The Bureau of Industry and Security (BIS) has published a set of frequently asked questions in an effort to provide guidance on its summer update to the foreign direct product rule, which increased restrictions on particular foreign trade items.
The guidance includes FAQs that explain how restrictions apply to companies and goods, and how they may impact supply chains, prior licenses, prior exports, manufacturing plants, and more. The BIS rule was issued in August and refined a May amendment to the foreign direct product rule. This created a “footnote 1” designation which established controls on goods that are the direct product of certain technology software subject to the Export Administration Regulations (EAR).
The rules were aimed to restrict exports to Huawei and other companies on the Entity List. The rules placed restrictions on transactions wherein U.S. software or technology is the basis for a foreign-made item produced, purchased, or incorporated to any item made or ordered by a Huawei affiliate that is designated by footnote 1.
This rule specifically targets Huawei’s acquisition of semiconductors that are a product of U.S. software. The semiconductor industry requested that BIS clarify the new restrictions, as they would likely cause significant disruptions for chipmakers and restrictions appeared to be too broad.
Although the guidance summarized how the restrictions may apply to various scenarios faced by the industry, including due diligence requirements and licensing responsibilities, BIS declined to answer industry requests to recognize definitive equipment that is included in the rule. BIS has stated that it applies to semiconductors and finished and unfinished wafers.
In its guidance, BIS has also stated that “parties producing items should assess the function of equipment in the production process to determine whether it is essential” to the production of semiconductor products and therefore a “major component of a plant,” which would be captured by the rule. However, BIS stated that they were not in a position to provide a list of equipment.
BIS also clarified that the definition of “plant” in the FDP rule is not limited to wafer foundries or outsourced semiconductor assembly and test facilities (OSATs). The rule also covers “any foreign produced ‘item’ produced with such equipment.”
BIS also addressed licenses related to “subsequent replacement parts” and stated that it will not necessarily approve a license for replacement parts simply because it had approved a prior license for “production equipment” subject to the FDP rule. BIS added that License Exception Servicing and Replacement of Parts and Equipment (RPL) may be available for exports to entities not on the Entity List.
The BIS guidance also describes specific due-diligence efforts that exporters should take before and after applying for licenses.
For further questions on the guidance, please contact your Mohawk Global representative.