U.S. Bureau of Industry and Security targets Huawei’s ability to use U.S. technology and software.

On 19th May 2020, the U.S. Department of Commerce’s Bureau of Industry and Security (BIS) published an interim final rule through the Export Administration Regulations (EAR) which prevents Huawei Technologies Co. Ltd. and 114 of its non-U.S. affiliates from using U.S. controlled technology and software in the design and manufacture of its foreign made semiconductors. This interim final rule is effective from 15th May 2020.

U.S. extraterritorial export controls

U.S. extraterritorial law imposes export controls in the form of licensing requirements on items (including goods, software and technology) that are considered “subject to the EAR” as follows:

1. Items that are exported from the U.S .and any subsequent re-export between third countries, as well as third country transfers (transfers within a third country).
2. Foreign manufactured or developed items which contain more than the de-minimis amount of controlled U.S.-origin content. This amount is generally 25%, but it may be 10% or even 0% dependent on the type of controlled U.S.-origin content or end destination of the item.
3. Items that are the “direct product” of U.S. technology or software controlled for “national security” (NS) reasons in the U.S. Commerce Control List (CCL), and the foreign-produced item also is classified in CCL entries controlled for NS reasons and
4. Items that are the direct product of a complete plant or any major component of a plant, when that plant or component is the direct product of U.S.-origin technology or software that is controlled for NS reasons on the CCL and the resulting items are also controlled for NS reasons.

The “direct product” rules as described in (3) and (4) above are now amended. The interim final rule extends the scope of the “direct product” rule beyond NS controlled items. It now includes items that are the direct product of specified ECCN’s in the categories of Electronics, Computers and Telecommunications (see table below for list of Export Control Classification Numbers) when destined for specially designated entities as described in footnote 1 to Supplement No. 4 of the EAR (Entity List). Huawei Technologies Co. Ltd. and 114 of its non-U.S. affiliates are currently the only entities specially designated in footnote 1.

New interim final rule

a) This rule imposes a control on the direct product of “technology” or “software” subject to the EAR, as shown in the list of ECCN's (Export Control Classification Numbers) below when produced or developed by an entity with a footnote 1 designation on the Entity List.

BIS uses the following example:

"If an entity with a footnote 1 designation on the Entity List produces or develops an integrated circuit design utilizing specified Category 3, 4 or 5 “technology” or “software” such as Electronic Design Automation software, whether the “technology” or “software” is U.S.-origin or foreign-produced and made subject to the EAR pursuant to the de minimis or foreign-produced direct product rule, that foreign-produced integrated circuit design is subject to the EAR."

b) The rule also applies a control to any foreign-produced item (1) that is the direct product of a plant or major component of a plant located outside the United States when the plant or major component of a plant itself is a direct product of U.S.-origin “technology” or “software” as shown in the list of ECCN's below, and (2) such item is a direct product of “software” or “technology” produced or developed by an entity with a footnote 1 designation on the Entity List.

BIS uses the following example:

"If a foreign company produces integrated circuits outside the United States in a foundry containing U.S.-origin or foreign-produced equipment (which itself is a direct product of U.S.- origin “technology” or “software” in specified Category 3, 4, or 5 ECCNs) that is essential to the “production” of the integrated circuit to meet the specifications of their design, including testing equipment (i.e., a major component of a plant), and the design for the integrated circuit was produced or developed from “software” or “technology” by an entity specified in footnote 1 to the Entity List, whether or not such design is subject to the EAR, then that foreign-produced integrated circuit is subject to the EAR."

Commerce Control List Description Export Control Classification Number (ECCN)

Category 3 (Electronics) 3D001, 3E001, 3E002, 3E003, 3D991, 3E991

Category 4 (Computers) 4D001, 4E001, 4D993, 4D994, 4E992, 4E993,

Category 5 (Telecommunications) 5D001, 5E001, 5D991, 5E991

U.S. BIS is will further review these changes following public comment on the effect of this rule. Closing date for comment is 14th July 2020.

The U.S. Federal Register can be seen here.

See more information on Export Controls & Sanctions here.

Contact AM Skinner Solicitors for expert legal advice in all areas of trade law, including export controls, sanctions, import & customs controls, brexit, anti-bribery, ethics, commercial contracts, supply chain and other domestic and international trade law matters.