President Donald Trump promised on Sunday to help Chinese telecom company ZTE “get back in business, fast” after a U.S. Commerce Department ban on sales of crucial components to the firm, a punishment for illegally shipping American goods to Iran and North Korea, drove it to the brink of suspending operations.
ZTE, whose full name is Zhongxing Telecommunications Equipment Corporation, agreed to $1.19 billion in civil and criminal penalties in March 2017 for “illegally shipping telecommunications equipment to Iran and North Korea, making false statements, and obstructing justice including through preventing disclosure to and affirmatively misleading the U.S. Government.”
In essence, ZTE admitted it was engaged in a conspiracy to evade long-standing sanctions against shipping certain hi-end electronics to Iran and North Korea. The penalty was the largest ever imposed by the Commerce Department’s Bureau of Industry and Security (BIS).
“We are putting the world on notice: the games are over. Those who flout our economic sanctions and export control laws will not go unpunished—they will suffer the harshest of consequences,” Commerce Secretary Wilbur Ross said at the time.
One of the conditions ZTE agreed to was a seven-year denial of export privileges, which was suspended but could be activated at any time if the U.S. government concluded the company was breaking other aspects of the settlement agreement or violating other U.S. regulations. In April 2018, Secretary Ross announced that ZTE made false statements to BIS in 2016 and 2017, so the export denial would be activated.
“ZTE made false statements to the U.S. Government when they were originally caught and put on the Entity List, made false statements during the reprieve it was given, and made false statements again during its probation,” said Ross. “ZTE misled the Department of Commerce. Instead of reprimanding ZTE staff and senior management, ZTE rewarded them. This egregious behavior cannot be ignored.”
A few weeks later, ZTE announced that it was suspending “major operating activities” as a result of the Commerce Department action. Recent bans on federal government purchases of ZTE equipment and their sale at military bases, on the grounds that the Chinese company’s equipment might pose a security risk, may also have contributed to the decision.
President Trump’s announcement on Sunday that he was working with Chinese President Xi Jinping to keep ZTE in business, therefore, came as a surprising reversal of U.S. policy as well as Trump’s longstanding criticism of Chinese trade practices.
Two sources told Reuters that China was very insistent about obtaining sanctions relief for ZTE before trade negotiations could move forward:
During trade talks in Beijing earlier this month, Chinese Vice Premier Liu He told U.S. Treasury Secretary Steven Mnuchin that China would not continue talks on broader bilateral trade disputes unless Washington agreed to ease the crushing sanctions on ZTE, two people briefed on those meetings said.
“The message was, ‘we have to deal with ZTE before we continue talks’,” one of the people said.
Both sources, who declined to be identified given the sensitivity of the matter, said China was willing in principle to import more U.S. agriculture products in return for Washington smoothing out penalties against ZTE, but they did not offer details.
Chinese Foreign Ministry spokesman Lu Kang told a regularly scheduled news briefing on Monday that China “greatly appreciates the positive U.S. position on the ZTE issue”.
He said that Liu would travel to Washington from Tuesday to Saturday to continue trade talks.
According to Reuters’ sources, “Trump’s reversal surprised and frustrated many U.S. officials” because the penalty against ZTE was seen as well-deserved and entirely separate from trade negotiations with China.
There was also some concern about Trump taking steps to help a company whose products have been deemed a security risk by the U.S. intelligence community. Sen. Marco Rubio (R-FL) criticized Trump’s announcement on those grounds on Monday morning:
Problem with ZTE isn’t jobs & trade, it’s national security & espionage. Any telecomm firm in #China can be forced to act as tool of Chinese espionage without any court order or any other review process. We are crazy to allow them to operate in U.S. without tighter restrictions https://t.co/AXtTDgufc9
— Marco Rubio (@marcorubio) May 14, 2018
Britain’s National Cyber Security Center advised companies not to do business with ZTE in April, warning “the national security risks arising from the use of ZTE equipment or services within the context of the existing UK telecommunications infrastructure cannot be mitigated.”
China’s state-run Xinhua news service points out that ZTE employs about 70,000 people around the world, 130,000 of them in the United States, along with many tech jobs at companies which supply ZTE with components that could be imperiled if the company shuts down. A ZTE official quoted by Reuters over the weekend said the company spent $2.3 billion with U.S. exporters in 2017.
China’s state-run Global Times welcomed Trump’s tweet on Monday, arguing that ZTE’s legal battle with the U.S. government has “dragged on for too long,” and that it “does not make sense to issue a death sentence” for the entire company over the actions of a few individuals.
The Global Times contended that ZTE has been unfairly persecuted by U.S. government regulators in an effort to shelter American telecom companies from Chinese competition:
President Trump’s decision couldn’t have arrived at a better time. Many Chinese saw ZTE’s ordeal as the result of evil wrongdoing carried out by the US as was the speculation among international businesses. This latest development offers a new angle for analyzing US intentions.
Whether ensconced with trade disputes or conflicts among other companies, it is sincerely hoped for that major issues can be resolved fairly without having to utilize extreme measures. As the largest economy in the world, the US needs to contribute to its stability.
Economic and trade partners should not have to feel a deep sense of unease when working with the US. We expect President Trump to follow through with his Twitter announcement quickly, and it shouldn’t be just another card in the game. The situation with ZTE is about credibility and nothing more.
ZTE phones are much more popular in the United States than they are in China, making American operations crucial to the company’s survival. ZTE is currently the fourth-largest supplier in the American market, behind Apple, Samsung, and LG.
The Wall Street Journal reported on Monday that millions of Americans who own ZTE phones find themselves unable to update their Google Android operating systems, depriving them of important security patches and technical support, because Google is complying with the Commerce Department’s order to stop providing services to the Chinese company.
“The lapse could leave some consumers with inoperable devices, according to a person familiar with the matter,” the WSJ wrote. “The Shenzhen-based company has sold nearly 25 million smartphones in the U.S. since the start of last year, according to Canalys, a research firm. Some of those customers have taken to social media to vent frustration over the inability and lament that they may have to dump their ZTE models and switch to other brands.”