Alert May 19, 2020

U.S. Limits Huawei’s Access to Foreign-Produced Items and Announces Final 90-Day Extension to Temporary General License

On May 15, 2020, the U.S. Department of Commerce’s Bureau of Industry and Security (BIS) issued an interim final rule amending the Export Administration Regulations (EAR) to prohibit the supply of certain foreign-produced items to Huawei and its many non-U.S. affiliates on the Entity List. On the same day, BIS authorized another 90-day extension of the Huawei Temporary General License, through August 13, 2020, but indicated that this could be a final extension. Both rule changes went into effect on May 15, 2020, and mark the latest push by the Trump Administration to cut off Huawei’s access to U.S.-origin products and technologies.

The interim final rule amends the EAR’s General Prohibition Three (foreign-produced direct product rule) to prohibit any unlicensed reexport, export from abroad, or in-country transfer of certain foreign-produced items with “knowledge” that the item is destined to an entity having a “Footnote 1” designation on the Entity List.

This rule change also amends the Entity List by applying “Footnote 1” to the designated Huawei entities, imposing the new control on any direct product of, or any item produced by a foreign plant (or a major component thereof) that is a direct product of, certain controlled technology or software described in Category 3 (Electronics), Category 4 (Computers), or Category 5, Part 1 (Telecommunications) of the Commerce Control List. Remarkably, the newly controlled technologies and software include not only strongly controlled items classified under Export Control Classification Numbers (ECCNs) 3E001, 3E002, 3E003, 4E001, 5E001, 3D001, 4D001, and 5D001, but also lesser-controlled items classified under ECCNs 3E991, 4E992, 4E993, 5E991, 3D991, 4D993, 4D994, and 5D991. No license exception is available for the designated Huawei entities.

Under the new rule, whenever Huawei or any of its affiliates on the Entity List makes or designs any electronic component anywhere in the world in reliance upon certain U.S.-origin software or technology, such component becomes subject to the EAR. Similarly, whenever a designated Huawei entity commissions the manufacturing of chipsets (e.g., for Huawei smartphones or network equipment) by a semiconductor foundry that uses equipment based on certain U.S.-origin technology or software, such chipsets would be subject to the EAR. Since practically every integrated circuit design tool and semiconductor fabrication equipment today incorporates at least some of the controlled U.S. technologies and/or software, it is hard to see how any designated Huawei entity (such as its fabless design arm, HiSilicon) or modern semiconductor foundry could lawfully design or produce any electronic component specifically for Huawei without a BIS license. BIS will review license applications for export to any designated Huawei entity under a “presumption of denial.”

As a practical effect of this new rule, the designated Huawei entities will be unable to acquire electronic components custom made to Huawei’s design specifications. By design, this is likely to have a devastating effect on Huawei’s core business by severely limiting its ability to procure electronic components even from non-U.S. manufacturers. The rule’s impact could reverberate for years and dramatically recast the U.S.-China relationship.

Although the new rule went into effect immediately, a savings clause provides a 120-day transition period in order to prevent immediate adverse economic impacts on foreign foundries that had initiated production based on Huawei design specifications by May 15, 2020.

In light of the latest rule change, any company that wishes to design or produce any electronic product or component for Huawei should determine whether an export license is required.