The U.S. Commerce Department, Bureau of Industry and Security (“BIS”) published a final rule on May 21, 2019, adding the largest telecommunications-equipment manufacturer in the world, Huawei Technologies Co., Ltd., and 68 of its non-US affiliates (collectively, “Huawei”), to BIS’s Entity List. See 84 FR 22961. This rule imposes an export license requirement for all exports, reexports, and in-country transfers to Huawei of all items “subject to the EAR,” with a presumption of denial for any application for such transactions.

In general, the U.S. Export Administration Regulations (“EAR”) applies only to U.S.-origin items. There are, however, certain classes of non-U.S.-origin items that are also subject to the EAR. These non-U.S.-origin items are those that are subject to the EAR by application of either the “de minimis” rule or the “foreign-made direct product” rule.

The primary purpose of this note is to summarize these two rules and, particularly, their impact on non-U.S. manufacturers trading with Huawei. In the subject scenario, a non-U.S. manufacturer (the “Manufacturer”) is producing these sorts of items outside the U.S., for sale to Huawei. For foreign affiliates of a U.S. parent, the Manufacturer will frequently use/license the U.S. parent’s technology in order to manufacture the non-U.S.-origin goods. And, depending on the particular supply chain, the non-U.S.-made goods may contain some level of “U.S.-origin controlled content.” Finally, after the non-U.S.-origin goods are fabricated, the Manufacturer would then want to ship the goods to Huawei.

So, the non-U.S. Manufacturer wants to know whether selling its goods to Huawei is permissible, in light of the new addition to the Entity List. The answer will depend on whether the non-U.S.-origin goods are subject to the EAR, by function of either the de minimis rule or the foreign-produced direct product rule. Even if the goods are subject to the EAR, a sale to Huawei may yet be authorized under a recently published Temporary General License, which is also discussed below.

The De Minimis Rule (EAR Section 734.3(a)(3) and 734.4, and Supplement No. 2 to Part 734):

The de minimis rule subjects foreign-produced commodities to the EAR’s jurisdiction, if those commodities contain more than the “de minimis” percentage of “U.S.-origin controlled content.” For most items/destinations, the percentage is 25%. But for certain items/destinations, there is no de minimis level, and for others, the percentage is only 10%. For example, for most telecom equipment (e.g., ECCNs 6A005, 6A995, 5A001, and 5A991) destined for China, the 25% threshold would apply.

Para. (a)(1) of the De Minimis Guidelines (Supplement No. 2 to Part 734) tells us how something qualifies as “U.S.-origin controlled content,” as follows:

“(a) Calculation of the value of controlled U.S.-origin content in foreign-made items is to be performed for the purposes of §734.4 of this part, to determine whether the percentage of U.S.-origin content is de minimis. (Note that you do not need to make these calculations if the foreign made item does not require a license to the destination in question.) Use the following guidelines to perform such calculations:

(1) U.S.-origin controlled content. To identify U.S.-origin controlled content for purposes of the de minimis rules, you must determine the Export Control Classification Number (ECCN) of each U.S.-origin item incorporated into a foreign-made product. Then, you must identify which, if any, of those U.S.-origin items would require a license from BIS if they were to be exported or reexported (in the form in which you received them) to the foreign-made product’s country of destination. For purposes of identifying U.S.-origin controlled content, you should consult the Commerce Country Chart in supplement no. 1 to part 738 of the EAR and controls described in part 746 of the EAR. Part 744 of the EAR should not be used to identify controlled U.S. content for purposes of determining the applicability of the de minimis rules. In identifying U.S.-origin controlled content, do not take account of commodities, software, or technology that could be exported or reexported to the country of destination without a license (designated as “NLR”) or under License Exception GBS (see part 740 of the EAR). Commodities subject only to short supply controls are not included in calculating U.S. content.

Note to paragraph (a)(1): U.S.-origin controlled content is considered ‘incorporated’ for de minimis purposes if the U.S.-origin controlled item is: Essential to the functioning of the foreign equipment; customarily included in sales of the foreign equipment; and reexported with the foreign produced item. U.S.-origin software may be ‘bundled’ with foreign produced commodities; see §734.4 of this part. For purposes of determining de minimis levels, technology and source code used to design or produce foreign-made commodities or software are not considered to be incorporated into such foreign-made commodities or software.”

