Foreign direct product rules under BIS / EAR: the essentials

A semiconductor manufacturer in East Asia designs a chip using software tools developed in the United States. The finished device never touches US soil. A buyer in a restricted jurisdiction places an order. Is that transaction caught by US export controls? The answer is very often yes – and the mechanism that reaches it is the foreign direct product rule (a rule under the Export Administration Regulations that extends US jurisdiction to certain foreign-made items that are the direct product of controlled US technology, software, or production equipment).

Foreign direct product rules under BIS / EAR rules allow the Bureau of Industry and Security to assert jurisdiction over foreign-produced goods, software, and technology when they are the direct product of specified US-origin technology or software, or when they are produced by a plant or major component of a plant that is itself such a product. As of January 2026, BIS has expanded the scope of these rules across several advanced-technology sectors, making them one of the most consequential extraterritorial tools in modern export controls. The rules operate independently of where the item was manufactured and regardless of whether any US person was involved in the transaction.

This briefing sets out who administers the foreign direct product rules, the legal basis and scope, the two-part test that determines whether an item is caught, how the rules interact with related regimes – including EU dual-use controls and UK export licensing – the risk flags that signal exposure, and when to involve counsel.

Who administers the foreign direct product rules and what is their legal basis?

BIS, within the US Department of Commerce, administers the foreign direct product rules under the Export Administration Regulations, which derive authority from the Export Control Reform Act and, in a continuing sense, from the International Emergency Economic Powers Act. The rules sit within the broader EAR and are not a standalone instrument; they extend the reach of the Commerce Control List to items that would otherwise fall entirely outside US jurisdiction.

The foundational concept is straightforward: the United States asserts that its technology inputs confer US jurisdiction on the items those inputs produce. That assertion is not new. What has changed in recent years is its scope. Rules applying to specific sectors – in particular advanced semiconductors and certain telecommunications equipment – have been layered on top of the general provision, each with its own product and destination triggers. In our practice, we see multinationals outside the United States regularly surprised to discover that a production line using US-origin chipmaking equipment or electronic design automation software has brought their entire output within BIS jurisdiction for those categories.

The jurisdictional foundation matters for cross-border planning. A company subject to EU dual-use controls and UK export licensing may also be subject to BIS jurisdiction over the same item by operation of the foreign direct product rules. Where two regimes both apply, the stricter prohibition governs the conduct of a person subject to both.

What is the two-part test that determines whether foreign direct product rules apply?

The foreign direct product rules apply when an item satisfies both a product prong and a destination/end-use prong, and the test must be satisfied for each transaction, not assessed once at the time of manufacture.

The product prong asks whether the item is the direct product of technology or software that is subject to the EAR and controlled for national security reasons, or whether it was produced by a plant or major component of a plant that is itself such a direct product. "Direct product" is not limited to items produced using US-made machines; it extends to items produced using the knowledge encoded in US-origin technology or software. An integrated circuit designed using US electronic design automation tools is a direct product of that software, even if every physical element of the fabrication process is non-US.

The destination/end-use prong asks whether the item is destined for a restricted destination or a specified entity. For the general foreign direct product rule, this is a country-group question: the item must be destined for a destination that requires a licence under the relevant provisions. For the sector-specific variants – particularly those covering advanced computing and certain semiconductor fabrication items – the prong is satisfied when the item meets specified performance parameters and is destined for certain country groups, or when it is intended for a listed entity regardless of destination.

Both prongs must be met. An item that is a direct product of controlled US technology but that is destined for a country where no licence is required will not be caught by the general rule – though a sector-specific variant may impose different requirements. In our experience, the product prong is frequently misread as applying only to hardware. Software and technology outputs – including compiled code, trained model weights, and process recipes – can each be the direct product of controlled inputs.

What BIS / EAR foreign direct product rules requirements apply to which actors?

BIS / EAR foreign direct product rules obligations explained below apply to any person who exports, re-exports, or transfers an item subject to the rules, regardless of the person's nationality or location. The obligations do not fall only on the original US exporter of the underlying technology; they attach to any actor in the supply chain who handles a covered foreign-produced item in a transaction that meets the two-part test.

For manufacturers, this means conducting a classification analysis of their production inputs before they export or transfer finished products. If their design tools, process equipment, or base materials include US-origin controlled items, the product prong may already be satisfied. The destination analysis must then be conducted for each intended transaction.

