On October 27, China Tech Threat released a new memo calling attention to five priority areas worthy of attention in the wake of the Department of Commerce’s new China-focused export controls issued on October 7.
The new set of rules have been described as “wreaking havoc on China’s chip industry” and “strangling with intent to kill.” But it’s hard to gauge their full impact after only three weeks. Alan Estevez, the Under Secretary of the Bureau of Industry and Security, has said “we are not done” on focusing on the Chinese semiconductor sector.
We’re now 20 days into an important 60 day window that will mark a critical time for analysts, reporters, and industry observers to assess how serious the Department of Commerce is in following through on many enforcement provisions of the new rules – and whether Congress will likewise push Commerce on doing so.
The full memo has more detail, but here are the five areas worth examining and relevant questions surrounding each one:
1. END-USE VERIFICATION
BIS added 31 Chinese entities – including YMTC – to its Unverified List (UVL). If a company is on the UVL, it means the Commerce Department has been unable to verify that controlled technologies aren’t being used in ways contrary to U.S. national security interests. It’s doubtful that the Chinese government will allow companies on the UVL to comply with BIS end-use checks.
- When does the Commerce Department plan to begin these end-use checks?
- How will it determine if the Chinese government or the company is impeding the end-use check, and what criteria will Commerce use?
- Does Commerce have enough resources to conduct adequate end-use checks in China, and will it have appropriate access to all of the data, documentation, export/transfer records that it needs, even for technology transfer?
- Will Commerce publish the findings of its end-use checks and specify what it specifically examined?
- What about the reaction in China? Will Chinese companies already on the UVL such as YMTC allow end-use inspections or continue shutting out the Commerce Department over the next two months?
- Is Commerce pursuing a much-deserved end-use check with CXMT? If so, when did it initiate a request, and is CXMT on a running clock right now? If not, when will Commerce make a request?
2. TRANSFERRING COMPANIES ON THE UNVERIFIED LIST TO THE ENTITY LIST
Chinese companies’ compliance with BIS’ end-use checks will also likely determine whether they land on the Entity List. If “sustained lack of cooperation by a host government” prevents BIS from conducting end-use checks for a company on the UVL, that company can be added to the Entity List after a 60-day process.
- Does the Commerce Department have to wait until the end of the 60-day window to start preparing an Entity List designation?
- Since YMTC has been involved in activities that undermine U.S. national security – e.g. it is reportedly under investigation for selling chips to Huawei – why hasn’t it already been designated to the Entity List? In other words, what is BIS waiting for?
- Finally, if YMTC and others are designated to the Entity List, will Huawei-type foreign direct product rules apply? And will the license review policy for all exports be “presumption of denial,” or will the more relaxed “case-by-case” license review policy apply?
3. CONGRESSIONAL OVERSIGHT
While Congress has no formal role in the issuance or enforcement of the rules, multiple Democrat and Republican members of Congress have spent the last two years demanding that the Commerce Department add YMTC to the Entity List, reflecting a concern that the Department actually do what it is empowered to do.
- Now that the Commerce Department has laid out a clear pathway for YMTC and other Chinese tech entities to land on the Entity List, will Congress keep up the pressure to make sure the Department does what it says is can do?
- If a change of congressional leadership happens, will a new Chair of the House Foreign Affairs Committee provide more intense oversight?
4. U.S. CITIZENS SUPPORTING CHINESE CHIP PRODUCTION
BIS has also now “[restricted] the ability of U.S. persons to support the development, or production, of ICs (integrated circuits) at certain PRC-located semiconductor fabrication “facilities” without a license.” Translation: Americans can’t work at a Chinese semiconductor facility inside China without permission. This could potentially govern hundreds, if not thousands of American engineers and other support staff working inside China.
However, the prohibition applies only to specific activities. Non-advanced Chinese fabs can still hire engineers and the engineers can assist fabs with technologies that have crossover application to advanced chips.
Still, this rule has already had an immediate impact and could deprive top Chinese semiconductor firms like YMTC and CXMT of critical brainpower they will need to survive, but only if the U.S. government enforces it.
- What agency will be tasked with policing these special immigration situations? Is this a function for Commerce/BIS or another, such as ICE or the State Department?
- How will the U.S. government punish American citizens who do not obey this rule?
5. REVIEW OF LICENSE APPLICATIONS
The new export controls impose a bevy of new license requirements on American firms seeking to export semiconductor-related technologies to China. But some of those requirements are only good insofar as licenses to export American technologies are denied
Some of the license requirements helpfully institute a “presumption of denial” policy for items bound for any semiconductor fabrication facility owned by the PRC producing certain chips. But there’s a loophole. This policy applies only to parts destined for Chinese-headquartered companies, not companies with a Chinese ultimate beneficial owner. Chinese semiconductor companies can circumvent the rules by re-reincorporating in a jurisdiction outside China.
- Will the applications be made publicly available? If so, how can policymakers and interested experts conduct an independent review of submitted applications?
- How will BIS close the loophole of companies headquartered outside of China but still owned/controlled by the PRC?
Any individual or organization is free to comment on the BIS’s recent rules, even anonymously. China Tech Threat will continue to monitor developments and gauge whether the Commerce Department’s actions align with Under Secretary Estevez’s words: “We will use our full gamut of capability…to enforce our rules.” Time will tell how serious the Commerce Department is about following through.
For more information on BIS’s export control rules, check out China Tech Threat’s latest page.