Export controls have long been a key tool the United States has used to manage the country’s complex relationship with China and the relationship among China, the United States, and US allies or partners. The Biden administration has continued this trend and has taken several significant steps over the course of the last year to impose extensive export controls designed to protect identified US national security interests.
Given the global nature of commerce today and the Biden administration’s efforts to engage partners and allies to enact multilateral restrictions, the effects of these controls are not limited to businesses operating in the United States or China. The broad reach, based on technology, rather than just destinations, means that third parties—such as US partners and allies—can be drawn into the net of these controls and find that new licensing requirements apply.
As China is likely to be a focus for the United States, its partners, and its allies, we anticipate expanded export controls within the key sectors defined by the Biden administration, including but not limited to semiconductors, artificial intelligence (AI), robotics, biotechnology, autonomous vehicles, and related areas.
As controls expand—both unilaterally and multilaterally—it is prudent for companies, universities, individuals, research institutions, and those who work in the advanced technology field to track the ebbs and flows that govern the relationship between the two countries and prepare to respond to the prospective additional controls that will likely be effective on shorter timelines.
Most US export controls are enacted pursuant to multilateral agreements, such as the Wassenaar Arrangement, the Missile Technology Control Regime, the Australia Group, and the Nuclear Suppliers Group. However, the United States has, and will continue to, use unilateral export controls in select circumstances, especially in circumstances where it maintains a lead in the technology or otherwise maintains a strong, singular presence in a particular industry sector, such as semiconductor design.
The US recently enacted significant unilateral controls based on specific semiconductor- and supercomputer-related technologies focused on China through the Export Administration Regulations (EAR). These include the following:
In addition, the October 7, 2022 semiconductor and supercomputer rule published by the US Department of Commerce’s Bureau of Industry and Security (BIS) amends the EAR to impose sweeping controls on advanced computing semiconductor chips, transactions for supercomputer and integrated circuit end uses, and semiconductor manufacturing items.
In releasing the interim final rule, BIS noted that the rule was a matter of US national defense and security, as advanced computing items and supercomputers have the potential to be used by China for civil and certain military applications.
The BIS sought comments on the interim final rule and many companies weighed in on its impact. BIS has yet to publish a new rule based on the comments submitted although the comments have been published by the BIS and are available on the agency’s website. For now, Morgan Lewis is monitoring the situation closely and anticipates that the comments may encourage the BIS to enact some changes to allow for greater certainty, perhaps more authorized activities and clarity on the reach of currently vague concepts such as “facilitation” and “support.”
As it now stands, the rule includes far-reaching, complex controls that seek to broadly regulate exports of hardware from the United States to China and non-US-produced items going to China that the United States has jurisdiction over because they were produced with US software or technology.
Among the more significant restrictions, in addition to the creation of new Export Control Classification Numbers to encompass advanced integrated circuits, computer assemblies, and components related to the integrated circuits, the new rule expands the concept of “facilitation”—an activity generally covered by US sanctions laws administered by the Office of Foreign Assets Control (OFAC). While the BIS and the EAR have licensed or restricted certain activities related to EAR-controlled items, the reach of the new “facilitation” and “support” requirements extends beyond what had been instituted.
In a sense, the BIS appears to be managing these requirements as it did when it used the authority of the International Emergency Economic Powers Act (IEEPA) rather than its now substantive statute, the Export Control Reform Act of 2018 (ECRA). This approach raises significant concerns—many of which were addressed through the comments filed in response to the proposed rule and the interim final rule.
The rule imposes these restrictions on activities of US persons who may support development or production of integrated circuits that meet the advanced technology criteria in China, based on the notion that the US government views the sharing of US-developed knowledge and information to support manufacturing in China as a national security threat that highlights vulnerabilities and creates unacceptable consequences to US interests.
The rule also expanded the scope of licensing requirements for 28 existing entities on the Entity List located in China and alleged to be involved in developing supercomputers or integrated circuits for military end uses and users.
The BIS rule has had a significant impact across industries and jurisdictions since many companies investing in the United States also have strong business interests in China. Companies have taken a variety of approaches to comply with the measure, such as the following:
The current administration has assertively engaged partners and allies to persuade them to impose sanctions or restrictions similar to those in the United States. This approach, used less extensively by the prior administration, is based on the president’s belief that the most effective export controls are those imposed multilaterally.
In that vein, the United States has focused efforts on the Netherlands and Japan, which are home to companies that make some of the world’s most advanced equipment for manufacturing semiconductors. Japan and the Netherlands manufacture equipment and other technologies that act as effective “choke points” through which advancements can be delayed. The recent enactment and upcoming implementation of restrictions by both countries signifies an understanding that multilateral efforts are those most likely to manage China’s advancements.
In January 2023, public reports indicated that the United States, Japan, and the Netherlands agreed to limit the export of advanced chip-making equipment to China. However, no concrete effective steps have been taken other than in the licensing context.
Additionally, in March, the Dutch trade minister announced new export controls on semiconductor technology, and as of July, Japanese companies will need a license to sell nearly two dozen types of chip-manufacturing technology to a foreign country. Neither of these announcements explicitly reference China or the January multilateral agreement.
In September 2022, National Security Advisor Jake Sullivan made remarks at the Global Emerging Technologies Summit that the United States can no longer stay only a couple of generations ahead on technology and “must maintain as large a lead as possible.” He noted that three families of technology will be of particular importance in the coming decade, including computing-related technologies such as microelectronics, quantum information systems, and AI, biotechnologies and biomanufacturing, and clean energy technologies.
An anticipated executive order on outbound investment will seek to address outbound investments in sensitive technologies, particularly investments that would not be captured by export controls.
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