By Clay Chandler
April 21, 2018

In theory, the U.S. Commerce Department’s move earlier this week to slap a seven-year ban on the sale of American products to ZTE Corp., China’s second-largest telecommunications equipment manufacturer, was all about national security and had nothing to do with trade. In announcing the ban, Commerce Secretary Wilbur Ross said his agency was punishing ZTE for violating terms of an agreement struck last year to settle allegations that the Chinese company had flouted U.S. restrictions on selling technology to Iran and North Korea.

From a legal and regulatory standpoint, sanction-busting and lax regulatory compliance are very different sins than intellectual property theft and discriminatory trade polices (which Trump often cites as the main justifications for his threat to impose tariffs on Chinese imports). And yet, in the escalating war of words between the world’s two largest economies on trade issues, it’s almost impossible to preserve such fine distinctions.

The ban immediately provoked nationalist outrage in Chinese media and on online forums, with many commentators urging Beijing increase state subsidies for China’s domestic chip industry. ZTE chairman Yin Yimin blasted the US penalties as “unfair and unreasonable” and accused the Commerce department of “overly playing up subtle issues and politicizing trade disputes.” Beijing echoed those denunciations and warned that China is prepared to take action to protect the interests of its firms.

On Thursday, a spokesman for China’s commerce ministry signaled Beijing has anti-trust concerns about Qualcomm Inc.’s $44 billion purchase of NXP Semiconductors, a Dutch firm, a move trade experts on both sides of the Pacific interpreted as a direct response to the ZTE ban. Antitrust regulators in eight other countries have approved the Qualcomm acquisition; but China is a crucial market for the San Diego-based company. Shares of Qualcomm and NXP dropped 5% on investor concerns about the deal.

At a global financial conference in Washington Thursday, Heath Tarbert, assistant U.S. Treasury secretary for international markets, upped the ante by suggesting that the White House might restrict Chinese investment in American firms in sectors such as semiconductors and robotics by declaring a national economic emergency and invoking a law designed to administer sanctions against rogue regimes and terrorist groups. Will Beijing feel compelled to counter those statements too? Where does all this end?

The histrionics over trade provided a useful smokescreen for ZTE to obscure what appears to be an egregious failure to comply with U.S. law. The company paid civil and criminal penalties of $1.19 billion last year after pleading guilty to illegally shipping telecommunications equipment to Iran and North Korea, as well as to making false statements to U.S. investigators and obstructing justice. As part of that settlement, ZTE agreed to dismiss four senior executives and discipline 35 others either by reducing their bonuses or reprimanding them. Commerce put ZTE on probation and warned that it would impose the seven-year export ban if the company stepped out of line again. Reuters reports that while ZTE dismissed the four executives, it took no action against the other employees, and Ross says the company continued to lie to government investigators even after the settlement.

Those have proved costly errors. ZTE was the only Chinese smartphone maker to crack the U.S. market and was thriving there. Last year, the company sold nearly 19 million handsets in the U.S. becoming America’s fourth-largest seller of handphones and making the U.S. ZTE’s largest market. But ZTE is heavily dependent on U.S. suppliers. According the New York Times, ZTE’s products for the infrastructure of telecommunications networks, as well as its smartphones, depend on a host of American components including microprocessors from Qualcomm, glass made by Corning and sound technology from San Francisco-based Dolby. Before the ban was announced, ZTE had a market capitalization of about $20 billion. Trading of the company’s shares was suspended in markets in Hong Kong and Shenzhen on Tuesday. ZTE says the ban threatens its very survival.

Meanwhile, as controversy raged around ZTE, China’s other telecom equipment giant, Huawei, signaled at its annual meeting for global investment analysts in Shenzhen, that it is finally abandoning its effort to compete in the U.S.

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Last week’s Sino-Saturday newsletter prompted a lively response from readers. Many of you skewered me for chiding Alaska senator Dan Sullivan for his cluelessness about China while demonstrating my own cluelessness about the U.S. Senate by mis-identifying Sen Lindsey Graham as hailing from Florida. Doh! Many apologies. Sen. Graham, of course, hails from the great state of South Carolina.

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More China news below.

Clay Chandler
@claychandler
clay.chandler@timeinc.com

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