Trump's ZTE puzzler
Wait, Trump will give Chinese companies legal immunity in exchange for a trade deal?
President Trump is suddenly very concerned about the job security of Chinese workers. "President Xi of China, and I, are working together to give massive Chinese phone company, ZTE, a way to get back into business, fast," he tweeted Sunday. "Too many jobs in China lost. Commerce Department has been instructed to get it done!"
It was a strange statement, even for Donald Trump. Not only had his Commerce Department just cut off ZTE — China's second-biggest manufacturer of telecommunications equipment, and the fourth-largest supplier of smartphones in the U.S. — from trade with American companies thanks to its habit of violating sanctions against Iran and North Korea, but this is a president who made his name with nationalistic and xenophobic rhetoric, often explicitly targeting China. Democrats like Rep. Adam Schiff (D-Calif.) and Senate Minority Leader Chuck Schumer (D-N.Y.) had fun tweaking Trump on that latter point in particular.
But the bizarreness goes deeper than a mere reversal of Trump's "America first" pledge.
The saga of ZTE actually began way back in 2012 under the Obama administration. That was when the Commerce Department began investigating the firm for violating economic sanctions then in force against both Iran and North Korea. The inquiry carried over into the Trump administration. Ultimately, Commerce concluded ZTE had ignored the sanctions from 2010 to 2016: The company had hundreds of millions in contracts with Iran during that time, and shipped microprocessors, servers, routers, and other telecommunication equipment to both countries.
In 2017, a settlement forced ZTE to pay the U.S. a $1.19 billion fine and cut the company off from trade with American firms for seven years. But that latter ban was then suspended, pending ZTE's promise to punish the executives and employees responsible for the breach.
A follow-up investigation concluded ZTE hadn't honored its promise: "ZTE misled the Department of Commerce. Instead of reprimanding ZTE staff and senior management, ZTE rewarded them," Commerce Secretary Wilbur Ross said. "This egregious behavior cannot be ignored."
Meanwhile, there were parallel concerns — both in the U.S. and in Britain — that relying on ZTE's equipment and services could pose a national security risk.
So, in mid-April this year, Commerce reimposed the seven-year ban. It was a near death blow for ZTE; "major operating activities of the company have ceased," the company informed its investors.
The decision came amid a brewing trade conflict between China and America. The Trump administration is threatening tariffs on $50 billion worth of Chinese exports, as punishment for practices it says amount to intellectual property (IP) theft on a mass scale. China has warned it will retaliate, which has provoked the White House into considering further tariffs on another $100 billion in exports. But the Trump administration's ultimate hope really does seem to be that none of these tariffs ever get imposed — and that the two countries ultimately strike a grand bargain where America rescinds the tariffs in exchange for China buying more American goods and reducing the trade imbalance.
But the ZTE decision has emerged as a sticking point. Given the company's size and importance, and the near-existential crisis it's facing, the Chinese are up in arms over Commerce's decision. Chinese President Xi Jinping is reportedly "irate," and top Chinese officials have told the U.S. that there will be no deal unless the ZTE situation is dealt with.
Trump's tweet seems like an indication he got the message.
This is where the bizarreness starts.
The ZTE decision was not part of Trump's trade "strategy," such as it is. The administration inherited the inquiry, and the Commerce Department ultimately made its call based on that long-running investigation. "Everyone has been explicitly saying this is not part of the trade conflict. And now the president has overtly linked it to the trade dispute for better or worse, and that is not good if you're trying to maintain credibility," an anonymous U.S. official told Reuters.
In other words, if ZTE was violating trade laws and lying to officials about its efforts to correct the problem, then it should be punished until that specific violation is dealt with. If you punish them, but then lift the punishment because of some unrelated accommodation, suddenly everything is up for grabs. "Now we've opened up every law enforcement action that the United States takes, where other countries will think, 'Aha, I can impose this economic pain or this tariff or this market access restriction, and I can use this as a chit to trade off against more favorable treatment with the law enforcement case,'" a former U.S. official explained to The Washington Post.
In fact, this is the same problem with Trump's IP tariffs. If China is violating IP laws, sanctions should be imposed until the violations stop. Sanctions shouldn't be used as a bankshot to close the trade gap.
On top of all that, this is just a really bad way to bring down America's trade deficit with China. The problem is really an imbalance in the values of our respective currencies. We need policies that address that systemic problem directly, as opposed to browbeating the Chinese into buying more American goods.
So using ZTE as just another chit in a trade deal is a puzzlingly shortsighted negotiation strategy. It makes the U.S. look like a capricious bully who can be provoked or appeased, rather than a principled actor seeking specific goals.
And the former is much easier to fleece.