Business

Trump Strikes Deal to Save China’s ZTE as North Korea Meeting Looms

Posted June 7, 2018 8:05 p.m. EDT
Updated June 7, 2018 8:06 p.m. EDT

WASHINGTON — President Donald Trump handed the Chinese telecommunications firm ZTE a lifeline Thursday, agreeing to lift tough U.S. sanctions over the objections of Republican lawmakers, his defense advisers and some of his own economic officials.

The deal will help defuse tensions with the Chinese president, Xi Jinping, who personally asked Trump to intervene to save ZTE and whom the president has relied on to help pave the way for next week’s summit meeting with the North Korean leader.

The Commerce Department said ZTE had agreed to pay a $1 billion fine, replace its board and senior leadership, and allow the United States to more closely inspect the company by effectively having a handpicked compliance team embedded inside the firm. The United States would then lift a seven-year ban that prevented the company from buying U.S. products and was quickly driving it out of business.

But the settlement has inflamed lawmakers, including top Republicans, who objected to helping a Chinese company that broke U.S. law and has been accused of posing a national security threat. It also puts the United States in an awkward position as it punishes allies like Canada, Mexico and the European Union with stiff tariffs on steel and aluminum, and insists that countries in Europe and elsewhere abide by U.S. sanctions on Iran.

In 2016, the United States found the Chinese company guilty of violating U.S. sanctions on Iran and North Korea. In April, the government said ZTE had failed to take the necessary actions to rectify the issue, and had lied about its efforts, prompting the Commerce Department to implement the ban. Defense officials have also repeatedly expressed concern about the risk that ZTE’s equipment could pose to national security.

Lawmakers moved swiftly to try to scuttle the agreement Thursday as a bipartisan group of senators introduced an amendment that would automatically reinstate ZTE’s ban on purchasing U.S. products until the president certified to Congress that the company had met certain conditions.

“I assure you with 100% confidence that #ZTE is a much greater national security threat than steel from Argentina or Europe,” Sen. Marco Rubio, R-Fla., who supported the amendment, wrote on Twitter on Thursday. “#VeryBadDeal.”

Sen. Mark Warner, D-Va., called the deal an “awful mistake,” adding that “Mr. Trump has done something pretty unique — he’s built a virtual unanimous bipartisan coalition.”

Commerce Secretary Wilbur Ross emphasized the toughness of the agreement Thursday, saying it was the largest such penalty ever levied by the agency’s Bureau of Industry and Security and included “unprecedented compliance measures.”

Ross and other administration officials have repeatedly insisted that ZTE is being handled as a law enforcement matter that is independent of trade negotiations. But those statements have been undercut by the president himself, who has suggested that the company is a bargaining chip in negotiations between the countries.

In mid-May, the president said he was working with Xi to give ZTE a way to get back in business. Two days later, Trump described the ZTE move as part of “the larger trade deal we are negotiating with China and my personal relationship with President Xi.”

Derek Scissors, a resident scholar at the American Enterprise Institute, said that while ZTE’s punishment was sufficiently tough, the path by which it received a reprieve set a worrying precedent that suggested “a month-old decision by a Trump administration Cabinet member can be reversed if you call the president and tug on his heart strings.”

“The process by which we got here suggests you can buy off U.S. law, and it suggests we’re treating the Chinese better than our friends, both of which are terrible implications,” Scissors added. ZTE’s fate has gotten caught up in a bigger web. A U.S. telecom company, Qualcomm, which sells a large amount of semiconductors to ZTE, is awaiting Chinese approval of a deal to acquire NXP, a Dutch telecom firm that will help it build the next generation of wireless technology, known as 5G.

The Trump administration has expressed concerns about China gaining a leading role in the development of 5G and has singled out Qualcomm as key to helping the United States retain an edge. China, meanwhile, had made it clear to the United States that it would not engage in talks to defuse a brewing trade war between the two economic giants without putting ZTE’s ban on the table for discussion.

During a round of trade talks in Beijing last weekend, the Chinese offered to make nearly $70 billion worth of purchases of U.S. manufactured goods, natural gas, oil, coal, soybeans and other agricultural products, people familiar with the discussions said. But that offer was conditional on the Trump administration’s not proceeding with tariffs on $50 billion worth of Chinese goods.

The Trump administration has not yet announced plans to suspend those tariffs, which the White House has said would go into effect shortly after June 15, and the administration’s trade advisers remain deeply divided over whether to proceed. Trump’s advisers have portrayed the tariffs as leverage to force China to open its markets and make other concessions, such as dropping demands that U.S. companies hand over valuable intellectual property in order to operate in China.

A deal that lets ZTE back into business but does little to resolve those broader concerns would most likely be criticized by hard-liners within the administration, as well as many lawmakers, who agree that China needs to change its practices and view a promise by the Chinese to purchase more U.S. goods as a false victory.

Sen. John Kennedy, R-La., said he was undecided about how lawmakers should proceed now that the administration has struck a deal.

“I’m not a big ZTE fan; they cheat, they helped Iran and North Korea in violation of our sanctions, and they are a little too close for my taste with the Communist Party of China,” Kennedy said. “Call me very skeptical about the wisdom of what’s been done.” The Trump administration privately told lawmakers last month that it had reached a deal to keep the company alive. On Thursday, the administration went public with its decision.

“At about 6 a.m. this morning, we executed a definitive agreement with ZTE,” Ross said in an interview on CNBC’s “Squawk Box,” adding, “This is a pretty strict settlement.”

“We are literally embedding a compliance department of our choosing into the company to monitor it going forward. They will pay for those people,” Ross said. He went on to say that ZTE would pay a $1 billion fine, as well as $400 million in escrow to cover “any future violations.”

“We still retain the power to shut them down again,” Ross said.

Some in China have speculated that the ZTE penalties are an effort to gain leverage in other trade matters. But Washington-based experts and officials point to another issue: that the administration had not realized what a political problem it would be for Xi to have the state-owned technology firm, which employs tens of thousands of people in China, fail.

“You just don’t have people in the administration that would recognize how seriously the Chinese would take it,” Scissors said. “Ross did not know he was running into a Chinese buzz saw.”