Commerce Department Expands Export Controls Regarding Huawei - Four Key Points

Today the U.S. Commerce Department published an interim final rule to amend the so-called direct product rule of the Export Administration Regulations to target certain transfers of items tied to Huawei and Huawei entities set forth on the Export Administration Regulations (“EAR”) Entities List (Huawei listed entities). The rule became effective on May 15, 2020.

The new rule expands the scope of U.S. export controls to cover exports and some other transfers of certain items going to Huawei listed entities if the items are: (a) developed or produced by Huawei listed entities and the direct product of U.S. technology or software; or (b) (i) produced by a foreign plant or major component of a foreign plant when the plant or major component of the plant is a direct product of U.S. technology or software, and (ii) the direct product of Huawei software or technology.

As with abrupt regulatory changes promulgated without consultation with industry, much uncertainty accompanies the new rule. Nevertheless, a few aspects of the new rule are especially significant:

1. Although not limited to semiconductors, the new rule is aimed at restricting supply by “foundry” fabrication facilities in East Asia to Huawei listed entities of items that are a direct product of technology or software produced or developed by Huawei listed entities.
2. The rule change is considerably narrower than a range of other proposals under consideration. Apart from the two limitations set forth above, no new restrictions are imposed on the exports, reexports or in-country transfers of semiconductors and related items to Huawei listed entities by U.S. companies.
3. Concurrent with the publication of the new rule, the leading foundry semiconductor producer, TSMC of Taiwan, announced it will build an advanced semiconductor fabrication facility in the United States. This is a positive development for the U.S. fabless semiconductor sector and the maintenance of a vibrant semiconductor manufacturing base in the United States.
4. The rule establishes grandfathering arrangements that preserve from application of the rule some items produced before May 15, 2020, and shipped before September 14, 2020.

Huawei U.S. Export Control Restrictions

The new rule builds on 2019 EAR amendments that added Huawei Technologies Company, Ltd. and 114 of its affiliates to the EAR “Entity List.” These actions established that all parties are generally forbidden from supplying any item to any designated Huawei entity if the item is subject to the EAR.

The new rule attempts to address concerns among some in the U.S. government that the 2019 restrictions are not capturing supply to designated Huawei entities of a sufficiently broad range of foreign-made items that benefit from U.S. technology.

Prior Orrick alerts, Huawei/National Security Sanctions and Huawei Entity List Action – Update, address the 2019 actions against Huawei.

“Subject to the EAR” Standards

EAR restrictions apply to transfers of items that are subject to the EAR and generally do not apply to transfers of items that are not subject to the EAR. Accordingly, whether the EAR regulate the transfer of any given item depends, as an initial matter, on whether the item is subject to the EAR.

• All items made in the United States or exported from the United States are subject to the EAR.
• Foreign-made items are generally subject to the EAR if they (i) contain more than a de minimis level of U.S.-origin controlled content (which can include incorporation of any portion of generally licensable U.S.-origin encryption items), (ii) are the “direct product” of certain U.S.-origin controlled technology or software, or (iii) are manufactured in a plant or major plant component that is the “direct product” of certain U.S.-origin controlled technology or software.

In limited respects, the new rule expands the jurisdiction of U.S. export controls to certain items related to Huawei listed entities that are not of U.S. origin.

New Rule

The first part of the new rule—restricting certain transfers from Huawei listed entities to other Huawei listed entities—is not expected to affect U.S. semiconductor device companies.

Similarly, the second part of the new rule—restricting certain transfers to Huawei listed entities of items produced by plants or components that are the direct product of U.S. technology and that are made using software or technology developed by Huawei—is not expected to directly affect U.S. semiconductor equipment manufacturers. However, the consequences to U.S. equipment manufacturers of shutting down Huawei’s substantial business with foreign foundries and a potential increase in Huawei business by Chinese foundries is unclear.

In any event, countermeasures by the Chinese government are likely and trade tensions between the United States and China will continue.

In an effort to “prevent immediate adverse economic impacts on foreign foundries utilizing U.S. semiconductor manufacturing equipment that have initiated any production step,” BIS is permitting foreign producers to ship to designated Huawei entities certain items implicated by the new rules if the items were produced prior to May 15 and that are shipped to designated Huawei entities prior to September 14, 2020.

BIS will accept comments on the interim final rule until July 14, 2020.

Separately, the Commerce Department recently extended the general license authority described in our prior client alerts (linked above) for U.S. companies to export certain civilian items to Huawei. In addition, while the new direct product rule requires export licenses for foreign foundries to supply certain items to Huawei listed entities, it does not impose a presumption of denial for such license applications. Both of these actions can serve to ameliorate the restrictive trade effects of recent U.S. export control initiatives.