On December 18, 2020 Semiconductor Manufacturing International Corp. (“SMIC”) was officially added to the Bureau of Industry and Security (“BIS”) Entity List. SMIC, which on December 3, 2020 was also officially identified by the U.S. Department of Defense as a Communist Chinese military company, is mainland China’s largest semiconductor foundry company and a key player in the global semiconductor industry. SMIC has been seen in large part as Huawei’s de facto semiconductor sourcing replacement, after the Taiwanese Semiconductor Manufacturing Co. (“TSMC”) was cut off from fulfilling Huawei orders as a result of a May 15, 2020 BIS expansion of the Foreign Direct Product Rule.
General Prohibition Five of the Export Administration Regulations (“EAR”), it should be noted, prohibits without a license knowingly exporting or re-exporting any item subject to the EAR to an end-user that is prohibited by part 744 of the EAR. In simple terms, because of the December 18, 2020 Entity List addition, those engaging in any exports or re-exports subject to the EAR destined for SMIC must now submit for a BIS export license.
The SMIC saga represents just one high-profile example of increasing trade tensions between Washington and Beijing. While Beijing has recently passed a new sweeping export control law and has committed to creating its own version of the Entity List, called the “Unreliable Entity List,” President Donald J. Trump last month issued an executive order (“EO”) aimed at severing U.S. investment directed to any company identified as a “Communist Chinese military company.” The Trump Administration is concerned, in part, that Beijing’s “national strategy of Military-Civil Fusion” allows for U.S. investment to flow into the private Chinese economy, while the activities (e.g., scientific R&D) of the Chinese economy are being directed and guided by Beijing to rapidly close the technological gap between the U.S. and China, specifically in the areas of military, defense and security. In effect, the U.S. Government argues that this arrangement allows for U.S. investment to directly fund Beijing’s military advancements.
While not initially implicated by the November 12, 2020 EO, with the December 3, 2020 announcement SMIC is now officially subject to its provisions. Beginning at 9:30 a.m. EST on January 11, 2021, any transaction in publicly traded securities, or any securities that are derivative of, or are designed to provide investment exposure to SMIC or any identified Communist Chinese military company are prohibited. We recently published a detailed breakdown of the EO.
While an official designation as a Communist Chinese military company comes with the abovementioned financial ramifications, exports subject to the EAR face greatly expanded export licensing requirements as well. 15 C.F.R. § 744.21 imposes an export license requirement on exports, re-exports, or in country transfers of a wide variety of Export Control Classification Numbers (“ECCNs”) when exporting, re-exporting, or transferring for “military end uses” or to “military end users.” Products subject to this rule are found in § 744 Supp. 2 of the EAR and include common ECCNs such as 3A991, 5A991, 5D991, 5D992, and 7A994, to name a few. Once a company has been identified as a Communist Chinese military company, exporters are officially on notice that any exports, re-exports, or in country transfers of a wide variety of products destined for such a company will now require a BIS export license, with many license applications facing an immediate presumption of denial. To date 39 companies have been formally identified by the U.S. Government as Communist Chinese military companies.
In the face of increasing trade tensions between Washington and Beijing, now more than ever exporters must find ways to remain compliant despite frequent major regulatory changes. If you have any questions about SMIC or the U.S. Department of Defense list of Chinese Military companies please contact an attorney at Barnes, Richardson & Colburn, LLP.