On May 15, 2020 the Commerce Department announced an amendment to the direct product rule that further restricts the ability of Huawei Technologies Co., Ltd. and its affiliates on the Entity List, such as HiSilicon (collectively “Huawei”), to receive certain foreign-made semiconductor products.
The Commerce Department also extended the temporary general license (TGL) that authorizes certain dealings with Huawei and its subsidiaries by U.S. persons through August 13, 2020. Statements from the Commerce Department indicate this may be a “final” extension.
Huawei-Specific Amendment to the Direct Product Rule
The Bureau of Industry and Security (BIS) released to the public an interim final rule effective May 15, 2020, requiring foreign manufacturers to obtain an export license before supplying Huawei with certain items “produced or developed” by Huawei.
Huawei was added to the BIS Entity List in May 2019. Pursuant to this designation, companies are prohibited from exporting, reexporting, or transferring items subject to the Export Administration Regulations (EAR) to Huawei without a license from BIS. Despite being added to the Entity List, according to the Commerce Department, Huawei has continued to commission the production of semiconductors in overseas foundries that use U.S. software and technology.
In general, foreign-made items controlled for “national security” (NS) reasons are subject to the EAR when exported to certain countries (including China) if they are the “direct and immediate product” of NS-controlled U.S.-origin software/technology or a plant or major plant component that is a direct product of NS-controlled U.S.-origin software or technology.
The new interim rule adds a Footnote 1 designation to certain parties on the Entity List, imposing additional restrictions on items destined for such parties. Currently, Huawei and its affiliates on the Entity List are designated with Footnote 1. No other entities are subject to Footnote 1.
Under the new interim rule, the following foreign-made items are subject to the EAR if destined for an entity with the Footnote 1 designation:
- Items that are:
- the direct product of software or technology subject to the EAR and specified in the following ECCNs; and
- “produced or developed” by any entity with a Footnote 1 designation.
- Items that are:
- the direct product of a plant or major component of a plant that is a direct product of U.S.-origin technology or software subject to the EAR and specified in the following ECCNs; and
- a direct product of software or technology produced or developed by an entity with a Footnote 1 designation.
The covered Export Control Classification Numbers (ECCNs) identified in the rule are U.S.-origin technology or software that is specified in ECCNs 3E001, 3E002, 3E003, 4E001, 5E001, 3D001, 4D001, or 5D001; technology specified in ECCNs 3E991, 4E992, 4E993, or 5E991; or software specified in ECCNs 3D991, 4D993, 4D994, or 5D991.
A major component of a plant means equipment that is essential to the production of an item, including testing equipment. Items that are the direct product of a covered plant or major component of a plant do not themselves have to be classified in one of the listed ECCNs to be restricted under this rule.
The interim final rule did not indicate how BIS will interpret the term “produced or developed” by a designated entity.
The rule will not apply to shipments of foreign-produced items whose production had started prior to May 15, 2020 and are exported before September 14, 2020.
In response to the announcement of the interim final rule, China’s Ministry of Commerce threatened to publish its “Unreliable Entities List.” The Unreliable Entities List had been announced last year but was never published or formally implemented. It remains to be seen whether this list will be published, and if so, the extent of restrictions that may be imposed on U.S. and non-U.S. listed companies.
Extension of Temporary General License Authorization and 5G Collaboration
In conjunction with this action, BIS also announced the renewal of Huawei’s TGL through August 13, 2020. There are no other changes to the TGL.
In the first version of the TGL, BIS authorized engagement with Huawei necessary for the development of 5G standards as part of duly recognized international standards bodies. BIS subsequently removed this TGL authorization when it was renewed in August 2019. This caused many U.S. companies to cease collaborating with international standards bodies in which Huawei was a member, out of a concern that such discussions could involve the release of technology subject to the EAR.
Reports suggest the Commerce Department is nearing approval of a rule that would permit U.S. companies to collaborate with Huawei on setting global standards for next generation 5G networks, but no such announcement has been made to date.