ZTE’s wild ride; A farewell to ‘militarization’ in the South China Sea (2018.05.14)

Welcome to Issue 3 of Transpacifica. Before we get to two big stories—the Trump administration’s ZTE saga, and the still-stirring South China Sea—I want to take a moment to encourage those interested to subscribe for updates from the DigiChina project at New America, for which I serve as coordinating editor.

DigiChina is a cross-organization collaborative project devoted to translating and analyzing primary sources about digital policy in China. Since last July, we have closely watched, among other things, the regime of regulations surrounding the Cybersecurity Law; the Chinese government’s ambitious plans and progresson artificial intelligence and building China into a “cyber superpower“; and the rising bureaucratic status of central cyberspace authorities. Here’s the full list of our work so far.

Readers have asked for updates, and we’re introducing a monthly newsletter to highlight the latest work. So if you follow Chinese developments in the digital economy, cybersecurity, AI, 5G, privacy protection, semiconductors, and much more, subscribe here for a monthly update from DigiChina at New America. –Graham Webster

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ZTE’s winding path with the U.S. government

President Trump on Sunday said on Twitter: “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!” A day later, under intense criticism and amidst much confusion, he said: “ZTE, the large Chinese phone company, buys a big percentage of individual parts from U.S. companies. This is also reflective of the larger trade deal we are negotiating with China and my personal relationship with President Xi.” How did we get here?

A national security threat?

The Chinese telecommunications equipment company ZTE, now also a major mobile phone producer, has been in the U.S. government’s crosshairs since at least 2012. That year, the House Intelligence Committee released a report placing ZTE alongside Huawei and concluding that “the risks associated with Huawei’s and ZTE’s provision of equipment to U.S. critical infrastructure could undermine core U.S. national-security interests” and recommending that both government and private-sector entities should not use Huawei or ZTE in their networks. The two companies, the report said, “cannot be trusted to be free of foreign state influence and thus pose a security threat to the United States and to our systems.”

So began years of vague but intense expressions of concern that using ZTE products could allow the Chinese government to threaten U.S. security. Most recently, the Defense Department moved to ban sales of ZTE and Huawei phones from stores on U.S. military bases, with a spokesperson saying: “Huawei and ZTE devices may pose an unacceptable risk to Department’s personnel, information, and mission.” (Service members, however, are not banned from using the phones.)

While not perfectly parallel, these developments limiting ZTE and Huawei in their ability to sell in the U.S. market have coincided with increasing security-linked uncertainty for U.S. businesses selling to China—especially after the Snowden revelations—adding an element of bilateral industrial competition to the picture that has only expanded with the U.S. focus on market access in recent years.

A sanctions violator

For ZTE, however, losing some sales in the United States due to unspecified security concerns was nowhere near as dangerous what happened last month. On April 16, after a years-long series of investigations, Commerce Secretary Wilbur Ross announced that the U.S. government would ban ZTE from using U.S. products, effectively cutting off a crucial supply of components for a broad range of its products.

This “denial order” came after ZTE was investigated for, among other things, breaking U.S. sanctions by selling products containing U.S. technology to Iranian and North Korean customers. But the extraordinary denial order, which caused ZTE to shut down major operations last week, came only after ZTE and the U.S. government had reached a settlement in which ZTE admitted to supplying Iran in violation of U.S. law and “agreed to a record-high combined civil and criminal penalty of $1.19 billion“—an agreement ZTE then allegedly broke.

A Commerce Department Bureau of Industry and Security document dated several months after the settlement, but well before the denial order, presents the ZTE case as a teachable moment for companies that might get caught by U.S. sanctions enforcers. “Lessons” include “Don’t lie,” “Don’t restart your criminal activity during the investigation,” and “Don’t create a written, approved corporate strategy to systematically violate the law.”

The final page includes an ominous quote from Ross: “Those who flout our economic sanctions and export control laws will not go unpunished—they will suffer the harshest of consequences.” Six months later, Commerce took the steps that have brought the company to the brink of collapse.

