Government Regulation

Regulating A.I. through the Supply Chain

The United States has significantly intensified export controls with the aim of curbing China's advancement in artificial intelligence. This involves the adaptation or enhancement of longstanding export regulations to effectively navigate the increasingly global landscape of advanced equipment. This article marks the second part of a series exploring the implementation of these enhanced export controls and their impact.

Artwork: Kenna Camper
Larry Sussman
April 10, 2024

he United States has significantly intensified export controls with the aim of curbing China's advancement in artificial intelligence. This involves the adaptation or enhancement of longstanding export regulations to effectively navigate the increasingly global landscape of advanced equipment. This article marks the second part of a series exploring the implementation of these enhanced export controls and their impact.

In the first installment, Seagate's $300M Lesson, we examined the Foreign Direct Product Rule (FDPR). This regulatory tool, which is aimed at enhancing control over exports of advanced technologies, was breached by Seagate, the renowned American hard disk drive manufacturer. Within the discussion, we unraveled the intricate framework of Export Administration Regulations (EAR), Export Control Classification Numbers (ECCNs), designation of "EAR99" items, and the significance of the Department of Commerce's Bureau of Industry and Security's (BIS) Entity List. Notably, our focus centered on the FDPR's remarkable extraterritorial aspect, enabling the U.S. to restrict the sale of products to specific foreign entities, irrespective of where they are produced, if they incorporate or utilize American-origin intellectual property.

In this second part, we conclude the discussion by introducing two additional FDPRs enacted on October 7, 2022, and significantly expanded on October 17, 2023: (1) the Advanced Computing FDPR and (2) the Supercomputer FDPR. Unlike the "Entity List" FDPR detailed in Part one, these new rules don't target specific Chinese entities. Instead, they adopt broad destinations and use criteria to target China. As we'll see, these regulations possess extraterritorial reach and effectively subject large segments of Chinese companies to de facto Entity List status based on their activities, without explicitly naming them. Additionally, we'll examine two other export control programs aimed at China, including semiconductor manufacturing end-use controls and new restrictions on the activities of U.S. citizens handling such technology.

Artificial Intelligence

In the fall of 2022, the Commerce Department’s Bureau of Industry and Security (BIS) introduced the Advanced Computing/Supercomputing Interim Final Rules (AC/S IFR) and the Export Controls on Semiconductor Manufacturing Items (SME IFR) in order to safeguard U.S. national security interests. These regulations are a response to China's military-civil fusion strategy (MCF), where civilian avenues are exploited to acquire crucial technology for enhancing military capabilities. China's focus on acquiring advanced semiconductors and manufacturing equipment for exascale supercomputing and artificial intelligence (AI) development is targeted. 

According to the BIS, China aims to harness these technologies to bolster its military, potentially surpassing the capabilities of the United States and its allies. This move, the U.S. says, threatens regional and global security by enhancing China's military prowess. Advanced AI capabilities, fueled by supercomputing and advanced semiconductors, could equip China with next-generation weapon systems. These systems could significantly improve military decision-making speed and accuracy, and enhance cognitive electronic warfare, radar, signals intelligence, and jamming.

To address these concerns, the BIS has implemented a comprehensive set of export control measures. The AC/S IFR and SME IFR include the introduction of the two new FDPRs, amendments and specialization of ECCNs, expanded end-use controls, broader destination coverage, and various anti-abuse and anti-circumvention concepts. Let’s look at each one.

Collection of the Top Chinese Chipmakers in WireScreen

Advanced Computing (AC) FDPR

The AC FDPR is structured the same as the Entity List FDPR we discussed in Part one in that the item to be restricted from export must meet the Product Scope and the Destination Scope. Unlike the Entity List FDPR, the Destination Scope is not tied to a list of entities. The AC FDPR Product Scope covers integrated circuits, computers, certain electronics, and components (and certain related technology) meeting a set of high-performance parameters (Advanced Chips) that are a direct product of listed U.S.-origin technology or software. 

High performance parameters for Advanced Chips

Total processing performance (TPP). TPP is a value that identifies the theoretical peak number of trillions (tera) operations of a chip for a standard computation. Fast chips that meet the TPP immediately satisfy the Advanced Chips definition. For example, AI training chips like the Nvidia A800.

Performance density values. Performance density is TPP divided by the die area of a chip. Slow chips that do not meet the requisite TPP values but meet performance density values can also satisfy the Advanced Chips definition. For example, video encoding chips like the Nvidia L40 meet the performance density test even though they are too slow to meet the requisite TPP values. The BIS introduced performance density as an anti-abuse measure because certain Chinese end-users were found to be grouping large numbers of low-end chips to achieve high TPP levels.

