A laborer pushes a bicycle beside the ZTE Corp. stand ahead of the Mobile World Congress (MWC) in Barcelona, Spain (Photographer: Pau Barrena/Bloomberg)  

Trump Defends ZTE Concession After Sparking Bipartisan Rebuke

(Bloomberg) -- President Donald Trump defended a move to help Chinese telecom equipment maker ZTE Corp. on Monday after his concession stoked bipartisan criticism that it could jeopardize national security.

“ZTE, the large Chinese phone company, buys a big percentage of individual parts from U.S. companies,” Trump said in a tweet. “This is also reflective of the larger trade deal we are negotiating with China and my personal relationship with President Xi.”

Trump shocked many in Washington with a tweet Sunday that he was working with Chinese President Xi Jinping to give ZTE “a way to get back into business, fast.” Trump said "too many jobs in China" had been lost and that his Commerce Department "has been instructed to get it done!"

It was an abrupt shift from the campaign Trump has mounted against Chinese technology companies, which he regularly accuses of stealing American intellectual property and exploiting unfair trade rules. The Commerce Department cut off ZTE from U.S. suppliers last month, saying it violated a 2017 sanctions settlement related to trading with Iran and North Korea and then lied about the violations.

Commerce Secretary Wilbur Ross told reporters Monday at the National Press Club in Washington that the department is now considering “alternative remedies” for ZTE’s sanctions violations and will seek to resolve the issue “very, very promptly.”

In a sign that both sides are trying to avoid a trade war, Chinese regulators restarted their review of Qualcomm Inc.’s application to acquire NXP Semiconductors NV, according to people familiar with the process. The work had been shelved earlier in response to growing trade tensions with the U.S.. San Diego-based Qualcomm supplies semiconductors to ZTE.

Both Republican and Democratic lawmakers have expressed concerns that Chinese telecom companies, such as ZTE, have ties to the Chinese government and pose a cyber espionage threat as they move into the U.S. market.

‘Tighter Restrictions’

Senator Marco Rubio, a Florida Republican, tweeted Monday that the U.S. would be "crazy" to allow ZTE to operate in the U.S. "without tighter restrictions."

"Any telecomm firm in #China can be forced to act as a tool of Chinese espionage without a court order or other review process," Rubio said.

Those concerns were echoed by Senate Democratic Leader Chuck Schumer, who said in a statement Monday that the plan was "a bad deal if there ever was one."

“The toughest thing we could do, the thing that will move China the most, is taking tough action against actors like ZTE," Schumer said. "But before it’s even implemented, the president backs off. This leads to the greatest worry, which is that the president will back off on what China fears most — a crackdown on intellectual property theft — in exchange for buying some goods in the short run."

And Representative Tim Ryan, an Ohio Democrat, noted that Trump’s tweets had highlighted layoffs in China even as autoworkers were losing their job in his home state.

"On top of that, the NSA, FBI, and CIA all have cyber security concerns with ZTE," Ryan said. "The Pentagon even stopped selling its phones in its bases. Your willingness to throw a lifeline to ZTE and China puts our national security at risk. What happened to America First?"

‘Wouldn’t Use Huawei’

Members of the president’s own national security team have expressed concerns over Chinese telecom manufacturers in recent months. In February, Director of National Intelligence Dan Coats told the Senate Intelligence Committee he believed Chinese cyber espionage capabilities would "continue to support China’s national security and economic priorities.”

Gina Haspel, nominated by Trump to lead the CIA, said during her confirmation hearing last week that she wouldn’t use a phone manufactured by Chinese telecom manufacturer Huawei Technologies Co.

"I don’t even have a social media account, but I wouldn’t -- I wouldn’t use Huawei products," Haspel said.

Even as some lawmakers leveled criticism at the administration’s move, analysts said it still wasn’t clear what impact the president’s tweet would have. The White House has refused to explain what specific direction was provided to the Commerce Department, but said in a statement that the ultimate decision on how to handle the restrictions imposed against ZTE would reside there.

“It certainly sends a bad signal about sanctions on companies that do business with Iran and for the normal procedures at Commerce,” in terms of “the consistency with U.S. sanctions and follow-through,”said Adam Segal, director of the Digital and Cyberspace Policy Program at the Council on Foreign Relations in New York.

High-Level Talks Tuesday

The U.S. retreat from penalizing ZTE may also be determined by talks Tuesday between Treasury Secretary Steven Mnuchin and Chinese Vice Premier Liu He.

“I don’t think this tweet tells us that the U.S. is going to relax its suspicion of ZTE products sold in the U.S.,” said Stewart Baker, a partner at Steptoe & Johnson and a former assistant secretary for policy at the Department of Homeland Security. “This was about whether to cut ZTE off entirely from U.S. products that it needs as components for the systems it sells around the world. The U.S. can and probably will work to keep ZTE out of the U.S.; the tweet is about whether the U.S. is going to put ZTE out of business entirely.”

The U.S. blockade forced the suspension of most operations at ZTE, which employs about 75,000 people. The firm’s shares were suspended from trading in Hong Kong last month.

ZTE faces two likely scenarios, according to analysts Edison Lee and Timothy Chau at Jefferies: Commerce may conclude ZTE’s violation is a careless mistake and will lift the ban without additional penalty, or the U.S. agency could suspend the ban temporarily, subject to further investigations and negotiations. Lee and Chau said the second scenario is much more likely, which would make it harder for ZTE to sign up new, overseas customers because of the uncertainty over its future.

©2018 Bloomberg L.P.