The Long(er) Arm Of US Export Controls: US Moves To Close "Loophole" In Latest Bid To Hamper Huawei's Access To Supply Of Chipsets

• Published date: 30 May 2020
• Author: Mr Tamer A. Soliman, Jing Zhang, Yoshihide Ito, Jason Hungerford and Timothy C. Lee
• Subject Matter: Government, Public Sector, International Law, Technology, Terrorism, Homeland Security & Defence, International Trade & Investment, Export Controls & Trade & Investment Sanctions, New Technology
• Law Firm: Mayer Brown

On May 15, 2020, the US Department of Commerce, Bureau of Industry and Security ("BIS") announced an interim final rule that will further restrict the use by non-US persons of certain US technology, software and equipment in the design, development and production abroad of semiconductors for Huawei Technologies Co., Ltd. and 114 of its affiliates around the world.¹ The rule is the latest in a series of recent actions by the United States intended to address US national security concerns relating to China's drive for 5G dominance and to enhance national security controls on related transactions. The rule has already drawn reaction from the Chinese government and will have far-reaching implications for US and non-US foundries, chipset design firms and others in Huawei's global supply chain.

The interim rule took effect May 15, 2020, and includes a conditional grace period for covered items the production of which was initiated as of that day, as well as for certain in-transit shipments. On or before July 14, 2020, BIS is requesting comments on the impact of this rule. This Legal Update provides background on BIS's actions targeting Huawei and an overview of the rule change and its potential ramifications.

Background

Entity List Designation of Huawei

As discussed in our previous Legal Update, on May 16, 2019, BIS added Huawei Technologies Co., Ltd. and dozens of its non-US affiliates (collectively, "Huawei") to the Entity List. That action imposed a license requirement on exporting, reexporting or transferring (in-country) items subject to the Export Administration Regulations ("EAR") to Huawei. BIS issued a Temporary General License ("TGL") authorizing certain limited categories of transactions for a 90-day period and has issued successive extensions of that general license.² Outside of these narrow exceptions, the Entity List designation effectively cut Huawei off from both US and non-US items, whether goods, technology or software, (collectively, "items") when they are subject to the EAR. For example, items made outside of the US may also be subject to the EAR if they incorporate greater than de minimis controlled US-origin content (generally, greater than 25 percent) or, in certain limited cases, are produced as the direct product of certain controlled US-origin technology subject to national security controls. As discussed in our recent Legal Updates,³ the Entity List designation of Huawei is part of the US government's assessment of critical national security risks associated with China's efforts to secure cutting-edge technologies as part of its "military-civil fusion" initiative, which aims to merge China's defense and commercial economies as part of its strategy to advance Chinese interests.

Huawei's Adapting Supply Chain

As the above suggests, foreign-made items with less than de minimis US content and items that do not fall within the "foreign direct product" category of US technology fall outside the reach of the rule. In the year since Huawei's designation, Huawei has demonstrated an ability to adapt and leverage its substantial market position by...