Tax & Accounting Blog

ZTE, President Trump, and the Elephant in the Room

Blog, Global Trade, ONESOURCE May 18, 2018

President Trump won his executive position on a platform touting the inequity associated with trade between China and Mexico, and the negative impact to the United States through the loss of jobs. Earlier this year, he pushed that stance forward by signing a pair of trade safeguards imposing steep tariffs on washing machines and solar panels. It now seems that he is contradicting his position of accusing China of stealing American jobs, by embarking on a path to save the U.S. sanctioned telecommunications company ZTE, to rescue Chinese jobs.

On May 13, 2018, President Trump tweeted a promise to help save ZTE, China’s 2nd largest telecommunications firm, because the sanctions imposed on ZTE had cost too many Chinese jobs.

“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!”

History of the U.S. actions with ZTE

In 2017, ZTE was fined $1.19 Billion for violating U.S. sanctions with Iran and North Korea by selling American-made goods into those countries. ZTE was also slapped with a seven-year ban on the purchase of U.S. tech products with legislation still pending in Congress banning the sale of ZTE products in the U.S.

Former Acting Assistant Attorney General Mary B. McCord stated that “ZTE engaged in an elaborate scheme to acquire U.S.-origin items, send the items to Iran and mask its involvement in those exports.” As proof, the Commerce Department provided two internal ZTE documents, one of which laid out an elaborate flow chart on how to circumvent the U.S. export controls.

As was expected by this tough stance, the action would interrupt ZTE’s supply chain and recently ZTE announced that “its operations had ground to a halt” due to the company’s inability to purchase, from U.S. companies, the microchips it uses in its products.

Two days after the President’s tweet, one of our top counterintelligence officials stated to the Senate Intelligence Committee that ZTE could pose a national security risk to the U.S. if allowed to enter the U.S. market. This was followed up by a tweet from Senator Rubio; “Problem with ZTE isn’t jobs & trade, its national security & espionage. We are crazy to allow them to operate in U.S. without tighter restrictions.” And one from Representative Schiff, “Our intelligence agencies have warned that ZTE technology and phones pose a major cyber security threat. You should care more about our national security than Chinese jobs.”

The President has long promised to get tough on China, so why the change to save Chinese jobs?

Theory or Fact – Why the change?

The mystery of why the President has changed his position with ZTE comes under great speculation, running the range from the upcoming negotiations with China and North Korea, to a more nefarious opinion that Trump may benefit from personal gain with the Trump Organization’s involvement in an Indonesian theme park. Below are the top 4 areas of speculation circulating, as Washington reels from what appears to be another about-face from the President.

1. The President hopes to smooth relations with China and get their cooperation in the upcoming summit with North Korea. It appeared tensions were lessening between the U.S. and North Korea with the recent release of three American’s held by North Korea for alleged subversion, espionage and other unspecified hostile acts. However, on May 16, North Korea announced they were reconsidering their participation in these talks if the U.S. demands North Korea give up its nuclear weapons.

2. By changing the direction imposed by the sanctions on ZTE, Trump is demonstrating his willingness to work with China on avoiding the massive tariffs [1] (Trump had threatened $150B in tariffs on imports of Chinese goods) threatened by both sides. Vice-Premier Liu He, leader of a Chinese delegation stated he “would not return to Washington for talks without a reprieve for ZTE.” Within hours after the President’s tweet, word came out that Liu would in fact meet with top administration officials in Washington.

3. Qualcomm and Intel, two large manufacturers of telecom components used by ZTE, were reeling from the disruption in their business with ZTE [2]. The President also tweeted this week that he was focused on U.S. jobs:

“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.”

Within the same day of the President’s tweet, it was reported that the China Ministry review of Qualcomm’s acquisition of NXP was no longer on hold and that the regulatory review would be expedited.

4. Are the President’s latest trade discussions positioning the Trump Organization toward profit? A theory of Trump’s change with ZTE may be tied to an announcement (May 11, 2018) that Chinese state enterprises will provide $500M in loans to a development project in Indonesia to build a theme park outside Jakarta. This project will include ‘Trump-branded hotels, residences and golf courses’ with the President’s private business benefitting by millions of dollars. Though Chinese companies will not be directly financing the Trump properties, the timing of this announcement begs the question that “Even if this deal is completely and entirely above board, it simply furthers the perception of impropriety surrounding Trump’s businesses”, stated Christopher Balding, an economics professor at Shenzhen’s HSBC Business School. “Especially with the potential trade war, this is not a good look … Critics will be entirely right to demand answers.”

Trump’s approach to international policy has been consistently inconsistent. He taunts with demands, makes threats and then follows with exceptions and about-turns. Regardless of whether ZTE has become a bargaining chip with China, one can only sit and watch the direction Commerce will take to resolve the regulatory actions against ZTE.

[1] Previous actions: China might rescind planned tariffs on agricultural products, pork and ginseng threatened when the U.S. announced planned tariffs on Chinese steel and aluminum

[2] ZTE paid USD $2.3B, providing est. 25%-30% of components in ZTE’s equipment, last year to U.S. exporters, including Qualcomm, Broadcom, Intel and Texas Instruments

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