US and China Export Controls: An update

Update to Part 744 of the EAR

On June 29th, the final Rule on “Expansion of Export, Reexport, and Transfer (in-Country) Controls for Military End Use or Military End Users in the People's Republic of China, Russia, or Venezuela,” will come into effect.

Similar controls have already been in place for entities in Russia. This rule change aims to extend those restrictions to prevent entities in Venezuela and China from using US technology obtained through civilian channels or for purported civilian purposes to support military end uses. This rule will affect companies both inside and outside of the US doing business with China, and particularly those working with high technology items.

The main changes are:

• Expansion of military end use controls to cover military end users, as well as a broader definition of end use, which will now cover any item which ‘supports’ or ‘contributes to’ any aspect of the development, production or maintenance of military equipment;
• Expansion of the coverage of end use controls to include materials processing, electronics, including equipment for semiconductor manufacture, telecoms, information security, sensors and lasers, and propulsion (the items newly subject to this end-use control are identified by their export classification numbers and include 2A290, 2A291, 2B999, 2D290, 3A991, 3A992, 3A999, 3B991, 3B992, 3C992, 3D991, 5B991, 5A992, 5D992, 6A991, 6A996, and 9B990).
• Removal of licence exception CIV, which normally permits certain exports for civilian end use to countries of national security concern; and
• Proposed removal of licence exception APR (Additional Permissive Reexports) which permits certain reexports from US partner countries to countries of national security concern.

The implication of these changes will mean that businesses need to be much more vigilant in documenting and fully understanding the supply chain risk and end-use/end-users of their exports. There is likely to be an increase in the number of licence applications for less sensitive goods to these destinations. These will not be easy to obtain since the Department of Commerce has already indicated that there will be a ‘presumption of denial.’

The companies principally affected will be US exporters in high tech sectors. Outside of the US the new rule will impact companies which sell to China or the subsidiaries of Chinese companies, especially those whose offerings include US-origin items (though de minimis rules remain unchanged). Such companies will need to check whether US-origin goods are covered by the newly expanded list of Export Control Classification Numbers (ECCN) subject to end use controls. Perhaps the more significant challenge will be to establish whether their Chinese customers are considered by the US authorities to have links with military end use/end users. As the relevant Federal Register Notice puts it, ‘This expansion will require increased diligence with the respect to the evaluation of end users in China, particularly in view of China’s widespread civil-military integration’.

The Department of Commerce has, in an FRN published on June 5th, added to the US ‘Entity List’ 24 Chinese companies (including two registered in the UK) on the basis that they pose a significant risk of becoming involved in the procurement of commodities and technologies for military end use in China. Companies are therefore automatically barred from doing business with them in US-origin goods. Absent further guidance to the contrary, however, companies should not assume that they are free to do business with any Chinese entity which does not appear on the list, if, as a result of due diligence, they have knowledge that such an entity engages in activities proscribed by the new rule.

The Department of Commerce has confirmed that it will be issuing further guidance to industry to help clarify the expanded licensing requirements for China, but nothing has been published thus far. DoC officials have indicated informally that the aim is to keep sensitive US technologies out of the hands of the Chinese military, and that it is not their intention to disrupt civilian business, even if carried out by entities with both a military and civilian capability. Due diligence requirements might be satisfied with an appropriately worded end use/user undertaking, but companies should await definitive guidance before taking decisions.

More Measures against Huawei

In 2019, Huawei and its foreign subsidiaries and affiliates were placed on the US ‘Entity List’, which meant that companies were restricted from providing them with US-origin products, software and technology.

The US Department of Commerce has now announced, in a draft FRN, published on 19 May, that, in view of the fact that Huawei has been evading the controls by sourcing chips from non-US fabricators using US-origin equipment, such activities will in future, with a short transition period, be licensable (and effectively banned).

This new rule stretches US export control jurisdiction not just, as before, to the foreign direct product of US technology but to the product of manufacturing equipment which is the direct product of US technology. It is, however, (currently) limited to Huawei and its subsidiaries.

Again, companies sourcing goods from Huawei will need to watch for controlled US components and any supply chain disruption, with a possible impact on quality.

For support in helping your business comply with these requirements, or other global trade compliance queries, please contact:

• Stacey Winters – Partner, Risk Advisory
• Julia Bell – Director, Risk Advisory