Is it possible to believe that coal can show up in your stocking, even if you don’t believe in Santa Claus? Maybe not, but Semiconductor Manufacturing International Corporation just received another lump, on top of those from earlier in the year. It has joined the by now not-so-exclusive club called the Entity List, courtesy of the Bureau of Industry and Security. Merry Christmas, SMIC.
What Is the Entity List?
The Entity List comprises foreign organizations and individuals sanctioned by BIS for malignant activities. While it started out mostly covering illicit proliferation activities, in recent years parties posing national security or foreign policy concerns have been added.
Most Entity List designees face prohibitions on unlicensed exports, reexports or in-country transfers of any item “subject to the EAR”. These prohibitions apply, as well, to the parties that otherwise would engage in such exporting, reexporting or transferring. Consequently, although the Entity List is intended to cut its members off from U.S. export trade, its compliance burdens fall upon existing and potential suppliers to them.
Welcome Aboard, SMIC
SMIC “is a semiconductor foundry providing IC foundry and technology services”. According to BIS, there is “evidence of activities between SMIC and entities of concern in the Chinese military industrial complex.” As a resulted, SMIC and ten related companies were listed, effective on December 18, 2020.
While there always are broad consequences to an Entity List designation, BIS signaled that its primary concern is to “limit[ ] SMIC’s ability to acquire certain U.S. technology by requiring” licenses to provide that technology. The agency explained that “Items uniquely required to produce semiconductors at advanced technology nodes 10 nanometers or below will be subject to a presumption of denial to prevent such key enabling technology from supporting China’s military modernization efforts.” This implies to me that other items may be given more favorable licensing treatment, so the Entity List designation will not necessarily work as a complete bar on export trade with SMIC.
One Lump or Two, or Three, or . . . ?
SMIC’s inclusion follows a number of other U.S. government actions aimed at the company. Earlier this year, BIS reportedly informed SMIC’s suppliers that certain articles (and perhaps technologies) to that company presented a risk of diversion to military end uses/end users in China. While public information was sparse, this presumably meant that whatever items concerned BIS would require a license, which of course would not be forthcoming.
The more subtle tipoff from this development is that BIS now considered SMIC to be covered by the “military end use/end user” restrictions that were effective in June 2020. These require a license for exports, reexports and transfers of specified items controlled for antiterrorism reasons, including production and testing equipment and electronic components. Companies astute enough to have recognized this connection should already have ceased supplying covered items to SMIC.
If that event didn’t give enough of a clue, the Defense Department’s naming of SMIC as a “Communist Chinese Military Company” should have provided pretty clear guidance that SMIC is covered by the military end use/end user restrictions.
The Defense Department’s notice further means that SMIC will be covered by Executive Order 13959’s prohibition on investments by United States persons in Chinese military companies. The EO’s divestment requirement will go into effect on January 21, 2021, so Happy New Year too, SMIC.
The focus on SMIC shouldn’t divert our attention from the other Entity List finalists, including energy giant China National Offshore Oil Corporation; CNOOC, too, was named as a military company at the same time SMIC was. Maybe these companies and their suppliers should be “celebrating” Festivus instead.