Export ban shocks ZTE

Export ban shocks ZTE
A US ban on sales of American components to ZTE Corp has resulted as a major blow to China’s hi-tech ambitions. The Committee on Foreign Investment in the United..

A US ban on sales of American components to ZTE Corp has resulted as a major blow to China’s hi-tech ambitions. The Committee on Foreign Investment in the United States (CFIUS) is at the center of the US government’s efforts to stop the transfer of advanced technology to China through acquisitions.

Background

The United States and China are two of the largest economies in the world. Both countries consider the other as a partner in trade and a challenger in geopolitics. In 2015, China purchased US$165 billion in goods and services from the United States in 2015. After Japan, China is the biggest overseas creditor to the US. Its holdings of US debt come to around US$1.12 trillion dollars.

US President Donald Trump has been vocally critical of China. He states that China is responsible for the loss of jobs within the US. He has often criticized the “very unfair and one-sided” trade relationship. In recent months, there have been several reports surrounding an ongoing trade war between US and China. These rumors were further solidified last month, when Trump announced global import tariffs of 25% on steel, and China initiated retaliation. The US has imposed tariffs worth over US$150 billion on Chinese goods. In response, China responded with US$50 billion worth of tariffs.

Recent Trade Disputes

In September 2017, the US administration blocked the sales of American companies to Chinese conglomerates. Trump blocked the sale of American technology company Lattice Semiconductor to a Chinese-backed organization called Canyon Bridge Capital Partners, LLC.

In November, Liu Zhongtian, a Chinese metals entrepreneur, withdrew a US$2.3 billion deal to acquire US aluminum producer Aleris. In January 2018, the US blocked the sale of money-transfer service Moneygram to Ant Financial, an affiliate of the Chinese e-commerce giant Alibaba. The sale was worth US$1.2 billion.

Huawei, a Chinese telecommunication giant, canceled a deal with AT&T due to security concerns. In the February hearing of the Senate Intelligence Committee, FBI Director Christopher Wray said, "We're deeply concerned about the risks of allowing any company or entity that is beholden to foreign governments that don't share our values to gain positions of power inside our telecommunications networks”.

ZTE

ZTE Corporation is a Chinese multinational telecommunications equipment and systems company headquartered in Shenzhen, Guangdong. ZTE operates in three business units: carrier networks (54%), terminals (29%) and telecommunication (17%).

CFIUS

The Committee on Foreign Investment in the United States (CFIUS), an inter-agency body under the US treasury department’s control, is at the center of the US government’s efforts to stop the transfer of advanced technology to China through acquisitions.

CFIUS was established by President Gerald Ford in 1975 as an extension of the treasury department to advise the commander-in-chief on how to respond to investments “which, in the judgment of the committee, might have major implications for United States national interests.”

In 1988, Congress endowed CFIUS with a stronger mandate by allowing it to recommend that the president suspend or block acquisitions of US firms by foreign entities on national security grounds.

Analysis

The Chinese foreign ministry warned the United States government about reversing the trend in China-US relations with the export ban threatening to put ZTE Corp out of business. ZTE Corp is China’s largest listed telecommunications equipment maker.

Relations between the two countries has become tense because of a potential trade war and is currently worsening. “We hope the US doesn’t go against the flow,” ministry spokesperson Hua Chunying said. “If the US policy is based on all kinds of possible nonsense, it is extremely irresponsible and extremely dangerous.”

ZTE is expected to take all available legal means to challenge the seven-year ban imposed by the US government on the export of American-made parts, including semiconductors. ZTE has criticized this ban as being “extremely unfair.”

China’s aim of achieving strategic hi-tech, from artificial intelligence and robotics to 5G mobile systems, depends on how quickly and broadly it can develop the domestic supply chain for semiconductors on par with the US. Over the last 20 years, China has continuously developed its chip industry to reach on par with the US, including forced intellectual property transfer via joint ventures and overseas acquisitions.

The ban of sales by American hi-tech companies to ZTE commenced because the company failed to discipline 35 employees involved in the illegal sale of telecommunications equipment to Iran and falsely reported facts to US authorities. The initial terms of ZTE’s settlement was to reprimand the employees involved. ZTE had agreed to pay US$1.2 billion in penalties to the US government to settle its violation of long-standing trade sanctions on Iran and North Korea. 

Under the export ban, ZTE will not be permitted to import from US chip suppliers Qualcomm, Intel, and Micron Technology, optical components suppliers Maynard, Acacia, Oclaro and Lumentum, as well as software suppliers Microsoft and Oracle. Without the US-made chips and other required components, ZTE would be unable to meet its global network equipment and smartphone orders or advance its telecommunications research and development efforts.

In addition to the ban on ZTE’s imports, in the past year, CFIUS has blocked several proposed Chinese acquisitions of US companies. Read more on Trump blocks Broadcom.

It is speculated that CFIUS may attain more authority to block or unwind proposed purchases in response to US lawmakers’ worries that China’s acquisition of US technology presents a national security threat.

Counter Point

China has been heavily investing substantial amount of money in building its semiconductor industry. In 2014, the Chinese government announced that it would invest US$100 billion in the development and production of computer chips. It has already begun spending large amounts on new fabrication plants. With its ongoing initiatives, China hopes to produce 40% of its own chips by 2020 and 70% by 2025.

Assessment

Our assessment is that when technology is denied, countries put all their might in developing such critical technologies. India is a poignant example of how a country responded when technology in space and nuclear technology was denied.

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