Last night we observed that in response to Trump’s 7-year ban of component sales by US companies to China’s telecom-manufacturing giant ZTE in retaliation for “tech IT theft and distribution”, a tide of angry populist rhetoric swept across China’s social media and press. Then, overnight, ZTE itself chimed in and on Friday said that the U.S. ban on the sale of parts and software to the company was “unfair and threatens its survival”, vowing to safeguard its interests through all legal means.
“It is unacceptable that BIS insists on unfairly imposing the most severe penalty on ZTE even before the completion of investigation of facts,” ZTE said in its first response since the ban was announced, referring to the U.S. Commerce Department’s Bureau of Industry and Security.
“The Denial Order will not only severely impact the survival and development of ZTE, but will also cause damages to all partners of ZTE including a large number of U.S. companies,” ZTE said in a statement.
Defiantly pushing back against the ban, ZTE also said it regards compliance as the cornerstone of its strategy, adding it invested $50 million in export control compliance projects in 2017 and plans to invest more this year.
Unfortunately for the Chinese company, a senior U.S. Commerce Department official told Reuters earlier this week that it is unlikely to lift the ban: “We’re going to have to see how this unfolds. But there is no provision currently for that to occur,” the official said, although should China fold on all of Trump’s trade war demands, it is likely that the ZTE export ban will also be lifted.
For the immediate future, however, ZTE is in trouble, as it has little to no recourse because appeals would have to be approved by the BIS, the same agency that issued the ban. Companies must submit appeals to a committee that would issue a ruling within 30 days, according to the agency’s website.
Still, clearly worried about it future – as a substantial part of the company’s supply chain comes from the US and it will be virtually impossible for the company to quickly find alternative suppliers – ZTE said it will not give up efforts to solve problems through communication, and it is determined to take judicial measures to protect the legal rights and interests of the company.
Meanwhile, a state-backed Chinese trade body said the ZTE case represented a “milestone” for China Inc and highlighted compliance risks its corporate sector is facing. It urged the Chinese government to speed up implementation of national guidelines on corporate oversight, and go through informal channels and seek leniency with U.S. Congress members to resolve the ZTE case
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Ironically, the US could be hurting its own interests through the export ban: as the WSJ reports, according to international trade experts, the sales the will affect not just exported items, but also software and components marketed by American companies but manufactured in other parts of the world.
That would include a broad slate of hardware critical to ZTE, including Qualcomm semiconductors. It also potentially covers software like the Android operating system, which powers ZTE smartphones. ZTE is working to find ways to preserve its access to Android, according to a person familiar with the matter.
“If they’re unable to use Google Android, I think that’s a big blow because there’s no real viable alternative at this point,” said Neil Shah, an analyst with research firm Counterpoint.
Still, the biggest loser is the Chinese firm, who without access to parts from U.S. companies needed for its networking gear, will have a tough time selling its products and being competitive in the rollout of 5G equipment, said Edison Lee, a telecom analyst at Jefferies. “If this ban really continues and the U.S. really enforces it, I think ZTE is in big trouble,” he said.
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The realization that the trade war over IP theft is heating up prompted foreign ministry spokeswoman Hua Chunying to lash out at the US during a Beijing briefing, saying that possible restrictions on China’s investments in U.S. technology would constitute an improper use of national security considerations to limit the country’s access to American markets.
Hua then lashed out, saying that “the U.S. is thinking and acting like a bully – only it can have high tech and others cannot. With regard to the high tech restrictions, they are citing the reason of national security, but their motivation is protectionism. Is the U.S. really that fragile?“
Well, maybe not “fragile,” just not willing to have its latest tech stolen and reverse-engineered by that one industrious trading partner who benefits the most from access to US consumers.
Hus also accused the U.S. of asking China to open its markets but creates obstacles for China, contravening principles of equality, fairness and reciprocity. He concluded that Trade restrictions will not resolve imbalances between countries.
However, as we noted last night, Trump does not agree: On Thursday night the U.S. government announced it was considering using an emergency law to restrict Chinese investments in sensitive U.S. technologies, further escalating this especially painful – to China – battle in the increasingly hotter trade war.
As for ZTE, its shares have remained suspended since Tuesday. As of Monday’s close, they were worth some $19 billion; they may soon be worth much less.