restrictions on semiconductor integrated circuits (ICs) (i.e., chips), strengthen restrictions on semiconductor manufacturing equipment and add 13 Chinese companies to the Entity List.

The package reflects a continuation of efforts by the U.S. government to restrict access to high-performance U.S. semiconductor chips used in advanced supercomputers powering AI platforms that could be used for military applications, such as advanced weapons designs, smart war planning and AI-assisted operational decision-making.
BIS has indicated that it is continually assessing the effectiveness of its advanced computing controls and signaled potential future updates are likely.

Advanced Computing Chips Interim Final Rule

The Advanced Computing Chips Rule, effective November 16, 2023, strengthens the existing requirements imposed last year by adjusting the parameters that determine whether an advanced computing chip is restricted and imposing new measures to prevent circumvention of the rules.

Prior to this new rule, chips were restricted if they exceeded specifications for both total processing performance (TPP) (i.e., performance speed) and interconnect bandwidth (i.e., the rate at which chips communicate). BIS made two key revisions to streamline the control parameters and address perceived loopholes.

First, BIS removed “interconnect bandwidth” as a method for determining whether a semiconductor chip is restricted. During the November 6, 2023 public briefing, BIS explained that this change was based on a finding that interconnect bandwidth is not the best way to gauge a chip’s AI capacity. Second, BIS added “performance density” as a control parameter, which measures a chip’s processing speed vis-à-vis its overall size. Performance density is calculated by dividing a chip’s TPP by its size. Because chips are embedded onto wafers with finite space, the performance density of individual chips is correlated to a wafer’s aggregate computing capability. Therefore, by restricting a chip’s performance density, BIS aims to prevent purchasers from bypassing the TPP cap by combining multiple, smaller chips with TPPs slightly below the control threshold to reach similar computing capabilities as with restricted chips.

BIS also established certain additional requirements aimed at preventing circumvention of the existing controls, in particular through transshipment and diversion, including:

• Expanded Licensing Requirements. To prevent the PRC from accessing restricted items through third countries, the new rule imposes additional license requirements for controlled chips destined for any destination specified in Country Groups D:1, D:4 or D:5 that is not also specified in Country Groups A:5 or A:6. (hereinafter “Country List 1”),^[3] or any entity headquartered in a Country List 1 location.

• Red Flag and Diligence Requirements. To make it easier for semiconductor fabrication plants, also referred to as foundries, to assess whether foreign parties are attempting to circumvent the controls by illicitly fabbing restricted chips, BIS identified four new red flags including instances where: (1) a customer has advertised or otherwise indicated its capability for developing or producing advanced-node ICs, (2) there is a mismatch between what a customer says an item would be used for and the item’s traditional use, (3) a customer is known to develop or produce items for companies that are involved with supercomputers and located in Macau or a destination specified in Country Group D:5 (hereinafter “Country List 2”)^[4] and (4) a customer has indicated intent to develop or produce supercomputers or ICs in a Country List 2 location. The rule also lays out recommended due diligence steps to better assist semiconductor fabrication facilities in developing enhanced foreign direct product rule guidance.

• Notified Advanced Computing (NAC) License Exception. For certain AI-capable, consumer-grade chips that fall slightly below the control thresholds, the rule also introduces the Notified Advanced Computing (NAC) license exception. The NAC license exception requires parties to notify BIS before exporting such dual-use chips to any destination in Country List 2. This is in direct response to certain large-scale chip manufacturers that have recently designed chips that are not technically restricted but that blur the line between consumer and military applications. Accordingly, the NAC license exception also requires that the transaction’s purpose is not for a military end-use or to a military end-user.

Expansion of Export Controls on Semiconductor Manufacturing Items Interim Final Rule

The Expansion of Export Controls on Semiconductor Manufacturing Items Interim Final Rule, effective November 16, 2023, strengthens the existing requirements imposed on semiconductor manufacturing equipment (SME) by implementing two key changes.

First, as part of a trilateral arrangement among the United States, Japan and the Netherlands, this rule expands upon the types of SME controlled under the 2022 rule. These new provisions target machinery used to manufacture chips under certain size thresholds as well as equipment used in certain manufacturing methods, particularly dry etching and wet chemical processing. Additionally, the rule removes any de minimis threshold for certain key equipment, including lithography equipment and certain “specially designed” items when the export is destined for use in the development or production of advanced-node ICs, except when the country from which the foreign-made item was originally exported or reexported has the item listed on its export control list.

Second, the new rule (1) expands the licensing requirements for SME to include any destination in Country List 2 and (2) removes certain SME from eligibility under the Shipment of Limited Value (LVS) license exception.

