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New China Chip Controls Designed to Target Loopholes, Will Be Continually Updated, Officials Say

October 18, 2023 by Ian Cohen|Top News

The Bureau of Industry and Security this week released a range of updates to its Oct. 7, 2022, China chip controls, unveiling two rules that will impose new license requirements on additional chips and chipmaking tools, make revisions to its U.S. persons restrictions, expand licensing requirements for exports of certain chipmaking items to U.S. arms-embargoed countries, create a new notification requirement and introduce other measures to address export control circumvention risks.

Both interim final rules also ask for public comments on some of the changes and address feedback submitted to the agency as part of the initial Oct. 7 rule (see 2302020034). One new rule, which will update restrictions on certain advanced computing items, supercomputer and semiconductor end-uses and make other updates and corrections, takes effect 30 days from the date of public inspection in the Federal Register. The other rule, which will update controls on certain semiconductor manufacturing items, will take effect 30 days after being placed on public inspection in the Federal Register, except for the new temporary general license included in the rule, which takes effect upon Federal Register publication. Neither rule had yet been placed on public inspection as of press time.

In an Oct. 16 call with reporters, a senior administration official said the updates are “really focused” on closing loopholes, addressing new “technical developments” in semiconductors and monitoring implementation of the 2022 rule. The official declined to say whether the U.S. expects any of the updated restrictions to be coordinated with allies -- something the U.S. chip industry has repeatedly pushed for -- but said the agency is working toward that. “We have been talking to our allies all through this process,” the person said.

Commerce Secretary Gina Raimondo, also speaking during the call, said the updates are “specifically designed to control access to computing power, which will significantly slow” China’s development of “next generation frontier” artificial intelligence technology. She also said the administration plans to update the rules “at least annually” to make sure they’re keeping pace with innovation and so the U.S. can address circumvention efforts.

“As technology and national security risks evolve,” she said, “we will constantly monitor and adjust to the kinds of advances in technology that materially create new national security risks.”

Along with updated export control parameters for chips used in AI applications and a novel notification requirement for certain “gray-zone” chips that fall below that updated threshold, the rule also includes a specific carve-out for certain consumer chips that the Biden administration has deemed don’t pose national security risks, such as semiconductors used in gaming, phones, electric vehicles and laptops.

The rules also “refine and better focus” the U.S. persons restrictions included in the 2022 rule, an administration official said, which set restrictions on activities related to the development or production of certain semiconductors involving China and which caused widespread concern among global chip firms and researchers (see 2210310044 and 2211010042). The updated U.S. persons restrictions are designed for “maximum impact and to assure U.S. companies don’t support advanced [People’s Republic of China] semiconductor manufacturing and stem the transfer of technical knowhow,” the official said.

“By imposing stringent license requirements, we ensure that those seeking to obtain powerful advanced chips and chip manufacturing equipment will not use these technologies to undermine U.S. national security,” said Thea Kendler, the BIS assistant secretary for export administration. “We will continue to hone these controls as technology evolves so that our technology is not used to threaten global peace and security.”

BIS said the rules were specifically designed to slow China’s development of advanced AI capabilities in military applications, including technologies that can be used to improve the speed and accuracy of military decision making and for radar, signals intelligence and jamming. Raimondo stressed that the controls are meant to restrict exports that have “clear” national security or human rights implications. “Our goal and our principle in devising these controls is that we don't want to be more restrictive than necessary,” she said.

Advanced Computing Rule

One of BIS’ new rules set new export control parameters for advanced chips, identifies certain Export Control Classification Numbers that “meet or exceed” certain export control performance parameters; clarifies the scope of U.S. person and end-use controls involving supercomputers and advanced computing items; amends various licensing policies; broadens the country scope for certain controls; outlines new red flags to help companies with compliance; and adds a new temporary general license, a new license exception and makes other corrections and clarifications to the initial Oct. 7 rule.

Among the most notable changes is a new “performance density threshold” that administration officials said will capture U.S. semiconductor company Nvidia’s A800 and H800 chips, products developed by the firm to comply with BIS’ export controls (see 2211080005). The new parameter, which will apply to ECCN 3A090 -- the ECCN introduced by the Oct. 7 rule to restrict high-performance chips -- will prevent workarounds by companies that are “simply purchasing a larger number of smaller datacenter AI chips which, if combined, would be equally powerful as restricted chips,” BIS said.

