The US Department of Commerce (“DoC”) expanded the reach of its regulations of exports to China as part of the US current administration’s attempt to maintain the US technological superiority and prevent China’s technological rise.[1] The new regulations, further expanding the Foreign Direct Product Rule (“FDPR”) are aimed at preventing exports to China of certain advanced computing chips and semiconductor manufacturing equipment, with a goal of preventing China from independent development and production of high-end computer chips. This industry is viewed as strategic and competition from China may pose a national security threat, especially with regard to implementation of China’s military-civil fusion development strategy and dual-use technology used for its military modernization.
An important feature of the new regulation is its extraterritorial application, which can be of particular relevance to Israeli companies active in the field of high-performance integrated circuits and computers, electronic assemblies and components, that contain such integrated circuits, as well as advanced semiconductor manufacturing equipment and related software (all of which falls within the scope of new regulations) and selling to customers in China. If an Israeli company manufactures its products entirely outside of the US, either in Israel or elsewhere, it still may be subject to the new DoC regulations. For instance, if items manufactured in Israel contain certain specified US-origin technology or software, or were produced from equipment that itself is the direct product of certain US technology or software, then such items would require a license for export to China. As such, Israeli companies in semiconductor field need to review their current operations to ensure continuous compliance with FDRP. To the extent any of the covered technologט is exported or is planned to be exported to China, it is important to make sure that it does not contain any US-origin technology or software. To this end, introducing and following clear“ know your supplier” procedures would be critical.
In addition, there are new restrictions on “US Person” activity, that stem from the Export Reform Control Act of 2018, specifying that no US person may be involved in supporting certain WMD-related and military intelligence-related end uses and users. While formerly applied only to WMD-related activities, the DoC now concluded that semiconductor manufacturing that may enable the development or production of advanced integrated circuits may support WMD-related and military intelligence-related end uses and users. As a result, any US person, that can also be a US citizen or permanent resident working abroad for a non-US company, will require a license in order to ship, transfer or service to or within the PRC any of the above specified items, significantly increasing a burden on individuals that are involved in semiconductor supply chain. This would cover an Israeli citizen working for an Israeli company in Israel, if that person happens to also hold a US citizenship. The absence of knowledge about the uses of such technology in China does not exempt a US person from license requirements and due diligence related to end users and uses in China will have a critical importance in ensuring compliance with the US persons restrictions. Implementation of this new regulation has already resulted in changes to semiconductor-manufacturing and research-and-development operations of several multinational companies working in China, such as removing Americans from key positions. An Israeli company employing US citizens would need to make sure they stop servicing Chinese customers and provide support to Chinese fabrication plants.
Any Israeli company active in semiconductor sector and working with China should be aware of these new regulations and should carefully examine its current and proposed operations in China, especially if it has any US touch points, in particular in terms of personnel or components or sources of its technology or software. It will have to perform thorough due diligence on both the supplier side (to make sure no specified US technology is involved)and in terms of end users and uses in China to ensure continued compliance with the US export control regulations.
While this particular export control regulation focuses on semiconductors, it is possible that similar restrictions will also be introduced in other areas deemed strategic or posing national security threat, such as biotechnology or artificial intelligence.
[1]Commerce Implements New Export Controls on Advanced Computing and Semiconductor Manufacturing Items to the People’s Republic of China (PRC), Bureau of Industry and Security, Press Release, October 7, 2022 (https://www.bis.doc.gov/index.php/
documents/about-bis/newsroom/
press-releases/3158-2022-10-07-bis-
press-release-advanced-computing-and-semiconductor-manufacturing-controls-final/file)
An important feature of the new regulation is its extraterritorial application, which can be of particular relevance to Israeli companies active in the field of high-performance integrated circuits and computers, electronic assemblies and components, that contain such integrated circuits, as well as advanced semiconductor manufacturing equipment and related software (all of which falls within the scope of new regulations) and selling to customers in China. If an Israeli company manufactures its products entirely outside of the US, either in Israel or elsewhere, it still may be subject to the new DoC regulations. For instance, if items manufactured in Israel contain certain specified US-origin technology or software, or were produced from equipment that itself is the direct product of certain US technology or software, then such items would require a license for export to China. As such, Israeli companies in semiconductor field need to review their current operations to ensure continuous compliance with FDRP. To the extent any of the covered technologט is exported or is planned to be exported to China, it is important to make sure that it does not contain any US-origin technology or software. To this end, introducing and following clear“ know your supplier” procedures would be critical.
In addition, there are new restrictions on “US Person” activity, that stem from the Export Reform Control Act of 2018, specifying that no US person may be involved in supporting certain WMD-related and military intelligence-related end uses and users. While formerly applied only to WMD-related activities, the DoC now concluded that semiconductor manufacturing that may enable the development or production of advanced integrated circuits may support WMD-related and military intelligence-related end uses and users. As a result, any US person, that can also be a US citizen or permanent resident working abroad for a non-US company, will require a license in order to ship, transfer or service to or within the PRC any of the above specified items, significantly increasing a burden on individuals that are involved in semiconductor supply chain. This would cover an Israeli citizen working for an Israeli company in Israel, if that person happens to also hold a US citizenship. The absence of knowledge about the uses of such technology in China does not exempt a US person from license requirements and due diligence related to end users and uses in China will have a critical importance in ensuring compliance with the US persons restrictions. Implementation of this new regulation has already resulted in changes to semiconductor-manufacturing and research-and-development operations of several multinational companies working in China, such as removing Americans from key positions. An Israeli company employing US citizens would need to make sure they stop servicing Chinese customers and provide support to Chinese fabrication plants.
Any Israeli company active in semiconductor sector and working with China should be aware of these new regulations and should carefully examine its current and proposed operations in China, especially if it has any US touch points, in particular in terms of personnel or components or sources of its technology or software. It will have to perform thorough due diligence on both the supplier side (to make sure no specified US technology is involved)and in terms of end users and uses in China to ensure continued compliance with the US export control regulations.
While this particular export control regulation focuses on semiconductors, it is possible that similar restrictions will also be introduced in other areas deemed strategic or posing national security threat, such as biotechnology or artificial intelligence.
[1]Commerce Implements New Export Controls on Advanced Computing and Semiconductor Manufacturing Items to the People’s Republic of China (PRC), Bureau of Industry and Security, Press Release, October 7, 2022 (https://www.bis.doc.gov/index.php/
documents/about-bis/newsroom/
press-releases/3158-2022-10-07-bis-
press-release-advanced-computing-and-semiconductor-manufacturing-controls-final/file)
