What’s the deal with ZTE?

What’s the deal with ZTE?

On 13 May in the midst of the US-China trade spat, US President Donald Trump surprised the world by tweeting, “President Xi and China, and I, are working together to give massive Chinese phone company, ZTE, a way to get back into business, fast. Too many jobs in China lost.” The sudden U-turn from his aggressive stance on China and unexplained interest in Chinese employment set off a chain of events that has American lawmakers confused and alarmed. While the new ZTE deal could absolutely ease bilateral tensions and prevent a global economic crisis, it has more successfully revealed Trump’s malleability, the growing rift within the US government, and ignored larger security threats. The US may have found China’s weak spot in ZTE, but in the process it exposed its own more vital vulnerabilities.

What is ZTE?

ZTE Corporation’s worldwide reach worries the US. As China’s second-largest telecommunications equipment manufacturer, ZTE sells equipment to Chinese phone companies, the US’ Microsoft, the UK’s Vodafone and Canada’s Telus, and manufactures phones for T-mobile and Android. Rising security concerns in the US have led to an increased effort against Chinese business: the Committee of Foreign Investment in the United States (CFIUS) consistently blocks both Huawei and ZTE from acquiring or merging with US companies “given the threat to US national security interests.” The US suspects China of data breaches, eavesdropping, and property theft, especially in the rising age of cyberespionage made clear by alleged Russian hacking during the 2016 election. In February, Senators Tom Cotton and Marco Rubio proposed legislation that would ban the US government from using Huawei or ZTE equipment—in March, the Pentagon banned their sale on military bases. As security concerns homed in on Chinese telecommunications, Huawei and ZTE were initially likely to be blocked from the US entirely.

ZTE dug its own grave, but Trump saved it. In 2017, the company admitted to sending equipment to North Korea and Iran in a direct violation of US sanctions and, as punishment, the US Department of Commerce fined ZTE over USD 1 billion. When ZTE failed to appropriately punish the offending employees, the department also banned the sale of US equipment vital to ZTE’s production including products from Qualcomm and Google. In May 2018 ZTE announced that it was shutting down due to the ban, only to be followed by Trump’s order to lift it just a few days later. On June 11, ZTE settled its USD 1 billion fine, put aside another USD 400 million in escrow to cover possible violations in the future, and promised to reshuffle its entire board of directors and executives as well as comply with US inspections. ZTE survived, but not without its toll—when stocks reopened on June 13 for the first time in two years, shared dropped 42% in one day.

China’s gambit

Trump’s decision to save ZTE initially appears practical, even benevolent. His talk with President Xi Jinping coincided with increasing tensions that had many afraid of a trade war between the two largest economies in the world. Offering ZTE a second chance depicts the US as the peacemaker and rational actor attempting to de-escalate tensions, avoid an international crisis, and silence critics in his own Republican party that have warned against provoking China. Furthermore, the ZTE ban and Trump’s decision to lift it exposed a huge weakness in the company: in order to become a telecommunications behemoth, ZTE needed US-produced parts and software. By immediately addressing ZTE’s revelation that the ban had singlehandedly destroyed the company, and consequentially saving over 75,000 ZTE employees, the US’ gracious rescue looked more like the triumphant discovery of a weak point.

While ZTE’s fall seemed like a low moment for China, it is entirely likely that the corporation was just a pawn to expose the US’ much larger weaknesses. Firstly, Trump’s reversal may have been bought. South China Morning Post first reported that the arm of a Chinese state-owned firm agreed to spend USD 500 million to build an “integrated lifestyle resort” in Indonesia—with many of the resort’s buildings under the Trump Organization’s brand. Two days after the deal was signed, Trump tweeted his surprise order to lift the ZTE ban. If Trump did indeed save ZTE in exchange for investment into a new building project along China’s “One Belt, One Road” campaign, the US could be vulnerable to manipulation by China or any other country that offers him the right monetary incentive.

Secondly, the ban lift triggered dissent within the GOP’s ranks. While Trump suffered unhappy economists during high trade tensions, he now must confront a larger, even more frustrated team of security advisors and a surprisingly bipartisan Senate determined to keep Chinese technology out of the US. Republican Senator Tom Cotton and Democratic Senator Chris Van Hollen led the push for a proposed amendment to the National Defense Authorization Act (NDAA) that would add sanctions on ZTE to the list of other defense measures. As the Senate prepares for a direct clash with Trump over the NDAA, Trump will be forced to decide what he values more: Chinese money or national security.

It is also possible that ZTE was never in danger to begin with. While ZTE suffered greatly, it is unlikely that the Chinese government would have let the country’s second-largest telecommunications manufacturer shutter, especially if its alleged ties to the company are true. When ZTE needed a financial lifeline in 2012, the state-owned China Development Bank offered a massive USD 20 billion financing agreement. Even if ZTE operated independently before, it has recently taken decisive steps towards stronger state control. The corporation has followed through on promises to replace the entire board of directors, and five of the nominees are from firms controlled by the government. It is likely that ZTE’s petition for a USD 10.7 billion credit line will also be approved by state-owned Bank of China and, once again, China Development Bank.

A second chance

ZTE is likely to take full advantage of their lifeline and the US’ exposed weaknesses. The telecommunication firm’s reliance on imported parts is not likely to last much longer. While Beijing’s “Made in China 2025” campaign aims to develop the country’s technology sector, it will do so by first establishing at least “70% self-sufficiency” for basic materials and components that China often has to import from South Korea, Germany, and the US. The US is unlikely to have as strong a hold over Chinese telecommunication firms again as the country quickly patches up its few weaknesses in its a sector. Furthermore, as bilateral trade tensions ramp up again, China is likely to hit even harder at the US’ agriculture industry. Some of Trump’s strongest voters in the 2016 election were from the rural American Midwest and South, and if Trump loses their support due to China’s heightened tariffs over soybeans, sorghum, and pork, the Republican party could fall into even further disarray and damage Trump’s chances at re-election. Although Trump has continued to threaten and slap tariffs on China, the US may have already lost the trade war because of his decision on ZTE.

Categories: Asia Pacific, Politics
Tags: China, telecoms, zte

About Author

Kiana Mendoza

Kiana Mendoza is China-based consultant who has worked with firms from Shanghai to London, but remains proud of her California roots. She graduated from Claremont McKenna College with a degree in International Relations and Asian Studies and specializes in US-China relations, Chinese foreign policy, and national security.