The new parameter outlined in 3A090.a will place license requirements on chips with at least one digital processing unit that has either a total processing performance value of 4800 or more; or a total processing performance of 1600 or more and a performance density of 5.92 or more. New ECCN 3A090.b will control chips with at least one digital processing unit having either a total processing performance of 2400 or more and less than 4800 and a performance density of 1.6 or more and less than 5.92; or a total processing performance of 1600 or more and a performance density of 3.2 or more and less than 5.92.

“Together, these paragraphs expand the scope of control as compared to the October 7” rule, BIS said. “This action is necessary to ensure that [integrated circuits] below the October 7 ECCN 3A090 parameters that were still useful for training advanced AI with military applications would be controlled.” An administration official said this new parameter, together with the pre-existing performance threshold introduced by BIS last year, “sets a bright line restriction on the export of chips if they exceed either of the two parameters.”

Another official said the density parameter “is really focused on trying to ensure there aren't what are called chiplet workarounds that take certain chips and string them together, aggregate them in larger quantities, and achieve similar performance.” Under the new parameters, Nvidia’s “A880 and H800 would be restricted,” the official said.

In addition, a revised license requirement for the “entire ECCN 3A090” expands the scope of the ECCN's destination-based licensing requirements beyond China and Macau to also include any destination specified in Country Groups D:1, D:4, or D:5 of the Export Administration Regulations that is not also in Country Groups A:5 or A:6. The agency noted some exports may qualify for a license review policy of presumption of approval.

New License Exception Notified Advanced Computing (NAC) will authorize certain exports of certain 3A090.b datacenter chips and certain ECCN 3A090.a non-datacenter chips destined to nations in Country Groups D:1, D:4, or D:5. The license exception may also apply to certain exports of items classified in ECCNs 3A090, 4A090, 3A001.z, 4A003.z, 4A004.z, 4A005.z, 5A002.z, 5A004.z, 5A992.z, 5D002.z, or 5D992.z that meet the parameters of 3A090.a.

The exception will include a notification requirement for Macau and destinations in Country Group D:5 for certain chip exports that are​​ “less powerful but could be used to train large-scale AI systems by a sufficiently well-resourced actor.” Chip exporters must notify BIS when sending these items, which BIS officials said will apply to “gray-zone” chips that fall just below the new parameters.

The agency said exporters don’t need to submit a commodity classification determination from BIS with their notification, “but doing so will be helpful in limiting any concerns associated with the technical nature of the item because BIS will already be familiar with the item’s performance characteristics if it has conducted a classification review.”

An administration official said violators of the notification requirement could face penalties under the EAR. “The goal with the notification is to provide a streamlined and efficient approach to the gray-zone chips that does not take the length of time that is associated with license applications,” the official said. “So I'm hopeful that we won't be facing much of that situation.”

BIS plans to announce on its website when companies may begin to submit these notifications, “with the goal that License Exception NAC requests may be submitted prior to the effective date of this rule.” Once BIS receives a notification, it plans to review it with other export control agencies during a 25-calendar day period.

“If no objection to a NAC notification is raised,” BIS’ System for Tracking Export License Applications will on the 25th day “provide a confirmation of that fact and a NAC confirmation number to be submitted in” the Automated Export System. If the NAC notification isn’t approved, the system will issue the exporter a “confirmation if you cannot use License Exception NAC.”

BIS also identified a “positive list” of nine ECCNs that meet or exceed the export control performance parameters of ECCNs 3A090 or 4A090, another ECCN created by the Oct. 7 rule that controls computers that contain certain high-performance chips. The agency said it wanted to highlight the ECCNs after public commenters told BIS that conducting diligence on items that may fall under the scope of the controls would be “burdensome and possibly unimplementable for many exporters.”

BIS said it “agrees that a more conventional structure is needed for imposing this aspect of the October 7” rule. The agency made changes to each of the nine ECCNs "intended to make it easier for exporters" to identify those items as subject to the Oct. 7 rule, including by adding a new ".z paragraph" to each of the ECCNs.

"BIS is adopting the .z structure because no ECCN currently has a .z 'items' level paragraph," the agency said. "Similar to the structure used with the .x and .y paragraphs for the '600 series,' 9x515, and 0x5zz ECCNs, using a common 'items' paragraph designation will make it easier for exporters, reexporters, and transferors to identify these items, as well as for the U.S. Government to identify these items under these nine ECCNs."

