On August 17, 2020, the US Department of Commerce, Bureau of Industry and Security (“BIS”), issued a final rule further restricting Huawei Technologies and its non-US affiliates (collectively, “Huawei”) from access to US technologies (“Rule”).1 The Rule (1) adds 38 Huawei entities to the BIS “Entity List” and removes the Temporary General License that had been in effect for certain transactions with Huawei (with an exception related to cybersecurity research and vulnerability disclosure) and (2) amends and clarifies the foreign-produced direct product rule related to the Huawei companies on the Entity List. The Rule is the latest in a series of recent actions intended to address national security concerns the US government has cited regarding Huawei. The Rule took effect immediately to “prevent Huawei’s attempts to circumvent U.S. export controls to obtain electronic components developed or produced using U.S. technology.”2 However, the Rule includes an important Savings Clause that will allow for certain limited transitional activities. This Legal Update provides background on BIS’ actions targeting Huawei and the effect of the Rule for businesses.
Entity List Designation of Huawei
On May 16, 2019, BIS added Huawei Technologies Co., Ltd. and dozens of its non-US affiliates to the Entity List. (See our Legal Update.) That action imposed a license requirement on exporting, re-exporting or transferring (in-country) items subject to the Export Administration Regulations (“EAR”) to Huawei. On August 19, 2019, an additional 46 non-US Huawei affiliates were placed on the Entity List. BIS issued a Temporary General License (“TGL”) authorizing certain limited categories of transactions for a 90-day period and issued successive extensions of that general license. Outside of these narrow exceptions, the Entity List designation effectively cut Huawei off from both US and non-US items, whether goods, technology or software, (collectively, “items”), when they are subject to the EAR. For example, items made outside of the United States may also be subject to the EAR if they incorporate greater than de minimis-controlled US-origin content (generally greater than 25 percent) or, in certain limited cases, are produced as the direct product of certain controlled US-origin technology subject to national security controls.
The Foreign Direct Product Rule
As described in our previous Legal Update, on May 15, 2020, BIS announced an amendment of the EAR’s long-standing foreign-produced direct product rule (“Foreign Direct Product Rule”) to effectively expand the reach of that rule to transactions involving Huawei and its affiliates on the Entity List. This amendment imposed licensing requirements on foreign-made items produced or developed by Huawei that are also (1) the product of certain specified technology or software subject to the EAR or (2) the product of a plant or major component of a plant located outside of the United States that is itself a direct product of certain specified technology or software subject to the EAR. BIS explained that the amendment “narrowly and strategically target[ed] Huawei’s acquisition of semiconductors that are the direct product of certain U.S. software and technology.”3
BIS FINAL RULE
The August 17 Rule expands and amends both the Entity List designations and the Foreign Direct Product Rule. BIS further restricted access by Huawei to US technologies by (1) adding 38 additional non-US affiliates of Huawei to the Entity List, (2) removing the TGL for Huawei and replacing it with a more limited authorization and (3) further amending the Foreign Direct Product Rule.
Inclusion of 38 Additional Non-US affiliates of Huawei in the Entity List
First, the Rule has designated 38 additional non-US affiliates of Huawei located across 21 countries4 to the Entity List, which have been determined to also pose a significant risk of involvement in activities contrary to the national security and foreign policy interests of the United States. BIS now imposes for each of the additional 38 entities a license requirement for all items subject to the EAR, and no license exceptions are available. Separately, the Rule revises the Entity List: It adds additional information, including aliases and addresses, with respect to Huawei and three of its listed affiliates.
