NEW YORK: The United States has struck a deal with ZTE, ending a high-stakes dispute with China.
What is ZTE?
ZTE is a Chinese telecommunications manufacturer, founded in 1985, that makes inexpensive Android smartphones. ZTE says it has partnerships with 150 wireless companies in more than 60 countries.
It is the fourth-largest seller of mobile phones in the United States and the second-largest seller of prepaid phones.
The company uses parts from many US companies, including chips from Qualcomm and glass from Corning.
Its US headquarters is in Richardson, Texas, and it has about 75,000 employees around the world.
The company is listed on both the Hong Kong and Shenzhen stock exchanges.
Why does the US government say ZTE poses a national security threat?
In March 2017, ZTE agreed to pay a record fine of $1.2 billion to the United States for violating sanctions on Iran and North Korea.
The company was accused of shipping equipment to these two countries. It had allegedly made 283 shipments to North Korea. ZTE claimed to have stopped doing business in Iran in 2012 but secretly resumed operations there the next year.
“Those who flout our economic sanctions and export control laws will not go unpunished – they will suffer the harshest of consequences,” Commerce Secretary Wilbur Ross said in a statement after the fine was announced.
After that, ZTE overhauled most of its top management. CEO Zhao Xianming, who had taken over in April 2016, said the company had introduced new compliance procedures.
“ZTE acknowledges the mistakes it made, takes responsibility for them, and remains committed to positive change in the company,” he said at the time.
Why did the United States impose a ban on ZTE?
But ZTE didn’t punish the employees who were involved. Instead, it paid them full bonuses, the Commerce Department says.
That’s why, in April 2018, the United States imposed a seven-year export ban on the company. American companies were forbidden from selling parts or services to ZTE.
The company still relies on US tech for its products. The ban brought its factories to a standstill. And shareholders were left in limbo. ZTE’s Hong Kong-listed stock has been suspended since the ban took effect.
Why did the Trump administration offer ZTE a lifeline?
The US crackdown on ZTE came at a delicate time for economic relations between Washington and Beijing. The two sides had threatened each other with waves of new tariffs on tens of billions of dollars of exports.
The Trump administration came up with a tentative deal in May to get ZTE back into business by lifting the ban and imposing other punishments instead.
“The objective was not to put ZTE out of business,” Treasury Secretary Steven Mnuchin said. “The objective was to make sure that they abide by our sanctions programs.”
Trump also tweeted his support to find “additional remedies” to the issue.
But Trump’s lifeline was controversial. The Senate Banking Committee overwhelmingly approved an amendment that would block Trump from reducing penalties on ZTE without first providing Congress proof that the company is following American laws
“If the president and his team won’t follow through on tough sanctions against ZTE, it’s up to Congress to ensure that happens,” Senate Minority Leader Chuck Schumer said last month. “Both parties have come together today to strongly rebuke ZTE and the administration’s soft approach.”
What’s the latest deal?
Ross announced the new deal on Thursday.
Under the deal,ZTE will be fined $1 billion by the Department of Commerce, and a new, United Stated-selected compliance team will be embedded at ZTE for 10 years to ensure similar violations won’t occur in the future. ZTE will also have to change both its board of directors and executive leadership sometime within the next 30 days. The Commerce Department says it is “the first time” it has achieved “such stringent compliance measures in any case.”
ZTE will also be required to put $400 million in escrow, which the US can claim should further penalties arrive. The deal also threatens ZTE with a potential 10 year ban, should terms not be met.
ZTE had previously pleaded guilty for violating US sanctions, in a deal that saw the company agree to reprimand and deny bonuses to the employees who had acted illegally — with the caveat that if it didn’t, the company would be subject to a seven-year ban on exporting US products (like Qualcomm chips, which are crucial to its business). But ZTE failed to meet the conditions of the deal. The company not only failed to reprimand employees who had acted illegally, but it even gave them full bonuses, according to the Commerce Department. Additionally, the company only fired four senior staffers, leaving the other 35 employees who had also violated the law on staff.