According to the AC FDPR, any Advanced Chips (defined above) produced outside of the United States that are a direct product of listed U.S.-origin technology or software meet the Product Scope test. The types of U.S.-origin technology or software mostly overlaps with the table set out in Part one (See Table 1, Listed U.S. Technology). In addition, the Product Scope is met for Advanced Chips produced by a plant (or major component thereof) outside the United States that itself is a direct product of the same listed U.S.-origin technology or software.

The AC FDPR's Destination Scope encompasses a wide array of locations, facilitated by the incorporation of comprehensive anti-abuse provisions. Initially aimed solely at China, the Destination Scope has been expanded to counter China's evasion tactics involving third-party countries. Presently, the Destination Scope encompasses large country groupings identified by the BIS for national security risks, missile technology risks, and arms embargoes. These are technically referred to as “Country Groups D:1, D:4, or D:5 (excluding Country Groups A:5 or A:6)” and we refer to them as “Suspect Destinations” . The map below identifies Suspect Destinations, showing the breakout between the various country groups defined by the BIS.

Suspect Destinations Map (D:1, D:4, D:5, excluding A:5 and A:6)

Countering evasion techniques

The AC FDPR’s Destination Scope not only applies due to the destination of the product but also for any products that are incorporated into non-EAR99 items which are destined to the Suspect Destinations. Further, a worldwide anti-abuse provision deems any location a Suspect Destination if the receiving party is headquartered (or its ultimate parent company is headquartered) in either China, Macau, or the other Country Group D:5 locations (Blocked Destinations). Finally, if the Advanced Chips constitute technology developed by an entity headquartered (or its ultimate parent is headquartered) in any of the Blocked Destinations they are still covered if they are used in connection with the production of a mask or an integrated circuit wafer or die. Additional anti-abuse concepts are applied for Blocked Destinations to capture parties that are involved in the transaction as a purchaser, intermediate consignee, ultimate consignee, or end-user.

Supercomputer FDPR

The Supercomputer FDPR diverges slightly in structure from the AC FDPR. While maintaining a Product Scope, it adopts a Country and End-Use Scope instead of a simpler Destination Scope. Notably, the Product Scope of the Supercomputer FDPR exceeds that of the AC FDPR, encompassing any item subject to the Export Administration Regulations (EAR) manufactured outside the United States under two conditions: (1) as the direct product of Listed U.S. Technology (with certain modifications), or (2) produced by a facility (or a significant component thereof) outside the United States, which itself is a direct result of Listed U.S. Technology (with certain modifications).The Supercomputer FDPR’s Country and End-Use Scope is satisfied if the item will be:

      (1) used in the design, development, production, operation, installation, maintenance, repair, overhaul, or refurbishing of, a “supercomputer” located in or destined to China or Macau or

       (2) incorporated into or used in the development, or production, of any part, component, or equipment that will be used in a “supercomputer” located in or destined to China or Macau.

A “supercomputer” is a computing system having a collective maximum theoretical compute capacity of 100 or more double-precision (64-bit) petaflops or 200 or more single-precision (32-bit) petaflops within a 41,600 square foot or smaller envelope. A general example would include a high-performance multi-rack system having thousands of closely coupled compute cores connected in parallel with networking technology and having a high peak power capacity requiring cooling elements. Such systems are typically used for computationally intensive tasks such as scientific and engineering work.

As an example of applying the Supercomputer FDPR, let’s consider the first item of Listed U.S. Technology on our table: ECCN 3E001.  This classification covers technology (as defined) for the development or production of equipment, or materials controlled by the ECCN 3A series.  Under the ECCN 3A series, we may consider as an example the item ECCN 3A001.a.1: Radiation-hardened Semiconductors. These would be those semiconductors which are rated to satisfy certain radiation resistance standards. Such semiconductors would originally be designed for military application given their special durability. However, since semiconductor density designs are constantly being improved upon, chips tend to get smaller over time and as they do they become naturally more radiation resistant. As a result, many modern chips not intended for military application can eventually wind up in the ECCN 3A series. It follows that the technology used by a fab to produce such items (ECCN 3E001) also becomes more widespread for non-military downstream production.

Now take the definition of supercomputers. Along the same rapid modernization lines, some commentators have noted that it is difficult to detect upgrades of Chinese computers into “supercomputers” because a given Chinese computer installation that does not meet the definitional threshold today may be surreptitiously upgraded to meet them tomorrow. Finally, take the regulatory language which specifies that supercomputers “destined for China” are covered – in other words, the coverage becomes worldwide so long as the supercomputer ends up in China. One can see that the rules are not only complex and expansive, but also that a lot will go into how the “knowledge” standards operate in practice. 

