Potential Expansion of U.S. Export Controls: “Foundational” Technologies, Commodities and Software

Key Takeaways

• The U.S. Government has begun the process of considering new export controls on “foundational technologies” and is seeking industry comments through October 26, 2020.
• The focus is not limited to technology, but includes equipment and software relating to foundational technologies.
• The regulators are requesting input on how to define foundational technology and what types of controls might be appropriate.
• As seen in the similar “emerging technologies” process, proactive engagement by industry may significantly influence the regulatory outcome.

Background

The Department of Commerce, Bureau of Industry and Security (“BIS”), published an advance notice of proposed rulemaking (“the Notice”), on August 27, 2020, announcing the initiation of its review of foundational technologies pursuant to section 1758 of the Export Control Reform Act of 2018 (“ECRA”). BIS is considering potential controls on technology as well as commodities (i.e., hardware, production equipment and materials) and software.

The ECRA requires BIS, and its interagency partners, to identify foundational technologies and emerging technologies that are essential to the national security of the United States and to impose appropriate export controls. At a minimum, such controls would apply to countries subject to an embargo, including an arms embargo (e.g., China), imposed by the United States. BIS formally began its evaluation of emerging technologies in 2018 through a similar advanced notice of proposed rulemaking (the “Emerging Technologies Notice”). Additional information on the ECRA mandate and BIS’ emerging technology review is available here.

Process Status

The August 27, 2020 Notice evidences that BIS is very much at the initial stages of considering controls on foundational technologies. It is framed primarily as a request for industry input. BIS is considering increasing controls on items already subject to anti-terrorism controls on the Commerce Control List, for which an export license is not required (except for countries subject to a U.S. embargo), as well as placing new controls on previously uncontrolled items (classified for export as EAR99). BIS also is looking to establish a framework for future identification of fundamental technologies. This is an invitation for companies to present reasons that items should not be controlled, or alternatively, to suggest controls that would be appropriate where U.S. industry has unique technology that is not commonly available abroad.

Unlike the predecessor Emerging Technologies Notice, which explicitly listed 14 potential categories of technology under consideration for control with a request for comment on that list, this Notice did not offer any guidance on specific foundational technologies being considered. The Notice provided some general direction, indicating that BIS may be considering controls involving:

• Items that are subject to existing military end use/user controls under Supplement No. 2 to part 744 of the EAR, such as semiconductor manufacturing equipment and associated software tools, lasers, sensors, and underwater systems, which BIS stated can be tied to indigenous military innovation efforts in China, Russia or Venezuela; and
• Items being utilized or required for innovation in developing conventional weapons, enabling foreign military or intelligence capabilities, or development of weapons of mass destruction.

Our analysis of recent changes to military end use/user restrictions concerning China, Russia and Venezuela is available here.

Because BIS is at an information gathering stage with respect to foundational technologies, it is premature to anticipate when a new rule may be imposed. However, by analyzing BIS’ action following the Emerging Technologies Notice, we can anticipate potential interim actions relating to foundational technology. Following the Emerging Technologies Notice, BIS received approximately 250 comments. However, that exercise did not result in a new definition of emerging technologies, a formal process for identifying such technologies, or a categorical new reason for control. Instead, BIS used the information received to issue a handful of new controls over the past two years, in the form of specific export control classification numbers (“ECCNs”) covering items that involve certain emerging technologies identified during the Emerging Technologies Notice process. Because BIS could follow a similar path with foundational technologies, companies should take the opportunity to comment in order to educate BIS on the potential impact of controls on their foundational technologies and to help scope any potential new controls.

Requests for Information

BIS has identified eight specific topics on which it would like further comment from industry:

1. How to further define foundational technology to assist in identification of such items;
2. Sources to identify such items;
3. Criteria to determine whether controlled items identified in the anti-terrorism control level ECCNs, in whole or in part, or covered by EAR99 categories, for which a license is not required to countries subject to a U.S. arms embargo, are essential to U.S. national security;
4. The status of development of foundational technologies in the United States and other countries;
5. The impact specific foundational technology controls may have on the development of such technologies in the U.S.;
6. Examples of implementing controls based on end-use and/or end-user rather than, or in addition to, technology-based controls;
7. Any enabling technologies, including tooling, testing, and certification equipment, that should be included within the scope of a foundational technology; and
8. Any other approaches to the issue of identifying foundational technologies important to U.S. national security, including the stage of development or maturity level of any foundational technology that would warrant consideration for export control

In preparing written responses, companies should describe the existing practices of their industry and demonstrate where the controls would not be effective in achieving BIS’ goal of protecting U.S. national security. In many industries, foundational technologies not currently subject to control are already deployed in global manufacturing chains, such as robotics. For such industries, attempts to restrict such technologies could disrupt already established manufacturing operations and may require companies to realign their strategic plans.

For other industries, similar and competing foundational technologies may be under development from non-U.S. sources. For companies in these industries, if their commodities become subject to restrictive BIS controls, foreign customers may elect to procure from non-U.S. sources. A shift away from U.S. procurement (or designing-out U.S. origin content, as it is sometimes described) on the basis of export control concerns could make U.S. companies less competitive and divert R&D resources away from U.S. industry. Companies might consider whether they can make the case that the regulators would have less visibility and control over transactions involving their type of foundational technology if the result of increased control drives foreign companies away from U.S. jurisdiction, versus allowing those transactions to continue under an EAR99 status.

Finally, companies might also consider specific technologies or products that would be appropriate for control. This approach often can be more effective than simply telling the regulators not to issue new controls. The regulators find it helpful when companies point out technologies that truly are unique to the United States, for which there is not yet much or any foreign availability, and when companies provide recommendations on specific criteria that can help the regulators draw lines around new areas for control. This approach can sometimes position a company as a trusted advisor to the regulators, opening up a dialog that may result in a more favorable outcome for the impacted industry.

Conclusion

While BIS has initiated its review obligation pursuant to the ECRA, this process may continue to play out over many more months. However, following the path of the emerging technology process, BIS could begin implementing specific new controls, or expand existing controls, on foundational technologies as soon as early 2021. The potential for quick government action, in combination with BIS’ wide-ranging request for comments, offers meaningful advantages to companies that accept the government’s invitation to participate in the rulemaking process.