Temporary General Licenses

The rules also add two new Temporary General Licenses (TGLs)—effective November 17, 2023 through December 31, 2025—in an attempt to ease the restrictions on companies based in the U.S. or other closely-allied countries.

The first TGL includes an exemption for certain products to be exported, reexported or transferred (in-country) when the following conditions are met: (1) the recipient is located in, but not headquartered in or whose ultimate parent company is not headquartered in, any destination in Country List 1; (2) the product is to be used to further ancillary activities, such as assembly and inspecting and (3) the ultimate end use is outside any destination in Country List 2 and by entities that are not headquartered in, or whose ultimate parent company is not headquartered in, Country List 2.

The second TGL includes an exemption for certain exports of SME from companies headquartered in the U.S. or Country Group A:5 and A:6 (hereinafter “Country List 3”)^[5] that send controlled items to manufacturing facilities in Country List 2 for the development or production of parts, components or equipment of certain goods.

U.S. Persons Activities

The new rules streamline the U.S. persons restrictions in an effort to ensure U.S. companies cannot provide support to advanced PRC semiconductor manufacturing, while also not chilling permitted activities. Under Section 744.6, U.S. persons must obtain a license for engaging in, facilitating or supporting, the shipment, transmission, servicing or transfer, to or within the PRC or Macau, of certain items not subject to the EAR, but that the U.S. person nevertheless “knows” could still be used in the development or production of controlled ICs. The new rules codify existing BIS guidance and further clarifies the scope of the terms “facilitation,” “support” and “knowledge.”

Key Takeaways

These new rules demonstrate the continuing U.S. goal of ensuring that U.S. technology does not enable military advancements of countries acting contrary to U.S. national security interests. Specifically, these rules reflect the increasing proliferation and significance of AI and its potential military applications.

BIS’s recent steps are likely to be broadly viewed as an attempt to disarm China in the AI technological race. As the two countries’ trade policies move further away from each other, and toward mutual exclusivity, market participants may get caught in the crossfire. Although BIS continues to refine its rules to minimize collateral damage, companies may be forced to choose sides in the ongoing quest for technological dominance. It is not just chipmakers that are likely to be directly affected. AI and the associated export restrictions could have implications for companies and financial institutions across multiple sectors and geographies. Accordingly, companies should:

• Consider the potential business impacts of the updated prohibitions on exporting, reexporting or transferring (in-country) certain advanced computing technologies or related manufacturing equipment to China and U.S. arms embargoed countries;

• Evaluate the need to update their compliance programs by incorporating BIS’s recommended red flags into their due diligence processes to detect and address potential offenses; and

• Monitor emerging longer-term trends of the ongoing technological competition between the United States and China to identify and forecast qualitative and quantitative business impacts.

Footnotes

[1] BIS added two Chinese chip developers and eleven affiliated subsidiaries to the Entity List because of their involvement in the development of advanced computing chips, which BIS found to be contrary to U.S. national security interests.

[2] In October 2022, BIS added certain advanced computing chips and related semiconductor manufacturing equipment to its Commerce Control List (CCL), expanded the Export Administration Regulations (EAR) to cover certain foreign-produced advanced computing items and imposed licensing requirements on superconductor technologies sent to China or Macau.

[3] Country List 1 includes: Afghanistan, Armenia, Azerbaijan, Bahrain, Belarus, Burma, Cambodia, Central African Republic, China (PRC), Cuba, Democratic Republic of Congo, Egypt, Eritrea, Georgia, Haiti, Iran, Iraq, Jordan, Kazakhstan, Kuwait, Kyrgyzstan, Laos, Lebanon, Libya, Macau, Moldova, Mongolia, North Korea, Oman, Pakistan, Qatar, Republic of South Sudan, Russia, Saudi Arabia, Somalia, Sudan, Syria, Tajikistan, Turkmenistan, United Arab Emirates, Uzbekistan, Venezuela, Vietnam, Yemen and Zimbabwe.

[4] Country List 2 includes: Afghanistan, Belarus, Burma, Cambodia, Central African Republic, China (PRC), Cuba, Cyprus, Democratic Republic of Congo Eritrea, Haiti, Iran, Iraq, Lebanon, Libya, North Korea, Republic of South Sudan, Russia, Somalia, Sudan, Syria, Venezuela and Zimbabwe.

[5] Country List 3 includes: Albania, Argentina, Australia, Austria, Belgium, Bulgaria, Canada, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, India, Ireland, Israel, Italy, Japan, Lithuania, Luxembourg, Malta, Mexico, Netherlands, New Zealand, Norway, Poland, Portugal, Romania, Singapore, Slovakia, Slovenia, South Africa, South Korea, Spain, Sweden, Switzerland, Taiwan, Turkey and the United Kingdom.

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