May 14, 2018
Let’s put any potential ZTE deal in perspective. More than a year ago, ZTE was caught selling telecommunications equipment to Iran that included U.S. parts, thus violating sanctions. ZTE pled guilty in November 2017, paid a $900 million fine, punished the responsible executives, and—this was unwise—agreed that if it was later caught violating the terms of the settlement, it would be cut off from all U.S. technology. This last condition was certainly not in ZTE’s interest and probably not good for the United States either.
In speaking to Chinese executives about the ZTE case, one problem they raise is the very different expectations about corporate compliance in China and the United States. Many big Western companies now have specialized units responsible for ensuring that they comply with all the rules and regulations that apply to their business for things like sanctions, technology exports, or corrupt practices. Some even have chief compliance officers. The opposite is true for many Chinese companies, reflecting China’s very different attitudes about the rule of law. The law (and its enforcement) is much more “flexible” in China, and some Chinese companies don’t expect to be held accountable. ZTE may have been one of them. This flexible approach to compliance is the norm in China, but not in the United States or other developed nations.
There was also a bit of disorganization at ZTE. The people who decide on bonuses may not have known that the company agreed not to pay bonuses to complicit executives (at least this is what some sources say), or they may not have cared. ZTE replaced a few executives, moved the company president, paid the fine, and thought it had put the U.S. problem behind it. Instead, paying bonuses to implicated execs poured gas on the fire of ZTE’s noncompliance.
This had nothing to do with espionage or trade tensions. The punishment inflicted on ZTE the second time around would have happened to any U.S. or foreign company (look at Volkswagen or Deutsche Bank) that flagrantly violated the law or the terms of a settlement. Courts and law enforcement agencies in the United States enforce the law. They do not ask the executive branch or the ruling party for permission. ZTE violated the law and then violated the terms of its settlement. ZTE would have been smacked down even if the United States and China were best friends, which they are not.
China’s leaders can be a bit paranoid; it’s a side effect of Leninism. The Snowden revelations about U.S. spying only reinforced what they already believed. China has been trying to end its dependence on U.S. technology for more than a decade. Worries about the risk of U.S. espionage are part of this. Building national champions in different industry sectors (aerospace, telecom, information technology, cars, solar energy) is an important part of Chinese economic policy and fits the narrative of China’s “return to the center of the world’s stage” that party leaders cite as a major accomplishment of their rule. Finally, there is an espionage benefit for China. If you make and maintain other countries’ telecom networks, it is easier to spy on them.
ZTE depends on U.S. technology to make its cellphones, the core technology (a “chipset”) that is the single most important part of what makes a cellphone work. Huawei is also dependent, but to a lesser degree as it has invested in the research and development needed to build its own chipset—not as good as the American version, but improving. China still depends on U.S. (and Western technology), and though it has made significant strides in many technology areas, it is not ready to stand on its own. In a global market for technology and research, it’s possible that no country can stand on its own, but China wants to try for all the reasons cited above.
Punishing ZTE for violating the settlement was a good idea, but cutting it off from U.S. technology was not. Another whopping big fine would have been better. Denying access to U.S. chipsets has been a near death experience for ZTE. It only accelerates Chinese efforts to build competitors (something the United States has inadvertently done before) to the U.S. companies that supply ZTE. This would have happened in any case, but it is not in our interest to hasten the trend to design out U.S. technology.
ZTE was not punished for trade purposes or as part of some larger anti-China strategy, but it turns out to be a useful bargaining chip. Left to their own devices, the Chinese have little desire to make concessions on trade. ZTE inadvertently gave the United States leverage in trade talks. The risks to national security are low; for all practical purposes, Chinese telecom is already banned in the U.S. market. Nor is there an unfortunate precedent for export enforcement; most companies that get caught are eventually let out of the penalty box, and ZTE could have changed its compliance programs, fired a few people, offered to pay more, and come back in a few months to plead for mercy. This is not that unusual for these kinds of violations. The intent of the law is to punish, not destroy, so offering to cut ZTE and Beijing some slack in exchange for trade concessions is a good idea. ZTE will still need to do some kind of penance, but it will not be forced to collapse.
The ZTE case is an episode, not a precedent. China and the United States need to recognize their mutual dependence in technology. China needs to stop engaging in predatory trade practices and live up to global corporate norms. ZTE makes the case for these changes, but it will not change what promises to be a long fight over trade and technology. We will probably have to go through this kind of action again—not with ZTE, but just wait until China decides to sell its new passenger jets (loaded with key components made in the United States) to Iran.
James Andrew Lewis is a senior vice president at the Center for Strategic and International Studies in Washington, D.C.
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