Chip Industry Concerned About Lack of BIS Engagement on China Controls, Conflicting Messaging

The semiconductor industry was disappointed the new U.S. export control rules involving China weren’t imposed multilaterally and were frustrated by the Commerce Department’s lack of engagement before the rules were announced, a chip industry executive said. Semiconductor companies also have received mixed messages from Commerce about how long it could take to convince allies to impose similar controls, a China technology expert said, and fear that China could retaliate before allies are brought on board.

The semiconductor industry for several decades has been accustomed to a “regular-order rulemaking” from the government on export controls, including “significant engagement with the private sector,” Jimmy Goodrich, vice president of global policy with the Semiconductor Industry Association, said during an event last week hosted by the Washington International Trade Association. But industry didn’t see that same collaboration before the Bureau of Industry and Security issued its Oct. 7 rule that expanded chip export restrictions on China (see 2210070049).

“This time, frankly, the government’s level of engagement with industry was much, much more limited, in some cases non-existent,” Goodrich said. He pointed to the fact that some companies received unexpected is-informed letters from BIS, which forced them to stop sales of certain items before the rules were announced (see 2211020027, 2209160025 and 2209010059).

“Those came as a complete surprise,” Goodrich said of the letters. “So that's also a very significant departure from past BIS and Commerce rulemaking with export controls.”

Paul Triolo, a China and technology policy expert with Albright Stonebridge Group, said the fact that parts of the rule took effect so quickly “surprised some people.” He specifically pointed to the new U.S. persons restrictions, which “caused a lot of consternation in the industry” because companies had only days to react to new license requirements.

“The fact that these took effect right away” has made compliance “a bit tricky,” Triolo said, although he noted that some parts of the rule didn’t take effect until later in October. He also said BIS’s first round of frequently asked questions, which were issued last month and included guidance on certain U.S.-persons restrictions, deemed exports and a definition for semiconductor “facility,” were “not considered” all that helpful (see 2210310044).

“We’ve been swimming up to our necks trying to understand the regulations,” Goodrich said. As lawyers and executives grapple with what they say is an unusually complex set of regulations, chip companies have been forced to delay decisions on shipments until they can better understand their risks and BIS’s due diligence requirements (see 2211010042).

Goodrich also said there was “definitely a sense of disappointment” among chip companies that the U.S. didn’t first ensure the controls were imposed multilaterally. He said the industry is concerned firms in China and Japan can “replace and backfill” many of the U.S. companies whose exports and activities now require licenses.

“While the U.S. has around 40 percent, 45 percent of global sales, we don't have a monopoly on the market,” Goodrich said. Unilateral controls don’t “help the U.S. government achieve their objective,” he added. “It harms U.S. industry, but more importantly, it does not address the national security goal, because those entities of which the U.S. government has concerns over in China are still able to access that technology the U.S. government does not want them to obtain.”

Triolo said Commerce has sent “conflicting” messages about how long it may take to convince allies with similar semiconductor capabilities to impose similar restrictions against China. BIS Undersecretary Alan Estevez said last month that he is confident allies will adopt similar controls in the “near term” (see 2210270047), but Commerce Secretary Gina Raimondo reportedly told chip companies last week that the process could take nine months (see 2211040014).

Estevez “made it sound as if this was sort of a slam dunk to get the other key parties, such as Japan and the Netherlands, on board,” Triolo said. And if the U.S. were to try to propose some of the restrictions at the Wassenaar Arrangement, “that's probably a two-year process rather than nine months,” Triolo said. “So that's a really outstanding issue.”

A BIS spokesperson pointed to Estevez's comments last month, in which the undersecretary expressed confidence the U.S. will eventually secure multilateral controls. The spokesperson also pointed to the agency's resource and information page on the new restrictions, which includes BIS's first set of FAQs and an October public briefing held by Thea Kendler, BIS's assistant secretary for export administration.

Melissa Duffy, a trade lawyer with Fenwick & West, said it's notable that the U.S. was able to coordinate multilateral sanctions against Russia “so fast” but has not seen the same success with export controls against China. “Our allies aren't there with us in the same way that they were with Russia,” she said.

Both Goodrich and Triolo said they are closely monitoring whether China will retaliate against the new controls. “Our clients ask us that question just about every day,” Triolo said, adding that “it's likely that the Chinese response at some point will be fairly strong” and could involve investigations of U.S. companies.

But he also said Beijing is “being very careful in the short term not to do things that would further poison the business climate.” China’s “major retaliation will take some time,” he said. “They're still assessing the full impact of these regulations on their industries.”

Goodrich said Beijing is “very unhappy about these rules,” and retaliation could harm the U.S. chip industry. “We don't expect them to just kind of sit by and do nothing about it,” Goodrich said. “So that's something that we're very concerned [about] and watching as well.”