An employee places a connector on a circuit board in a manufacturing facility at ZTE Corp.’s headquarters (Photographer: Brent Lewin/Bloomberg)

Trump Is Said to Argue ZTE Fine, Penalties Are Punishment Enough

(Bloomberg) -- President Donald Trump will try to persuade lawmakers on Wednesday that the U.S. is sufficiently punishing Chinese telecommunications giant ZTE Corp. for sanctions violations by fining it $1.4 billion and forcing changes in its management, an administration official said.

Members of Congress are meeting with Trump at the White House. He hopes to soften a provision in defense policy legislation that would reimpose a ban on ZTE doing business with its U.S. suppliers, a sanction that would essentially close the company.

The Senate’s 85-10 vote to pass the defense measure on Monday prompted a 27 percent slide in ZTE stock on the Hong Kong exchange.

The attempt to block Trump’s deal to lift the crippling U.S. sanction on China’s second-largest telecom equipment maker has united Democrats and many Republicans, who say the company poses a national security threat to the U.S. The dispute also is enmeshed in broader trade tensions between the two countries.

The official acknowledged that Trump’s alternative punishment for the company would help relations with China, but that the White House isn’t trying to link the issue with negotiations to curb North Korea’s nuclear weapons program. Trump says China has been instrumental in pressuring its ally to discuss giving up its arsenal.

The official asked not to be identified discussing the president’s position on ZTE.

In the coming weeks, lawmakers will try to reconcile the Senate bill with a defense bill passed by the House in May that doesn’t contain the same ZTE provision. While a compromise may be weeks away, there were signs Tuesday that some key senators are open to negotiation.

Oklahoma Senator James Inhofe, the leading conference committee negotiator for the Senate, plans to attend Wednesday’s meeting and told reporters he’ll support Trump on ZTE “if he’s right.”

“This might change in conference,” Inhofe said. “We’ll have the meeting and then decide."

Second-ranking Senate Republican John Cornyn of Texas said the meeting will give both sides the chance to come to a better understanding. He said Wednesday he doubted a compromise on ZTE would be announced immediately after the meeting, which he said would involve a "rather large group" of lawmakers, including second-ranking House Republican Kevin McCarthy of California.

Trump’s decision to cut a deal that would allow the company to remain in business came after a personal plea from China’s president, Xi Jinping.

ZTE got into trouble in 2016 for violating U.S. laws restricting the sale of American technology to Iran and North Korea. The company agreed to pay as much as $1.2 billion and penalize the workers involved. But the Commerce Department said in April that ZTE instead paid full bonuses to employees who engaged in the illegal conduct, and the agency imposed a seven-year ban on ZTE purchases from U.S. suppliers. ZTE said weeks later that it would shut down.

In May, Trump signaled that he planned to walk back those penalties. The administration said it would lift the sales ban once ZTE paid a fine, installed U.S. compliance officers and replaced its board.

Jorge Guajardo, a former Mexican ambassador to China and now a consultant with McLarty Associates, said a failure to settle the issue that resulted in shutting down ZTE would force Xi’s hand in trade negotiations between the world’s two largest economies.

China’s ‘Honor’

"The sanction on ZTE has become national news in China, giving rise to nationalist, anti-U.S. sentiments, which forces Xi to look strong versus the U.S.," Guajardo said. "If he is to sit at the table to negotiate, he must signal to his own people that he’s already extracting concessions from the U.S., protecting China’s national interest and honor."

The Trump administration said Monday it was moving forward with tariffs on $200 billion worth of Chinese products, three days after it published a target list for tariffs on $50 billion of Chinese goods and Beijing quickly said it would retaliate in kind.

Senator Mike Rounds of South Dakota said he is working to craft a compromise on ZTE that would preserve House language preventing the Pentagon from purchasing its products.

“My concern is that ZTE equipment is not used in places where it can compromise our critical infrastructure," Rounds said.

‘I Wasn’t Invited’

Wednesday’s meeting won’t include top ZTE critics Senator Marco Rubio, a Florida Republican, and Chris Van Hollen, a Maryland Democrat.

“I wasn’t invited," Rubio said in an interview. “I think they know I’ve made up my mind.”

Inhofe said he doesn’t know when the House and Senate will come to an agreement on the defense bill. Armed Services Committee members have talked about having an agreement by August.

One possible solution could be to weaken a requirement that any ZTE deal be accompanied by a certification that the company hasn’t violated the law in the past year, requiring instead that the company certify it’s not currently violating the law, an easier hurdle.

“The sense of Congress seems increasingly clear that ZTE is a law enforcement matter and distinct from bilateral trade negotiations," said Robert Holleyman, former deputy U.S. trade representative in the Obama administration and now a partner at the law firm Crowell & Moring. "China knows this, and we’re playing into their hands if we expect concessions on ZTE to result in meaningful reforms to China’s trade policies.”

©2018 Bloomberg L.P.