ZTE is the closest thing we have to a poster child for the Chinese trade mischief that Donald Trump railed about throughout his 2016 presidential campaign. Yet, inexplicably, Trump seems to have let ZTE off the hook for serious trade violations in a single tweet last weekend, saying that he wants to help get ZTE “back into business” because China has lost “too many jobs.” It’s a stunning twist given the U.S. government and tech industry’s long-standing mistrust of ZTE.
Last year, ZTE knowingly sold products containing U.S. components to North Korea and Iran, then tried to cover it up. A federal court in Texas found ZTE guilty of breaking U.S. export law and levied a fine of $1 billion on the company. The government also issued a Denial Order banning the sale of U.S.-made components and software to ZTE for seven years. The order was originally put on hold to allow ZTE to fire the four executives involved in the sale of products to North Korea and Iran and punish 35 others. Reuters reported that ZTE fired the executives but failed to reprimand the others involved. So the order was reinstated.
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
Unable to buy technology from U.S. companies like Google (Android), Qualcomm, and Corning, ZTE was out of business. The company halted trading of its shares on the Shenzhen and Hong Kong exchanges.
“That’s when this became a political football, with President Trump offering to lift the Denial Order if China offers other trade concessions,” said GlobalData research director Avi Greengart.
People on Twitter were quick to mock Trump’s quick turnabout on a campaign promise to get tough on China, and his sudden concern about Chinese jobs. Others pointed out that Trump’s mind may have been changed by the Chinese government’s recent decision to extend loans of up to $500 million to fund a new Trump hotel and resort in Indonesia.
The Washington Post reported that resuming sales of U.S.-made components to ZTE was just one of a whole list of demands provided to the U.S. by the Chinese.
History of Mistrust
Long before Trump, the U.S. has looked at ZTE with suspicion. Much of the mistrust stems from the Chinese government’s close control over Chinese companies.
The government requires that companies like ZTE be at least 51% owned by Chinese nationals, and that a Communist Party cell be active within the company. These facts alone create plenty of concern that Chinese companies are by nature agents of the Chinese government–whether they want to be or not.
On the other hand, there isn’t any material evidence that ZTE handsets or network gear have been used to attack or steal U.S. property.
“Our [the U.S.’s] opposition to companies like ZTE and Huawei is political,” says Cooper Levenson attorney and cybersecurity expert Peter Fu. “The fact that the company has to have a Communist Party cell rubs people the wrong way.”
“It’s similar to the belief back in the 1930s and ’40s that the U.S. shouldn’t be dependent on foreign steel,” Fu adds.
Back in 2012, the U.S. House Intelligence Committee released a report saying that telecom infrastructure gear from Huawei and ZTE are national security risks. The report provided no specific proof of the threat (though that information could have been classified).
“The report itself pointed to the ownership structure of the companies as a problem,” said GlobalData’s Greengart. “Presumably, Chinese agents could insist on backdoor monitoring without U.S. knowledge,” the thinking goes.
That was just for the ZTE’s telecom infrastructure equipment business. ZTE, believe it or not, is the fourth-largest smartphone maker in the U.S. The six heads of the U.S. security agencies testified earlier this year that ZTE (and Huawei) smartphones, too, are a security risk to the U.S. None provided any evidence or rationale for that claim, Greengart says.
Actually, smartphones are probably far less worrisome than the network gear. “While networking infrastructure software can be layered and opaque, ZTE’s smartphones run fairly stock Android from U.S.-based Google, on top of off-the-shelf U.S.-based Qualcomm chipsets, that then pass through U.S. carrier network testing,” Greengart said. “If the phones are pinging Chinese servers somewhere, nobody has ever seen it.”
Fear of a Chinese Trojan Horse
The Trump administration is afraid of a Chinese Trojan Horse that could be activated once a significant part of the U.S.’s wireless infrastructure and handsets are products of Chinese companies like ZTE and Huawei. The coming conversion to 5G wireless technology represents a massive overhaul of the nation’s wireless systems, and a big opportunity for the companies that provide the gear.
“Huawei and ZTE are the main Chinese companies making IP investments in 5G and 6G, so there is reluctance to help the companies along,” Greengart noted.
In fact, in the list of demands China provided to the U.S. trade delegation, you’ll find this: “The United States agrees to ensure Chinese businesses can participate in U.S. infrastructure projects.”
The Federal Communications Commission was reacting to the same fears when it voted to prohibit U.S. carriers from spending federal money to buy equipment made by ZTE or Huawei.
“For years, U.S. government officials have expressed concern about the national security threats posed by certain foreign communications equipment providers in the communications supply chain,” said FCC Chairman Ajit Pai in a statement. “Hidden ‘backdoors’ to our networks in routers, switches, and other network equipment can allow hostile foreign powers to inject viruses and other malware, steal Americans’ private data, spy on U.S. businesses, and more.”
Years of the same kind of suspicion came to the surface when ZTE’s dealings with North Korea and Iran came to light last year.
“ZTE was extraordinarily stupid to transfer U.S. tech to a sanctioned country,” Cooper Levenson’s Fu said. “That only gave the U.S. a reason for doing something it had wanted to do all along.”
So you can understand why many in the State and Commerce departments were surprised to see their legitimate and long-standing concerns over ZTE suddenly turned into a bargaining chip with Trump’s tweet.
It’s possible that the U.S. government will allow ZTE to continue sourcing vital hardware components and software from U.S. companies, but strongly discourage the use of ZTE and Huawei gear in new 5G networks.
But with this administration, it’s hard to predict.