Complex China Chip Controls Burden Industry, Need Clearer Guidance, BIS Hears

Dutch chip company ASML said the BIS rule goes “beyond traditional export controls” and has “significant unintended adverse impacts.” Intel said the rule is “likely the most complicated export control rule ever published.” The Semiconductor Industry Association said the new rule can only be understood by a “relatively small group of experienced export control compliance” professionals, and even then, the controls require an “extraordinary amount of due diligence” to avoid violations.

In 17 pages of comments to BIS, SIA, which submitted some of the most comprehensive feedback, warned the agency that the controls, which were released in October and meant to restrict China’s ability to acquire advanced computing chips and manufacture advanced semiconductors (see 2210070049), could have a range of unintended consequences on U.S technology competitiveness. The association also urged BIS to convince allies to impose similar restrictions, publish a list of semiconductor fabrication facilities that are subject to the new restrictions, and asked the agency to clarify a range of issues related to the restrictions, including questions about licensing obligations, the new foreign direct product rules, what kinds of activities are captured by the controls and more.

Although SIA asked BIS to address a number of specific, technical questions about the rule’s parameters, the association also urged the agency to consider the “unnecessarily harmful impacts of regulatory complexity, uncertainty, and burden.” Since their release, lawyers and companies have struggled to grasp what they say is an unprecedented set of regulations and are still awaiting clearer government guidance on how and whether their activities are covered (see 2211010042).

SIA said BIS risks forcing many smaller companies -- or even “large foreign multinationals” who aren’t “highly versed” in U.S. export regulations or semiconductor supply chains -- to over-comply with the rules. The association predicted there will be an “increase in compliance-related costs and associated burdens,” adding that all the items impacted by the restrictions are “widely available” and most of the items have been for sale in China for “years.”

The group also warned that some companies may choose to abandon U.S.-origin items rather than spend the time and money trying to comply with the restrictions. “The level of industry uncertainty about which new controls on otherwise commercial items might or might not be imposed in the future is also at an all-time high,” SIA said. ‘In many cases, the psychological impact of these rules, which leads to the designing-out of U.S. components, software, technology, and services, may far exceed the direct regulatory impact.”

Compliance with the rule’s new foreign direct product restrictions will be especially “difficult” for foreign manufacturers, Intel said, “many of whom will not comply, not out of maliciousness, but simple ignorance or misunderstanding.” The technology company said the FDPR rules extend U.S. export control jurisdiction to “basic commodities,” including items like screws, nuts and bolts that are made using equipment built from controlled U.S.-origin technology, such as cryptography. “These types of items were clearly not the target of this rule, but that is not a proper basis for non-compliance,” Intel said.

The rule imposes obligations on industry that “cannot be met even by the U.S. Government,” law firm Morgan Lewis said. The firm pointed to the fact that the controls impose obligations on industry to “determine exactly what may be occurring in certain buildings in China in order to determine whether an inappropriate use” of controlled items may be occurring. But certain governments, including China, “fail to provide the visibility needed to determine end use and end users,” Morgan Lewis said. “To impose an obligation on industry that cannot be met by the U.S. Government shifts the burden inappropriately.”

To aid with industry due diligence, BIS should publish an “affirmative list of ‘semiconductor fabrication facilities’ that engage in covered ‘development’ or ‘production’ of NAND, logic, or [Dynamic random access memory] integrated circuits,” SIA said. An SIA official in December recommended that BIS create the list, and a former BIS official last week said the list could help companies identify smaller Chinese fabs that may be covered by the restrictions (see 2212140038 and (see 2301260052).

SIA said most companies that ship commercial items “have no way of knowing, or even easily finding out the answer to the question of whether they would be for use in a covered fabrication facility.” The association also said there may be “many layers of purchasing” between suppliers and a covered Chinese fab facility.

“SIA believes that untold hours of due diligence efforts by companies could be eliminated if BIS would simply identify the covered entities,” the group said. “In addition, the due diligence conclusions reached by one exporter may be different for another, even for the same Chinese end-user, leading to an un-level playing field.”

ASML also called for BIS to create the list, saying the government “rather than industry is in the best position to identify facilities for which it has national security concerns.” A “limited, narrow and stable list would eliminate a major source of regulatory and business uncertainty and need for extensive and challenging due diligence by industry.”

BIS should also provide more guidance to exporters on how much “assurance” they should require from their customers “to provide confidence that materials are used appropriately,” SIA said. The agency can do this by further clarifying the extent to which companies can rely on end-use declarations “to instill confidence on the part of the customer regarding compliance with the export control rules.” BIS should also expand and update its Know Your Customer guidance to “include specific examples of common fact patterns at issue in the” new controls, SIA said.

