U.S. Strikes Deal to Help China’s ZTE

Posted June 7, 2018 11:14 a.m. EDT

The United States announced a deal Thursday to end tough U.S. sanctions on the Chinese telecommunications giant ZTE, a company that has been at the center of a dispute between China and the United States.

The Commerce Department said that ZTE had agreed to pay a $1 billion fine and allow the United States to more closely inspect the company by effectively having a hand-picked compliance team embedded inside it.

It is not clear what the United States received in return for allowing the company to avoid tough sanctions. ZTE had been a bargaining chip in negotiations between the two countries, which have been edging toward a trade war with tit-for-tat tariff threats.

President Donald Trump softened his approach to ZTE several weeks ago after Chinese President Xi Jinping asked Trump to consider easing penalties on the company, which was headed toward collapse after the sanctions. That request came at a sensitive diplomatic moment for Trump, who is heading to Singapore next week to meet with North Korea’s leader, Kim Jung Un. Trump has made Xi his partner on North Korea while condemning China’s trade practices.

Trump has framed the ZTE move as part of “the larger trade deal we are negotiating with China and my personal relationship with President Xi.”

But letting ZTE off the hook is likely to inflame lawmakers, including top Republicans, who have objected to helping a Chinese company that has been accused of posing a national security threat. The move to allow ZTE off the hook also puts the United States in an even more awkward position as it punishes allies like Canada, Mexico and the European Union with tariffs on steel and aluminum.

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

“When it comes to China, despite his tough talk, this deal with ZTE proves the president just shoots blanks,” said New York Sen. Chuck Schumer, the Democratic leader. “There is absolutely no good reason that ZTE should get a second chance and this decision marks a 180-degree turn away from the president’s promise to be tough on China. It’s up to Congress now to act to reverse the deal.”

Administration officials have stressed that the penalties on ZTE are still tough and will not compromise U.S. national security. But the president’s sudden change of heart has still left the White House vulnerable to criticism that it is walking back its tough stance on China.

On Wednesday, lawmakers from both political parties took their biggest step yet against the Trump administration’s trade agenda, introducing legislation that would require Congress to approve tariffs issued under a legal statute known as Section 232. The Trump administration has used the law to impose sweeping tariffs on metal imports from around the world and proposed similar measures on automobile imports.

Both houses of Congress have drafted legislation that would block the ZTE deal, though those efforts remain in initial stages. The House passed a bill last month that would prevent the administration from easing restrictions on the company, while the Senate Banking Committee approved an amendment that would prevent the president from modifying penalties on Chinese companies that had recently violated U.S. law.

ZTE has been at the center of a wide-ranging and complex trade dispute between Washington and Beijing, and its survival has been used as a bargaining chip between the two sides as each imposed tariffs and restrictions on the other’s products and services. The Trump administration told lawmakers last month that it had reached a deal to keep the company alive.

“At about 6 a.m. this morning, we executed a definitive agreement with ZTE,” Wilbur Ross, the Commerce Secretary, 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.”

The company will also be required to change its board of directors and executive team within 30 days.

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

ZTE had been banned from buying U.S. technology components for seven years, a penalty that industry analysts said would put it out of business within weeks because of its reliance on the United States for parts. The punishment was tied to violations of U.S. sanctions against Iran and North Korea.