On March 23, 2023, the Department of Commerce’s Bureau of Industry and Security (BIS) published a Notice of Proposed Rulemaking implementing measures to prevent the improper use of CHIPS Act Incentives Program funding. Described as “guardrails,” the proposed rules are intended to ensure technology and innovation funded by the Creating Helpful Incentives to Produce Semiconductors (CHIPS) and Science Act are not used for malign purposes by adversarial countries against the United States or its allies and partners. The CHIPS Act was enacted in August 2022 to incentivize the manufacture of semiconductors and semiconductor manufacturing equipment in the United States, especially amid growing national security concerns and economic competition risks posed by China’s increasing chip production in recent years. It provides appropriations to develop domestic manufacturing critical to U.S. competitiveness and national security interests. See Update of July 29, 2022.
The proposed rule provides additional details on national security measures that would be applicable to the CHIPS Incentives Program, including limiting recipients of funding from investing in the expansion of semiconductor manufacturing in foreign countries of concern (i.e., China, Russia, Iran and North Korea). According to BIS, these guardrails “will advance shared national security interests as the U.S. continues coordinating and collaborating with allies and partners to make global supply chains more resilient and diversified.” The proposed rule provides additional details on and definitions for these national security guardrails, including:
- Establishing standards to restrict advanced facility expansion in foreign countries of concern.
- Limiting the expansion of legacy facilities in foreign countries of concern.
- Classifying semiconductors as critical to national security.
- Reinforcing U.S. export controls.
- Restricting joint research and technology licensing efforts with foreign entities of concern.
Establishing Restrictive Standards and Limiting Facility Expansion
To protect national security and the resiliency of supply chains, CHIPS Incentives Program funds may not be provided to a foreign entity of concern. The proposed rule provides a detailed explanation of what is meant by “foreign entities of concern,” as well as a definition of “owned by, controlled by, or subject to the jurisdiction or direction of.” The proposed rule defines other terms used in the CHIPS Act (including terms that will be used in required agreements with funding recipients), identifies the types of transactions that are prohibited under the Expansion Clawback and Technology Clawback sections of the CHIPS Act and provides a description of the process for notifying the Secretary of Commerce of significant transactions involving expansion of semiconductor manufacturing in a foreign country of concern.
Classifying Semiconductors as Critical to National Security
While the CHIPS Act allows companies to expand production of legacy chips in foreign countries of concern in limited circumstances, the proposed rule would classify a list of semiconductors as critical to U.S. national security. In doing so, the rule would define “legacy semiconductors” subject to tighter restrictions, which would include “current-generation and mature-node chips used for quantum computing, in radiation-intensive environments, and for other specialized military capabilities.” The proposed rule seeks to also clarify what would not be considered legacy semiconductors.
Reinforcing U.S. Export Controls
In October 2022, BIS implemented export controls to prevent China from purchasing and manufacturing advanced chips that would enhance that country’s military capabilities. See Update of October 31, 2022. The proposed rule provides definitions that are harmonious with and reinforce these export controls “by aligning prohibited technology thresholds for memory chips between export controls and CHIPS national security guardrails.” Accordingly, the proposed rule applies a more restrictive threshold for logic chips than is used for export controls.
Restricting Joint Research and Licensing
The proposed rule would prohibit during the term of a federal financial assistance award a recipient from knowingly engaging in any joint research or technology licensing with a foreign entity of concern that relates to a technology or product that raises national security concerns. In addition to any foreign entities of concern, the proposed rule would also add entities from BIS’ Entity List, the Treasury Department’s Chinese Military-Industrial Complex Companies (NS-CMIC) list, and the Federal Communications Commission’s Secure and Trusted Communications Networks Act list of equipment and services posing national security risks.
BIS will accept comments from all interested parties through May 22, 2023 via the federal eRulemaking portal or via email.
This BIS proposed rule seeks to align with similar national security “guardrails” included in the Department of the Treasury’s Notice of Proposed Rulemaking, also issued on March 23, 2023, that details the Advanced Manufacturing Investment Credit (Investment Tax Credit) administered by the Internal Revenue Service; see separate update here.