Commerce Increases Restrictions on Huawei, Issues Direct Product Rule Changes

The Commerce Department amended its direct product rule, increasing restrictions on foreign-made chips exported to, and made by, Huawei and its affiliates, the agency said in a May 15 interim final rule. Commerce also said it does not expect to issue another temporary general license extension for the Chinese technology company after its latest 90-day renewal expires Aug. 13.

The rule, which took effect May 15, amends the direct product rule so that it now applies to certain foreign-made items designated with a new footnote on Commerce’s Entity List. It also applies that footnote to 93 entries on the Entity List for Huawei and its affiliates.

The footnote 1 designation, created by the rule, imposes controls on goods that are the direct product of certain technology or software subject to the Export Administration Regulations and specified in certain Export Control Classification Numbers provided in the notice. The footnote also imposes a control on any foreign-made item that is the “direct product of a plant or major component of a plant” located outside the U.S. when the plant or a “major component” of a plant is a direct product of a certain U.S.-origin technology or software. Commerce said it defines a “major component” as equipment that is “essential to the ‘production’ of an item to meet the specifications of any design produced or developed” by the designated entities.

The change applies restrictions on foreign-produced semiconductor designs and items, such as chipsets, that are direct products of controlled U.S. software and technology, Commerce said. Those items will require a license when the exporter has “knowledge” that the item’s destination is Huawei. The Trump administration hopes the rule closes a loophole that allowed Huawei to use U.S.-origin items even after being placed on the Entity List last year, a senior Commerce official told reporters on a May 15 conference call. “Huawei has been able to find workarounds mainly by using offshore chip fabrication facilities,” the official said. Huawei did not immediately respond to a request for comment.

To mitigate the rule’s effect on industry, the change will not impact certain foreign-produced items already in production as long as they are reexported, exported from abroad or transferred within 120 days from the rule’s May 15 effective date, the Commerce official said. “If a production step has begun as of [May 15] and if the production process is completed and shipped within 120 days, it will not be captured by these license requirements,” the official said. Other goods newly covered by the direct product rule must be en route as of May 15 to escape license requirements.

Although Commerce is accepting comments, which are due July 14, it did not solicit public feedback before the rule took effect despite requests for a comment period from industry (see 2004070024). “The government took great care to calibrate this rule to approach it narrowly to avoid adverse economic impacts to semiconductors and toolmakers,” the Commerce official said. Semiconductor Industry Association President John Neuffer said the rules may not have as large of an impact on the industry as previously thought (see 2002180060). “We are concerned this rule may create uncertainty and disruption for the global semiconductor supply chain, but it seems to be less damaging to the U.S. semiconductor industry than the very broad approaches previously considered,” Neuffer said in a May 15 statement. The rule appears to be “narrowly tailored,” Richard Sawaya, vice president of the National Foreign Trade Council, said in a brief interview. “When you compare it to other things going on, it could have been worse.”

China has threatened to retaliate if the U.S. followed through on the restrictions (see 2003310053), which have been under consideration for months (see 2003260036). China is preparing countermeasures, including placing U.S. companies on a so-called unreliable entity list (see 1910090069), according to a May 15 report from the Global Times, a Chinese state-run newspaper. Those measures may include imposing restrictions or launching investigations into U.S. companies such as Qualcomm, Cisco and Apple and stopping purchases of aircraft from Boeing, the report said.

The State Department official said China “understands” that the rule is a license requirement, not a blanket denial, and justified the restrictions by pointing to Huawei’s criminal charges (see 2002130045) and involvement in Chinese human rights violations (see 2001080039). “There are significant issues of legal propriety and intellectual property theft that are unfortunately all too common in the ecosystem of Chinese technology companies,” the official said. “When one hears indignation from Chinese officials about this move that we have taken out of an imperative to protect our own security interests, one needs to remember what one is dealing with and why these problems have arisen in the first place.”

In a separate rule, Commerce issued a 90-day extension for its temporary general license to Huawei for what the agency said will likely be the last time. The decision was made after receiving public comments from “numerous” companies and trade groups, Commerce said (see 2003260007). Companies that rely on the general license “are encouraged to begin making preparations to come into the Department of Commerce for a license,” the Commerce official said.