Semiconductor Manufacturing End Use (SME)

The comprehensive scope of the above mentioned FDPRs is complemented by an equally wide-ranging set of controls over semiconductor manufacturing end uses. These rules, due to their expansive focus on end uses, signify a shift away from individually listing entities on the Entity List. Instead, the new controls carry similar implications to entity listings but are applicable based on function or usage by any entity, regardless of whether they are listed or not. The following table delineates the various semiconductor manufacturing end-use controls. Essentially, any company in China (and other mentioned countries, subject to the headquarters test) engaged in the development or production of integrated circuits (ICs) or IC manufacturing equipment is considered a controlled destination.

US Person Controls

Traditionally, Export Administration Regulations (EAR) have primarily targeted exporters, typically legal entities, although individuals can also fulfill this role. Controls over individuals, such as U.S. citizens and permanent residents, were typically confined to specific circumstances, such as involvement with nuclear devices, missile technology, or chemical/biological weapons. More recently, controls have extended to encompass military intelligence-related activities. Notably, the Bureau of Industry and Security (BIS) has explicitly broadened these controls to encompass the technology sector, particularly concerning China.

US Person controls have significant implications for product coverage, extending beyond items subject to the EAR. While items already under EAR jurisdiction are regulated through standard exporter rules, US Person controls in the technology sector pertaining to China encompass three key activities: authorization, shipment/transfer, and servicing. The concept of servicing is broadly defined and includes installation, maintenance, repair, overhaul, or refurbishment activities. Any of the mentioned activities to or within China, Macau, or Blocked Destinations for items not subject to the EAR require a BIS license. This requirement applies to the following end-use scenarios:

  • The development or production of ICs at a facility or an entity headquartered (or whose ultimate parent company is headquartered) in China, Macau, or the Blocked Destinations where production of advanced-node ICs occurs.
  • The development or production of ICs at a facility or an entity headquartered (or whose ultimate parent company is headquartered) in China, Macau, or the Blocked Destinations where production of ICs occurs where items meet the parameters of test, inspection, production equipment, materials, software, and technology for all electronics under the CCL (i.e., it is unknown whether the facility handles advanced-node ICs).
  • Any end use or end user where items meet the parameters of various types of controlled semiconductor manufacturing equipment.3

Published Red Flags

The BIS emphasizes the importance of due diligence on Chinese supply chains using all available information and tools. They have in fact codified the following additional red flags for this purpose:

  • The customer's website or other marketing materials prior to the rules show it was capable of developing or producing covered technology.
  • The customer claimed ICs and other items are not intended to be used for covered functions but the items requested are customarily used for the purpose.
  • The customer is known to develop or produce items for companies located in Macau or a Blocked Destination that are involved with “supercomputers.”
  • The exporter has knowledge that the customer intends to develop or produce supercomputers or ICs in the future that would otherwise be controlled.
  • The exporter has knowledge that it seeks to produce covered technology at a sophisticated facility for a company headquartered in either China, Macau or a Blocked Destination.

EAR Supplement No. 3 Part 732


This part two of our two-part series completes our survey of the modern FDPR landscape and their associated controls relating to China. The specialization and expansion of end-use controls and US person controls is evidence of a greater trend towards placing the burden on actual activities and outcomes and away from reactive listings on the Entity List or Military End User List. Newly published red flags and the application of the revised “knowledge” standards will be critical to how enforcement plays out. The WireScreen platform continues to build on its industry classification strengths and other supporting features to assist in the diligence of end-uses and red flag identification.

1 It should be noted that multiple ECCNs were expanded and enhanced to work with these new rules.

2These include (1) logic integrated circuits using a non-planar transistor architecture or with a production 'technology node' of 16/14 nanometers or less; (2) NOT AND (NAND) memory integrated circuits with 128 layers or more; or (3) Dynamic random-access memory (DRAM) integrated circuits using a “production” 'technology node' of 18 nanometer half-pitch or less.

3These include ECCNs 3B001.a.4, c, d, f.1.b, k to p; 3B002.b and c; 3D001 (for 3B001.a.4, c, d, f.1.b, k to p, 3B002.b and c); 3D002 (for 3B001 a.4, c, d, f.1.b, k to p, 3B002.b and c); or 3E001 (for 3B001.a.4, c, d, f.1.b, k to p, 3B002.b and c).

Larry is an experienced lawyer who worked for over 20 years as a partner and Head of China at O’Melveny & Myers in Beijing, and as a partner at Hogan Lovells. As Special Counsel at WireScreen, he specializes in analyzing Chinese ownership structures and their associated national security and sanctions implications.

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