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New Restrictions Imposed on Exports to Huawei but Limited Export License Extended

Monday, May 18, 2020
Sandler, Travis & Rosenberg Trade Report

The U.S. has announced an unprecedented step that will further restrict exports to China’s Huawei Technologies Co. Ltd. and is warning of possible limitations on a temporary license allowing some exports to Huawei and its affiliates.

Clients and potential clients requiring support related to these actions should contact export attorney Kristine PirniaClick here to register for ST&R’s upcoming webinar on export control basics.

Direct Product Rule

The Bureau of Industry and Security is issuing an interim final rule amending its longstanding foreign-produced direct product rule and the Entity List to narrowly and strategically target Huawei’s acquisition of semiconductors that are the direct product of certain U.S. software and technology. Specifically, effective May 15, this rule makes the following foreign-produced items subject to the Export Administration Regulations.

- items, such as semiconductor designs, when produced by Huawei and its affiliates on the Entity List, that are the direct product of certain Commerce Control List software and technology

- items, such as chipsets, when produced from the design specifications of Huawei or an affiliate on the Entity List, that are the direct product of certain CCL semiconductor manufacturing equipment located outside the U.S. (such foreign-produced items will only require a license when there is knowledge that they are destined for reexport, export from abroad, or transfer (in-country) to Huawei or any of its affiliates on the Entity List)

BIS states that it is taking this action because Huawei has continued to use U.S. software and technology to design semiconductors after being added to the Entity List in 2019, “undermining the national security and foreign policy purposes of the Entity List by commissioning their production in overseas foundries using U.S. equipment.”

To prevent immediate adverse economic impacts on foreign foundries utilizing U.S. semiconductor manufacturing equipment that have initiated any production step for items based on Huawei design specifications as of May 15, 2020, such foreign-produced items are not subject to these new licensing requirements so long as they are reexported, exported from abroad, or transferred (in-country) by Sept. 14.

Temporary General License

BIS is extending through Aug. 13 a temporary general license authorizing certain exports to Huawei and 114 of its non-U.S. affiliates on the Entity List. However, BIS is also warning that activities authorized by this TGL may be revised or eliminated after Aug. 13.

The TGL covers certain activities necessary for the continued operations of existing networks and equipment as well as the support of existing mobile services, including cybersecurity research critical to maintaining the integrity and reliability of existing and fully operational networks and equipment. Exporters, reexporters, and transferors that qualify to use the TGL must maintain certifications and other records regarding their use of it that must be made available to BIS upon request. In addition, any exports, reexports, or in-country transfers of items subject to the EAR to these entities that are not explicitly authorized by this TGL continue to require a license and license applications will continue to be reviewed under a presumption of denial.

Given the extent of Huawei’s supply chain in the U.S., companies should be screening or re-screening their customer, vendor, and other third-party data against the list of Huawei affiliates to identify any potential ongoing or pending transactions with these parties and set up appropriate controls to ensure compliance with U.S. export control laws. Violations can result in significant financial penalties, denial of export privileges, and reputational damage.

BIS states that activities authorized in this TGL may be revised and possibly eliminated after Aug. 13. As a result, BIS advises companies and persons relying on TGL authorizations to begin preparations to determine the specific, quantifiable impact of elimination if they have not done so already. They should also be prepared to submit license applications to BIS to determine which, if any, activities will be authorized in the event their TGL authorization is eliminated. BIS states that it will provide prior notice via the Federal Register of a need to submit such applications.

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