On October 7, 2022, the U.S. Department of Commerce’s Bureau of Industry and Security (“BIS”) announced a major new rule that restricts the ability of the People’s Republic of China (“PRC” or “China”) to obtain advanced computing chips, develop and maintain supercomputers, and manufacture advanced semiconductors.[1] That same day, BIS published a press release summarizing the updates, and, a few days later, U.S. National Security Advisor Jake Sullivan commented on the strategic intent underlying BIS’s actions.[2]

The BIS rule change, which constitutes the latest in a series of escalations in the U.S.-China trade war, signals that there is no shortage of political will in Washington to use the U.S. export control system as a “new strategic asset in the U.S. and allied toolkit” to impose costs on adversaries and maintain the U.S.’s technological edge over its strategic competitors.[3]

This article provides a high-level overview of BIS’s October 7 rule implementing new export controls on chips to the PRC in light of the Biden administration’s National Security Strategy.[4]

BIS’s October 7 Rule and Guidance: Controls on Chips to China

According to BIS’s press release, the October 7 controls are “part of BIS’s ongoing efforts to protect U.S. national security and foreign policy interests” by restricting access to items and capabilities: “used by the PRC to produce advanced military systems including weapons of mass destruction; improve the speed and accuracy of its military decision making, planning, and logistics, as well as of its autonomous military systems; and commit human rights abuses.”  

As explained in the rule itself, BIS views its approach as largely reactive to PRC efforts to mobilize vast economic resources to support the military modernization of the People’s Liberation Army (“PLA”). Through its Military-Civil Fusion development strategy, the PRC aims to transform the PLA into a world-class military by eliminating barriers between the country’s civilian research and commercial sectors and its military and defense industrial sectors.[5]

The October 7 rule imposes robust controls on certain advanced computing semiconductor chips, transactions for supercomputer end-uses, and transactions involving certain entities on the Entity List. The rule also imposes new controls on certain semiconductor manufacturing items and on transactions for certain integrated circuit (“IC”) end-uses. Specifically, the rule implements the following changes:

1. Addition to the Commerce Control List (“CCL”) of certain advanced and high-performance computing chips and computer commodities that contain such chips;
2. Addition of new license requirements for items destined for a supercomputer or semiconductor development or production end-use in the PRC;
3. Expansion of the scope of the EAR over certain foreign-produced advanced computing items and foreign-produced items for supercomputer end-uses;
4. Expansion of the scope of foreign-produced items subject to license requirements for 28 existing entities located in the PRC already on the Entity List;
5. Addition to the CCL of certain semiconductor manufacturing equipment and related items;
6. Addition of new license requirements for items destined to a semiconductor fabrication “facility” in the PRC that fabricates ICs meeting specified requirements;

• Note that licenses to facilities owned by PRC entities face a “presumption of denial,” whereas licenses for facilities owned by multinationals are to be decided on a case-by-case basis. The relevant technical specification thresholds are:
  • Logic chips with non-planar transistor architectures of 16nm or 14nm, or below;
  • DRAM memory chips of 18nm half-pitch or less; and
  • NAND flash memory chips with 128 layers or more.

7. Restriction of the ability of U.S. persons to support the development, or production, of ICs at certain PRC-located semiconductor fabrication “facilities” without a license;
8. Addition of new license requirements to export items used to develop or produce semiconductor manufacturing equipment and related items; and
9. Establishment of a Temporary General License (“TGL”) allowing specific, limited manufacturing activities related to items destined for use outside of the PRC to minimize the short-term impact on the semiconductor supply chain.

• To assist with conducting due diligence related to the TGL, BIS also identified a model certificate that may be used in compliance programs.

U.S. Strategy for Out-Competing China

BIS’s rule changes follow on the heels of recent policy pronouncements from top officials in the Biden administration regarding the U.S.’s security-based approach to international economic competition. The Biden administration’s National Security Strategy, published on October 12, 2022, emphasizes out-competing China, constraining Russia, and cooperating with global partners on shared challenges.

The National Security Strategy identifies “two critical trends” facing the United States in 2022: (1) heightened strategic, geopolitical competition between status-quo democracies and revisionist autocracies, and (2) shared transnational challenges that do not respect borders and affect all nations. Importantly, the National Security Strategy calls attention to international institutions, norms, and standards governing international trade and investment, economic policy, and technology, arguing that many of these mechanisms have “not kept pace with economic or technological changes, and today risk being irrelevant, or in certain cases, actively harmful to solving the challenges we now face.”

On international strategic competition, the National Security Strategy emphasizes that, while the PRC and Russia are “increasingly aligned with each other,” the challenges they pose to U.S. national security are different. Accordingly, the Biden administration’s policy prioritizes “maintaining an enduring competitive edge over the PRC while constraining a still profoundly dangerous Russia.”

National Security Advisor Sullivan, in comments delivered on September 16, 2022, at the Global Emerging Technologies Summit, provided insight into how the U.S. plans to utilize export controls to implement its strategic vision regarding outcompeting the PRC. “On export controls,” Sullivan said, “we have to revisit the longstanding premise of maintaining ‘relative’ advantages over competitors in certain key technologies.”[6] Whereas previously the U.S. applied a “sliding scale” approach that aimed to “stay only a couple of generations ahead,” today’s strategic environment necessitates a policy shift. “Given the foundational nature of certain technologies, such as advanced logic and memory chips, we must maintain as large of a lead as possible,” Sullivan explained.

In an October 27, 2022 interview, Under Secretary for Industry and Security Alan Estevez made clear that BIS’s work is far from finished.[7] Estevez indicated that BIS “will continue to look at, not just … semiconductors, but other areas that the Chinese are using to threaten the United States and its allies.” Estevez also commented on the decision to move forward with unilateral controls targeting chips to the PRC. Though BIS felt that it needed to issue the October 7 rule – at that time – for national security reasons, multilateral negotiations regarding the implementation of similar controls by allies – particularly the Netherlands and Japan, which are leaders in the chip manufacturing sector – remain ongoing. Estevez expressed his confidence that a multilateral deal targeting the highest-end semiconductors will soon be struck with key allies.

Conclusion

BIS’s recent actions demonstrate the tremendous impact that U.S. export control law and regulation can have on the international economy. Comments from top officials in the Biden administration shed some light on the strategic intent underlying the imposition of such controls. With U.S.-China tensions nearing a fever pitch, industry has every reason to expect that additional, similar controls could be imposed in the future targeting other emerging and foundational technologies.

Given the nature of BIS’s approach, sensitive technologies with high barriers to entry – such as artificial intelligence, biotechnology, and quantum computing – are among the most likely targets for the U.S. and its allies to leverage control over key “chokepoints” in the technology supply chain. Recent policy shifts at BIS, typified by BIS’s October 7 rules, portend a major restructuring of certain high-tech global supply chains to protect U.S. national security and foreign policy interests and maintain U.S. technological leadership.

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If you have questions concerning the scope or applicability of BIS’s October 7 rules, recent shifts in U.S. export control policy, or their implications for your business operations, feel free to contact the attorneys at Torres Trade Law, PLLC.