The ZTE case reveals flawed US thinking on China, tech, and trade

Not everything’s rosy.
Not everything’s rosy.
Image: Reuters
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It’s been over a month since the US slapped penalties on Chinese smartphone maker ZTE, and the debacle is only getting messier. On Tuesday, Donald Trump stated he was considering lifting a components sales ban that has crippled the Shenzhen-based company and instead imposing management changes and a $1.3 billion fine. Soon after, a bipartisan group of 27 US lawmakers signed a letter urging the Trump administration to not back down on the sales ban, while also urging it to consider “national security” during trade talks with China.

As the incident unfolds, it seems as though Washington is conflating two separate but intertwined issues—and thinking about the true threat posed by China through the wrong framework.

The first issue is trade: Trump is obsessed with the US’s trade deficit with China and is pushing Beijing to take steps to reduce it. More broadly, US companies remain largely locked out from certain sectors of the Chinese economy, or limited in their ability to compete equally. In the auto industry, for example, foreign companies must form joint ventures with local partners (often state-owned enterprises) in order to manufacture and sell vehicles in China, or else their vehicles will be subject to an import tax. (Beijing announced recently it would reduce the tax from 25% to 15% of the vehicle’s sticker price, and plans to dispense with the joint-venture requirement for electric-vehicle makers this year.) In the consumer internet industry, blocks on access to sites like Facebook and Google are arguably part censorship and part protectionism.

The second is “national security,” particularly as it relates to China’s tech prowess. Beijing has set a precedent domestically in which the government, as well as companies acting on behalf of it, leverage technology to conduct surveillance, censorship, and espionage. Meanwhile, China is aiming to become a world leader in the semiconductor industry, artificial intelligence, and other tech sectors, while its military regime ramps up and its government becomes more and more authoritarian. These trends have led US lawmakers to push for measures that will make it easier to block Chinese acquisitions of American companies.

On Twitter, politicians are conflating these two issues with the ZTE case. Trump, on May 14, highlighted the number of jobs lost by ZTE as a result of the order, framing it in the realm of trade. Senator Marco Rubio, a vocal China hawk, framed it as an issue of “national security and espionage,” as did congressman Adam Schiff.

On the surface, the ZTE case fits into neither category neatly. Technically, the US Department of Commerce issued the order because of ZTE’s alleged failure to live up to parts of an agreement reached after it pleaded guilty to violating sanctions on Iran and North Korea. Some argued that the penalty was unusually harsh—with adverse affects on ZTE’s US suppliers like Qualcomm, and likely to only embolden techno-nationalist sentiment in China. One can speculate (but not necessarily prove) that the commerce department was motivated not by a desire to enforce the law fairly, but by a desire to rattle Beijing—which it clearly did.

Yet when it comes to fending off Beijing’s tech prowess, ZTE has already been mostly neutered as a potential national security threat to the US. Compared to its chief Chinese rival Huawei, which has also been a target of Washington, ZTE’s networking equipment is not as widely deployed globally. It’s largely barred (paywall) from selling such equipment to major US carriers, thanks to a 2012 Senate Intelligence Committee report that cited its potential ties to the Chinese Communist Party. It hasn’t been an aggressive acquirer of US technology companies. And despite marks against it, American consumers have been purchasing its handsets for years, without any incidents of government-directed cyberattacks surfacing publicly. In the first quarter, it ranked as the fourth top-selling smartphone brand in the US.

With ZTE, if Washington wants to enforce the commerce department’s ruling, it should probably find a way to do so that has fewer consequences for US companies. Trump, meanwhile, by bypassing the department, sends the message to Beijing that the law is up for negotiation. And all the while, crippling ZTE does very little to address the real problems posed by unfair trade policies and China’s political influence in the global tech industry.

Washington should be asking itself: How can we penalize bad behavior from Chinese companies like ZTE, or fight against unequal trade policies, without increasing Beijing’s distrust of Washington and boosting China’s ambitions for technological self-reliance? And how can we allow Chinese tech companies to compete in the US, while reducing the risk that Beijing uses these companies as a conduit for espionage, surveillance, or geopolitical gains?

Unfortunately, these questions have no easy answers.