New BIS Export Controls Target China – But Effective Security Will Depend On Enforcement

Tech Industry

On October 7, Commerce Department’s Bureau of Industry and Security (BIS) issued an historic new set of restrictions targeting Chinese technology companies. Greg Allen of the Center for Strategic and International Studies (CSIS) described the action as “a new U.S. policy of actively strangling large segments of the Chinese technology industry.”

But the devil is in the details. The issuance of the controls triggered a 60-day window for Commerce to begin enforcing many of the rules’ provisions. BIS Under Secretary Alan Estevez has said “we are not done” with respect to semiconductors. What Commerce does during this period will indicate a long-term commitment to enforcement or not.

As China Tech Threat has captured in a memo, here are five areas observers should scrutinize:

1. END-USE VERIFICATION

BIS added 31 Chinese entities – including Yangtze Memory Technology Corporation (YMTC) – to its Unverified List (UVL). If a company is on the UVL, it means the Commerce Department has been unable to verify that controlled technologies aren’t being used in ways contrary to U.S. national security interests. It’s doubtful that the Chinese government will allow companies on the UVL to comply with BIS end-use checks. The significance of these checks prompts a host of questions:

  • When does the Commerce Department plan to begin these end-use checks?
  • Does Commerce have enough resources to conduct adequate end-use checks in China, and will it have appropriate access to all of the data, documentation, export/transfer records that it needs, even for technology transfer?
  • How will Commerce determine if the Chinese government or the company is impeding the end-use check?
  • Will Chinese companies already on the UVL such as YMTC allow end-use inspections or continue shutting out the Commerce Department over the next two months?
  • Is Commerce pursuing a much-deserved end-use check with CXMT? If so, when did it initiate a request, and is CXMT on a running clock right now? If not, when will Commerce make a request?

2. TRANSFERRING COMPANIES ON THE UNVERIFIED LIST TO THE ENTITY LIST

Chinese companies’ compliance with BIS’ end-use checks will also likely determine whether they land on the Entity List. If “sustained lack of cooperation by a host government” prevents BIS from conducting end-use checks for a company on the Unverified List after 60 days, that company can be added to the Entity List after a 60-day process.

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  • Does the Commerce Department have to wait until the end of the 60-day window to start preparing an Entity List designation?
  • More specifically, YMTC has reportedly been under investigation by the U.S. government for selling chips to Huawei. If found guilty before the current 60-day window is exhausted, can the Entity List designation be made sooner?

3. CONGRESSIONAL OVERSIGHT

While Congress has no formal role in the issuance or enforcement of the rules, multiple Democrat and Republican members of Congress have spent the last two years demanding that the Commerce Department add YMTC to the Entity List.

  • Now that the Commerce Department has laid out a clear pathway for YMTC and other Chinese tech entities to land on the Entity List, will Congress keep up the pressure to make sure the Department does what it says is can do?
  • If a change of congressional leadership happens, will a new Chair of the House Foreign Affairs Committee provide more intense oversight?

4. U.S. CITIZENS SUPPORTING CHINESE CHIP PRODUCTION

BIS has also now prohibited Americans from working at a Chinese semiconductor facility inside China without permission. American semiconductor manufacturing equipment companies such as KLA Corp and Lam Research are already hitting pause on their operations in China and pulling out their staff based at YMTC, and YMTC has asked its core U.S. staff to leave.

  • What agency will be tasked with policing these special immigration situations? Is this a function for the Commerce or another federal agency?
  • How will the U.S. government punish American citizens who might attempt to disobey this rule?

5. REVIEW OF LICENSE APPLICATIONS

The new export controls impose a bevy of new license requirements on American firms seeking to export semiconductor-related technologies to China. But there’s a loophole: This policy applies only to parts destined for Chinese-headquartered companies, not companies with a Chinese ultimate beneficial owner. Chinese semiconductor companies can circumvent the rules by re-reincorporating in a jurisdiction outside China.

  • Will the applications be made publicly available? If so, how can policymakers and interested experts conduct an independent review of submitted applications?
  • How will BIS close the loophole of companies that are headquartered outside of China but still owned/controlled by the People’s Republic of China?

The new rules are a great start. But with plenty of unknowns still outstanding, the next sixty days will reveal how serious the Commerce Department is about driving this policy forward.

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