For distributors and trading houses, the foreign direct product rules create due-diligence obligations at the point of sale. A distributor who knows or has reason to know that an item is a foreign direct product of controlled US inputs, and that it is destined for a restricted end-user or destination, faces the same licence requirement as the original manufacturer. BIS maintains the Entity List and the Denied Persons List; dealings with parties on those lists require a licence or are prohibited entirely, and a foreign direct product analysis is required before completing any sale involving listed parties.

For financial institutions and investors, the rules are increasingly relevant in M&A and financing transactions. A target that manufactures items subject to the foreign direct product rules may carry significant export-control risk if its sales practices have not kept pace with the expanding scope of BIS authority. We regularly advise acquirers and lenders on how to scope that risk during diligence.

A deemed export – the release of controlled technology to a foreign person within the United States – is a separate but related obligation. The foreign direct product rules and the deemed-export rules can both be engaged by a single transaction: providing a foreign national employee with access to the production technology that sits at the top of the direct-product chain may itself require a licence.

How do the foreign direct product rules interact with EU dual-use controls and UK export licensing?

The cross-regime interaction between BIS / EAR foreign direct product rules and the EU dual-use regime is one of the most practically important divergences in international export controls today. EU dual-use controls, governed by the recast EU Dual-Use Regulation, are based on the nature of the item and its destination; they do not have an equivalent of the US foreign direct product rule that asserts jurisdiction based on the origin of production inputs. An item manufactured in an EU member state from non-EU components may be fully within EU dual-use controls without being a foreign direct product – or it may be both, if US-origin controlled inputs were used in its production.

The practical consequence is a layered compliance obligation. A European manufacturer of advanced semiconductors may need to obtain a licence from a national competent authority under the EU dual-use regime and separately determine whether a US re-export licence is required under the foreign direct product rules. These applications go to different authorities, are assessed against different criteria, and may produce inconsistent outcomes. One regime may permit a transaction that the other prohibits.

UK export licensing, administered by ECJU, presents a comparable dynamic. ECJU licences govern the export of controlled items from UK territory; they do not affect the US jurisdiction that the foreign direct product rules assert over the same item based on its production inputs. A UK manufacturer that has obtained a valid ECJU licence for an export is not thereby released from BIS jurisdiction if the item is a foreign direct product of controlled US technology or software.

The EU Blocking Regulation adds a further layer of complexity in selected contexts. Where a US measure falls within the scope of the Blocking Regulation, EU operators may be prohibited from complying with it. Legal counsel is required to navigate that conflict; it is not resolvable by reference to either regime alone, and the analysis is fact-specific.

What does BIS / EAR require for foreign direct product rules compliance across multi-jurisdictional supply chains? The answer is a structured analysis of inputs, destinations, and end-users conducted at each stage of production and distribution, with documented conclusions that can be produced to a regulator. "We used commercial tools" is not a sufficient answer if those tools were controlled US-origin items.

What are the principal risk flags that indicate foreign direct product rule exposure?

A mis-classified item – one where the company has not applied the foreign direct product analysis to its production inputs – is the most common source of undetected exposure, and the consequences can be severe. OFAC liability for civil violations is strict-liability in character; BIS enforcement similarly does not require proof that the exporter knew the rules applied. The question is whether the transaction was prohibited, not whether the exporter believed it was.

The following are the risk flags we see most frequently in practice.

• Design tool origin not mapped. Electronic design automation software and semiconductor process technology are frequently US-origin and frequently controlled. A manufacturer that has not traced the origin and classification of its design tools cannot determine whether its products are foreign direct products.
• Production equipment not assessed. Chipmaking equipment, deposition tools, and lithography systems may themselves be direct products of controlled US technology. A plant built using such equipment may bring all of its output within the rules regardless of the origin of the raw inputs.
• End-user screening applied only to direct customers. The foreign direct product rules follow the item through the supply chain. A sale to a distributor who resells to a restricted entity can expose the original manufacturer if it had reason to know of the onward destination.
• Country-group changes not monitored. A country's export-control country-group classification determines licence requirements and exception eligibility; reclassification changes the analysis prospectively. A production and sales programme built on one country-group position may become non-compliant after reclassification without any change to the item or the customer.
• Entity List additions not tracked in real time. BIS adds parties to the Entity List throughout the year; there is no advance notice. A transaction that was permissible when contracted may require a licence by the time of shipment if the buyer or an intermediate party is added between those dates.
• Sector-specific rules assumed not to apply. The sector-specific foreign direct product rules have their own product and destination parameters. A company that assessed its products under the general rule and found no issue has not necessarily completed the analysis if sector-specific variants exist for its product category.

