September 7, 2022 – With the pandemic, we saw an incredible demand for technology that consumers use in work and for entertainment. Unfortunately, that demand was coupled with worldwide shortages and significant supply chain issues, and these factors had a devastating effect on semiconductor production. With semiconductor chips in very short supply, there was a wide-ranging impact in many industries, from automobiles to gaming consoles, leaving consumers with few options for purchasing.
This shortage has highlighted the fact that these chips that we rely on for so much of our technology are not widely made in America. According to a statement from Whitehouse.gov, while America invented the semiconductor, we currently only produce about 10 percent of the world’s supply. All of this has led to the passage of the CHIPS and Science Act of 2022, designed to tackle the chip shortage with a new approach to bringing chip technology, manufacturing, and innovation to the United States.
President Joe Biden signed this bill into law on Aug. 9, and we can now expect to see a boost in U.S. leadership in semiconductor research and design, innovation, and manufacturing. The CHIPS Act will have a broad impact, bolstering U.S. leadership in wireless technology, and CHIPS funding will benefit not only U.S. chip manufacturers, but also U.S. universities, K-12 STEM educational programs, and regional hubs among other advancements in innovation.
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To assist in securing the domestic chip supply, the CHIPS Act provides $52.7 billion for American semiconductor research, development, manufacturing, and workforce development, including:
•$39 billion in manufacturing incentives, including $2 billion for the legacy chips used in automobiles and defense systems;
•$13.2 billion in R&D and workforce development;
•$500 million to provide for international information communications technology security and semiconductor supply chain activities, such as research and design, packaging, and distribution;
•A 25 percent investment tax credit for capital expenses for manufacturing of semiconductors and related equipment. (See here https://bit.ly/3e9xqMg).
The Bureau of Industry and Security (BIS) already controls exports of semiconductors and semiconductor technology strictly under Category 3 of the Export Administration Regulations (EAR) Commerce Control List (CCL). The reasons for control for Category 3 electronics include national security, regional stability, missile technology, nonproliferation, and antiterrorism.
The U.S. government has not hesitated to enforce these controls, for example in the 2021 case of Vorago Technologies Inc., an Austin-based semiconductor manufacturer, charged with illegally exporting controlled wafers to Russia via Bulgaria. According to the BIS publication “Don’t Let This Happen to You,” on Sept. 28, 2021, Vorago Technologies agreed to a civil penalty of nearly $500,000, $247,00 of which was suspended, along with a two-year denial of export privileges. The BIS also added three Russian companies and four Russian individuals to the BIS Entity List in connection with this investigation.
The Department of Justice (DOJ) also charged individuals criminally in this case. The Assistant Attorney General explained in a Dec. 18, 2020, press release, “Time and again, we find the Russians attempting to get access to sensitive American technology. The defendants here are charged with exporting radiation-hardened chips to Russia, knowing that it was illegal to do so and establishing a business in Bulgaria to circumvent U.S. enforcement authorities.” (See here https://bit.ly/3AXzL5V).
So, now that chip production will inevitably increase in the United States, what does that mean for export controls? The U.S. export controls on semiconductors are hardly new, but taking on a greater leadership role in this area will require the United States to protect even more carefully against unauthorized exports of controlled technology. For example, CHIPS funds will come with “guardrails” to help ensure subsidized entities do not build certain facilities in China or other countries of concern.
This bill also comes at a time when the U.S. has been implementing stricter semiconductor export controls and licensing policies — and tougher export enforcement overall. For example, in June, the BIS announced heightened enforcement measures for export control, including for example the publicizing of administrative penalties. (https://bit.ly/3pXc07L).
“Our enforcement tools have never been a better match for the global threat environment than they are right now, and today’s changes will help to make sure that we are using those tools to their fullest potential to protect our national security,” said Assistant Secretary of Commerce for Export Enforcement Matthew S. Axelrod in a June 30, 2022, press release on the BIS website.
Then, on Aug. 15 BIS announced a formal ban on the export of four technologies directly tied to semiconductor manufacturing. According to BIS, in a statement released on Aug. 12 on its website, the rule “establishes new export controls on four technologies that meet the criteria for emerging and foundational technologies under Section 1758 of the Export Control Reform Act (ECRA) and are essential to the national security of the United States.”
The four technologies include two substrates of ultra-wide bandgap semiconductors: Gallium Oxide (Ga2O3), and diamond; Electronic Computer-Aided Design (ECAD) software specially designed for the development of integrated circuits with Gate-All-Around Field-Effect Transistor (GAAFET) structure; and Pressure Gain Combustion (PGC) technology. (See here https://bit.ly/3CJ3Qra).
All of this increased regulation in tandem with the CHIPS Act will have a direct impact on Chinese corporations, covering a wider range of Chinese end-uses and end-users.
Recent “entity listings” cover certain public and private semiconductor-related entities, including chip designers and end-users (like Huawei), various Chinese supercomputing entities, and Chinese chipmakers (like Fujian Jinhua). These controls typically cover all semiconductor technologies.
With the passage of the CHIPS Act, U.S. semiconductor manufacturers, technology developers, universities, educators, funded state and regional hubs, electronics distributors, and other leaders in semiconductor and telecom innovation must remain vigilant in protecting against unlawful releases to China, Russia, and any listed entities and individuals under U.S. export laws and regulations. For example, any CCL products, equipment, or technology classified under Export Control Classification Numbers in Category 3 or Category 5 will require a license for export to certain destinations.
U.S. export controls are far-reaching, and enforcement is trending upward. U.S. export controls touch exports as well as re-exports to third countries, in-country re-transfers, and even releases of drawings, blueprints, formulas, and other technology to foreign nationals located in the United States.
Fortunately, the BIS offers outreach on compliance in this complex area of law and technology. (See here https://bit.ly/3TrF3hm). As the semiconductor industry navigates the benefits of the CHIPS and Science Act, export controls will also require an increase in export compliance awareness.
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Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias. Westlaw Today is owned by Thomson Reuters and operates independently of Reuters News.
Michelle Schulz is a partner with Schulz Trade Law PLLC, advising corporate clients on complex international trade and Customs compliance and enforcement matters. Her practice includes export and import disclosures, investigations, audits, penalties, encryption controls, and other complex areas of international trade law. She can be reached at firstname.lastname@example.org.