On December 18, 2020, the Office for Industry and Security (“TO“) Announced the addition of 77 new companies, including Semiconductor Manufacturing International Corporation (“minimum wage”) To the entity list. In support of its action, the BIS cited “indications of activities between SMIC and affected bodies in the Chinese military industrial complex”. Exports, re-exports and transfers (within the country) to listed companies of items that are subject to the export administration regulations (“EAR”) Require export license approval and the availability of license exemptions is generally limited.
National security concerns lead to stricter guidelines for reviewing licenses for exports to SMIC
For export to SMIC and its affiliates only, the BIS announced a guideline on the presumption of denial of license applications for items that are “uniquely required” for the manufacture of semiconductors at technology nodes of 10 nanometers and below. A license review policy applies on a case-by-case basis to the export of other items to SMIC, pertaining to a company that works with a military end-user.
Differentiating by the parameter of 10 nanometers or less suggests that the BIS, and likely other US government agencies, have specific national safety concerns about exporting SMIC technology and manufacturing systems that fall under this parameter. Exporters are unlikely to be able to license items that are “uniquely required” to manufacture semiconductors 10 nanometers or less in size.
The new standard “uniquely required”
The new “uniquely required” standard appears to be aimed at meeting the stated parameter – manufacture of semiconductors at advanced nodes (10 nanometers or less) – and does not appear to be aimed at specific semiconductor manufacturing systems or technologies.
In the absence of a definition of “clearly required” in the BIS announcement or elsewhere in the EAR, exporters will have to interpret the meaning of the new standard for themselves.
The simple meaning of the words is a useful starting point. The word “required” is commonly used to mean “required” or “required to meet certain requirements”. The word “unique” means an item that is “unique” or “exclusive”.
However, the EAR has its own definition of “required” in relation to technology. This definition of required is much narrower than the definition of common sense.
Required technology in the context of the EAR is a necessary or essential technology, but only that part of the essential technology that is also particularly responsible for reaching or exceeding certain parameters. However, a strange responsibility does not seem to extend so far that it is exclusively or clearly responsible. Instead, according to the EAR definition, the required technology would be specifically responsible for meeting a certain parameter, but could also be specifically responsible for meeting other parameters.
In contrast, “clearly required” would be required only to meet one parameter and would not be able to meet other parameters. The use of the word “unique” restricts the meaning of the term “required” further and distinctly.
Accordingly, the “uniquely required” standard appears reasonably to cover elements that (i) are particularly responsible for making the semiconductors at advanced nodes (10 nanometers and below) and (ii) can make semiconductors at such nodes, and not at other nodes.
A hypothetical example of a car that can travel 300 miles per hour (“mph”) Can easily illustrate the relevant distinctions. Many items are required to go 300 mph: tires, fuel, engine, and so on. However, under the EAR definition of required, only the engine is required as it is specifically responsible for the vehicle’s ability to travel 300 mph. And this is true even if the engine can drive a car at many other speeds, both above and below 300 mph.
The definition of “clearly required” is stricter than the EAR definition of “only required”. The engine must travel 300 mph in a unique way when it has special responsibility for reaching that speed and only that speed. In other words, the engine has one speed and no other. Such an engine is unique and is only required to travel 300 miles per hour.
There may be other engines that allow the car to go 300 miles per hour and at many other speeds as well. These motors would not clearly be required for the 300 mph parameter. Those engines under the EAR would have to meet the 300 mph parameter but are not clearly required. Indeed, the word “clearly” would be redundant and meaningless if such engines also qualified to the “uniquely required” standard.
BIS’s informal guidance
In view of the new “uniquely required” standard and the numerous inquiries from exporters, trade officials undertook to provide representatives of the semiconductor industry with informal advice on the significance of the new standard. According to a senior BIS official, an item used to make semiconductor nodes above and below 10 nanometers would not be caught under a presumption of denial. Instead, the directive would apply to the individual assessment. However, on another occasion, the same BIS official stated that “uniquely required” are the elements that can be used to get as far as 10 nanometers and under knots, but can also be used at larger knots.
BIS officials claimed they only wanted to intercept a very limited set of chokepoint semiconductor manufacturing technologies, but their guidelines were unclear and inconsistent.
The importance of the “uniquely required” standard
So far there is no indication whether the BIS or other US government agencies support or oppose any particular interpretation of the “uniquely required” standard. Other agencies, independently of the BIS, could conclude that all exports to SMIC should be subject to a presumption of denial, or simply refuse license applications for SMIC on a case-by-case basis.
At the same time, the “uniquely required” standard can have effects that go beyond export licenses. For example, the US government can use the “uniquely required” standard to define “basic technologies” or to spell out new controls in general.
Given US officials’ absolute discretion to interpret their own policy statements and national security concerns about SMIC, exporters can have little confidence that US officials would accept or reject the most reasonable definition of the “uniquely required” standard. However, because of its potentially broader implications, the new “uniquely required” standard requires careful scrutiny by exporters.