BIS Publishes Guidance on FDP Rule Changes
The Bureau of Industry and Security published a set of frequently asked questions to provide industry guidance on its summer update to the foreign direct product rule, which increased restrictions on certain foreign-made items (see 2009170026). The guidance, issued this week, features FAQs that cover how the restrictions apply to companies and products, and how they impact prior exports, manufacturing plants, supply chains, prior licenses and more. BIS also outlined how the restrictions may apply to various scenarios faced by industry, including licensing responsibilities and due diligence requirements.
The BIS rule, issued in August (see 2008170029), refined a May amendment to the foreign direct product rule, which created a “footnote 1” designation that imposed controls on goods that are the direct product of certain technology or software subject to the Export Administration Regulations (see 2005150058). The rules were geared toward restricting exports to Huawei and other companies on the Entity List and placed restrictions on transactions wherein U.S. software or technology is the basis for a foreign-made item produced, purchased or incorporated into any item made or ordered by a Huawei affiliate that is designated by footnote 1.
The semiconductor industry asked BIS for clarity on the new restrictions, saying they would likely cause “significant disruption” for chipmakers and other semiconductor companies (see 2008180048). The industry also called the restrictions broad and expressed concerns they could impact a range of non-sensitive commercial products.
In its guidance, BIS declined to answer industry requests to pinpoint specific equipment that is captured by the rule, aside from saying it applies to semiconductors and finished and unfinished wafers. One FAQ asks whether BIS can identify the “types of back-end assembly, testing and inspection equipment” that would be caught by the rule, but the agency said it “is not in a position to provide a list of equipment.” BIS added that “parties producing items should assess the function of equipment in the production process to determine whether it is essential” to the production of semiconductor products and therefore a “major component of a plant,” which would be captured by the rule.
BIS also said the definition of a “plant” in the FDP rule is not “limited to wafer foundries or outsourced semiconductor assembly and test facilities,” referring to the restrictions on foreign-made items that are the “direct product of a plant or major component of a plant” located outside the U.S. “While wafers and semiconductors produced by the equipment described” are “clearly covered by the FDP rule,” BIS said the rule also covers “any foreign-produced ‘item’ produced with such equipment.”
The agency also addressed licenses related to “subsequent replacement parts.” BIS said it will not necessarily approve a license for replacement parts just because it had approved a prior license for “production equipment” subject to the FDP rule. “The license application for the initial export of the equipment should request a sufficient number of parts and spares,” BIS said, but added that License Exception Servicing and Replacement of Parts and Equipment (RPL) may be available for exports to entities not on the Entity List.
The guidance also outlines certain due-diligence efforts that exporters should take before and after applying for licenses. If “Company A” knows that a certain percentage of items it sells to “Company B” are destined to a “footnote 1 entity” but does not know “what percentage of the items will be incorporated into those products,” Company A should ask for that information from Company B, BIS said. If Company B declines to provide that information, BIS said, a license will be required for “all of Company A’s items that will be exported from abroad, reexported, or transferred” to Company B.