On May 13, President Trump tweeted: “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!”
As the Trump Administration flirts with a trade war with China, the President’s deep concern over this Chinese company, which has worked to evade U.S. sanctions against Iran and North Korea, seems puzzling. And it comes as another Chinese government-owned company has announced it is pouring money into a massive Indonesian joint venture with the Trump Organization, raising questions.
ZTE, more formally Zhongxing Telecommunications Equipment Corporation, is a cellphone manufacturer in southern China. The majority share of its stock is held by state-owned entities.
The company depends on proprietary technology from American companies to manufacture its wares. American components account for as much as 60 percent of some popular ZTE products.
ZTE also has multi-million dollar contracts with government-owned businesses in countries the United States has banned from trade, like Iran and North Korea. Despite six years of efforts by the U.S. Commerce Department to stop it, ZTE has systematically and persistently been breaking U.S. sanctions and lying about it.
Finally, last month, this Commerce Department order brought the hammer down on the illicit activity, suspending ZTE’s ability to do business with U.S. companies until 2025.
The “top secret” “standardization” plan from ZTE’s “Legal Department” for overcoming “U.S. export control obstacles,” addressed to “company leaders,” alerts departments to “current export control risks” regarding “ongoing projects in all five major embargoed countries — Iran, Sudan, North Korea, Syria and Cuba” (page 1). The document spells out the repercussions of being caught by U.S. export control: a large “civil penalty,” “managers will face prison,” and being “banned from purchasing U.S. products” (page 1).
Although bringing in a “cooperating” company, called a “cut off,” to sign contracts had proved a “fairly effective” way to avoid detection of ZTE’s “North Korea project” (page 2), the ZTE lawyers were particularly concerned about the negative impact of the U.S. “Comprehensive Iran Sanctions, Accountability and Divestment Act” on their “four party project contract with Iran customers.”
Encouraged perhaps by a “reward” of 400,000 Renminbi ($62,600) for project teams working hardest to complete their assignments (pages 4, 8), the 9-page scheme seemed to work.
That is, until a March 2012 Reuters investigation of ZTE, headlined “Special Report: Chinese firm helps Iran spy on citizens,” came out. The Reuters exposé led the U.S. Attorney in Dallas, Texas, to open a grand jury investigation of ZTE USA. The Chinese multinational temporarily ceased sending new U.S. technology to Iran, but soon was at it again. Despite the ongoing federal investigation, ZTE had resumed delivering bootlegged American products to Iran by July 2014 using ever-more-elaborate strategies to avoid American export control.
By March 2016, the Commerce Department figured out ZTE was still violating the U.S. trading embargo. It added the company to a watch list that requires an export license for any companies selling American-made products to ZTE, even those operating outside the country. By then the telecom corporation’s annual income was $15.5 billion and this restriction would be catastrophic to that revenue stream.
ZTE’s chairman assured ZTE stockholders the company had been “working with associated U.S. government departments on investigations since 2012 and... is committed to fully address and resolve any concerns.”
Soon after ZTE’s overtures, the Commerce Department reversed course, allowing American companies to continue selling their goods to the Chinese conglomerate without the strict requirements, even as the Dallas investigation continued.
A year later, in March 2017, federal prosecutors charged ZTE with a 25-page list of criminal offenses. ZTE pled guilty to “evasion of export controls and financial transactions with countries supporting international terrorism.” The company was hit with fines of $1.2 billion and a seven-year denial of ZTE’s export privileges, which would have effectively put it out of business.
“Our government will use every tool we have to punish companies who would violate our laws, obstruct justice and jeopardize our national security,” declared Attorney General Jeff Sessions. Commerce Secretary Wilbur L. Ross also warned, “Those who flout our economic sanctions and export control laws will not go unpunished, they will suffer the harshest of consequences.”
Nonetheless, thanks to intense lobbying, ZTE received yet another chance. With promises of good behavior, the Chinese company negotiated a settlement that reduced its fines by $300 million. Instead of losing its export privileges, ZTE agreed to be put on a three-year period of “corporate probation” and to cooperate with strict compliance oversight by U.S. export authorities.
Yet, a year after dodging the bullet, it violated the terms of its probation, and on April 16 the Commerce Department reinstated the 2017 denial order, calling ZTE “incapable of being, or unwilling to be, a reliable and trustworthy recipient of U.S.-origin goods, software, and technology.” (ZTE had told Commerce it was disciplining responsible employees (page 6-7) while actually awarding them bonuses.)
Losing its U.S. supply lines, ZTE quickly ran out of components and this month announced its major operations activities had ceased, complaining the U.S. suspension will “severely impact the survival and development of ZTE, [and] also cause damages to all partners of ZTE including a large number of U.S. companies.”
But ZTE’s sob story is having an effect. The lights might stay on at ZTE after all.
After the President’s concerned tweet about the benched employees, a White House spokesperson clarified, “President Trump expects Secretary Ross to exercise his independent judgment... to resolve the regulatory action involving ZTE based on its facts."
U.S. Treasury Secretary Steven Mnuchin discussed modifying ZTE’s sanctions with Chinese Vice Premier Liu He last week and they have a “handshake deal,” according to Reuters. For his part, Secretary Ross has already begun “exploring alternative remedies,” and is traveling to Beijing next week. As of this week, the President denied the two sides have yet agreed, insisting, “There is no deal. We will see what happens.”
But as the Memorial Day weekend began, President Trump tweeted he had decided to “let it reopen” with another penalty and greater supervision. Rather than deny ZTE access to U.S. technology, Trump decreed the company “must purchase U.S. parts.”
Three days before President Trump’s first tweet of support for ZTE, the Metallurgical Corporation of China (MCC), a separate Chinese state-owned enterprise, entered an agreement to finance MNC Land to build the “theme park” entertainment aspect alongside a Trump Hotels Collection resort and golf course. MNC Land is led by Indonesian tycoon and presidential hopeful Hary Tanoesoedibjo, who joined forces with Trump on the project in 2015.
MCC announced the agreement, which reportedly includes $500 million in financing from China, on May 10, adding that the “integrated lifestyle resort” would be part of Beijing’s global influence-expanding “Belt and Road” infrastructure initiative. Although Agence France-Presse reported, “the Chinese companies will not be directly involved in the construction or financing of the Trump properties,” it’s hard to see how the project could avoid indirectly benefiting the Trump Organization’s bottom line.
We don’t know whether the prospect of a lucrative business deal influenced President Trump’s effort to save ZTE, but the big problem is we don’t know that it didn’t, either. In November 2016, after the presidential election, POGO urged President-elect Trump to take action to mitigate conflict-of-interest concerns regarding his ownership of the Trump Organization: “The American people need to know that when you are making decisions concerning our allies or our adversaries, you are not doing so because they are allies or adversaries of your businesses.”
This post was updated to reflect a new announcement from President Trump made hours after this post was initially published.