ZTE will reopen under US oversight in US$1.4 billion deal - unless US lawmakers spoil Donald Trump’s triumph

The end of sanctions against embattled Chinese telecom equipment maker ZTE resolves an issue that had boosted Washington-Beijing tensions

PUBLISHED : Thursday, 07 June, 2018, 9:05pm
UPDATED : Friday, 08 June, 2018, 12:08pm

US Commerce Secretary Wilbur Ross announced an end to sanctions against Chinese telecom equipment maker ZTE on Thursday, intensifying a confrontation with lawmakers in his own party, who intend to pass legislation that would block the move.

The deal Ross announced includes a US$1 billion penalty against ZTE and the installation of a US-selected compliance team at the company to prevent further violations of the sort that initially prompted the Commerce Department to cut ZTE off from its US suppliers, according to a statement released by the department.

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The settlement also requires ZTE to put US$400 million in escrow to cover any future violations and to change its board of directors and executive team within a month. That brings total penalties imposed by the US against ZTE to US$2.3 billion, according to Thursday’s announcement.

In April, the Commerce Department banned ZTE, based in Shenzhen, from importing American-made components critical to its operations for seven years.

Removing the ZTE sanctions would resolve a problem that has increased tensions between Washington and Beijing in the lead-up to a showdown on trade issues. However, Republican Senators Marco Rubio and Tom Cotton have teamed up with Democrats Chuck Schumer, the Senate Minority Leader, and Chris Van Hollen, to sponsor legislation to restore the penalties.

ZTE and Huawei, another Chinese telecommunications equipment maker, “pose a serious threat to America’s national security”, the four senators said in a joint statement released hours after the Commerce Department’s announcement on Thursday.

The legislation will take the form of an amendment to the National Defense Authorization Act “to respond to the national-security threat posed by Chinese telecom companies like Huawei and ZTE”, the release said.

ZTE and Huawei “have direct links to the Chinese government and Communist Party”, Rubio said in the announcement. “Their products and services are used for espionage and intellectual property theft, and they have been putting the American people and economy at risk without consequence for far too long.”

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The amendment is co-sponsored by Senators Richard Blumenthal and Bill Nelson, both Democrats, as well as Susan Collins, a Republican.

In its announcement on the ZTE deal, the Commerce Department said that ZTE would only reopen if it allowed US inspectors into its offices to keep an eye on its dealings.

“Special compliance coordinators selected by and answerable to [the Commerce Department’s Bureau of Industry and Security will be in place] for a period of 10 years,” the department said.

“Their function will be to monitor on a real-time basis ZTE’s compliance with US export control laws. This is the first time BIS has achieved such stringent compliance measures in any case.”

“This is a pretty strict settlement,” Ross added, calling it “the strictest and largest settlement fine that has ever been brought by the Commerce Department against any violator of export controls”.

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ZTE has figured into a larger web of bilateral tensions that have the potential to break out into an all-out trade war.

US President Donald Trump started to come under bipartisan attack last month when he announced that he would reverse the ban, with some lawmakers warning that payments do not address security concerns over Chinese telecommunications equipment.

Schumer led the criticism, accusing Trump of ignoring US intelligence community warnings by dangling a ZTE reprieve as a way to convince Beijing to offer concessions that would allow the president to call off punitive tariffs on Chinese imports set to take effect next week.

ZTE has been flagged as a potential security risk in several government reports.

For example, a report commissioned by the US-China Economic and Security Review Commission in April calls out ZTE for state-sponsored corporate espionage.

“In the case of Chinese national champions, [government support] appears to include officially sanctioned or officially conducted corporate espionage designed to improve the competitiveness of Chinese firms while potentially advancing other government interests,” the report said.

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“Huawei, [ZTE], and Lenovo are three Chinese ICT companies that exhibit some of these characteristics.”

Sanctions against ZTE were first imposed by the US in early 2017, after the Commerce Department discovered that the company had done business with Iran, in violation of existing US restrictions.

Those sales of “hundreds of millions of [US] dollars’” worth of routers, microprocessors and servers to Iranian entities violated the US’s Export Administration Act of 1979, according to the original complaint against ZTE.

Later communications also charged that the company had sold products to North Korea, again breaking US restrictions.

A settlement with Washington keeping the ban from going into effect was put in place on March 2017, after ZTE agreed to punish those responsible for covering up its sales to Iran and pay about two-thirds of a US$1.2 billion penalty.

But on April 16 of this year, Ross’s department re-activated sanctions against ZTE, claiming that the company had lied when it said it had taken measures against the employees who ran the Iran unit.

Later communications also charged that the company had sold products to North Korea.

The sanctions have prevented ZTE from receiving semiconductors and other components from suppliers including Qualcomm, Intel and Micron Technology, optical component suppliers Maynard, Acacia, Oclaro and Lumentum, as well as software suppliers Microsoft and Oracle, among others.

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“ZTE made false statements to the US government when they were originally caught and put on the entity list, made false statements during the reprieve it was given, and made false statements again during its probation,” Ross said in April, when his department reactivated the sanctions.

“The provision of false statements to the US government, despite repeated protestations from the company that it has engaged in a sustained effort to turn the page on past misdeeds, is indicative of a company incapable of being, or unwilling to be, a reliable and trustworthy recipient of US-origin goods,” the commerce department said.

Trump announced last month that he and his Chinese counterpart, Xi Jinping, were working on a plan to release ZTE from US sanctions, but backed away from the remarks days later, following criticism from Schumer and other lawmakers.

At the time Trump said a resolution of the ZTE case was needed because it was “reflective of the larger trade deal we are negotiating with China and my personal relationship with President Xi”.