US Commerce Department Rulemaking on “Foundational Technologies” to Further Expand Export Controls and Mandatory CFIUS Declaration Requirements

On August 27, 2020, the US Department of Commerce Bureau of Industry & Security (“BIS”) published the long-awaited advance notice of proposed rulemaking (“the Notice”) seeking public comment on the definition of, and criteria for, identifying “foundational technologies” essential to US national security.¹ The rulemaking process will have significant implications for developers and exporters of US-sourced foundational technologies—particularly in relation to exports and transfers involving China and several other countries—as well as foreign investments in US businesses engaged in certain activities relating to such technologies. As discussed in our recent Legal Updates, this is the latest in a series of US government efforts to reform the legal and policy framework governing national security-based regulation of trade and technology transfer.²

BIS’s identification of “foundational technologies” will trigger broad export licensing restrictions to countries currently subject to US arms embargo, including China. Moreover, BIS’s rulemaking will also broaden the scope of Committee on Foreign Investment in the United States (“CFIUS”) jurisdiction to review certain foreign investments in US businesses whose activities involve the technologies that BIS identifies as “foundational” through this process, as well as make it mandatory to notify CFIUS for such transactions. Comments responding to the Notice are due October 26, 2020.

Background

The Notice comes two years after enactment of the Export Control Reform Act of 2018 (“ECRA”), which mandated that BIS, through an interagency process, identify and establish appropriate controls on the export, reexport or transfer (in country) of emerging and foundational technologies that (i) are essential to the national security of the United States and (ii) do not fall under one of a number of existing US export control regimes.

In November 2018, BIS published an advance notice of proposed rulemaking seeking public comment on criteria for identifying emerging technologies that are essential to US national security.³ In January 2020, BIS issued an interim final rule imposing controls for certain software specially designed to automate geospatial imagery (the control was considered to be on a new technology, but it was not designated as an “emerging technology” under the ECRA).⁴ In June 2020, BIS issued a final rule adding controls for certain items in the categories of chemical weapons precursors; human and animal pathogen and toxins; and equipment capable of use in handling biological materials, which are the first group of technologies designated as “emerging technologies” under the ECRA.⁵ Additional rules on emerging technologies are expected soon.

With the Notice, BIS is now formally seeking public comments to identify foundational technologies and will work with its interagency partners to do so. Foundational technologies essential to the national security are those that may warrant stricter controls if a present or potential application or capability of that technology poses a national security threat to the United States. The Notice states that the United States has a national security interest in maintaining global leadership in “science, technology, engineering, and manufacturing, including foundational technology that is essential to innovation.”

Identifying Foundational Technologies

Unlike the 2018 notice on “emerging technologies,” where BIS identified several industry areas and “representative technology categories” for consideration and comment, this Notice does not set out potential candidates for control and seeks industry input in identifying potential “foundational technologies.” The Notice does nonetheless provide some indication of the agency’s current thinking on potential kinds of technology that may warrant control.

First, before inviting comment on what should be treated as a “foundational technology,” BIS confirms what would not be covered by that term, consistent with the ECRA’s mandate. In particular, the Notice confirms that BIS is not seeking to expand jurisdiction over items not currently subject to the Export Administration Regulations (“EAR”), such as technology qualifying for the “fundamental research” under the regulations. Rather, the Notice specifies that for purposes of considering a foundational technology, BIS will consider items subject to the EAR that either are not currently on the Commerce Control List (known as “EAR99” items) or are otherwise controlled only for anti-terrorism, crime control, short supply or UN embargoes.

For example, BIS specifically identifies items currently subject to controls for “military end-use” or end-user reasons to China, Russia and Venezuela (as listed in Supplement No. 2 to part 744 of the EAR) as items that may warrant designation as “foundational technologies” based on the role they may play in military innovation programs. As discussed in our recent Legal Update, BIS recently expanded its controls on such items, including with respect to certain items that otherwise may be exported/reexported to most destinations without a license (including equipment and technology critical to semiconductor manufacturing, as well as lasers, sensors and underwater systems).⁶ BIS notes that many such items “can be tied to indigenous military innovation efforts in China, Russia or Venezuela” and accordingly “may pose a national security threat.”

Another area of potential focus is items of particular utility in innovation relating to weapons proliferation and foreign intelligence gathering activities. For example, BIS highlights for potential consideration items that “are being utilized or required for innovation in developing conventional weapons, enabling foreign intelligence collection activities, or weapons of mass destruction applications.” Consistent with the ECRA’s mandate, these may be items that currently may be exported without a license to all destinations with the exception of terrorism-list countries or where there is a prohibited end-use or end-user.

Similarly, the Notice also indicates that BIS may consider incidents and patterns of illicit procurement with respect to a potential foundational technology to be a potential indicator of “some level of dependency on U.S. technologies to further foreign military or intelligence capabilities in countries of concern” and therefore to warrant potential treatment as a foundational technology.

Invitation for Public Comment

BIS is seeking comments on the following topics:

• How to further define foundational technology to assist in identification of such items;
• Sources to identify such items;
• Criteria to determine whether certain EAR 99 items and items controlled only for anti-terrorism reasons, which are generally not controlled as to countries subject to a US arms embargo, are essential to US national security and hence presumably should be controlled as to those countries;
• The status of development of foundational technologies in the United States and other countries;
• The impact specific foundational technology controls may have on the development of such technologies in the United States;
• Examples of implementing controls based on end-use and/or end-user rather than, or in addition to, technology-based controls;
• Any enabling technologies, including tooling, testing, and certification equipment, that should be included within the scope of a foundational technology; and
• Any other approaches to the issue of identifying foundational technologies important to US national security, including the stage of development or maturity level of a foundational technology that would warrant consideration for export control.

US and non-US developers, exporters and others who deal with potential “fundamental technologies”; those whose supply chain may depend on such technologies; and potential foreign investors in US businesses whose activities involve such technologies should assess the potential impact on their businesses and consider submitting comments to the US government.

Comments are due October 26, 2020.