In an unprecedented move to maintain technological supremacy, the U.S. has enacted the most comprehensive semiconductor export controls in history, affecting everything from AI chips to manufacturing equipment. These complex regulations don’t just impact direct exports to China — they reach across the global supply chain, creating compliance challenges for companies worldwide that may not realize their products or activities fall under the rules. As a new presidential administration prepares to take office, understanding these rules has become critical for business survival, says Blank Rome’s Anthony Rapa.
Over the past two years, the United States has issued the most sweeping, complex export controls in history with respect to advanced computing items — including artificial intelligence chips — and semiconductor manufacturing equipment, as a signature aspect of U.S.-China strategic competition. These rules present significant challenges for companies that may not realize their items are subject to export controls at the apex of U.S. national security focus. Furthermore, the rules apply expansively to downstream use of U.S. items in support of chipmaking in China and other countries, making due diligence particularly challenging for companies.
As a new presidential administration prepares to take the reins in Washington, these challenges could become even more pressing for companies caught up in the U.S.-China relationship.
Export administration regulations
The U.S. Export Administration Regulations (EAR), administered by the U.S. Department of Commerce’s Bureau of Industry and Security (BIS), control the flow of some dual-use items to certain countries and in support of certain end-uses and end-users. Specifically, the EAR apply to goods, software and technology that are (1) located in the United States; (2) U.S.-origin, wherever located; (3) non-U.S.-origin but incorporating more than a “de minimis” level of “controlled” U.S. content; and (4) non-U.S.-origin but the “direct product” of certain technology or software that is subject to the EAR. Additionally, the EAR govern certain activities by U.S. individuals, wherever located worldwide.
Overview of semiconductor industry export controls
Across three rounds of rulemaking in October 2022 and 2023 and April 2024, the BIS has issued controls under the EAR covering (1) advanced-node semiconductors that power AI development, (2) semiconductor manufacturing equipment (SME) and (3) support for development or production of advanced computing items and SME. The BIS measures restrict a broad range of dealings with or involving China directly or indirectly and also cover transactions with other countries, including in the Middle East. The rules are breathtaking in scope, covering practically the entire semiconductor value chain worldwide.
Why the focus on semiconductors? In recent years, U.S. executive branch authorities, lawmakers in both parties and national security thought leaders have come to view advanced semiconductors and related SME as the sine qua non, or utterly essential, in the development of AI with possible military applications. In particular, the focus of these concerns has been China and its drive for technological and military parity with the United States, which has significant implications for Indo-Pacific security and the global geopolitical order.
Accordingly, U.S. authorities intend for the BIS rules to be a paradigm-shifting, generational change in export controls that secures the flow of U.S. critical technology and preserves U.S. military superiority, a core U.S. national security concern with broad bipartisan support.
How do the rules work, and how do they achieve these goals? In particular:
Specifically controlled items/destinations
The rules specifically identify, on the commerce control list (CCL) under the EAR, the types of chips, computing items and SME that are restricted for export to China and dozens of other destinations that present risk of diversion to China or data center usage by China, including in Asia and the Middle East.
- Notably, this includes export control classification number (ECCN) 3A090, which covers certain integrated circuits based on their “total processing performance” (a measure of computer computations relative to processing units on a chip) and performance density (TPP divided by the area of silicon on a single integrated circuit).
- Regarding SME, the rules control certain equipment designed for epitaxial growth, etch equipment, deposition equipment, and inspection equipment.
Expanded “foreign direct product” rule
The BIS measures significantly expand the reach of the EAR to apply to a broad range of non-U.S. items that are the “direct product” of U.S. technology or software. This has the effect of exercising EAR jurisdiction over items worldwide far beyond what the United States actually produces. This is a very important aspect of the strategy undergirding the rules. While the United States produces a relatively small portion of the world’s semiconductors, it contributes massively to the value chain in terms of know-how and design software, which BIS has leveraged to maximum effect through the “foreign direct product” rule.
Restrictions on companies headquartered in/with ultimate parent in restricted countries
The rules apply not only to exports to China and other restricted countries but also to exports to companies in non-restricted countries that are headquartered in, or have ultimate parents in, restricted countries.
