ZTE’s loss could be a gain for US-China trade relations

The telecoms firm’s compliance with a huge fine for violating US sanctions on North Korea and Iran may have helped avoid a potential political flashpoint

PUBLISHED : Tuesday, 14 March, 2017, 3:24am
UPDATED : Tuesday, 14 March, 2017, 3:24am

The fining of mainland telecommunications giant ZTE by US authorities to the tune of US$1.2 billion has made worldwide news. The incident could have been turned into a diplomatic spat if Beijing had not been trying to make nice with the volatile US president, Donald Trump. Though ZTE pleaded guilty to criminal charges of violating US sanctions on North Korea and Iran, the record penalties are viewed by many on the mainland as excessive.

Even so, let this be a big lesson for Chinese companies wanting to do business in the US. You must follow other people’s laws when you are in their country, just as Beijing expects foreign firms to follow Chinese laws.

The penalties essentially wiped out a whole year of profit and then some. The company reported a loss of 2.35 billion yuan (US$340 million) last year, but would have had a net profit of 3.83 billion yuan had it not made a provision for the US fine.

There was an element of cloak and dagger in the whole case, as a big break for US investigators came when a ZTE insider tipped them off, leading to the seizure of a laptop reportedly full of incriminating files from the husband of a company lawyer at an airport in the US.

While other financial institutions found guilty of money laundering for Iran and North Korea had faced higher fines, as a proportion of profits, they were equivalent to no more than one or two quarters of earnings.

It appears the Trump White House and the US Commerce Department have made good on the president’s tough talk on trade. This is despite the fact that the case was mostly prosecuted when Barack Obama was still president.

ZTE has no choice but to agree to the penalties – an immediate fine of US$892 million and another US$300 million to be suspended over seven years as US officials monitor ZTE’s compliance with the deal. Otherwise, it would have to exit the US market.

Agreeing to a hefty fine and to comply with regulations has helped to avoid a potential political flashpoint between the two countries ahead of anticipated tough negotiations.