First the Commerce Department bans the sale of U.S. parts to Chinese telecom equipment firm ZTE, after the firm broke U.S. sanctions and lied to the U.S. government. Then, weeks later, President Donald Trump says he’s told the Commerce Department to help ZTE get back in business.
What on earth is Trump playing at? That’s the fundamental question, as his Twitter announcement appears to be a major reversal of U.S. actions against ZTE (ZTCOY, -15.37%)—which just last week appeared mortally wounded by the American ban.
There are three main issues here. Firstly, if Trump is using the tens of thousands of at-risk ZTE jobs as some kind of bargaining chip in wider trade negotiations with China, it’s not clear what he’s getting in return.
Secondly, Trump’s move to rescue ZTE, a company on the brink of extinction because it unlawfully did business in Iran, comes at a time when the U.S. has just reimposed sanctions on the Islamic Republic, and is threatening European companies that continue to trade there.
Perhaps most importantly, it is also extremely unusual for a U.S. president to threaten to override his own Commerce Department like this.
Here’s a quick recap of the situation. ZTE, a major Chinese manufacturer of phones and telecom network equipment, was busting U.S. sanctions against Iran and North Korea by selling equipment there, despite the fact that the kit used American components. Last year the Justice Department fined ZTE almost $900 million over the Iran stuff, and also got ZTE to agree to a seven-year suspended denial of export privileges.
In April, the Commerce Department said ZTE had broken its agreement with the U.S. government by giving full bonuses to the employees involved in the illegal Iran sales, failing to reprimand them, and also lying about this to the Commerce Department.
So the seven-year ban on U.S. components kicked in, and last week ZTE informed its investors that it had ceased its “major operating activities”—it simply couldn’t make its products without parts from the likes of Qualcomm and Intel, and its inventory ran out.
Then, on Sunday, President Trump suddenly tweeted: “President Xi of China, and I, are working together to give massive Chinese phone company, ZTE, a way to get back into business, fast. Too many jobs in China lost. Commerce Department has been instructed to get it done!”
The Chinese are happy, with Foreign Ministry spokesman Lu Kang saying the country “highly commends” Trump’s move. Bloomberg reported Monday that China’s competition regulators have restarted their stalled review of Qualcomm’s merger bid with NXP Semiconductors—it’s not clear whether this is connected to the ZTE shift.
ZTE’s employees are reportedly delighted, too. Again, that’s more than understandable.
However, Kevin Wolf, the Obama-era assistant secretary of commerce who launched the case against ZTE, told the Financial Times he was “speechless” at Trump’s tweet.
“I’m highly confident that a president has never intervened in a law-enforcement matter like this before,” Wolf told the paper. “It’s so outside the way the rules were set up.”
D.C. lawyer Douglas Jacobson, who represents ZTE suppliers, echoed this sentiment in an interview with the BBC. “There’s no legal mechanism for this. How this will play out remains to be seen,” he said. “They are not simply going to be able to resume business as usual.”
Even the White House seems slightly taken-aback by Trump’s promise. Press Secretary Sarah Sanders told Politico on Sunday that the president merely expects Commerce Secretary Wilbur Ross to “exercise his independent judgement… to resolve the regulatory action involving ZTE based on its facts.”
When Ross announced the denial of export privileges a month ago, he said ZTE’s misleading of the department was “egregious behavior [that] cannot be ignored.” The Commerce Department was also careful to note that this was “a regulatory action and… unrelated to any ongoing trade-related actions.”
It seems the ZTE case cannot be so easily kept separate from the Sino-American trade negotiations after all.
By: David Meyer, Fortune