U.S. person restriction
The EAR prohibit U.S. persons, including U.S. entities and U.S. citizens and permanent residents wherever located, from supporting the development or production of certain integrated circuits in certain jurisdictions.
End-use controls
The BIS rules require a license to export certain items subject to the EAR for use in:
- Development or production of integrated circuits at an “advanced-node” facility in China or another restricted country;
- Development, production, operation, installation, repair, overhaul or refurbishing of a “supercomputer” in China or another restricted country; or
- Development or production of certain “front-end” SME.
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Read moreDetailsCompliance challenges
BIS intended the rules to have maximum impact on the entire semiconductor value chain, that is, by projecting U.S. jurisdiction over the industry to the greatest extent permissible under the EAR. In that respect, BIS has been successful, as the rules apply not only to advanced chips and SME but also to: downstream transactions supporting the development or production of such items; transactions with companies in non-restricted countries that are headquartered or have an ultimate parent in China or another restricted country; and non-U.S. items that are made using U.S. technology or software.
This presents significant compliance challenges for virtually all participants in the semiconductor industry. Consider:
- Items produced outside the United States may still be subject to the EAR, whether based on the incorporation of physical U.S. content or of software, or because of the involvement of U.S. technology or software in the production process that triggers the “foreign direct product” rule. This may not be immediately apparent or intuitive for companies operating outside the United States.
- The sweeping end-use restrictions can cover downstream transactions that ultimately may benefit development or production of advanced chips or SME in China and other restricted countries. Often this will require companies to conduct extensive due diligence.
- The restrictions on third-country transactions with companies that are headquartered or have an ultimate parent in China or another restricted country can present diligence challenges for companies dealing with customers that may not wish to furnish ownership information.
- U.S. employees at a non-U.S. facility may be subject to unique prohibitions not applicable to their employer, exposing both the individual employees and the non-U.S. employer to potential liability under the EAR.
- As the restrictions intensify in effect, malign actors seeking to obtain chips and SME are resorting to illicit measures, such as the use of shell companies and straw buyers, which can be difficult to detect for exporters.
Notably, these compliance challenges loom amidst a change in presidential administrations and a potentially shifting U.S.-China relationship, with tariffs and realigning supply chains potentially complicating an already fraught geopolitical landscape.
Compliance steps for companies
While the BIS rules significantly have complicated the compliance landscape for the semiconductor industry, it is possible (and important) for companies to design reasonably tailored compliance mechanisms to address the risks. These can include the following:
- Jurisdiction/classification analysis: Companies in the industry should (1) assess whether their products are subject to the EAR and (2) if so, determine the ECCN(s) applicable to the products. This is an important threshold consideration that informs the nature and extent of EAR requirements applicable to a company’s operations. Companies producing items outside the United States should be keenly focused on the potential application of the “de minimis” and “foreign direct product” rules.
- Counterparty due diligence: It has become essential for companies in the semiconductor industry to conduct robust due diligence of counterparties, including with respect to whether the counterparty: (1) is designated on a restricted party list; (2) is organized in a restricted jurisdiction; (3) is headquartered or has an ultimate parent in a restricted jurisdiction; and (4) lacks sufficient bona fides to confirm that it is a legitimate company rather than a shell company or straw buyer.
- Terms and conditions/end-user certificates: Companies, particularly downstream operators at risk of inadvertently contributing to development or production activity in China or another restricted country, should make use of terms and conditions in contracts to obligate their counterparties to handle their products in accordance with the EAR. Furthermore, it can be prudent for companies to obtain end-user certificates whereby customers affirmatively describe the end-use and end-user of the product and/or rule out certain restricted end-uses and end-users.
- U.S. person recusal: As needed, non-U.S. companies otherwise engaged in activities not subject to the EAR should consider recusing U.S. individuals from involvement in restricted activity.
Anthony Rapa is co-chair of Blank Rome’s international trade practice group. A dual U.S./UK-qualified practitioner, he counsels companies, private equity sponsors, and financial institutions regarding cross-border trade, operations and investments, drawing from on-the-ground experience spanning four continents.