BIS also introduced a new “tiered approach” that will place a license requirement on exports of a “wider scope” of advanced chips to any destination in Country Groups D:1, D:4, or D:5 that are not also in Country Groups A:5 or A:6. This is meant to address “diversion concerns” with certain countries in Groups D:1, D:4, and D:5. Those same parameters will be applied to BIS’ advanced computing foreign direct product rule.

The rule also clarified the scope of activities that are captured by parts of the U.S. persons controls introduced by the Oct. 7 rule and outlined some of the due diligence that “should be undertaken.” This includes guidance for how to resolve red flags around the U.S. persons controls and other restrictions outlined in the rule. Some of the red flags include:

Another new red flag is meant to help chip fabs identify when an order could lead to the production of an item subject to the agency’s foreign direct product rule. BIS stressed that this red flag is only “applicable” if the entity has “knowledge” the red flag’s criteria are met, and added the exporter can take compliance steps to resolve the red flag, including by obtaining information from the customer “in order to determine whether the item being produced is outside the scope of” the FDP rule.

The 295-page rule also introduced a new temporary general license for certain ECCNs in CCL Categories 3, 4 and 5 and for certain end uses. BIS said the license has a “different product scope than the original TGL that was included in the October 7” rule, “but is otherwise similar in the scope of activity authorized, although the destination scope is broader.”

BIS also asked for public comments on several of the concepts discussed in the updated controls, including the updated parameters for ECCN 3A090, the definition for companies “headquartered” in Macau or a Country Group D:5 destination, the definition for “supercomputer,” the impact of deemed export requirements, ways BIS can help chip facilities better comply with FDP rule restrictions and more.

BIS also asked for feedback on the best way to address Chinese companies using cloud computing services to “undermine the effectiveness" of the Oct. 7 rule. Lawmakers have urged BIS to address the workaround, which involves Chinese companies using certain rental agreements with cloud providers to access controlled items (see 2310100023, 2303210037 and 2305160092).

The agency asked for public comments from those cloud service providers “on the feasibility for them in complying with additional regulations in this area,” how they would identify whether a customer is involved with a dual-use AI foundation model, and what actions would “address this national security concern while minimizing the business process changes that would be required to comply with these regulations.”

Semiconductor Manufacturing Items Rule

BIS’ new semiconductor manufacturing items-related rule expands export controls to additional chipmaking tools, revises the scope of other controls, amends various license exception restrictions, removes certain ECCNs and makes a host of other changes.

One change expands the country scope for rule's controlled items from just China and Macau to all destinations in Country Group D:5, which are nations subject to a U.S. arms embargo. BIS said it wanted to address national security threats posed by exports of ​​advanced chips and chip making tools to a broader range of countries, adding that the new license requirements “will provide greater visibility into the flow” of chip equipment “to other countries and their intended end uses.”

BIS also added a new temporary general license to give chip companies “additional time to identify alternative sources of supply outside of arms-embargoed countries, or to acquire individually validated licenses to continue manufacturing” their chip equipment in those countries, BIS said. The TGL can be used by companies headquartered in the U.S. or a destination in Country Group A:5 or A:6, and applies to certain shipments of export-controlled items to manufacturing facilities in a Country Group D:5 country or Macau. The license will be valid from the date of the rule’s publication in the Federal Register through Dec. 31, 2025.

The agency also made a host of technical changes to certain U.S. persons restrictions, including clarifying "whether knowledge of a violation is a requirement to trigger the license requirements" and new language to clarify the types of end uses captured by the controls and the types of “facilities” where a prohibited end use must occur. Other changes affect the restrictions’ available exclusions, including a new exclusion for U.S. persons employed or working for a company headquartered in the U.S. or a destination in Country Group A:5 or A:6 and not majority-owned by an entity headquartered in Macau or a destination in Country Group D:5.

BIS said this exclusion is meant to “ease the compliance burden and corresponding disincentive to employ U.S. persons” in activities for which other governments, including U.S. allies, “maintain or may establish appropriate controls.” The rule also includes new language to “provide additional context” on when U.S. persons activities are excluded, including guidance on how these criteria apply to U.S. persons working as freelancers.

Other notable changes include the removal of ECCN 3B090 after BIS determined that controls on chip equipment “should be placed with similar equipment specified in previously existing ECCNs,” for “ease” of compliance and enforcement. BIS also said it expects these items to be the “subject of future formal multilateral controls.”