As a result, the US Department of Commence instituted the seven-year ban, per the terms of ZTE’s plea deal, back in April. Shortly after, ZTE responded by noting that the export ban would “severely impact” the company’s survival and that the company had tried to meet the terms of its plea deal, before announcing that due to the ban, it would have to end “major operating activities” in May.
But U.S. politicians on both sides of the aisle are still flummoxed by the decision to throw ZTE a bone.
#China on the verge of winning again. They mock us by appointing someone from another sanctioned company as the supposed “watchdog” over #ZTE & we respond by helping ZTE stay in business. Great deal for China. https://t.co/iNgzy43w4m via @bpolitics
— Marco Rubio (@marcorubio) June 6, 2018
If these reports are true, @realDonaldTrump has put China, not the United States, first. By letting ZTE off the hook, the president who roared like a lion is governing like a lamb when it comes to China. Congress should move in a bipartisan fashion to block this deal right away. https://t.co/ehRxD8b8bl
— Chuck Schumer (@SenSchumer) June 5, 2018
If all this seems like a whirlwind of weirdness, that’s because…it is. Here’s how we got here.
March 2017: The fight begins
The U.S. discovers that ZTE has been doing business with Iran and North Korea. This violates a trade agreement — the U.S. doesn’t want foreign companies that we do business with selling products that contain US-manufactured components to our enemies.
So, the U.S. Department of Commerce punishes ZTE. ZTE pays a fine of nearly $2 billion. It also promises to issue formal reprimands to its board, and revoke their bonuses. Burn.
February 2018: China is maybe spying on us, U.S. throws shade
The U.S. intelligence community issues a statement that they do not recommend U.S. citizens use ZTE or Huawei phones. The two Chinese companies failed to convince U.S. officials that they weren’t using their hardware to spy on U.S. citizens.
“We’re deeply concerned about the risks of allowing any company or entity that is beholden to foreign governments (…) to gain positions of power inside our telecommunications networks,” said FBI Director Christopher Wray. “It provides the capacity to maliciously modify or steal information. And it provides the capacity to conduct undetected espionage.”
This does not have to do with this trade issue specifically, but tensions heightened.
April 2018: ZTE gets greedy, U.S. gets mad
The U.S. discovers that ZTE never issued those reprimand letters. And that ZTE board members still got their bonuses. Gasp!
ZTE relies on several components manufactured in the U.S. for their handsets, and the U.S. knows it. So the U.S. imposes sanctions to hit them where it hurts. It revokes export privileges, meaning that ZTE won’t have access to the parts that it needs to manufacture its products.
May 2018: The sanctions are crippling
ZTE stops operations because it runs out of the crucial U.S. parts it needs.
May 2018: Trump gets involved
Trump tweets his support for ZTE, and insists he is working towards a deal to get ZTE back in business, and reinstate lost Chinese jobs.
President Xi of 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. Commerce Department has been instructed to get it done!
— Donald J. Trump (@realDonaldTrump) May 13, 2018
The world is extremely confused. It’s not clear why Trump wants to support Chinese jobs, given his past posturing against the country. Nor why he is ready to forgive a company for doing business with North Korea and Iran — especially having just imposed new sanctions on Iran.
Meanwhile, three days after the tweet, a Chinese developer announces the completion of a deal to build a new theme park with Trump brand licensing.
June 2018: Sayonara sanctions!
This takes us to the present. Secretary Ross traveled to Beijing for high-level trade talks during the first weekend of June. Days later, he announces the lifting of sanctions, and the new financial penalties. The fine is significant — ZTE’s annual revenue is 108 billion in Chinese Yuan, which comes out to about 17 billion U.S. dollars. So a $1 billion fine is about six percent of its annual revenue.
The deal is said to be part of a larger renegotiation of Chinese and American trade relations.
Whew, so now, ZTE can continue making its nonsense phones.