Is your compliance programme built around the general foreign direct product rule, or does it also capture the sector-specific variants? In our experience, the gap between those two positions is where the most significant enforcement risk lives.

When should a business involve sanctions and export-control counsel?

The foreign direct product rules are a legal analysis, not a screening exercise. They require a trained assessment of technology lineage, item classification, and destination and end-user status. Several situations call for specialist advice before the transaction rather than after.

A business should involve counsel when it is first assessing whether its production inputs bring its products within the foreign direct product rules. The classification of production technology – design software, process equipment, base materials – requires knowledge of the Commerce Control List and the current scope of each sector-specific rule. An incorrect initial assessment creates a compliance programme built on a false foundation.

Counsel is also required when a potential acquisition or investment involves a manufacturer whose products may be foreign direct products. The export-control due-diligence scope for such a target is distinct from a standard sanctions screen. It covers the target's production technology, its classification records, its sales into restricted destinations, its Entity List monitoring, and the adequacy of its end-use controls. A target with undisclosed exposure can transfer that exposure to the acquirer under applicable US law.

When an entity is added to the Entity List and the business has an existing contract with that party, the time window for taking protective action is short. BIS does not provide advance notice of additions. If a shipment is in transit or a payment is outstanding, the position is time-critical and the options available narrow quickly. Early engagement with counsel preserves choices that close with delay.

Finally, when a company identifies a possible past violation – a transaction that may have been caught by the foreign direct product rules without a licence – the question of voluntary self-disclosure (a recognised mitigating factor in BIS enforcement proceedings, as it is under OFAC's Enforcement Guidelines) arises. The decision to disclose, and how to scope the disclosure, requires legal analysis. Disclosure without a proper assessment of scope and mitigation can create additional exposure rather than reducing it.

The position above covers the standard analysis. Your specific facts – the origin of your production inputs, the classification of the technology they produce, the destinations in your sales pipeline, and the current Entity List status of your counterparties – change the analysis materially. For a classification and due-diligence review of your exposure under the BIS / EAR foreign direct product rules, contact Calder & Vance at info@caldervance.com.

Common misconception: commercial availability does not determine controlled status

A persistent and consequential myth in export-control compliance is that if an item is commercially available, it cannot be controlled under the EAR. The myth is wrong, and it produces real enforcement risk.

Items are classified by an ECCN (Export Control Classification Number under the US Commerce Control List) on the basis of technical parameters, not commercial availability. An item that is sold widely across global markets may still carry an ECCN that requires a licence for export to specified destinations or end-users. Commercial ubiquity is a factor that BIS may consider in certain licence exception analyses, but it is not a classification criterion and it does not remove an item from the Commerce Control List.

For the foreign direct product rules, the point is even more direct. The rules ask whether the foreign-made item is the direct product of controlled US technology or software. The commercial availability of the finished item is not part of that test. A chip that can be purchased from multiple non-US distributors may still be a foreign direct product if it was designed using controlled US electronic design automation software. The rule follows the technology input, not the market structure of the finished product.

Items subject to the EAR but not listed on the Commerce Control List are designated EAR99. EAR99 items generally do not require a licence for most destinations, but they remain subject to end-use and end-user controls. A company that assumes an EAR99 classification removes all export-control risk has made an error. BIS administers end-use and end-user controls, including military end-use/end-user restrictions for specified destinations, and these apply to EAR99 items as well as to classified items. The foreign direct product rules are a further layer: an EAR99 finished item that is the direct product of controlled US production equipment may still be subject to BIS jurisdiction for certain sector-specific transactions.

If a transaction has already been flagged as potentially non-compliant, or a shipment has been refused or returned, an early review can preserve options that narrow with time. Contact Calder & Vance at info@caldervance.com for a confidential assessment.

Related practices

• Advanced computing controls under BIS / EAR – licensing, classification, and Entity List risk for advanced chips and computing systems
• Cloud and remote access controls under EU dual-use rules – how EU intangible-technology controls interact with US export obligations
• Country-group changes under BIS / EAR – managing reclassification risk and updating compliance programmes when a destination moves

This publication is general information and does not constitute legal advice. For advice on your situation, contact info@caldervance.com.