Billion dollar fine, new management and “security guarantees” gains ZTE U.S. access

by Steve Blum • , , , ,

ZTE is back in business. The Chinese mobile phone and network equipment manufacturer paid $1.4 billion in fines and replaced its board of directors in order to make peace with the U.S. government. The federal commerce department effectively shut ZTE in May when it cut off access to U.S.-made products, including high end chips and key bits of the Android mobile operating system.

The problems began when the U.S. government accused ZTE of doing business with Iran and North Korea, in violation of U.S. trade sanctions. ZTE’s response wasn’t robust enough to suit the U.S. government, so the company was cut off from U.S. technology and had to close its doors, albeit temporarily. That kicked off a round of what passes for superpower diplomacy these days, according to a story in Bloomberg

President Donald Trump reversed course in May, saying he was reconsidering penalties on ZTE as a personal favor to Chinese President Xi Jinping. Later that month, his administration announced it would allow the company to stay in business after paying a new fine, changing its management and providing “high-level security guarantees”…

ZTE last month took a major step forward in meeting the White House’s conditions by firing its entire board and appointing a new chairman. Its new management faces the challenge of rebuilding trust with phone companies and corporate customers. But the company is said to be facing at least $3 billion in total losses from a months-long moratorium that choked off the chips and other components needed to make its networking gear and smartphones.

ZTE isn’t alone. Huawei, China’s biggest mobile phone maker (ZTE is number two), is also in the Trump administration’s crosshairs. The Federal Communications Commission is considering locking both companies out of federally subsidised projects, because of security concerns. That same kind of thinking led the Trump administration to block the sale of Californian chipmaker Qualcomm to a Singapore based company, Broadcom.

It’s appropriate for the U.S. government to worry about national security, and to take specific steps to meet specific threats. But conflating security with economic advantage is a losing game. The best guarantee of national security is shared economic interests, not trade barriers. To paraphrase Benjamin Franklin, perhaps egregiously, those who would give up a free market to purchase a little temporary security will get neither.