Tax & Accounting Blog

Trump Grants Another Pardon as U.S. Commerce Department and ZTE Reach Agreement Reversing Ban

Blog, Global Trade, ONESOURCE June 8, 2018

Part 2 of article: ZTE, President Trump, and the Elephant in the Room: https://tax.thomsonreuters.com/blog/onesource/zte-president-trump-and-the-elephant-in-the-room/

 
On June 7, 2018 the U.S. and ZTE agreed to a deal allowing ZTE, the Chinese Telecom company, to stay in business.  Part of this deal is to reverse the ban placed on U.S. companies prohibiting them in selling to ZTE the much-desired components they need to continue business.

Though U.S. Commerce Secretary, Wilbur Ross, assures us the agreement with ZTE is not part of the broader trade discussions between the U.S. and China, the timing of this announcement appears to be contradicted by two events.

  • Last Saturday through Monday (June 2-4, 2018) Secretary Ross met with Chinese officials in Beijing to push the ‘Buy more American’ agenda after Trump announced threats of higher tariffs on China hi-tech exports.
  • On Tuesday (June 5, 2018), President Trump met with his trade advisers to discuss China’s offer to import an extra $70 billion of American goods over a year, if the U.S. would not impose tariffs on $50 billion worth of Chinese goods; in hopes of defusing a potential trade war.

Beijing had said that getting the ban lifted from ZTE was a crucial negotiation demand in ongoing trade discussions with the United States, so on the surface it does appear that this deal might have bearing on the U.S.-China trade discussions.

Background

In 2017, ZTE was fined $1.19 Billion and banned for 7 years from buying American technology as punishment for violating U.S. sanctions against Iran and North Korea.  The Commerce Department alleged that ZTE also misled U.S. regulators and failed to discipline the employees responsible for the sanction breach.

ZTE was threatened with extinction because of the sanctions and in May announced they were shutting down operations.

Some of us are still questioning the timing of Trump’s statement a few days after ZTE’s announcement to save Chinese jobs at ZTE. In Trump’s tweet, he said it was “reflective of the larger trade deal we are negotiating with China and my personal relationship with President Xi”, further negating Ross’ assertions that his visit to Beijing was not tied to the negotiated agreement with ZTE.

Summary of what’s in this deal

  • ZTE will pay a $1 billion fine, and put $400 million suspended penalty money in an escrow account before BIS (Bureau of Industry and Security) will remove ZTE from the Denied Persons List.
  • ZTE will forfeit this amount if it again violates the sanctions.
  • These amounts are on top of the $892 million in penalties already paid.
  • ZTE must change its executive team and board of directors within 30 days.
  • A U.S.-chosen compliance team will be embedded into the company “to monitor it going forward,” Ross said.

“[t]he compliance terms are the strictest the U.S. has ever had on any company, foreign or American.”  “We are literally embedding a compliance department of our choosing into the company to monitor it going forward. They will pay for those people, but the people will report to the new chairman”, said Ross

U.S. Senate Minority Leader Chuck Schumer (N.Y. Democrat) has called on Congress to reverse this agreement stating, “there is absolutely no good reason that ZTE should get a second chance.”  He and a group of bipartisan senators have introduced an amendment to the National Defense Authorization Act (NDAA) to restore the Commerce Departments penalties on ZTE, ban government agencies from buying or leasing telecommunications equipment and services from ZTE, and ban the government from providing loans to, or subsidizing the company.

The Commerce Department is defending the agreement citing that ZTE is on a 10-year probation in which they must answer to BIS and if ZTE violates the agreement during the probationary period, then they will be blocked again from access to U.S. technology and forfeit the $400 million being held in the escrow account.

“The purpose of this settlement is to modify ZTE’s behavior while setting a new precedent for monitoring to assure compliance with U.S. law,” Commerce said in a statement. “Embedding compliance officers into the company vastly improves the speed with which the Department of Commerce can detect and deal with any violations.” [1]

Double edged sword

ZTE has been provided the lifeline they needed to get back in business, however this may be an uphill battle to recoup their operations.  Though ZTE may lose billions in lost revenue, it would appear that their brand may have taken a harder hit.  Analysts are predicting that the actions of the U.S. government and the bad press surrounding the situation have strained ZTE’s relationships with their customers around the world; potentially giving their competitors the leverage they need to win over ZTE’s client base.

[1] Trump Strikes Deal to Save China’s ZTE as North Korea Meeting Looms; https://www.nytimes.com/2018/06/07/business/us-china-zte-deal.html