The October rule introduced a new model certificate that can be used by exporters to require other parties in a transaction to certify that they are not violating BIS’ new advanced computing FDP rule. Although some lawyers said many companies already use some type of certification (see 2211010042), Intel said the certificate is a “great innovation that will help U.S. industry engage with their international suppliers, customers, and partners.” The company asked BIS to issue “similar model certifications and due diligence questionnaires to drive consistency and clarity for BIS’ expectations on U.S. exporters.”

The agency should also extend the one-year temporary general licenses it issued (see 2210260014) for exports to “the four multinational owned and operated fabs in China.” The one-year authorization is “appreciated” but “creates significant uncertainty about what the rules for exports to such fabs might be next year,” SIA said. “The semiconductor industry, particularly the fabs but also their suppliers, generally plan years ahead. Not knowing whether there will be an authorization next year for trade with the four fabs creates unintended impacts and discourages otherwise legitimate trade.”

SIA also criticized BIS for issuing the licenses as “private letters” instead of releasing them publicly (see 2211020027). That “unusual” procedure “creates uncertainty for shippers about what is and is not authorized to the four companies,” SIA said, adding that BIS should issue a “public temporary general license associated with multinational owned fabs and that the license [should] have an effective date for at least two years.” The agency should also “announce a long-term policy plan for exports to these facilities to enable better compliance and long-term business planning associated with trade involving these facilities.”

Among the most important steps BIS can take, SIA said, is making the rules multilateral. The trade group said the agency is making “significant attempts to bring allied partners on board,” but warned that it needs to move faster. The U.S. reportedly concluded talks with Japan and the Netherlands last week on imposing a similar set of export controls on chips-related items destined to China, but it remains unclear how closely aligned the three countries’ export rules will be (see 2301270002 and 2301250022). “[U]nless the types of controls at issue are soon imposed by our close allies over their exporters that have capabilities in the areas covered by the rule,” SIA said, “the rule will become both ineffective and counterproductive.”

ASML agreed, saying unilateral controls have a “negative impact” on U.S. companies. It called on BIS to provide “immediate licenses” to firms to continue supplying items and services to covered fabs in China if those companies “face foreign availability for their products.”

The Dutch company also asked BIS to clarify the rule’s new U.S. persons restrictions. It said the “application of these new controls will be complicated,” particularly because “U.S. person status is not widely maintained by non-U.S. employers.” The agency should clarify that sharing published information, or technology or software that arises from fundamental research, isn’t subject to the U.S. persons restrictions.

Without more clarity surrounding U.S. persons activities, universities -- many of which participate in basic semiconductor design and prototype fabrication -- may be “stifled in their ability to engage in fundamental international research collaborations and to instruct students in U.S. classrooms and laboratories,” the Association of University Export Control Officers said. AUECO said BIS should clarify the scope of the definitions for “support” and “facilitating,” which could be interpreted to include “core university activities,” such as training and teaching students and researchers from China.

BIS in October published a set of frequently asked questions to provide guidance on the rule, including on certain U.S. persons requirements (see 2301270026). The agency has drafted more guidance, including on U.S. persons activities, and hopes to release it soon (see 2301270026).

SIA also asked the agency to answer several specific questions about the rule’s parameters, diligence requirements and more. The agency should clarify whether a “mask shop” in a separate building from a facility that fabricates semiconductors qualifies as a chip fabrication facility; how “far back up the supply chain” do certain licensing obligations extend; and whether order intake, processing, invoicing and other actions are considered covered activities under the controls, among other things.

The U.S.-China Business Council said the new rules include a “number of definitional ambiguities” that are impeding U.S. companies’ ability to “deploy appropriately scoped compliance programs.” It asked BIS to provide more “adequate” definitions for “facility,” “support,” “production,” “servicing” and “facilitation”; clarify what types of U.S. person activities are covered by the restrictions; and provide more “clarity around covered business processes involving the entity list.”

American semiconductor company Applied Materials focused its comments on the rule’s new Export Control Classification Number 3B090, which places restrictions on equipment used to produce mature node semiconductors, "an impact outside the stated goal of the rule.” The company stressed that it doesn’t oppose the new 3B090 controls, but technical corrections to its scope could “ensure that the controls are both effective in their stated objectives without unintended consequences.”

One technology company asked a U.S. lawmaker to push BIS to narrow the scope of the controls. Rep. Max Miller, R-Ohio, said he was told by Momentive Technologies, a producer of shapes used in early stages of semiconductor manufacturing, that the restrictions are “overly broad” and will “damage and disrupt both American industry and global semiconductor supply chains.” Miller said he was told the “resulting vacuum” created by the restrictions “will be filled by foreign-produced products,” including items made in China. Momentive told BIS that portions of the restrictions “have had far broader impacts on purely commercial semiconductor supply chains that are far removed from the stated rationales for the rule.”