The Governance of Export Controls – How China Mirrors the U.S. Foreign Direct Product Rule (FDPR)

Last Updated on 13/10/2025 by 75385885

Foreign Direct Product Rule governance – The Return of Industrial Policy through Law

Export control has become the quiet language of global power.
Where tariffs once dominated trade wars, today legal definitions decide who can build, ship, or assemble the most advanced technologies. The Foreign Direct Product Rule (FDPR) — a U.S. export-control instrument — exemplifies how governance frameworks stretch beyond borders.

In 2020, the United States expanded its FDPR to restrict companies such as ASML and TSMC from supplying advanced chips or equipment to China if any part of the product involved U.S. technology, software, or intellectual property. Now, China is preparing to introduce a mirror version: its own FDPR targeting critical raw materials like rare earth elements.

Both measures signal the same truth: global supply chains are no longer merely economic systems; they are governance systems — governed by laws, licences, and national interpretations of control.

The Legal Core: What the FDPR Does

The Foreign Direct Product Rule allows the U.S. government to regulate products made anywhere in the world if they contain American technology or components.

In practical terms, if a product includes:

• U.S.-origin software or blueprints,
• U.S.-developed machine tools or design platforms, or
• any component manufactured with U.S. technology,

…then the U.S. can assert jurisdiction.

This creates a powerful extraterritorial reach — a governance mechanism built not on borders but on intellectual property rights. It is enforced through export licences, compliance monitoring, and penalties that extend to foreign companies such as ASML, Samsung, and TSMC.

The FDPR turns technical dependency into regulatory dependency.
A single screw, bolt, or algorithm of U.S. origin can trigger the rule. From a governance perspective, this transforms the global semiconductor chain into a web of compliance checkpoints.

Also other signals are going around – the Guardian US chip export controls are a ‘failure’ because they spur Chinese development, Nvidia boss says.

Why the Semiconductor Supply Chain Is a Perfect Target

The chip industry is the most globally interdependent value chain in existence.
Designs originate in Silicon Valley; lithography machines in the Netherlands; wafers in Taiwan; testing and packaging in Malaysia; and rare-earth magnets in China.

Every node in that chain touches another jurisdiction — a governance network by design.
That’s why the FDPR can reach deep into non-U.S. territories.

When ASML ships an Extreme Ultraviolet Lithography (EUV) machine, for instance, dozens of American patents and software modules are embedded in its control systems. Even if ASML operates from Veldhoven, it must comply with U.S. export regulations. This is the Semiconductor Supply Chain at work.

The logic is simple but far-reaching: if it has American DNA, it falls under American law.

This principle has reshaped boardroom risk discussions. Governance frameworks now include “origin audits” — internal reviews of whether any product or process relies on U.S. intellectual property. It is a new layer of corporate due diligence.

Read more on A journey through the hyper-political world of microchips and the Semiconductor Supply Chain.

China’s Countermove: The Rare Earth Version of the FDPR

According to the BNR report, China intends to introduce its own variant of the FDPR starting 1 December.
Instead of targeting chips, it targets rare earth metals — the essential ingredients for magnets, batteries, and defense technology.

The parallel is striking.
If the U.S. uses “Does it contain American technology?” as its test, China could ask, “Does it contain Chinese rare earths?”

These metals — mined and refined largely in China — power the modern economy:

• permanent magnets in electric vehicles,
• guidance systems in fighter jets,
• wind turbines,
• smartphones and computers,
• and, ironically, the same lithography machines restricted under the U.S. FDPR.

For decades, China’s dominance in refining these minerals was seen as a technical advantage, not a geopolitical lever. Now it becomes a governance instrument — a legal key that controls who may access or re-export materials with Chinese origin.

Read more – China steps up control of rare-earth exports citing ‘national security’ concerns.

Governance Implications: Compliance Beyond Borders

Export controls blur the line between law and corporate governance.
A company’s compliance framework must now consider not only domestic regulations but also extraterritorial ones.

This creates several governance challenges:

a. Origin Tracking

Firms must document the complete material and technology genealogy of their products — “who contributed what, where, and under whose jurisdiction.”

For many, this requires ERP-level integration of legal and technical metadata, connecting procurement, R&D, and trade compliance systems.

b. Dual-Use Classification

Many components have both civilian and military applications (so-called dual-use items).
Boards must approve export-control policies that classify products accordingly, often in consultation with national export authorities.

c. Ethical and Transparency Reporting

Under frameworks such as CSRD and OECD supply-chain guidelines, companies must disclose risks of sanctions or export-control violations. Governance therefore expands into sustainability reporting — connecting legal compliance with ESG transparency.

d. Board Oversight

Audit committees increasingly treat export controls as part of enterprise risk management (ERM).
Questions arise:

• Do we have the right export-licence management in place?
• Who is accountable if a supplier violates the FDPR or its Chinese equivalent?
• How do we document our due diligence for assurance purposes?

Export control thus becomes not just a trade issue, but a board-level governance issue.

Read more in a metaphore – AI Governance and Ethics: Introduction – Why Every Organization Needs a Brain.

The ASML Case: Between Two Rules

ASML’s situation illustrates the tension perfectly.
As a Dutch company, ASML is subject to EU law. But because its machines rely on U.S. technology, the FDPR also applies.

Now, with China introducing a reciprocal version, ASML’s supply chain could be bound by two overlapping extraterritorial regimes.

For instance:

• A magnet inside an ASML laser module might originate from Chinese rare earths.
• The software controlling that module might rely on U.S. code libraries.