EAR, Supplement No. 2 to Part 734 (emphasis added).

Determination of de minimis levels for parts and components (i.e., hardware) is tedious, but relatively straightforward under the rules. But what about the Manufacturer’s use of its U.S. parent’s technology to fabricate the goods destined for Huawei? Does a value need to be assigned to the U.S. parent’s technology and potentially counted as “U.S.-origin controlled content”? In this regard, note that one of the elements for an item to qualify as “U.S.-origin controlled content” is that the item must be “incorporated.” And, the above-underlined language in the Note to paragraph (a)(1) addresses this specific question. Based on this language, the U.S.-origin technology would not be “incorporated” and, thus, would not “count” as U.S.-origin controlled content for purposes of de minimis.

Separately, Huawei’s addition to the Entity List provides that everything “subject to the EAR” (even EAR99 items) has a license requirement. So, does that mean that all U.S.-origin content would count as “U.S.-origin controlled content”? It would, if you considered the Manufacturer’s customer—Huawei. However, the above-underlined language in para. (a)(1) of the De Minimis Guidelines addresses that issue, as follows: “Part 744 of the EAR should not be used to identify controlled U.S. content for purposes of determining the applicability of the deminimis rules.” Part 744 is where the EAR addresses end-user based controls (including controls based on the Entity List). And the quoted language from para. (a)(1) says you should not consider Entity-List-based controls for purpose of determining de minimis. Thus, the regular de minimis rules apply, and any shipment by the Manufacturer to China (including shipments to Huawei) would be subject to the 25% threshold.

The Foreign-Produced Direct Product Rule (EAR Sections 734.3(a)(4) and 736.2(b)(3)):

In addition to the de minimis rule, the Non-U.S. Manufacturer must also consider the “foreign-produced direct product” rule, in order to determine whether the non-U.S.-origin goods are subject to the EAR. There are some special rules for 9×515 and “600 series” foreign-produced direct products. But EAR Section 736.2(b)(3) provides the general rule, as follows:

“(3) General Prohibition Three—Reexport and export from abroad of the foreign-produced direct product of U.S. technology and software (Foreign-Produced Direct Product Reexports)—(i) Country scope of prohibition. You may not, without a license or license exception, reexport any item subject to the scope of this General Prohibition Three to a destination in Country Group D:1, E:1, or E:2 (See supplement no.1 to part 740 of the EAR). Additionally, you may not, without a license or license exception, reexport or export from abroad any ECCN 0A919 commodities subject to the scope of this General Prohibition Three to a destination in Country Group D:1, D:3, D:4, D:5, E:1, or E:2.

(ii) Product scope of foreign-made items subject to prohibition. This General Prohibition 3 applies if an item meets either the Conditions defining the direct product of technology or the Conditions defining the direct product of a plant in paragraph (b)(3)(ii)(A) of this section:

(A) Conditions defining direct product of technology. Foreign-made items are subject to this General Prohibition 3 if they meet both of the following conditions:

(1) They are the direct product of technology or software that requires a written assurance as a supporting document for a license, as defined in paragraph (o)(3)(i) of supplement no. 2 to part 748 of the EAR, or as a precondition for the use of License Exception TSR at §740.6 of the EAR, and

(2) They are subject to national security controls as designated on the applicable ECCN of the Commerce Control List at part 774 of the EAR.

(B) Conditions defining direct product of a plant. Foreign-made items are also subject to this General Prohibition 3 if they are the direct product of a complete plant or any major component of a plant if both of the following conditions are met:

(1) Such plant or component is the direct product of technology that requires a written assurance as a supporting document for a license or as a precondition for the use of License Exception TSR in §740.6 of the EAR, and

(2) Such foreign-made direct products of the plant or component are subject to national security controls as designated on the applicable ECCN of the Commerce Control List at part 774 of the EAR.”

