No EAR-Free, No Circumventing US Law

Posted by Wang, Yi on August 19, 2020

To stem the alleged circumventing U.S. law by Huawei against pre-existing sanctions, the Bureau of Industry and Security (BIS) under the US Commerce Department announced on August 17 with further restriction against Huawei and designated non-U.S. affiliates on the Entity List, blocking their accessing to items produced domestically and abroad from U.S. technology and software.

Core Chips Impacted

These expanding sanctions will impact significantly the production of Huawei’s flagship products such as Kirin chipsets.  Huawei’s Mate 40 handsets, which is yet to debut, will be the last smartphones featuring the Kirin 9000 processor.

Closing the EAR-Free Loophole

Notably, the latest measure also responds to the “EAR-Free” concept floated in the semiconductor industry.  It further expands the covered transactions under these sanctions against Huawei, especially with respect to “foreign-made (high-end) chips developed or produced from U.S. software or technology to the same degree as comparable U.S. chips.”

Under the US export control regime, the so-called Foreign-produced Direct Product (FDP) rule prohibits sanctioned entities from buying semiconductors or components that constitute a direct product of US software or technologies.  Evasive measures are allegedly conceivable, previously, if a sanctioned entity procures from a supplier/item not captured by the FDP rule,

However, the latest measure expands the coverage under FDP rule to capture situation “where U.S. software or technology is the basis for a foreign-produced item” or “when any Huawei entity on the Entity List is a party to such a transaction.  Under the latter situation, it suffices as “covered transaction” under the auspices of US export control regime, so long as Huawei or any of its affiliate is a “purchaser,” “intermediate consignee,” “ultimate consignee,” or “end-user.”

BIS highlights as follows:

“In a concurrent rule, BIS revised the Entity List to require a license when a party on the Entity List acts as a purchaser, intermediate consignee, ultimate consignee, or end user to an EAR transaction. This aligns with the additional restrictions imposed in the revisions to the FDP, when any of the Huawei entities on the Entity List are a party to the transaction, such as by acting as purchaser, intermediate consignee, ultimate consignee, or end user.”

It remains unclear how BIS interprets and enforces the latest measure, which literally may prohibit not only TSMC but also general software services such as Microsoft or Android, with profound ramifications to cut off the entire Huawei ecosystem from US technology, because of alleged “circumventing U.S. law.”

About the author: Yi Wang, a US and China qualified trade and business attorney with public and private sector experience in corporate, regulatory counsel and enforcement defense, and may be reached at yi.wang@mind-re.org.

(This briefing first appeared at China Big Idea. If our commentaries would add values or you simply like our newsletters to monitor with informed assessment, please subscribe at https://chinabigidea.substack.com)