New Chip Restrictions Give Export Control ‘Momentum’ to Incoming Trump Admin, Raimondo Says

The rules notably create two new foreign direct product (FDP) rules to cover certain foreign-made chip tools that contain U.S.-origin integrated circuits and other components, with certain carve outs for shipments from a list of countries that have implemented controls similar to those put in place by the U.S., such as the Netherlands and Japan. BIS also published a new set of red flags that it said will help companies vet Chinese chip factories and carry out due diligence on customers looking to evade U.S. licensing rules.

The new chip restrictions mostly take effect Dec. 31, although certain clarifications related to export controls over software keys took effect Dec. 2. The new Entity List additions also took effect Dec. 2, but BIS said companies don’t have to start complying with the new FDP rule restrictions for certain listed entities until Dec. 31.

Commerce Secretary Gina Raimondo called the new measures “groundbreaking and sweeping.” They’re “the strongest controls ever enacted by the U.S. to degrade the [People’s Republic of China’s] ability to make the most advanced chips that they're using in their military modernization,” she said during a Dec. 1 call with reporters.

National Security Adviser Jake Sullivan said the controls are designed to impede China’s ability to “indigenize the production of advanced technologies,” especially advanced semiconductors “and the equipment used to produce them that produce a substantial risk to U.S. national security” because they are being used by Beijing to develop AI for its military.

The measures are expected to be one of the final major moves taken by the Biden administration to restrict sales of advanced chips and chip equipment to China, an effort begun in October 2022 (see 2302020034) and updated in October 2023 (see 2310170055) and April 2024 (see 2404010020). Raimondo said the Commerce Department under Biden has “been the most aggressive of any in using export controls,” and she said she believes they leave a blueprint for the incoming Trump administration to follow as it crafts its own approach to semiconductor-related national security controls.

“We are leaving BIS more robust, more strategic, more effective than ever,” she said, and the new rules “set the next administration up to continue the important momentum necessary to preserve America's tech security and leadership.”

But Raimondo also stressed that the U.S. can’t pursue future chip restrictions alone. “In order to be most effective, export controls are used in collaboration with our allies,” she said, “and that's why we need our allies on board with our actions so that they're as comprehensive and effective as possible.”

The controls announced this week include an exclusion from certain chip tooling license requirements for companies based in more than 30 nations. Those countries -- most notably Netherlands and Japan, which house leading chip equipment makers ASML and Tokyo Electron, respectively -- will be exempt from complying with certain new semiconductor manufacturing equipment FDP rule restrictions and other controls aimed at expanding the universe of chip equipment that needs a license before being exported to China.

A new Semiconductor Manufacturing Equipment (SME) FDP rule places license requirements over certain foreign-produced SME and related items if there is “knowledge” that the foreign-produced items are destined to China, Macau or a destination in Country Group D:5, which are generally countries subject to a U.S. arms embargo. A new Footnote 5 FDP rule places license requirements over certain foreign-made SME if there is “knowledge” of “certain involvement” by an entity on or added to the Entity List with a Footnote 5, or “FN5," designation, BIS said. The agency said those entities help China make advanced chips for its military.

The rules "simply recognize" that certain chip equipment already subject to controls when shipped from the U.S. should "also be subject to controls when ... produced abroad," BIS said.

The agency said there will be “no de minimis threshold level of U.S. controlled content” for certain foreign-made items covered by both of the new FDP rules, meaning they capture certain items that BIS said contain “any amount” of U.S.-origin integrated circuits. “These new provisions ensure that foreign-produced SME containing U.S.-origin” chips “are controlled to the same extent as foreign-produced SME containing items controlled by the SME FDP rule and the FN5 FDP rule,” BIS said.

The Footnote 5 FDP rule specifically doesn’t apply to a list of more than 30 excluded countries outlined in the rule. BIS said those governments are already members of trusted multilateral export control regimes, such as the Wassenaar Arrangement, “and have the authority to control key SME items of concern.” The BIS rule also lists various Export Control Classification Numbers that are exempt from certain license requirements if they are being exported, reexported or transferred by a company based in a country on that list.

“In order to be most effective, export controls are used in collaboration with our allies,” Raimondo said, “and that's why we need our allies on board with our actions so that they're as comprehensive and effective as possible. “

A senior administration official said the new FDP rules will help BIS in “catching” foreign-made tools that the U.S. doesn’t think should be going to China “because they all contain, in our assessment, integrated circuits that we can make subject to our controls.” The rules are “another way we're getting at this issue of supplies to these [Chinese] fabs by parties outside the United States,” the official told reporters.

The official added that BIS wanted to carve out companies based in certain countries that have the “capability to impose comparable controls” on tools exported from their territory. “The idea is to create a pathway, if you will, for countries to impose their own controls, and that includes any number of allies … where they have significant tool-making capability.”

The official also said the U.S. had “extensive outreach” with U.S. and foreign companies that will be affected by the new controls, including to speak with them about how they can comply with the new measures.

“The companies want to make sure that they're in compliance, because there are significant consequences that flow from non-compliance,” the official said, pointing to the new set of red flags released by BIS. They’re “hypotheticals that essentially tell companies, if you see this circumstance before you proceed with a transaction without authorization from us, without a license from us, you need to resolve them.”

