ZTE ban was political from the start

16 May 2018 3:26pm
US Flag Outside the Department of Commerce

14 May 2018. By Adam Sigal.

President Donald Trump, via Twitter, said he will direct the US Department of Commerce to get ZTE “back into business, fast” as too many jobs had been lost in China, but Trump's intervention isn't the first time political considerations have figured into the sanctions that threatened ZTE's viability.

The Chinese telecom giant, which admitted to violating US sanctions by selling US technology products to Iran and North Korea, agreed to pay $1.16 billion dollars as part of a deal that included a seven-year ban that would be suspended. In April, however, the US Department of Commerce announced that ZTE had misled its investigators and the agency would, in fact, enforce the seven-year ban on doing business with US companies.

The political backlash to Trump's latest move has been swift, with some Democrats criticizing the president for focusing on jobs in China over jobs in the US. Others have questioned his decision to politicize an agency process to enforce US sanctions.

But the president's tweet against the ban isn't the first time that the administration has become involved in the case, MLex has learned. According to people familiar with the decision-making process, Ross directed the Bureau of Industry and Security to enforce the ban.

In a sanctions case, BIS staffers commonly use their own judgment on how to proceed in order to cause minimal interruption to international commerce. The president may open up Commerce to legal troubles by saying out loud that an agency decision might be altered by political factors. BIS regulators are governed by the Administrative Procedure Act, a federal law that prohibits decision-making for reasons other than those based on substantial evidence.

Neither Commerce nor the White House immediately responded for a request for comment.

“When we began the investigation, we were directed to work with ZTE and make sure their business with US companies was not interrupted,” one BIS employee told MLex. But “sometime later we heard from Ross’ office that the US would bring back the sanctions against ZTE,” the employee said.

The initial sanctions against ZTE were instituted under the Obama administration in March of 2016, and ZTE agreed to pay the fine in March of 2017. Investigators first became aware that ZTE misled the agency in early April 2018, but decided that the violation was not substantial, it is understood.

ZTE allegedly misled Commerce about the fact that it had given severance packages to company executives deemed responsible for violating the sanctions against Iran and North Korea.

Commerce staff told MLex that they had been aware of the payments for more than two weeks before Ross’ office decided to reverse ZTE’s exemption from the sanctions. The decision to sanction ZTE was neither “unwarranted nor undeserved,” said a Commerce staffer, but it did contradict the staff's recommendation.

At the time, trade tensions with China had been ramping up. The US announced a list of proposed tariffs on Chinese imports totaling $50 billion on April 3. China responded on the same day by raising the specter of its own $50 billion tariff package, and the Trump administration said it would consider increasing its package to more than $150 billion by the end of that week.

The market reacted poorly to the prospect of a trade war with China. The US business community, including voices from the farm, retail and technology sectors, had rallied in opposition of unilateral action against China. Bipartisan congressional concern was expressed.

The administration started to walk back its rhetoric while prominent members of the trade team sought to assuage concerns. Ross, as well as White House adviser and President of the National Trade Council Peter Navarro, appeared on numerous talk shows promising the two countries would talk through their differences.

On April 16, the US and China entered into another trade crisis, this time over sorghum. China announced it would levy antidumping duties on US sorghum of up to 178 percent, a move that would cripple US producers.

The announcement that ZTE would no longer be able to do business with US companies came later that day. On its face, the move against ZTE is consistent with the view that the Trump administration was creating trade leverage to force concessions.

ZTE’s importance to China and the country's leadership cannot be overstated. At its height, the company was the third-largest telecommunications company in the world, with annual revenues topping $17 billion. In the wake of the ban, the company said it “ceased major operations.”

The company is co-owned by private and public equity holding companies, but more than half of its board members are appointed by state-controlled entities. ZTE has gone from being a Chinese success story as the fourth-largest provider of phones in the US, to a non-functioning company in less than a month. Trading in shares of the company has been suspended since April 16.

The Chinese leadership has noticed, and the company has been the subject of direct talks at the highest level in Beijing. Vice Premier Liu He brought up the company in a meeting with a US trade delegation to Beijing in May. The delegation comprised seven top US trade policy leaders, including Ross, Navarro, Secretary of the Treasury Steven Mnuchin, Director of the United States National Economic Council Larry Kudlow, and US Trade Representative Robert Lighthizer.

On Monday in comments at the National Press Club, Ross said that the US has not offered the company’s license to do business back as part of the negotiations. “Our position is that that has been an enforcement action separate from trade,” Ross said. The While House did say on Monday that Ross is still empowered to use his own judgment in the matter.

“The administration is in contact with China on this issue, among others in the bilateral relationship. President Trump expects Secretary Ross to exercise his independent judgment, consistent with applicable laws and regulations, to resolve the regulatory action involving ZTE based on its facts,” said Lindsay Walters, a White House Deputy Press Secretary.

But in a tweet also on Monday, the president said that any decision on ZTE will be made as part of a coordinated policy towards China.

"ZTE, the large Chinese phone company, buys a big percentage of individual parts from U.S. companies. This is also reflective of the larger trade deal we are negotiating with China and my personal relationship with President Xi," the president tweeted.

The president could also have noted that members of the Chinese Communist Party leadership undoubtedly have a financial stake in the private equity companies holding ZTE stock.

Ross also said Monday his agency is exploring ways to get ZTE back to business “very, very promptly.”

The secretary also emphasized in his remarks Monday that a tit-tat trade war does not threaten the US. He gamed out several scenarios to make the case that the danger is much more real for China.

"A trade tit-for-tat will not be economically life-threatening to the United States,” Ross said.