In governance terms, this creates a regulatory sandwich — an entity caught between two sovereign compliance systems with opposing objectives.

Boards facing this scenario must decide where the “compliance priority” lies.
That decision is strategic, not merely legal. It affects market access, investor relations, and geopolitical risk exposure.

ASML’s public filings already highlight such risks in the “Export Controls” section of its annual report, illustrating how financial disclosure and governance now intersect.

Read more on our blog – ASML and the Power of Governance: From Underdog to Global Chip Machine Leader.

Global Precedents and Analogies

Export-control governance is not new.
Japan, South Korea, and the European Union maintain similar lists of restricted technologies. However, the FDPR stands out because it extends U.S. jurisdiction beyond national borders.

China’s planned version reverses that principle.

By conditioning exports of rare earths on Chinese approval, it asserts its own form of extraterritorial governance — not unlike how the EU’s GDPR governs data processing outside the EU.

This “governance by reach” reflects a wider shift: states increasingly enforce their rules through global value chains rather than physical borders. For corporations, it means that governance literacy must now include geopolitics, legal harmonisation, and data-traceability.

The Role of Corporate Reporting

From a financial-reporting perspective, export-control risk must be disclosed under:

• IFRS 7 (risk disclosure) – Management should disclose information that enables users of its financial statements to evaluate the nature and extent of risks arising from financial instruments to which the entity is exposed at the end of the reporting period. IFRS 7 requires certain disclosures to be presented by category of an instrument based on the IFRS 9 recognition and measurement categories of financial instruments,
• IAS 37 (provisions for regulatory penalties) – In a general sense, all provisions are contingent because they are uncertain in timing or amount. However, in this case the term ‘contingent’ is used for liabilities that are not recognised because their existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity., and
• CSRD (governance and risk-management disclosures) – the debate on climate change has become noisy, fragmented and often polarised. Scientists present alarming data, activists warn that the clock has run out, politicians stall or compromise, and businesses oscillate between ambitious promises and hesitant action, read more.

Companies may need to quantify potential losses or contingencies related to denied export licences, halted shipments, or reputational damage.

Governance disclosures increasingly mention “trade compliance frameworks,” similar to internal control systems under COSO. Boards integrate these controls within their assurance processes, ensuring that export-related decisions are traceable and ethically defensible.

China’s Rare Earth Policy: From Resource to Regulation

Rare earths were long considered abundant but messy to refine.
During the 1980s–2000s, Western producers exited due to environmental costs, leaving China to dominate extraction and processing.

Today, China controls roughly 70% of global rare-earth output and 90% of refining capacity.
By applying an FDPR-style rule to these materials, Beijing transforms its resource advantage into a governance instrument.

From December onward, any foreign defence or electronics manufacturer importing magnets or alloys with Chinese content could require Chinese approval — a mirror image of U.S. export-licence mechanisms.

This mechanism doesn’t only restrict flows; it also encourages localisation.
Foreign firms may be incentivised to relocate parts of their supply chain within China to avoid export-licence delays — a classic governance feedback loop between regulation and industrial strategy.

Governance Lessons for Boards and Investors

1. Interdependence equals exposure.
   Every international partnership embeds another jurisdiction’s legal DNA.
2. Compliance is now strategic.
   Export control decisions affect valuation, investor confidence, and operational continuity.
3. Transparency pays off.
   Investors increasingly demand disclosure of supply-chain dependencies and sanction risks.
4. Audit trails are governance assets.
   Companies that document origin, licensing, and risk management gain credibility with regulators and rating agencies.
5. Industrial policy is governance policy.
   Governments use compliance frameworks as tools of statecraft. Boards must anticipate such shifts rather than merely react to them.

A Neutral Outlook: The World After December

From December onwards, both Washington and Beijing will operate parallel extraterritorial regimes.
Each will monitor global supply chains not only for economic but for compliance purposes.

The long-term impact is structural:

• More due diligence: companies will need deeper supplier audits.
• More documentation: ERP and trade-compliance systems must trace origin data.
• More dialogue: multinationals will need government relations teams specialised in export control.
• More disclosure: annual reports will evolve into platforms for governance accountability, not just financial performance.

Export control is thus becoming the new frontier of corporate governance — an arena where transparency, traceability, and trust define competitiveness.

Export Control Governance – Governance Without Borders

The FDPR and its Chinese counterpart demonstrate a new age of governance:
Rules travel faster than products.

For companies like ASML, Intel, or Stellantis, compliance is no longer a back-office task but a board-room strategy.
For investors and auditors, export-control disclosures are the new ESG — indicators of how responsibly a company navigates the global rulebook.

The world may divide along regulatory lines, but governance remains the bridge — ensuring that even amid restriction, accountability survives.

FAQs – Foreign Direct Product Rule governance

Foreign Direct Product Rule governance

Foreign Direct Product Rule governance Foreign Direct Product Rule governance Foreign Direct Product Rule governance Foreign Direct Product Rule governance Foreign Direct Product Rule governance Foreign Direct Product Rule governance Foreign Direct Product Rule governance Foreign Direct Product Rule governance Foreign Direct Product Rule governance Foreign Direct Product Rule governance Foreign Direct Product Rule governance Foreign Direct Product Rule governance Foreign Direct Product Rule governance Foreign Direct Product Rule governance Foreign Direct Product Rule governance Foreign Direct Product Rule governance Foreign Direct Product Rule governance Foreign Direct Product Rule governance