Wang Xiangwei
SCMP Columnist
China Briefing
by Wang Xiangwei
China Briefing
by Wang Xiangwei

Xi Jinping’s ZTE concession to Donald Trump still haunts Chinese negotiators in US trade talks

  • Xi reportedly agreed last year to allow a compliance department of executives chosen by the US to be embedded into the company to monitor the flow of every transaction – and ZTE has to pay
  • For Washington, enforcement of any agreement is the key, but Beijing views the US demands as reminiscent of China’s historical humiliations at the hands of Western powers
In May last year, President Xi Jinping unexpectedly called his American counterpart Donald Trump to plead with him to ease up on crippling sanctions against ZTE Corporation, one of China’s largest telecoms equipment makers, which is accused of selling goods containing US parts to Iran and North Korea.
At the time, Chinese officials did not anticipate the phone call would produce significant complications for the subsequent trade talks with the United States.

In the preceding month, the Trump administration had imposed a seven-year ban on the Chinese firm buying American components, effectively sounding the death knell for ZTE, which has a workforce of 75,000.

As Trump related the story in an interview with Fox News, Xi had told him he wanted to save the jobs of these workers, many of whom were based in his home province of Shaanxi.

ZTE has a workforce of 75,000. Photo: EPA

Trump and Xi haggled over the phone and eventually agreed on a deal whereby in exchange for easing sanctions, ZTE would agree to pay a US$1.3 billion fine, undertake sweeping management changes, and, more importantly, hire American compliance executives to monitor the company from within.

Initially, the ZTE reprieve was believed to be a sterling example of Xi using personal diplomacy to prevent the bankruptcy of a major Chinese company and heavy job losses at a time when the economy was faltering, partly due to the trade war with the US. Moreover, it was also supposed to serve as an example of how the leaders of the two countries could work together to overcome obstacles and defuse trade tensions.

But the initial optimism in Beijing’s corridors of power quickly evaporated as Chinese officials realised the reprieve had turned out to be a poisoned chalice. It emboldened the Trump administration to take a much more aggressive and harder stance in subsequent trade talks and has complicated Beijing’s efforts to reach a deal.

As the on-again, off-again trade negotiations resume in Shanghai on Tuesday, the implications of the ZTE deal will continue to haunt negotiators from both sides, even though it is no longer on the table.

US Trade Representative Robert Lighthizer and other senior officials are reportedly scheduled to meet the Chinese negotiators, led by Vice-Premier Liu He and Commerce Minister Zhong Shan, for two days of talks.

These will be the first high-level, in-person trade talks since negotiations broke down in May, and follow a meeting at an Osaka summit last month between Xi and Trump where they declared a tentative truce to their year-long tariff battle.

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The new talks also come after several phone calls over the past few weeks between the top negotiators from both countries to lay the ground work.

But the choice of Shanghai as the meeting venue is interesting as the previous trade talks were all held in the capitals of Beijing and Washington.

One reason could be that the Chinese officials believe Shanghai would enable the negotiators to engage in more relaxed and thorough discussions without the political pressure brought by being near China’s centre of power.

On Wednesday, Bloomberg quoted an unnamed senior White House official as saying the Shanghai meeting would involve a broad discussion of the outstanding issues but was not expected to yield a major breakthrough.

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However, Larry Kudlow, the White House economic adviser, said on Tuesday the face-to-face talks were a good sign that both sides had taken steps to de-escalate tensions over the past week.

State media reported that China’s buyers had started to follow through on promises to purchase more US agricultural products, and the Trump administration had signalled it would soon allow American tech companies to sell products and services to Huawei, another major Chinese telecoms company on the US blacklist.

Kudlow said on Tuesday that the US negotiators had told their Chinese counterparts America wanted to go back to the original draft of an agreement put together in early May before the Chinese balked at what they saw as unequal terms.

Of all the stumbling blocks to reaching a deal – including Washington’s demand for structural reforms to China’s economy, the theft of intellectual property, the uneven playing field for foreign investors, as well as Beijing’s call for Washington to remove all punitive tariffs on Chinese imports – the real deal-breaker appears to be how the agreement should be enforced.

According to the original terms of the draft Beijing rejected, Washington reportedly insisted on having the right to punish Beijing in the event it violated the deal, and Beijing should not oppose or retaliate.

There were even suggestions Washington intended to set up a compliance office in Beijing to monitor how the deal was enforced.

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As Washington sees it, effective enforcement is the key to ensuring the success of the agreement, given Beijing’s spotty record in the past in honouring its pledges to open up to foreign investment.

But from Beijing’s perspective, Washington’s demands on enforcement literally amounted to an “unequal treaty”, reminiscent of past humiliations China suffered by accepting terms imposed by Western colonial powers.

Now the Chinese officials have realised the ZTE reprieve has given Washington the wrong idea. They agreed to allow a compliance department of executives chosen by the US to be embedded into the company to monitor the flow of every transaction – and ZTE has to pay those people. That has basically put the entire operation of the company under the watchful eyes of the Americans.

Explaining the US decision to lift the ban on ZTE in June last year, US Secretary of Commerce Wilbur Ross told the American media that Washington retained the power to shut down ZTE if it was deemed to be violating the terms of the agreement.

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The Chinese officials believe the Americans are now basically asking for similar treatment in enforcing the much larger and much more important trade agreement, which they find totally unacceptable.

Obviously, Beijing now regrets agreeing to the ZTE deal. Officials conclude that the Chinese government should have allowed ZTE to declare bankruptcy after the start of the seven-year ban imposed by the US. Its assets should have been stripped apart and sold to different Chinese companies, and workers retrained or redeployed.

Unless both the Chinese and American negotiators can compromise to remove this key stumbling block over the enforcement issue, the year-long trade talks are unlikely to break free of their on-off cycle, despite the renewed optimism.

Wang Xiangwei is the former editor-in-chief of the South China Morning Post. He is now based in Beijing as editorial adviser to the paper