Commerce Rule Would Set Limits on Chips Act Funding, Align With Export Controls

The Commerce Department this week released proposed “guardrails” for recipients of Chips Act funding, which could restrict how the funding is used in certain countries and align the guardrails with export restrictions. The proposed rule would block funding recipients from pursuing certain chip investments in China and other “foreign countries of concern,” restrict them from participating in certain research or technology licensing efforts with those countries, prevent the funding from being provided to companies on the Entity List and more, Commerce said.

The agency will accept feedback during a 60-day comment period once the proposed rule is published in the Federal Register. The agency is planning to finalize the rule “later this year.”

The proposed rule seeks to implement and define certain aspects of the Chips Act, enacted last year, that set limits on how the funding and incentives can be used. One proposal would block funding recipients from participating in “significant transactions involving the material expansion of semiconductor manufacturing capacity for leading-edge and advanced facilities” in certain foreign countries of concern for 10 years after receiving the funding.

Those countries include China, Russia, Iran and North Korea, the agency said. Commerce proposed defining “significant transactions” as those worth at least $100,000 and “material expansion” as “increasing a facility's production capacity by five percent.”

Those thresholds are meant to “capture even modest transactions attempting to expand manufacturing capacity,” Commerce said. “If a CHIPS Incentives Program funding recipient engages in transactions violating these restrictions, the Department can claw back the entire funding award.”

Under another proposal, funding recipients would be prevented from “adding new production lines” or expanding a facility's production capacity by more than 10% if the facility is in a country of concern. Companies and others may also only build new legacy facilities “if the output of those facilities ‘predominantly serves’ the domestic market of the foreign country of concern where the legacy chips are produced,” Commerce said. If a company plans to use these “exceptions,” it will have to notify Commerce so the agency “can confirm compliance with national security guardrails.”

Although companies would be allowed to use the funding to upgrade technology at facilities in the countries of concern, those upgrades would have to be “in compliance with export controls,” the agency said. The proposed rule will “reinforce” the China-related export controls released by the Bureau of Industry and Security in October (see 2210070049) by “aligning prohibited technology thresholds for memory chips between export controls and CHIPS national security guardrails,” Commerce said. The agency said the proposed guardrails apply “a more restrictive threshold for logic chips than is used for export controls.”

The rule would also block funding from being provided to certain “foreign entities of concern,” which would include parties on the Entity List, the Treasury Department’s Chinese Military-Industrial Complex Companies list and Federal Communications Commission’s Secure and Trusted Communications Networks Act list. Funding recipients would also be prevented from "entering into certain joint research or technology licensing efforts” with those entities.

Funding recipients will face further limits if they’re working with more sensitive semiconductors. The rule includes a list of semiconductors that are “critical to national security,” which are not considered to be legacy chips and “therefore subject to tighter restrictions,” Commerce said. Those chips include “current-generation and mature-node chips used for quantum computing, in radiation-intensive environments, and for other specialized military capabilities.”

The guardrails “will help ensure we stay ahead of adversaries for decades to come,” Commerce Secretary Gina Raimondo said. “CHIPS for America is fundamentally a national security initiative and these guardrails will help ensure malign actors do not have access to the cutting-edge technology that can be used against America and our allies.”

Raimondo also noted the agency will coordinate the chip funding efforts with U.S. allies, saying it received “extensive input and cooperation” from trading partners on the proposed rule. “As semiconductors and technologies continue to evolve, the U.S. will work with allies and partners and develop coordinated strategies to ensure the latest technology cannot be used by entities of concern to undermine our collective economic and national security,” Commerce said.