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The Fate of ZTE in the Midst of U.S.-China Trade Talks

ZTE, one of China’s top telecom-equipment producers, has been in hot water since the United States (U.S.) found the company guilty of violating trade embargoes against North Korea and Iran several years ago.

The company faced repercussions for using U.S. technology in its products that it then shipped to North Korea and Iran, both of which the U.S. State Department considers supporters of terrorism. This initial punishment was imposed in March 2017 when ZTE pleaded guilty to these activities, and it included fines of over $800 million and a promise to discipline the employees involved in the scheme.

In April 2018, the U.S. Department of Commerce concluded that ZTE had not abided by the terms of its punishment and, as a result, instituted a ban on American companies selling hardware and software to ZTE. The Chinese telecom vendor relies heavily on American technology, particularly on Qualcomm’s chips and Google’s Android app store.

ZTE not only needs American equipment for its sophisticated telecommunications products, but it also needs American markets. Over half of ZTE’s smartphone shipments in the first quarter of 2018 were to the U.S. Huawei, China’s top telecom company, dominates the domestic market, so most of ZTE’s revenue is from customers overseas.

As a result of the new ban, ZTE shut down its operations for a couple weeks, and has already lost an estimated amount of $2 billion in sales since April. The ban is also affecting some American companies, such as Qualcomm, whose annual sales are set to take a half-billion-dollar loss without ZTE as a customer.

In May, American President Donald Trump tweeted that he was working with President Xi Jinping of China to help ZTE recover because too many Chinese jobs were being lost in the company’s struggle. About 75,000 people work for ZTE.

In the beginning of June, the Trump administration made a deal to lift the sanctions on ZTE in exchange for $1 billion in fines, $400 million in escrow, ZTE replacing its entire board of directors and senior management, and installing an in-house compliance team made up of American staff.

ZTE agreed, as its other option was shutting down for good. Since resuming operations, the Shenzhen-based company has lost billions of dollars in market value.

On Monday, June 18, the U.S. Senate voted 85-10 to pass its Fiscal Year 2019 National Defense Authorization Act (NDAA). This draft included a provision to reinstate the penalties against ZTE. This is one of the few times the Republican-controlled Senate has strayed from the Trump administration’s policy.

American bipartisan lawmakers believe the Chinese company poses national security risks, and that it is in the U.S.’s best interest for it to shut down. Earlier in 2018, several intelligence chiefs, including heads of the FBI, NSA, and CIA stated that they do not recommend using ZTE products.

The NDAA is not finalized yet; it still needs to be reconciled with a version passed by House and signed by Trump before becoming law. The President called a meeting with lawmakers on Wednesday, June 20 to discuss the ZTE decision. No concrete legislation was drafted by the White House, but Trump conferred with several Republican senators about options that would ban U.S. government purchases of ZTE products, but allow U.S. companies to export to the Chinese telecom giant.

These negotiations come during the height of trade talks between China and the U.S., but U.S. Commerce Secretary Wilbur Ross maintains that the ZTE matter is unrelated to the tit-for-tat tariff threats between the two economic powerhouses.

In addition to saving Chinese jobs, the Trump administration may be going easy on China in the ZTE deal to help American company Qualcomm. Not only does Qualcomm stand to lose significant revenue if ZTE shuts down, but it is also in the process of buying Dutch company NXP Semiconductors. Before this deal can be finalized, Qualcomm needs the approval of several countries’ antitrust regulators, including those from China.

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