A confusion of objectives

Enter Trump, whose administration has pursued trade and investment brinksmanship with China, with a major emphasis on high-tech industries and a serious under-emphasis on coordination and realistic goals.

It is unclear what precisely led Trump to make the eye-popping statement that he had instructed Commerce to reverse an enforcement action that cost “too many jobs in China.” But it is clear that ZTE remains in the crosshairs—even if key characters aren’t totally clear why.

Rep. Adam Schiff, the top Democrat on the House committee that in 2012 raised the alarm about Huawei and ZTE, responded to Trump’s tweet, saying: “Our intelligence agencies have warned that ZTE technology and phones pose a major cyber security threat. You should care more about our national security than Chinese jobs.”

It wasn’t the warning of a threat to U.S. security, though, that underwrote the deadly denial order; as described above, it was a pretty extraordinary sanctions case—with a huge fine, a detailed settlement, and an alleged failure to comply. Everyday observers, and even a journalist new on the beat, might be forgiven for confusing the “security risk” and “sanctions scofflaw” narratives, but Schiff should know better. Blurring those lines serves no one.

Indeed, the U.S. public deserves a fuller accounting of its government’s behavior. If Huawei and ZTE are really such major security risks, we deserve better information so that reasonable security measures can be debated and implemented. If trade tensions or reputed security risks clouded Commerce’s law enforcement decision making, we deserve a full accounting of political motivations. If the U.S. government is going to effectively assassinate a major company, we deserve to know the process was fair. And the various issues really are separate, as may well be the case, leaders like Schiff should refrain from confusing matters. More broadly, the Trump administration owes the public a fuller accounting of its behavior with regard to China, especially in the trade arena. (If he’s going to cooperate with Xi to resuscitate a company gravely wounded by his government, we ought to know why.)

Time will tell what “larger trade deal” Trump claims to be negotiating with Xi. There are indications that, with Trump’s planned meeting with North Korean leader Kim Jong-Un fast approaching, the president may be motivated to resolve things quickly rather than favorably. Either way, there is no indication that Chinese leaders will back off from efforts to develop indigenous “core technologies.”

Bidding farewell to ‘militarization’—but not to the South China Sea

President Xi never actually said China would not militarize the South China Sea. As interpreted, standing alongside President Obama in September 2015, Xi said: “Relevant construction activities that China are undertaking in the island of South — Nansha Islands [Spratly Islands] do not target or impact any country, and China does not intend to pursue militarization.” The emphasized section, as repeated many times official Chinese reports, was 无意搞军事化. It was well translated, but intentions can change.

This month CNBC reported that China had installed “anti-ship cruise missiles and surface-to-air missile systems on three of its fortified outposts west of the Philippines in the South China Sea.” Close observers identified this development as crossing a threshold from some ambiguity about Chinese installations (tenuous though it was, with airstrips and other military-compatible infrastructure long under construction) to a final resolution: The Spratlys are militarized.

It’s worth having a little fun with the term “militarization” (one that some of us would be happy to see fall quietly away). U.S. military ships and aircraft have long traversed the South China Sea, including near the Spratlys, at times with explicit missions to demonstrate U.S. views on the law of the sea or to conduct surveillance of the Chinese military. Chinese and other militaries also regularly operate in the area. If militarization is a process, it’s hard to mark a time before which it began.

Pedantry aside, the South China Sea has not gone away—and U.S.–China dynamics there could shift rapidly if there is an encounter between militaries or if anyone takes actions far outside of the tenuous norm. If U.S. “freedom of navigation” operations are still going on, they’re generally not being publicized anymore and are staying out of the headlines—which is as it should be. But that doesn’t put the issue away, even if North Korea and trade dominate the headlines for now.

About Transpacifica

The Transpacifica newsletter is produced by me, Graham Webster, a senior fellow with Yale Law School’s Paul Tsai China Center and fellow with New America, where I am coordinating editor of the DigiChina project, working from a home base in Oakland, California. The opinions expressed here are my own, and I reserve the right to change my mind. For three years after its founding in February 2015, this newsletter was known as U.S.-China Week. It now appears biweekly, delivered by free e-mail subscription.

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