ZTE Sanctions: An Opportunity Missed

June 8, 2018

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Commerce Secretary Wilbur Ross announced on Thursday that instead of carrying out exclusionary product sanctions against Chinese telecommunications firm ZTE for violating U.S. export controls when it sold equipment to Iran and North Korea, the United States will impose a $1 billion penalty on the company and embed a U.S.-chosen compliance team to ensure it doesn’t repeat its offenses.

The announcement has generated considerable opposition, largely around the claim that the administration should have imposed even tougher penalties. But the fine and the procedures Commerce put in place are completely appropriate, and any notions that the U.S. government should have done more are misguided.

This is not, despite what some argue, a case about the security of ZTE phones and their use in the United States. This is about one thing, and one thing only: ZTE violating U.S. export control law. Arguing that the U.S. government should have used this particular violation to address cybersecurity concerns is wrong. If legislators are concerned about the security of ZTE products in the United States, then they should direct the Department of Homeland Security to investigate the issue in depth and then, if necessary, enact legislation.

Ironically, those arguing that the administration should have gone beyond the narrow law and process in this case also took President Trump to task for not abiding by the law and appropriate legal process when he said he wanted to let ZTE off the hook completely. Further, some complain that the Trump administration should have completely cut off U.S. exports of high-tech inputs for ZTE. For example, liberal icon Robert Reich tweeted “this is astounding. Trump has done more to save Chinese jobs at ZTE than American jobs at Carrier.” Really? Where was this outrage when the Obama administration chose to impose similar sanctions (almost $900 million) on ZTE for the same violation, instead of cutting off all its exports? To be clear, despite the well-deserved animus toward the Chinese government for its unrepentant and rampant innovation mercantilism, it would have been unprecedented to use this law and procedure to kill the company.

Much has been made about the president’s recent tweet that “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!” Initially, it seemed as though President Trump was using this as a bargaining chip to force China to roll back its “Made in China 2025” plans. Indeed, this would have been a powerful chip to use. But it appears that the administration has gotten little or nothing for removing this sword of Damocles from ZTE’s head. We can hope that it will at least get China to approve the Qualcomm-NXP Semiconductors merger, which it has threatened to hold up. But, if China were playing by the rules, we shouldn’t have to give any concessions for approving a perfectly legitimate merger.

The more important long-term impact of the Trump administration even threatening to cut off U.S. tech exports to ZTE is that it proves to the Chinese government just how vulnerable it is to the U.S. government and just how dependent it is on U.S. technology. From China’s perspective that has accelerated and broadened actions by the government, including by its Ministry of Industry and Information Technology, to replace key tech imports across the board with Chinese-produced products and materials; something that will ultimately hurt the U.S. tech economy.

It’s time for all parties—left, right, and center—to focus on the most important thing vis-à-vis Chinese trade policy: rolling back the unfair, mercantilist policies underlying the “Made in China, 2025” strategy. Everything else is just a sideshow.