The official specifically pointed to one new red flag that outlines a scenario in which a chip fab on the Entity List builds a physical “bridge” or tunnel to another building or facility that isn’t on the Entity List. “That's a red flag” that the non-Entity Listed building may need a license, the person said. “Companies really have to satisfy themselves that" such a sale "does not lead to diversion.”

Other new red flags include:

• A non-advanced fab orders equipment designed to make advanced chips “that it would not need given its technology level.”
• A company receives an order where the ultimate owner or user of the items is “uncertain,” such as a request to ship chipmaking equipment to a distributor without a manufacturing operation.
• A company receives an “order or request related to an item” from an end-user -- including a request to service, install, upgrade or maintain the item -- but the end-user would likely not be able to obtain the item or service on its own without a license from BIS.
• A company receives a request to service, install, upgrade or maintain an item that was “altered” after the shipment by a third party for a “more advanced end use that would normally require a license for the destination.”
• A company receives a request for an item or service from a new customer that has senior management or technical leadership who overlap with an entity on the Entity List.
• A company receives a request from a new customer for an item or service that was designed or modified for an existing or former customer that is now on the Entity List.
• When analyzing the scope of the Entity List FDP rule for Footnote 5 entities, if a foreign-made item is “described in the relevant Category 3B ECCN in § 734.9(e)(3)(i) or § 734.9(k)(1)” and contains at least one integrated circuit, then BIS said that is a red flag that the item is likely captured under the FDP rule.

Along with the range of new controls, BIS created new License Exception Restricted Fabrication Facility (RFF), which will allow certain exports to fabs that are subject to end user-based license requirements but that aren’t currently producing advanced node chips. Under this license exception, those fabs can buy certain “legacy equipment and related items” to make those non-advanced chips “through a framework that establishes guardrails and monitoring to address U.S. national security concerns.”

This includes “terms and conditions on the use” of the license, including one that bars it from being used to ship items “essential for producing” advanced chips. Exporters using the license must also submit a pre-shipment notification to BIS 45 days before exporting the item and must submit various reports to BIS after the equipment has been installed, including one with the date of the equipment’s installation along with other information. The exporter must also certify to BIS annually that the equipment isn’t being used to make certain advanced chips.

“BIS believes that these restrictions, along with existing countrywide license requirements for SME and related items that cannot be overcome by RFF, will further U.S. national security and foreign policy objectives,” BIS said. The agency said so far only one entity under its new Entity List rule is eligible for this license exception: China-based Wuhan Xinxin Semiconductor Manufacturing Company Limited.

The rule also introduces new controls on high-bandwidth memory (HBM) that BIS said is “critical” to both “AI training and inference at scale and is a key component” of advanced chips. The new restrictions apply to U.S.-origin HBM as well as foreign-made HBM subject to the Export Administration Regulations under the agency’s advanced computing FDP rule, and certain HBM will be eligible for new License Exception HBM.

More controls target other software and technology, including Electronic Computer Aided Design (ECAD) and Technology Computer Aided Design (TCAD) software and technology when there is “knowledge” that those items will be used to design certain advanced chips to be produced in China, Macau or a destination in Country Group D:5. BIS also clarified that its export controls apply to transfers of software keys that “allow access to the use of specific hardware or software or renewal of existing software and hardware use licenses.”

Some exports that will soon require a license as a result of this rule, but not all, that were aboard a carrier to a port as of Jan. 2 may proceed to their destinations under the previous eligibility as long as the items are exported before Jan. 31, BIS said.

BIS also added 140 entities to the Entity List, including Chinese semiconductor fabs, tool companies and investment companies, for helping the Chinese government make advanced chips for its military. The additions include entities based in China, Japan, South Korea and Singapore, and they will be subject to a license requirement for all items subject to the EAR, with most facing a presumption of denial.

The additions include several notable Chinese firms involved in semiconductor equipment manufacturing, such as Naura Technology, Piotech and ACM Research, while other companies were added specifically because of their ties to Huawei. Sixteen entities on the list will now be designated with a Footnote 5, meaning they will be subject to certain chip manufacturing equipment FDP rule restrictions.

The rule also makes several other updates and modifications to companies already on the Entity List, including by revising the license review policy for several firms, including Semiconductor Manufacturing International Corp., China’s flagship chip company, to a presumption of denial for all items subject to the EAR. SMIC was previously subject to a presumption of denial license review policy for items “uniquely required for production of semiconductors at advanced technology nodes (10 nanometers and below, including extreme ultraviolet technology),” and a case by case review policy for all other items.

BIS also removed three entities from its validated end-user program, which allows foreign entities to receive certain export-controlled items without having to first obtain a specific license. The agency removed CSMC Technologies Corp.; Shanghai Huahong Grace Semiconductor Manufacturing Corp.; and Advanced Micro-Fabrication Equipment, Inc., China. BIS said Advanced Micro-Fabrication Equipment "requested to be removed" from the VEU Program.

Exports that now require a license as a result of this rule but were aboard a carrier to a port as of Dec. 2 may proceed to their destinations under the previous eligibility as long as the items are exported no later than Jan. 2, BIS said. This savings clause doesn’t apply to “Entity List-related requirements linked to Footnote 5 designations.”