BIS Amends Direct Product Rule To Target Huawei But Extends Huawei Temporary General License

Originally Posted on Pillsbury Global Trade Blog

On May 15, 2020 the Commerce Department announced an amendment to the direct product rule that further restricts the ability of Huawei Technologies Co., Ltd. and its affiliates on the Entity List, such as HiSilicon (collectively “Huawei”), to receive certain foreign-made semiconductor products.

The Commerce Department also extended the temporary general license (TGL) that authorizes certain dealings with Huawei and its subsidiaries by U.S. persons through August 13, 2020.  Statements from the Commerce Department indicate this may be a “final” extension.

Huawei-Specific Amendment to the Direct Product Rule

The Bureau of Industry and Security (BIS) released to the public an interim final rule effective May 15, 2020 requiring foreign manufacturers to obtain an export license before supplying Huawei with certain items “produced or developed” by Huawei.

Huawei was added to the BIS Entity List in May 2019.  Pursuant to this designation, companies are prohibited from exporting, reexporting, or transferring items subject to the Export Administration Regulations (EAR) to Huawei without a license from BIS.  Despite being added to the Entity List, according to the Commerce Department, Huawei has continued to commission the production of semiconductors in overseas foundries that use U.S. software and technology.

In general, foreign-made items controlled for “national security” (NS) reasons are subject to the EAR when exported to certain countries (including China) if they are the “direct and immediate product” of NS-controlled U.S.-origin software/technology or a plant or major plant component that is a direct product of NS-controlled U.S.-origin software or technology.

The new interim rule adds a Footnote 1 designation to certain parties on the Entity List, imposing additional restrictions on items destined for such parties.  Currently, Huawei and its affiliates on the Entity List are designated with Footnote 1.  No other entities are subject to Footnote 1.

Under the new interim rule, the following foreign-made items are subject to the EAR if destined for an entity with the Footnote 1 designation:

• Items that are:
  • the direct product of software or technology subject to the EAR and specified in the following ECCNs; and
  • “produced or developed” by any entity with a Footnote 1 designation.
• Items that are:
  • the direct product of a plant or major component of a plant that is a direct product of U.S.-origin technology or software subject to the EAR and specified in the following ECCNs; and
  • a direct product of software or technology produced or developed by an entity with a Footnote 1 designation.

The covered Export Control Classification Numbers (ECCNs) identified in the rule are U.S.-origin technology or software that is specified in ECCNs 3E001, 3E002, 3E003, 4E001, 5E001, 3D001, 4D001, or 5D001; technology specified in ECCNs 3E991, 4E992, 4E993, or 5E991; or software specified in ECCNs 3D991, 4D993, 4D994, or 5D991.

A major component of a plant means equipment that is essential to the production of an item, including testing equipment.  Items that are the direct product of a covered plant or major component of a plant do not themselves have to be classified in one of the listed ECCNs to be restricted under this rule.

The interim final rule did not indicate how BIS will interpret the term “produced or developed” by a designated entity.