Export Controls on “Foundational Technologies” – Opportunity for Public Comment

On August 27, 2020, the U.S. Commerce Department’s Bureau of Industry and Security (“BIS”) published an advance notice of proposed rulemaking (“ANPRM”) to solicit comments from industry and other stakeholders about how BIS should approach the establishment of new export controls on “foundational technologies” under the U.S. Export Administration Regulations (“EAR”).   Comments must be received by October 26, 2020.   This is an important opportunity for both U.S. and non-U.S. companies, industry groups, academic institutions and others to have a role in shaping this new U.S. regulatory process at an early stage. The U.S. government is required under Section 1758 of the Export Control Reform Act of 2018 (“ECRA”) to “identify emerging and foundational technologies” that are “essential to the national security of the United States” and that are not yet subject to export controls for most countries, and then to “establish appropriate controls” on such technologies, which “at a minimum” are to include restrictions on providing such technologies to China and other U.S. arms-embargoed countries.  Therefore, the end result of this process may be new U.S. export controls on China and other countries that are viewed as more sensitive from the perspective of U.S. national security.  Any controls ultimately established for foundational technologies will be relevant not just for export controls, but also other regulatory areas.  Notably, “emerging and foundational technologies” controlled pursuant to Section 1758 of ECRA will be treated as “critical technologies” for the purpose of foreign investment national security reviews led by the Committee on Foreign Investment in the United States (“CFIUS”), as we previously advised. BIS initiated a similar process pursuant to Section 1758 of ECRA for “emerging technologies” in late 2018, as we previously discussed.  The main difference with “foundational technologies” is that some of these technologies may already be restricted under the EAR with an Export Control Classification Number (“ECCN”) on the U.S. Commerce Control List (“CCL”).  In contrast, “emerging technologies” are generally viewed as those that have never before been subject to export controls.  Therefore, the “foundational technologies” process may involve some combination of establishing new ECCNs, increasing the restrictions applicable to existing ECCNs, and modifying existing ECCNs in other ways such as with respect to the nature and scope of items controlled.  BIS states in the ANPRM that it is looking at technologies that are currently “controlled only for anti-terrorism (AT), crime control (CC), or short supply (SS) reasons, subject to United Nations (UN) embargoes, or designated as EAR99.” BIS does not yet appear to have specific technologies in mind for the establishment of controls on “foundational technologies.”  The agency stated in the ANPRM that it is considering the following factors as examples:

• . . . if the items are being utilized or required for innovation in developing conventional weapons, enabling foreign intelligence collection activities, or weapons of mass destruction applications.
• . . . technologies that have been the subject of illicit procurement attempts which may demonstrate some level of dependency on U.S. technologies to further foreign military or intelligence capabilities in countries of concern or development of weapons of mass destruction.

BIS warned the semiconductor industry specifically in the ANPRM that it may seek to impose broader controls under this authority on “semiconductor manufacturing equipment and associated software tools.”  It also mentioned “lasers, sensors, and underwater systems,” based on the view that such technologies “can be tied to indigenous military innovation efforts in China, Russia or Venezuela” and may therefore “pose a national security threat.” The ANPRM does make clear that “BIS does not seek to expand jurisdiction over technologies that are not currently subject to the EAR, such as ‘‘fundamental research’’ described in § 734.8 of the EAR.”  BIS made an identical statement in the emerging technologies ANPRM. BIS is seeking comments on the following specific points:

(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 AT level Export Control Classification Numbers (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 an foundational technology that would warrant consideration for export control.

The ANPRM states that BIS will use the public comments provided to inform an interagency process aimed at developing new controls on foundational technologies, and that the next step following that interagency process will be the issuance of “rules and comment periods” for any such new controls.  In other words, as we saw with the “emerging technologies” process, the ANPRM should only be the first out of at least two steps in developing these new controls, and there will be another opportunity for industry comment prior to the implementation of specific new controls.  That said, it is possible that BIS could decide to issue “interim final” rules that go directly into effect at some point after this comment period, rather than “proposed rules” that have no effect until finalized in another rulemaking. BIS has taken a deliberative and case-by-case approach to emerging technologies.  To date, the agency has been following its pre-existing process to establish new controls on emerging technologies under the 0Y521 series of classifications, such as the January 2020 controls on geospatial imagery analysis automation software.  The U.S. government also continues to pursue new controls through the multilateral export control regimes, such as the annual Wassenaar Arrangement process. This ANPRM on foundational technologies, and the parallel process for emerging technologies, come in the context of other initiatives at BIS to expand the scope of U.S. export controls into new areas of technology, with a focus on China in particular.  For example, on July 17, 2020, BIS published a notice of inquiry seeking input on the development of new controls on “surveillance systems and other items of human rights concern,” such as “facial recognition software and other biometric systems for surveillance, nonlethal visual disruption lasers, and long-range acoustic devices and their components, software, and technologies.” We recommend that industry, academia and other stakeholders watch these developments carefully, as new U.S. export controls can impact a variety of concerns, including investment, hiring, IT infrastructure, R&D, partnerships/collaborations, and sales.