Washington blocks ZTE

Washington has slapped Chinese multinational telecommunications equipment and systems company, ZTE, with a seven-year ban on purchases of crucial American technology. The US government has argued that ZTE has violated terms of a sanctions settlement that took place in 2017.

The US government has blocked a number of Chinese companies in the recent months amid fears of an escalating trade war between Washington and Beijing.

Background

The United States and China are the two largest economies in the world. Both countries consider the other as a partner in trade and an adversary in geopolitics. The two countries have established a robust framework of trade. Currently, the US-China trade relationship supports around 2.6 million jobs in the United States. In 2015, China purchased $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 $1.12 trillion dollars.

In September 2017, the US administration played a direct role in blocking the sales of American companies to Chinese conglomerates. News emerged that US President Donald Trump blocked the sale of an American technology company called Lattice Semiconductor to a Chinese-backed organization called Canyon Bridge Capital Partners, LLC.

In November, Liu Zhongtian, a Chinese metals entrepreneur, abandoned a $2.3bn deal to acquire US aluminum producer Aleris. In January 2018, 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 $1.2 billion.

Huawei is a Chinese telecommunication giant popular in markets across Asia, South America, and the Middle East. The company had to cancel a deal with AT&T due to security concerns in January. 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%).

Analysis

In January, media released reports of a memo recommending that the US Government take over the work of deploying a 5G network. “Data is the oil of the 21st century and China has built the world’s largest reserve,” it read. “Building a nationwide secure 5G network sets the condition for future success in the information domain. Not building the network puts us at a permanent disadvantage to China in the information domain.”

In 2017, ZTE pleaded guilty to illegally shipping US technology to Iran and North Korea. Now, it has been confirmed that Washington has imposed a seven year ban on ZTE. The company will not be able to purchase crucial American technology it requires to ensure its competitiveness in the market. The ban is connected to ZTE’s guilty plea from 2017. The Commerce Department noted that the company had paid full bonuses to all employees who had engaged in these illegal activities.  “Instead of reprimanding ZTE staff and senior management, ZTE rewarded them,” Commerce Secretary Wilbur Ross said in the statement. “This egregious behavior cannot be ignored.” ZTE had already been subjected to a fine after it pleaded guilty in 2017.

The latest development from the US is a huge blow for ZTE. This means the company can no longer buy the best products that it sourced from America. It would put it at a disadvantage despite being one of the world’s top makers of smartphones and communications gear.  “All hell breaks loose,” wrote Edison Lee and Timothy Chau, analysts at Jefferies, after the export ban was announced.

The ban on ZTE comes during a period of increased trade tensions between US and China. Washington has tariffs on $150 billion in Chinese imports. In turn, Beijing has vowed to retaliate in a manner that would hurt American trade. US President Donald Trump has accused Chinese companies of violations of intellectual property rights. Some experts have warned that an escalated trade war would result negatively impacting the global economy.

The news has also caused some concern in the United Kingdom. ZTE worked with British firm BT in various capacities. A spokeswoman from BT told the Financial Times: “BT takes the security of the UK’s critical national infrastructure very seriously and has a robust testing regime in place to ensure that the equipment from all suppliers used in our network remains secure.”

Assessment

Our assessment is that the latest development indicates that it is unlikely that Beijing and Washington will be able to settle their trade disputes in the near future. The US President has been vocal regarding what he deems as “unequal” trade practices that have been employed so far. Other sales that are currently threatened by the political climate include the China Oceanwide Holdings Group's $2.7 billion purchase of US life insurer Genworth Financial and the acquisition of US mobile marketing firm AppLovin by Orient Hontai Capital's $1.4 billion.

There is also an additional pattern of Washington blocking telecoms companies like Huawei from America. This is due to increasing fears that Beijing uses these companies to spy on foreign governments. Thus, they are viewed as national security threats.