U.S. Department of Commerce Places Restrictions on Exports of Chip-Making Materials to China

Washington, D.C. (November 11, 2022) - The White House recently announced that President Biden will meet with Chinese President Xi Jinping on Monday, November 14, 2022, in Bali, Indonesia, on the sidelines of the G20 Summit. Although the White House did not announce a specific agenda for the meeting, the battle over the future of microchip manufacturing will certainly hang over this first face-to-face meeting between Presidents Biden and Xi Jinping.

On October 7, 2022, the Bureau of Industry and Security (BIS) at the U.S. Department of Commerce announced further trade restrictions with China as part of its “ongoing efforts to protect U.S. national security and foreign policy interests.” In an attempt to restrict China’s “ability to both purchase and manufacture certain high-end chips used in military applications,” BIS has implemented broad restrictions on the exportation of chip-making materials from the United States to China, disrupting U.S. suppliers’ business dealings with chipmakers located in China.

Rather than targeting individual Chinese companies, these new restrictions require U.S. companies and persons to obtain a license to export a vast array of materials destined for supercomputer or semiconductor development or production end use in China. These restrictions are broad and include any “activities” that facilitate semiconductor manufacturing and related activities in China. Applications for a license will be decided on a case-by-case basis, however, exports to Chinese-owned companies will face a presumption of denial.

The rules also clarify BIS’s regulations related to its Unverified List and Entity List, which identify foreign entities or individuals subject to additional licensing requirements for exports. Specifically, BIS policy calls for adding parties to the Unverified List 60 days after end-use checks are requested but prevented by host government inaction, such as China failing to schedule or facilitate an end-use check to ensure the non-military use of the export. After an additional 60 days, those on the Unverified List will be moved to the Entity List.

Businesses dealing with those on the Unverified List should be extra cautious when doing so as there may be additional documents required, including an Unverified List Statement, prior to exporting, reexporting, or transferring materials within the country. To that end, dealing with businesses on the Entity List may require a specific license and may be subject to even further restrictions.

American businesses are already seeing the impact of these additional trade restrictions. One U.S. chip equipment supplier announced earlier this month that it would miss its revenue forecast for the fourth quarter by about $400 million, or as much as $550 million, due to the restrictions. Another major U.S. chip-making technology provider stated that the company has “ceased shipments and support as required” by these new trade restrictions.

These most recent restrictions on international trade dealings in the chip-making industry are unlikely to be the last in the United States’ ongoing effort to paralyze China’s advancing military power. Businesses involved in trade with China should pay close attention to these evolving regulations.

Lewis Brisbois is actively monitoring this developing situation and advising clients on how to navigate the complex web of trade regulations that continue to emerge. For more information on these developments, contact the authors of this alert. Visit our Supply Chain Due Diligence Practice page to learn more about our capabilities in this area.

Authors:

Sean P. Shecter, Partner

Rebecca Stoddard, Associate

Editor:

Jane C. Luxton, Managing Partner - Washington, D.C.