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Thursday, 7 June 2018

ZTE fined $1 billion

After much negotiation with the Trump Administration, Secretary of Commerce Wilbur Ross confirmed this morning that ZTE,  the Chinese telecommunications giant, has agreed to a $1 billion fine. That penalty was assessed following an investigation showing that ZTE had violated U.S. sanctions by selling telecom technology to Iran and North Korea. Ross made the comments on CNBC’s morning show Squawk Box.


This was an incredible scare for ZTE. As part of the original settlement with the U.S. government last year, ZTE had agreed to accept a $1.19 billion fine and made personnel changes to satisfy U.S. regulators. The Trump administration then took that penalty even further, banning U.S. companies from selling components to ZTE for seven years, components critical to ZTE’s entire product line. That decision was expected to kill the company, which employs roughly 75,000 workers and had been worth about $20 billion before the ban.

While the ban seemed to be the end of the company, President Donald Trump seemed to offer it something of a reprieve on May 13, when he tweeted that he would instruct the Commerce Department to try to work out a deal that would offer “a way to get back into business, fast.” While the president is known for mercurial decision-making, the turnabout deeply surprised DC insiders, with many national security officials vociferously opposed to any deal to resuscitate the company.

In addition to a $1 billion fine, the company has made several personnel changes, including rotating out the company’s Communist Party leader. The company is also believed to have agreed to a $400 million escrow that would be used to pay for future penalties. An American monitoring team will join the company to ensure compliance with the law as well.

Discussions about the future of ZTE have not been in a vacuum. The United States and China have been hurling barbs on trade back and forth over the past few months, over tariffs, market access, and the widening trade deficit between the two countries. The U.S. position has been that the fine against ZTE is a law enforcement action, which should not be included in the continuing discussions around trade.

However, some sources who corresponded with me say that the Chinese government has purposely held up the acquisition of NXP Semiconductors by Qualcomm while it negotiates a more positive outcome for ZTE. China remains the only country that has not approved the deal worldwide, and it has repeatedly delayed the deal in recent weeks. That provided a valuable chip to negotiate trade deals with the U.S. more effectively.

In addition, President Trump is expected to head to Singapore next week to open talks with North Korean leader Kim Jong Un. China’s influence over North Korea is likely to prove pivotal for the success or failure of those talks, which gave Beijing even more leverage in its discussions with the Trump administration on ZTE.

Whatever its hand, the Trump administration now faces a deeply hostile reaction from Congress, where there is bipartisan opposition to any deal that rehabilitates ZTE. Senate minority leader Chuck Schumer (D-NY) has said publiclythat “Both parties in Congress should come together to stop this deal in its tracks.” Senator Marco Rubio (R-FL) has floated a proposal for Congress to block this sort of deal. Now that the deal is final, we will see if these comments are just hot air, or whether there really is a “supermajority” ready in Congress to overrule the president’s decision here.

This story has been updated with analysis and further information. It’s developing, and we will add more information as we have it

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