According to the reports, the Chinese telecom giant ZTE has come up with an agreement in principle with the Commerce Department which would allow it to resume operations. The deal involves a payment of additional $1 billion fine and putting $400 million into escrow as the insurance against the future fines.
ZTE, as per the reports, has promised to replace its board and executive team in 30 days. It would also allow the unfettered site visits to verify that U.S. components are being used as claimed by the company and will post calculations of U.S. parts in its products on a public website.
It is an unfortunate precedent to alter what was basically a legal/regulatory ruling. But the initial sanction to prevent ZTE from buying U.S. components for seven years was essentially the death penalty.
It is, however, unlikely that the Trump administration actually considered at a high level what this would do to U.S.-China relations. Given that initial mistake, it is a good thing that a severe penalty short of closing the firm has been agreed.
There has been bipartisan criticism in Congress, notably from Senators Marco Rubio and Chuck Schumer about the renegotiation of the initial legal/regulatory judgment on ZTE. The company had violated the U.S. sanctions by selling its products to Iran and North Korea which contained U.S. parts and technology.
ZTE had accepted a fine and had agreed to make the management changes. But then it did not follow the provisions properly. The Commerce Department made a descision that it could not buy U.S. components for seven years which was like the death penalty for a firm with more than 70,000 employees producing 55 million phones per year.
All of the ZTE products use imported American components, which was why the sanction led the firm to cease its operations.
The ZTE deal has to be seen in the larger context of U.S.-China trade issues. Wednesday morning, the U.S. reported updated trade data through April. U.S. exports are growing well – 9 percent year-on-year overall; 8 percent to China; and 8 percent to the eurozone. This reflects stronger growth in the world economy.
But U.S. imports are also rising rapidly as a result of late-cycle stimulus through the tax cuts. Imports year-on-year for January-April were up 9 percent overall; 11 percent from China; and 15 percent from the eurozone.
This is the underlying trend that the U.S. is trying to fight in its talks with the Chinese. As per the reports, Secretary Ross came back from Beijing, not only with the ZTE deal, but also with an offer from the Chinese side to buy more American products, especially in agriculture and energy.
The Chinese have made clear that additional purchases are contingent on the U.S. not imposing the first round of 301 tariffs: 25 percent on $50 billion of imports from China. It is also clear that if the U.S. imposes tariffs, China will retaliate with tariffs on $50 billion of U.S. exports.
These measures will hurt both economies. The administration has an important decision to make soon on whether to follow through with the tariffs or accept the deal offered by the Chinese.