Expiration of the TGL and New Limited Permanent Authorization
Second, the Rule allows the TGL to expire (the TGL’s validity period extended through August 13, 2020) and replaces those provisions with a more limited permanent authorization to exclude license requirements for exports, re-exports and transfers (in-country) to Huawei for cybersecurity research and vulnerability disclosure, subject to other provisions of the EAR. This limited authorization would allow for a disclosure of certain information to Huawei when the disclosure is limited to information regarding security vulnerabilities in items owned, possessed or controlled by Huawei. However, the disclosure must be related to the process of providing ongoing security research that is critical to maintaining the integrity and reliability of existing and currently fully operational network and equipment. The authorizations of the TGL related to the continued operation of existing networks and equipment and support to existing handsets are being allowed to expire. The authorization in the TGL related to the sharing of certain US technology with Huawei for the purpose of contributing to the revision or development of a “standard” by a recognized standards organization has been made part of the Entity List through an interim final rule published by BIS on June 18, 2020.5
Expansion of the Foreign Direct Product Rule
Third, the Rule made amendments to the Foreign Direct Product Rule to expand and clarify which foreign-produced items are subject to the EAR and require a license for re-export, export from abroad or transfer (in-country).6
In its August 17 Rule, BIS expands the scope of items that will be captured under the Foreign Direct Product Rule for Huawei and its affiliates on the Entity List to further restrict Huawei’s ability to procure items that are the direct product of specified US technology or software but not otherwise subject to the EAR. The Rule retains the license requirement on re-exports, exports from abroad or transfer (in-country) of certain foreign-produced items that are the direct product of (or that have been produced by a plant or major component of a plant located outside of the United States that are the product of) certain specified technologies or software subject to the EAR. Significantly, however, the Foreign Direct Product Rule is no longer limited to foreign-made items developed or produced by Huawei, a limitation that was part of the May 2020 amendment to the Foreign Direct Product Rule described above. Instead, foreign-made items will be subject to the EAR and require a license when there is knowledge (including reason to know) that:
- items will be incorporated into, or will be used in the “production” or “development” of, any “part,” “component” or “equipment” produced, purchased or ordered by Huawei; or
- Huawei is a party to any transaction involving the foreign-produced item, including as a “purchaser,” “intermediate consignee,” “ultimate consignee” or “end-user.”
The result is that the Foreign Direct Product Rule will now apply to a much broader set of items than under the May 2020 amendment, including commercial off-the-shelf items when there is knowledge that the items will be incorporated in or used in items that Huawei will ultimately buy or order or are part of a transaction to which Huawei is otherwise a party.
The controls imposed by this amendment have been incorporated in Footnote 1 to the Entity List.7 The Rule establishes a case-by-case license review policy (as opposed to a presumption of denial) specifically for items controlled under Footnote 1 that are capable of supporting the “development” or “production” of telecom systems, equipment and devices at below the 5G level. For those items, the sophistication and capabilities of the technology will be a factor to consider in the license application review.
While the Rule is effective as of August 17, 2020, it carves out exceptions that allow some ongoing activities made in reliance upon the regulatory framework pre-dating the Rule, including shipments of (1) items subject to the EAR that were en route aboard a carrier to a port on August 17, 2020, made pursuant to actual orders; (2) foreign-produced items that will be incorporated into, or will be used in the “production” or “development” of, any “part,” “component” or “equipment” produced, purchased or ordered by Huawei and that on August 17, 2020, were on a dock for loading, laden aboard an exporting or transferring carrier, or en route aboard a carrier to a port of export or to the consignee/end-user pursuant to an actual order; and (3) foreign-produced items involved in transactions in which Huawei is a party and whose “production” started prior to August 17, 2020, so long as they have been exported, re-exported or transferred (in-country) before midnight (local time) on September 14, 2020.
The Chinese government objected strongly to the US action as it has done with previous restrictions targeting Huawei. Because the changes effected by the new Rule are consistent with prior US actions severely restricting Huawei’s access to US goods and technology, and were in part a response to comments BIS received since May 2020 about loopholes in the Foreign Direct Product Rule, it is possible that the Chinese response to the US action may be limited in the short term, as China views it as a long-running issue with the United States. However, businesses operating in both countries should closely monitor developments in this area.
NEXT STEPS FOR BUSINESS
As a result of BIS’ Rule, companies who relied on the TGL authorizations that have expired and not been replaced must cease those activities immediately unless they fall within the scope of the Savings Clause. In addition, both US and non-US companies should evaluate their supply chains and sales distribution channels for transactions involving Huawei and the extent to which BIS’ action could impact them. Furthermore, businesses that supply products directly or indirectly to Huawei should promptly review the items they supply that are not otherwise subject to the EAR to determine whether they are the direct product of certain US technology or software that would be captured by the Foreign Direct Product Rule.
1 Addition of Huawei Non-U.S. Affiliates to the Entity List, the Removal of Temporary General License, and Amendments to General Prohibition Three (Foreign-Produced Direct Product Rule), 85 FR 51596 (Aug. 20, 2020).
4 The Huawei entities are located in the following countries: China (including Hong Kong), Argentina, Brazil, Chile, Egypt, France, Germany, India, Israel, Mexico, Morocco, the Netherlands, Peru, Russia, Singapore, South Africa, Switzerland, Thailand, Turkey, the United Arab Emirates, and the United Kingdom.