All About ZTE, the Chinese Sanctions Breaker That Trump Is Seeking to Help
Posted June 7, 2018 1:31 p.m. EDT
ZTE, the Chinese telecommunications giant that was on the brink of collapse after being hit with tough penalties by the Trump administration, has become a linchpin of trade relations between the United States and China.
On Thursday, Wilbur Ross, the commerce secretary, said the administration had reached a deal to lift restrictions imposed on ZTE after it was found to have violated U.S. sanctions related to doing business with countries like Iran and North Korea. ZTE’s fate has been at the center of a broader dispute between China and the United States, and the deal announced Thursday could inflame a battle with Congress over national security interests.
Here’s what you need to know.
What Is ZTE?
Zhongxing Telecommunications Equipment, known as ZTE, makes cheap smartphones that are mostly sold in developing countries, though it also sells them in the United States.
But ZTE is one of two Chinese companies — Huawei is the other — that sells equipment for cellular networks. It has about 75,000 employees and says it does business in more than 160 countries.
That makes it an important geopolitical pawn for Beijing, both as an innovator and as a builder of state-funded projects overseas. If China wants to improve ties with a government in the developing world, it often offers loans that can be used to set a ZTE-powered cellular network.
Longer term, China hopes that companies like ZTE will become powerhouses that can help the country wean itself from a reliance on American tech firms, which Beijing views as security threats because of the possibility that they could help Washington spy.
How Did It Break Sanctions?
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 U.S. 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 U.S. 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 U.S. sanctions. Last year, ZTE acknowledged its guilt and paid a $1.19 billion fine.
How Did the U.S. Hobble ZTE?
The Commerce Department was not done with that hefty penalty.
In April, officials said ZTE had violated its agreement with the United States because it did not 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 U.S. technology companies from selling their products to ZTE for seven years.
That means no Qualcomm chips or Android software for its phones, and no American chips or other components for its cellular gear. Analysts estimate that four-fifths of ZTE’s products have U.S. components. ZTE went into a tailspin, saying last month that it had shut down major operations.
Why Did President Donald Trump Intervene?
The American president has not explained his decision to try to help the company, other than to cite the potential for lots of Chinese workers to lose their jobs. But ZTE’s troubles come at a complicated moment.
In normal times, the company’s fate would be a legal matter for the Commerce Department. But the Trump administration is pressuring China to make trade concessions. It may also need Beijing’s help to strike a deal with North Korea as Washington and Pyongyang plan a high-profile meeting on June 12 in Singapore.
Trump appears to be using ZTE’s punishment as a bargaining chip in negotiations with China, rather than a matter of law enforcement. It is not clear what he will get in return for allowing ZTE to remain in business.
What Are the Terms of the Deal?
According to Ross, who announced the deal to end the sanctions Thursday morning on CNBC:
— ZTE must pay a $1 billion fine plus $400 million in escrow to cover “any future violations.”
— ZTE must allow a compliance team, chosen by the United States, to monitor the company.
— ZTE must also change its board of directors and executive team within 30 days.
Some Lawmakers Would Like to Block the Deal. Can They?
Some members of Congress, Republicans and Democrats, say that absolving ZTE of its misdeeds runs counter to national security interests. It is unclear, however, whether their efforts to block Trump’s moves regarding ZTE will be successful.
“Their technology is a national security threat, according to our defense and law enforcement authorities,” Sen. Chuck Schumer of New York, the Senate minority leader, said Wednesday. “Why on earth is the Trump administration considering relaxing penalties on such a bad actor?”
On Thursday, Sen. Marco Rubio, R-Fla., said on Twitter: “This ‘deal’ with #ZTE may keep them from selling to Iran and North Korea. That’s good. But it will do nothing to keep us safe from corporate & national security espionage. That is dangerous. Now Congress will need to act to keep America safe from #China.”
The House and Senate have drafted legislation that would block the ZTE deal, although it is uncertain what the practical effect would be. The House passed a bill last month meant to hamstring the Trump administration’s flexibility in maneuvering on the issue. The Senate Banking Committee approved an amendment to a bill on foreign investment that would prevent Trump from modifying penalties on Chinese companies within a year of their being found to have violated U.S. law.