How can the United States claim export control jurisdiction over an item that isn’t made in the United States, doesn’t contain any U.S.-origin content, and is traded between parties in other nations without ever touching U.S. territory?
That’s the idea behind the Foreign Direct Product Rule (FDPR), which was introduced in 1959 to place controls on the transfer of certain items made abroad with the benefit of U.S. technologies.
Stated as simply as possible, the FDPR allows the Department of Commerce’s Bureau of Industry and Security (BIS) to regulate the reexport and transfer of foreign-made items if their production involves certain technology, software or equipment. It does this by defining that technology, software and equipment as subject to the Export Administration Regulations (EAR).
Prior to 2013, there was just a single foreign direct product rule, focused on a limited range of dual-use items controlled for national security (NS) reasons. That original rule was relevant only to reexports to a group of countries consisting of Cold War adversaries of the United States, and was infrequently applied for most of the past 60 years.
Over the past decade, BIS has expanded the FDPR to apply to a wider range of circumstances, allowing the United States to expand its jurisdiction over goods that pass between other countries. Today, there are eight versions of the FDPR – four of them introduced in 2022 alone.
Understanding and applying the FDPR can be difficult. That’s why it’s the subject of deep-dive training by the Export Compliance Institute designed specifically for non-U.S. operators.
What follows is a basic overview of the rule and its evolution.
The Original FDPR
The National Security Foreign Direct Product Rule is contained in EAR 734.9(b). This is the successor to that original 1959 rule which states essentially that a foreign-produced item is subject to the EAR:
- … if it is the “direct product” of U.S.-origin technology or software that requires a written assurance for a license or license exception, and is subject to national security controls as designated under its ECCN; or, if it’s the “direct product” of production equipment that relies on such U.S.-origin technology or software;
- … And if the item is destined for any country listed in Country Groups D:1 (national security concern), E:1 (terrorist-supporting countries) or E:2 (under unilateral embargo) at Supplement No. 1 to Part 740.
It applies for products that make use of the listed U.S. technology or software ECCNs, but can also be one degree removed from that – such as if an item is produced using manufacturing equipment that is itself a direct product of U.S. technology.
The rule doesn’t apply to all transactions worldwide; it only applies when the equipment or its products are destined for the specified locations.
Versions 2 and 3
In 2013, under the Export Control Reform Initiative, a large number of items that had previously been subject to the International Traffic in Arms Regulations (ITAR) were moved to EAR jurisdiction.
That created the need for two new versions of the FDPR, largely to replicate restrictions that had been embedded in the ITAR for these sensitive items.
The 9×515 FDP Rule, found at EAR 734.9(c) is relevant to foreign-made spacecraft-related items described in 9×515 ECCNs.
It features essentially the same definitions as the original rule and has the potential to bring these foreign-made items under the EAR when destined to Country Groups D:5 (under arms embargo), E:1 or E:2.
The 600 Series FDP Rule, found at EAR 734.9(d), applies to certain foreign-made items described in 600 series ECCNs – signifying a munitions entry in the Commerce Control List (CCL). It also applies to ECCN 0A919 – certain military items produced and located outside the U.S.
It’s similar in requirements to the 9×515 rule, but it applies to a broader set of Country Groups: D:1, D:3 (chemical & biological), D:4 (missile technology), D:5, E:1 or E:2.
The so-called Huawei Rule
Huawei, a Chinese producer of telecommunications equipment, has long been under scrutiny by western nations because of its close relations with the Chinese government and concerns that its equipment could be used to gather information from other countries and businesses.
In 2019, it was sanctioned by the United States for national security concerns, and placed on the Entity List (see related post: Understanding the Various Restricted Party Lists) – generally prohibiting exports, reexports and transfers to Huawei for all items subject to the EAR.
But there was concern within the U.S. government that certain products made outside the U.S. remained beyond the scope of the EAR – and therefore were unaffected by Huawei’s designation on the Entity List. The solution? Expand the FDPR, render those products – chips in particular – subject to the EAR, and prohibit their shipment to Huawei.
This new version, the Entity List FDP Rule, is found in EAR 734.9(e) and controls a series of ECCNs related to computers, electronics, telecommunications and information security. While the rule never mentions Huawei directly, it applies specifically to entities with a Footnote 1 designation in the license requirement column of the Entity List. Only Huawei entities meet that criterion.
It was a major change in the way the FDPR was used. First, it applied to lower level and relatively less-sensitive technologies than had previously been subject to the FDPR. Second, it targeted a specific entity.
In 2022, BIS expanded the Entity List FDP Rule – deploying the playbook initially constructed for Huawei to target entities in China alleged to be involved in advanced computing and weapons of mass destruction. The affected organizations carry a Footnote 4 designation on the Entity List.
Versions 5-6: Russia and Belarus
BIS issued a fact sheet explaining two new FDP rules on Feb. 24, 2022 – less than 24 hours after Russian forces crossed the border into Ukraine.
In language similar to previous versions of the FDPR, the fact sheet explained the new Russia/Belarus FDP Rule, found in EAR 734.9(f): “To restrict Russia and Belarus’ abilities to acquire certain foreign-produced items, the … rule establishes a control over foreign-produced items that are: (i) the direct product of certain U.S.-origin software or technology subject to the EAR; or (ii) produced by certain plants or major components thereof which are themselves the direct product of certain U.S.-origin software or technology subject to the EAR. This control applies when it is known that the foreign-produced item is destined to Russia or Belarus or will be incorporated into or used in the production or development of any part, component, or equipment produced in or destined to Russia or Belarus.”
The rule does not generally apply to foreign-produced items that would be designated EAR99, which includes many non-sensitive consumer items. But it does apply to a broad range of items that are less sensitive than those covered by previous versions of the FDPR.
Russia/Belarus-Military End User FDP Rule: Found in EAR 734.9(g), this rule differs from the more general Russia/Belarus FDP Rule in two key ways:
- It can extend to items classified EAR99; and
- It is akin to the so-called Huawei Rule because it applies to specific entities referred to in Footnote 3 of the Entity List.
The purpose is to cast the widest net of restrictions on any items that might end up being used by the Russian and Belarusian militaries.
Versions 7 and 8: New Focus on China
The Advanced Computing FDP Rule in EAR 734.9(h) was implemented in October 2022, and places new controls on a series of ECCNs in the electronics, computers and telecommunications/information security categories of the CCL if their destination is China.
As an example, ASML is a world leader in equipment that’s used to manufacture computer chips. While the company is headquartered in the Netherlands, it has worldwide operations, and has employed U.S. technology in the design of some of its equipment.
Under this FDPR, this equipment – as well as chips that it produces – may be subject to U.S. export controls.
The Supercomputer FDP Rule, in EAR 734.9(i), is similar and was also implemented in October 2022. It specifies controls on a range of ECCNs in products or product manufacture that end up in China and can be used in the upkeep and development of supercomputers.
The combined purpose of these rules is to restrict China’s ability to buy and/or produce advanced computing capabilities in light of intensified competition between China and the U.S.
Do you have questions about the Foreign Direct Product Rule? Visit www.learnexportcompliance.com to learn about our company, our faculty, our staff and our esteemed Export Compliance Professional (ECoP®) certification program. To find upcoming e-seminars, live seminars and live webinars and browse our catalog of 80-plus on-demand webinars, visit our ECTI Academy. You can also call the Export Compliance Training Institute at 540-433-3977 for more information.
Scott Gearity is President of ECTI, Inc.