President Xi of China, and I, are working together to give massive Chinese phone company, ZTE, a way to get back into business, fast. Too many jobs in China lost. Commerce Department has been instructed to get it done!
— Donald J. Trump (@realDonaldTrump) May 13, 2018
With this tweet, U.S. President Donald Trump contradicted his years of tough talk and recent trade sanctions on China in threatening to overrule the U.S. Department of Commerce’s April 15 decision imposing a seven-year export ban on Chinese technology giant ZTE （中兴通讯股份有限公司）. Dependent on U.S. exports and explicitly citing the ban, ZTE announced on May 9 it would have to cease all company operations worldwide. After the ban came into force, Beijing issued a censorship directive pulling its “Amazing China” film. The hagiographical documentary used ZTE as a poster child for China’s economic success. Employing 75,000 and operating across 140 countries, ZTE is the fourth-largest mobile phone supplier to the US and the world’s third-largest telecom provider. The Economist’s Intelligence Unit explains the importance of ZTE to China’s foreign policy:
The threat to ZTE’s existence posed by the export ban carries weight. In addition to being a major domestic employer, ZTE plays an important role in China’s 5G mobile development plans, and is heavily involved in implementing the Belt and Road Initiative. The Chinese government had interceded, without success, on behalf of ZTE during bilateral trade negotiations in early May, in a sign of how important policymakers view the company. [Source]
The New York Time’s Paul Mozur provides information on ZTE’s violations leading up to the ban:
Tech supply chains are so intertwined these days that just about every product that ZTE makes has some American components or software in it — think microchips, modems and Google’s Android operating system. So if ZTE sells a smartphone to North Korea, it might also be selling a Qualcomm chip inside that phone. That’s illegal under American sanctions that prohibit the sale of United States tech to embargoed countries.
When the Commerce Department released its findings against ZTE in 2016, it took the rare step of disclosing evidence of the company’s guilt. One document, signed by several senior ZTE executives, cautioned that American export laws were a risk because the company was selling to “all five major embargoed countries — Iran, Sudan, North Korea, Syria and Cuba.”
A second company document featured flow charts for best practices to circumvent American sanctions. Last year, ZTE acknowledged its guilt and paid a $1.19 billion fine.
[…] Last month, officials said ZTE had violated its agreement with the United States because it didn’t punish senior management for having violated the sanctions. Instead, the Commerce Department said, ZTE paid them bonuses and lied about it. As punishment, the department forbade American technology companies from selling their products to ZTE for seven years. [Source]
Amidst a looming trade war with China that started with the March 22 U.S. declaration of $60bn tariffs, Trump’s olive branch was met with a mixture of bipartisan criticism and confusion. Because the Department of Commerce is a regulatory body, its decisions are apolitical. Associated rule of law violations notwithstanding, Trump was accused of blatant hypocrisy by showing favorable treatment to a company that traded with Iran, one week after he withdrew the U.S. from the Iranian nuclear treaty, and days after the U.S. ambassador to Germany warned German companies against doing business with Iran. Some observers have expressed fears that Trump’s unpredictability may harm U.S. firms, hastening China’s divestment away from them. One month before the ban, China already declared $31.5bn investment in domestic chip manufacturing. Trump was also criticized for overplaying his hand, gifting Beijing the opportunity to demand more:
Ironclad rule of predicting Chinese behavior – Beijing exploits perceived weakness and vacillation. Expect Beijing to push hard now for further US concessions before trade talks can meaningfully advance. ZTE decision makes U.S. trade negotiators' job harder, not easier.
— Ryan Hass (@ryanl_hass) May 14, 2018
The day after his first tweet, Trump attempted to justify his decision, responding to the backlash:
ZTE, the large Chinese phone company, buys a big percentage of individual parts from U.S. companies. This is also reflective of the larger trade deal we are negotiating with China and my personal relationship with President Xi.
— Donald J. Trump (@realDonaldTrump) May 14, 2018
He later countered criticisms that he was giving up too much to Beijing by offering to help ZTE, tweeting Wednesday that “The U.S. has very little to give… China has much to give” in trade talks.
This came just before China’s Vice Premier Liu He’s visit to Washington on May 15 for further trade discussions (currently underway), after the May 3 U.S. delegation to Beijing ended fruitlessly. It was revealed via leaks on social media that Chinese demands during the May 3 negotiations included an adjustment to ZTE’s export ban. Some claimed that Trump’s offer to remove sanctions was to curry favor with Beijing, ahead of his planned historic meeting with Kim Jong Un in Singapore on June 12. Others saw Trump’s using ZTE to lift Chinese tariffs on U.S. agricultural exports, a sector from which he receives considerable political support. Some saw the agricultural tariffs as part of a combination of deals, including Beijing dropping its antitrust investigation in U.S. chip manufacturer Qualcomm’s acquisition of the Dutch firm NXP Semiconductors. Observers also noted that Trump’s offer on ZTE came soon after a real estate project in Indonesia linked to Trump’s company received substantial financing from a Chinese state-owned company.
This is not the first time ZTE has been reprimanded by the U.S.. In 2012, it and Huawei, the leading Chinese mobile phone manufacturer, were flagged by the US Intelligence Committee for threatening national security. In his Transpacifica newsletter, Graham Webster writes:
The Chinese telecommunications equipment company ZTE, now also a major mobile phone producer, has been in the U.S. government’s crosshairs since at least 2012. That year, the House Intelligence Committee released a report placing ZTE alongside Huawei and concluding that “the risks associated with Huawei’s and ZTE’s provision of equipment to U.S. critical infrastructure could undermine core U.S. national-security interests” and recommending that both government and private-sector entities should not use Huawei or ZTE in their networks. The two companies, the report said, “cannot be trusted to be free of foreign state influence and thus pose a security threat to the United States and to our systems.” [Source]
Senator Marco Rubio raised this issue again in relation to Trump’s recent moves:
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
Aside from its American controversies, ZTE was also found to have formally registered $17m of bribes to West African officials in its accounting ledger to secure business contracts. This has not gone unnoticed in Australia, where ZTE is currently bidding to construct its 5G network.
Meanwhile, Huawei is under criminal investigation to determine whether it violated U.S. sanctions on Iran, the same conduct that ZTE was found guilty of.