In its Twilight, Biden Administration Adopts More Export Controls to Restrict China’s Ability to Produce Advanced Semiconductors

Although the Trump transition is well underway, the Biden administration made news in the national security space by announcing significant new export restrictions on semiconductor equipment and technology destined for the People’s Republic of China (PRC). On December 2, 2024, the Department of Commerce’s (Commerce) Bureau of Industry and Security (BIS) announced a package of two rules taking aim at the PRC’s ability to produce advanced semiconductors. The rules—an Interim Final Rule and a Final Rule—include:

• Revisions and additions to controls on 24 types of semiconductor manufacturing equipment (SME) and 3 types of software tools for developing or producing semiconductors;
• New controls on high-bandwidth memory (HBM);
• Substantially expanded coverage of foreign produced SME;
• Additions to Commerce’s “Know Your Customer” Red Flags to provide guidance to exporters;
• Several noteworthy changes to enhance the effectiveness of previous controls; and
• 140 Entity List additions and 14 modifications.

New Restrictions Seek to Protect Critical Technologies and Restrict PRC Capabilities

The new package of rules is designed to limit the PRC’s ability to indigenize the production of advanced technologies—such as advanced-node integrated circuits (ICs) and the equipment used to produce them—that the U.S. government believes pose a substantial risk to U.S. national security. In announcing the new restrictions, the Biden administration expressed concerns that the PRC uses these advanced technologies to modernize its military, improve its weaponry, and expand its surveillance capabilities, allowing it to further infringe on human rights. 

Although these rules focus on the PRC, the nationwide restrictions and license requirements generally apply to all countries in Commerce Country Group D:5 which include all U.S. Arms Embargoed Countries, including the PRC, as has been the case since the October 2023 semiconductor and SME rules were enacted. 

The restrictions include the following:

• Interim Final Rule Imposes New Export Controls and Establishes Two New Foreign Direct Product (FDP) Rules and Related De Minimis Provisions.
• SME Restrictions: The Interim Final Rule revises and updates existing controls with nationwide license requirements for SME related to the production of advanced-node ICs. The Interim Final Rule also creates a new control on equipment that enables advanced-node ICs but also has legitimate applications in non-advanced-node applications, and therefore does not have nationwide license requirements.
• New Controls on Software Tools for SME: The Interim Final Rule also imposes controls on software tools used for developing or producing advanced-node ICs, including certain software that increases the productivity of advanced machines or allows less advanced machines to produce advanced chips.
• New Controls on Design Software and Technology: The Interim Final Rule adds new restrictions on software for the design of advanced-node ICs. Specifically, the Interim Final Rule prohibits the export, reexport, or transfer of any Electronic Computer Aided Design and Technology Computer Aided Design software and technology subject to the Export Administration Regulations (EAR) when there is “knowledge” that such items will be used for the design of advanced-node ICs to be produced in Macau or a destination in Country Group D:5.
• SME FDP: Under these new restrictions, certain foreign-produced SME are subject to the EAR if they are specified under certain SME Export Control Classification Numbers (ECCNs) and a direct product of software or technology subject to the EAR (including widely used electronic design automation software) and if there is “knowledge” that the foreign-produced commodity is destined for Macau or a destination in Country Group D:5. 
• Footnote 5 (FN5) FDP: The Interim Final Rule extends EAR controls to foreign-produced SME and related items specified under certain SME ECCNs if there is “knowledge” that an entity on or added to the Entity List with an FN5 designation is a party to a transaction involving the item or will be the end user of the item. Such entities are designated on the Entity List for specific national security or foreign policy concerns, such as these entities’ involvement in supporting the PRC’s military modernization through their potential to produce advanced-node semiconductors, including for military end-uses.
• De Minimis: The Interim Final Rule also clarifies that specified foreign-produced SME and related items described in the above FDP rules that contain any amount of U.S.-origin ICs are subject to the EAR under the de minimis rule.
• HBM Controls: The Interim Final Rule explains how HBM is critical to AI training and inference at scale and, as such, is a key component of advanced computing integrated circuits. New export controls in the advanced computing IC ECCN apply to HBM with specified bandwidth density. Foreign-produced HBM may be subject to the EAR under the advanced computing FDP rule. Of note, certain HBM commodities will be authorized under new license exception HBM.
• “Keys” Categorization: Keys or licenses (including renewals of keys or licenses) that allow users to gain access to or download a software will now be categorized for EAR purposes based upon their corresponding software or hardware. If the key allows access to a software or hardware subject to export controls, the key is classified under the same ECCN. Firms that provide access to their products via keys or licenses should be aware that each provision of a key or license to a user is treated as a distinct export under these regulations.

• Final Rule Expands Entity List. The Final Rule adds 140 companies to the Entity List (and revises 14 other entries), including semiconductor fabricators and investment companies in the PRC, as well as entities in Japan, Singapore, and South Korea that BIS found to be “acting at the behest of Beijing to further the PRC’s advanced chip goals.” Ten firms added to the Entity List are identified as “contributing to the efforts of Huawei” to further the PRC’s advanced-node IC production capability. By virtue of their addition to the Entity List, the export of items subject to the EAR to these entities is prohibited unless licensed by BIS, applications for which will be reviewed under a presumption of denial. The final rule also designates nine of the entities being added and seven of the entries being modified as entities for which entity-specific restrictions involving foreign-produced items apply. 

PRC-Connected Firms Continue to Be Focus of Restrictions

The Biden administration touted these new restrictions as the “culmination” of its “targeted approach” to secure the nation’s critical technologies and to limit the PRC’s ability to develop such technologies itself. The administration’s so-called “small yard, high fence” strategy seeks to place tough restrictions on a limited group of sensitive technologies while otherwise allowing economic relations between U.S. and PRC entities.

The December 2, 2024 announcement is the latest Biden administration development in this space, as BIS announced a Notice of Proposed Rulemaking (NPRM) in September 2024 that would ban the import or sale of connected vehicles and components designed or manufactured by entities connected to the PRC or Russia (covered here). And in October 2024, the U.S. Department of the Treasury also published a rule prohibiting certain outbound investments to China (covered here), focusing on advanced semiconductors, quantum technologies, and AI systems. In the semiconductor space, this is now the third year in a row that BIS has issued significant new and enhanced rules, following major rulemakings in October 2022 and October 2023. 

The PRC responded quickly to the Biden administration’s recent action by announcing new export controls of its own on materials crucial for producing semiconductors and electric vehicles batteries.

Tough Stance on China Likely to Continue Under Trump Administration

The incoming Trump administration has indicated that it is likely to continue a “tough on China” stance concerning national security and trade, which is not surprising given the bipartisan support of such policies. Many presumptive nominees for Trump’s Cabinet have indicated hawkish views towards China, including the nominee for Secretary of State, Senator Marco Rubio, who issued a report claiming U.S. export controls have failed to keep the country’s semiconductor technology from China’s reach. Similarly, Jamieson Greer, the nominee for U.S. trade representative, testified in May 2024 to the U.S.-China Economic and Security Review Commission that Congress should expand export controls on China to include the aircraft and transportation equipment industries.[1]

This most recent round of export restrictions concerning China once again puts the AI, quantum computing, and semiconductor industries on alert that their fields are top of mind for trade officials. The pace of changing restrictions is unlikely to slow even as the administration changes hands early next year, and this is a space to watch closely as the Trump administration settles in.

[1] https://www.uscc.gov/sites/default/files/2024-05/Jamieson_Greer_Testimony.pdf.