EAR Section 736.2(b)(3) (emphasis added). In other words, the Non-U.S. Manufacturer’s export of the non-U.S. product to a D:1 country (which would include China and about 20 other countries) would be subject to the EAR if both: (1) the non-U.S.-made product is controlled for National Security (NS) reasons, and (2) the technology/software from which the non-U.S. product is made is controlled for NS reasons. Conversely, if the non-U.S. product is not going to a D:1 country or does not meet either of elements (1) or (2) above, then the non-U.S. Manufacturer’s export to Huawei would not be subject to the EAR.

If the non-U.S. product is subject to the EAR (under the de minimis or foreign-made direct product rules), the Entity List terms would normally apply—i.e., license required for all items, and a presumption of denial for all such license applications.

The Temporary General License (EAR Supplement No. 7 to Part 744):

If the Manufacturer determines that its sale of the non-U.S. product to Huawei is “subject to the EAR,” a sale to Huawei may yet be authorized under the Temporary General License, which BIS published as a final rule on May 22, 2019. See 84 FR 23468. The Temporary General License will be effective until 19 August 2019. During the effective period, the Temporary General License will effectively make it like Huawei is not on the Entity List, provided the subject export fits within one of the 4 scenarios. Those 4 scenarios are as follows:

“(1) Continued operation of existing networks and equipment: BIS authorizes engagement in transactions, subject to other provisions of the EAR, necessary to maintain and support existing and currently fully operational networks and equipment, including software updates and patches, subject to legally binding contracts and agreements executed between Huawei and third parties or the sixty-eight non-U.S. Huawei affiliates and third parties on or before May 16, 2019.

(2) Support to existing handsets: BIS authorizes engagement in transactions, subject to other provisions of the EAR, necessary to provide service and support, including software updates or patches to existing Huawei handsets. This authorization is limited to models of Huawei handsets that were available to the public on or before May 16, 2019.

(3) Cybersecurity research and vulnerability disclosure: BIS authorizes, subject to other provisions of the EAR, the disclosure to Huawei, and/or the sixty-eight non-U.S. affiliates of information regarding security vulnerabilities in items owned, possessed or controlled by Huawei or any of the sixty-eight non-U.S. affiliates when related to the process of providing ongoing security research critical to maintaining the integrity and reliability of existing and currently fully operational networks and equipment.

(4) Engagement as necessary for development of 5G standards by a duly recognized standards body: BIS authorizes, subject to other provisions of the EAR, engagement with Huawei and/or the sixty-eight non-U.S. affiliates as necessary for the development of 5G standards as part of a duly recognized international standards body (e.g., IEEE – Institute of Electrical and Electronics Engineers; IETF – Internet Engineering Task Force; ISO – International Organization for Standards; ITU – International Telecommunications Union; ETSI- European Telecommunications Standards Institute; 3GPP – 3rd Generation Partnership Project; TIATelecommunications Industry Association; and GSMA, a.k.a., GSM Association, Global System for Mobile Communications).”

Note: Just because a transaction fits within one of these scenarios (and otherwise meets the requirements of the Temporary General License) does not mean the transaction can be consummated without a specific EAR export license. Again, if the transaction fits one of these scenarios, the effect is that it is like Huawei is not on the Entity List. But, even before Huawei was added to the Entity List, many transactions would still require a license—primarily based on country of destination and the Part 742 CCL-based controls. So, all of those non-Entity-List controls still apply.

The Temporary General License also requires an exporter relying on the license to complete and retain (but not file) a certification statement that must specify how the export, reexport, or transfer (in-country) meets the scope of the Temporary General License.

Recap:

In conclusion, a non-U.S. Manufacturer who wants to sell to Huawei must evaluate both the de minimis rule and the foreign-made direct product rule, to determine if its proposed transaction is subject to the EAR. If the Manufacturer’s transaction is subject to the EAR, the Manufacturer’s proposed sale to Huawei may yet be authorized under the Temporary General License. If, however, the transaction is subject to the EAR and not authorized by the Temporary General License, then the Entity List’s terms regarding Huawei will apply—i.e., a license is required for all items, and a presumption of denial for any license application.