Wednesday , August 15 2018

Trump Vows to Save Chinese Company That Evaded US Sanctions Against Iran

451331-apps ZTE Max XL

President Trump has announced he will act to preserve Chinese jobs by working with President Xi of China to give the Chinese smartphone manufacturer ZTE a way to stay in business. The bombshell announcement comes less than a month after the US government announced a highly unusual punishment for the Chinese company. Last year, ZTE pled guilty to systemically and deliberately violating US sanctions against Iran. The company agreed to pay a $430.4 million dollar fine, to fire some of the employees involved, and to deny bonuses to the rest. It also agreed to a suspended sentence against itself. Should ZTE fail to uphold its end of the bargain, these additional penalties could trigger.

In April, the government announced that ZTE had reneged on the terms of the deal and awarded bonuses to some of the employees who were not supposed to receive them. It also failed to issue letters of reprimand that were formally part of the original plea bargain. As a result, ZTE was banned from doing business with any US corporation. The news was a death knell for the company, which announced it would shut down last week. President Trump’s announcement over the weekend is exactly the lifeline ZTE was hoping for.

It was an unusual punishment — I can’t recall the last time the government announced an equivalent move — but based on the documents filed by the Justice Department and Secretary of Commerce Wilbur Ross, it was an appropriate one. ZTE admitted its own criminal liability last year. It acknowledged running a six-year operation to sidestep sanctions against Iran that it knew existed. You can read the details of that scheme here, but ZTE sold $32M in hardware to Iran, schemed to hide that sale, lied to federal investigators, committed accounting fraud, and took repeated steps intended to obfuscate its own involvement and behavior. The punishment levied against the company was extremely harsh, yes — but it was also a punishment ZTE agreed to last year. The company knew that if it violated the terms of its agreement, it would lose the right to continue purchasing any products from any US customers.

The April announcement was surprising precisely because it implied the United States was willing to get serious about enforcing its own laws and regulations. President Trump has inveighed at length about the ways that the United States is taken advantage of, both on the campaign trail and in the 18 months since he was elected President. He has proclaimed, at various points, that our various trade partners and allies view the United States as a paper tiger and have taken advantage of our generosity. Whatever you may think of that argument generally, it’s clearly true in this specific case. Not only did ZTE ignore US sanctions against Iran from 2010-2016, it was willing to break the agreement it signed less than a year ago over something as trivial as employee bonuses.

ZTE phones like the Axon M were regularly sold by US carriers.

There is, to be sure, an argument that this action was not in the United States’ best interests — but the strength of that argument turns entirely on whether you define “the economic best interests of US technology companies” to be identical to “the political, social, and economic interests of the United States as a whole.” The US decision would have hit Google and Qualcomm revenues, and likely some other companies as well. But it also would’ve been a demonstration of the “America First” policy that President Trump argues forms a cornerstone of his own approach, and a difference between himself and President Obama.

When Commerce Secretary Wilbur Ross announced that the US was cutting off ZTE’s access to US companies and equipment based on its failure to abide by its own agreement, it sent a message that the United States would not allow multinational corporations to make a mockery of its laws and export regulations. Reversing that decision now is a huge mistake. The United States government has warned, repeatedly, that equipment from ZTE and Huawei should not be trusted. It has banned these devices from military bases. ZTE has pled guilty to running a six-year scheme to sell technology to an adversary of the United States in utter violation of US law.

It is indeed regrettable that Chinese citizens will lose their jobs. The vast majority of the workers at ZTE were undoubtedly completely innocent of wrongdoing. But the blame and fault for that outcome lie solely with ZTE. The reason the embargo from the US was likely to kill the company is because much of its profits are drawn from the smartphone side of its business, as opposed to its other business units, where it faced more competition. Declines in 4G infrastructure had hit the company, and it was counting on an aggressive 5G ramp to rejuvenate its business prospects. Nonetheless, it was not clear that China would act to bail out ZTE itself. Now, it seems the United States is willing to do the job for it.

There are millions of American workers facing job loss and uncertainty as corporations move positions overseas. If President Trump wishes to concern himself with the plight of workers, we suggest he look closer to home — including any workers whose jobs might otherwise be threatened if ZTE’s collapse indeed led to layoffs in the US technology business.

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