International Trade & Compliance Alert | May.19.2020
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:
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.
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.
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.
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.