The rule also includes new definitions for “Extreme Ultraviolet,” which are electromagnetic spectrum wavelengths greater than 5 nm and less than 124 nm, and “advanced-node integrated circuits,” which “now includes notes clarifying the meaning of ‘production technology node’ for two types of ‘advanced-node integrated circuits,’" BIS said.

The rule also eliminates the de minimis threshold for certain lithography equipment in ECCN 3B001.f.1.b.2.b., except when the country from which the foreign-made item was originally exported or reexported has the item already listed on its export control list. “In other words, if the other country maintains an equivalent export control” for that equipment, BIS said it “does not need to impose additional controls on the export from abroad.” The agency is adding a footnote with information detailing any countries that maintain an equivalent export control.

Among the many other changes in the 141-page rule, BIS relaxed its license review policy for certain chips destined for supercomputer and semiconductor manufacturing end uses in China. The new license review policy will now include a presumption of approval license policy “when there is a foreign-made item available that is not subject to the EAR and performs the same function as the item subject to the EAR." The review policy will also apply for end users headquartered in the U.S. or a destination in Country Group A:5 or A:6 if they aren’t majority-owned by an entity headquartered in either Macau or a destination in Country Group D:5.

“As a result, the presumption of denial license review policy does not cover all transactions,” BIS said. “In addition, the license review will take into account factors including technology level, customers, and compliance plans.”

BIS also said it’s no longer issuing specific authorization letters to companies to allow them to participate in certain controlled activities or controlled exports that contribute to restricted supercomputer and semiconductor manufacturing end uses under the chip rules. BIS said it received a comment from one company that said it “depends on receiving” these authorizations to export certain parts, software and technology related to certain “crystal pullers” to China, and the company said its supply chain team “has no work because all exports have been put on hold.”

In the past, BIS said it has “authorized certain types of transactions requiring a license” with “authorization letters (ALs).” But the agency said it “has transitioned away from using ALs to address these types of issues to BIS licenses and other more standard means of authorization.”

In another change, BIS removed ECCN 3B090.a.6, which had included certain “physical vapor deposition equipment capable of depositing a cobalt layer with a thickness of 10 nm or less on a top surface of a copper or cobalt metal interconnect.” BIS said the control was meant to “focus controls on items used in the production of advanced-node ICs" and agreed with commenters that said the agency “did not effectively tailor the scope of control to this objective.”

Chip Industry Assessing Impact

The Semiconductor Industry Association on Oct. 17 said it’s still “evaluating” the new controls, adding that “overly broad, unilateral controls risk harming the U.S. semiconductor ecosystem” without helping U.S.national security and could “encourage overseas customers to look elsewhere.” The group urged the administration to “strengthen coordination with allies to ensure a level playing field for all companies.”

Robert Atkinson, president of the Information Technology and Innovation Foundation, said the new updated rules show the administration has “doubled down” on its Oct. 7 controls. He said limiting sales of semiconductors to China “risks significantly reducing allied semiconductor competitiveness” and could further incentivize China to pursue “indigenous innovation” efforts.

“By cutting off U.S. sales, U.S. firms will lose the most profitable part of their market, significantly reducing profits that otherwise would be invested in research and development for the next generation of chips,” he said. “The issue here is not whether the United States works to restrict Chinese innovation advancement; it’s how to do that in a way that is effective without hurting U.S. capabilities.”

SEMI, a trade group that represents the microelectronics industry, said it will "continue to evaluate the consequences of these export controls and communicate to the Administration the impacts to the global and U.S. semiconductor supply chain.”

The new controls show the Biden administration “remains determined and will respond flexibly and adaptably to actions by industry, allied governments," and China, Paul Scharre, an executive vice president and director of studies at the Center for a New American Security, said in emailed comments to reporters.

Elizabeth Rosenberg, director of CNAS’ Energy, Economics and Security Program, also said in emailed comments that the rules represent a “more sophisticated understanding of how to prevent legal circumvention of the controls,” but noted that they didn’t tackle Chinese companies’ access to cloud computing services. The U.S. chip industry “needs to compete on a global basis,” she added, and the controls, “while justified on national security grounds, make this harder. “

Rep. Michael McCaul, the top Republican on the House Foreign Affairs Committee and one of Congress’ staunchest critics of BIS’ implementation of export controls, said the rules “move the ball forward to cut off” China’s access to advanced chips. “Continued vigilance is now required to prevent circumvention and limit workarounds.”