ZTE says US components ban is unfair – and it might be right

US china trade war faceoff
Image credit: rawf8 / Shutterstock.com

As you know, the US Commerce Department’s Bureau of Industry and Security (BIS) has banned US companies from selling components to ZTE for seven years. As you also know, ZTE isn’t taking this calmly. In a statement, ZTE said the denial order was both unacceptable and unfair, and it’s considering legal action to fight the order.

Cynical industry watchers may well comment, “Well they would say that, wouldn’t they?” and “Well it’s their own fault for violating export control laws in the first place, innit?” But ZTE makes a good case that it’s being treated unfairly and the penalty is extremely harsh.

If you read the statement carefully, ZTE isn’t denying any wrongdoing. It acknowledges that it violated export control laws in 2011 and has been taking steps to ensure it doesn’t happen again, and it acknowledges that employees made false statements regarding compliance with the penalty for the 2011 violation – in fact, ZTE says, it reported the latter problem to the US government itself and has already punished the employees responsible, taken corrective measures and launched an independent investigation.

ZTE’s complaint lies in the fact that BIS issued the penalty before ZTE could prove its case, and that the penalty itself is not only disproportionate under the circumstances, but also damaging to US suppliers that do a lot of business with ZTE.

The Commerce Department has since said that it will allow ZTE to submit additional documentation making its case. But that leaves unanswered the question of why BIS didn’t wait for ZTE to finish defending itself, and why it chose to issue a penalty that is obviously financially damaging not only to ZTE, but to US companies.

Obviously it’s all speculation at this point, but personally I think the answer lies partly in the current wave of anti-China paranoia sweeping over the current US government.

Historically, the more conservative wing of the Republican Party has always distrusted China when it comes to technology transfer issues. In the 1990s, for example, Republicans feared that if satellites built by US companies were launched on Long March boosters, the Chinese military could potentially use this as an opportunity to steal or reverse-engineer technology to improve their missile systems.

Meanwhile, as Huawei evolved from a domestic telecoms OEM to a global powerhouse, it has struggled to crack the US telecoms network infrastructure market because of the same paranoia mostly from Republicans who believe that Huawei’s board allegedly had ties with the PLA, and thus installing Chinese-made gear into US telecoms networks would enable the Chinese military to spy on America’s phone calls. (Never mind that all telecoms vendors are required by US law to enable eavesdropping capabilities so that the FBI can eavesdrop on phone calls – and the less said about the NSA, the better.)

Anti-China paranoia in the US waxes and wanes, depending on which party controls Congress and the White House, current political priorities, the level of sabre-rattling over real estate ownership in the South China Sea, hacking activities, etc and so on. It’s reasonably clear from the past year that the Trump administration and the current Republican Congressional leadership see China as the very least as an economic threat – certainly they’re aware of China’s increasing status as a regional (if not global) economic superpower and the progress of its Belt & Road initiative, as well as President Xi Jinping’s recent consolidation of power.

So given that context – under which we’ve seen (1) recent Congressional actions such as pressuring AT&T to drop a smartphone deal with Huawei, and proposing a law banning government departments from buying Chinese-made telecoms gear, (2) the FCC’s proposed rule that USF funds for rural coverage can’t be used to buy Chinese equipment, (3) President Trump’s tariff hikes, and (4) Trump’s general policy of America First – it seems fair to deduce that the severity and scope of the ZTE ban is as much a product of the current political environment as it is about straight-up law and order.

Some have pointed out that the BIS decision could also be a ploy to give the US leverage in its negotiations with China over trade deficits and tariffs. That’s possible. But that’s also arguably a product of the same political sentiment.

Politics is a perennial hazard of the telecommunications business – most governments still see telecoms as vital infrastructure that is crucial to national security. And that is always going to conflict with the concept of free trade to some degree, which means it’s not always going to be fair. That does appear to be the case with the ZTE ruling – so far. Again, we don’t know everything yet, and ZTE’s additional documentation may not tell us anything new or change the outcome.

But even if that’s the case, a seven-year ban that targets not only ZTE’s livelihood but also that of its suppliers seems overboard and overbroad – and quite likely would have been neither if ZTE was from Scandinavia.

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