Chinese telecommunication giant ZTE had been holding back a seven-year block on its exports and all sales to the company by US suppliers since March 2017. The ban was being delayed thanks to an agreement ZTE made to internally punish those responsible for covering up its equipment sales to Iran in violation of Department of Commerce regulations. ZTE also pledged to pay a $1.2 billion penalty, at the time. Before the finding was delayed, ZTE paid out nearly three-quarters of that amount. The commerce department’s reactivation of the order against ZTE also obligates the company to pay the rest of the original penalty, or about US$300 million.
The sales in question were for hundreds of millions of dollars worth of routers, microprocessors and servers to Iranian entities — violating the US’s Export Administration Act of 1979, according to an order by the US Department of Commerce. But the deal ZTE cut went south when it was determined that they misrepresented themselves during the process. “ZTE made false statements to the US Government when they were originally caught and put on the Entity List, made false statements during the reprieve it was given, and made false statements again during its probation,” Secretary of Commerce Wilbur Ross was quoted as saying in an announcement by the department.
Additionally, ZTE did not appear to have followed through on their promises to punish the nearly 40 employees running a unit conducting business with Iran and covering up the deals. Commerce had requested documentation proving implementation of the promised actions but instead found that disciplinary action had not in fact been taken.
“The provision of false statements to the US government, despite repeated protestations from the company that it has engaged in a sustained effort to turn the page on past misdeeds, is indicative of a company incapable of being, or unwilling to be, a reliable and trustworthy recipient of US-origin goods,” Commerce Department said in its order.
This move comes amid the threat of a US – China trade war in which more than US$250 billion worth of two-way product trade faces punitive tariff walls if the two sides fail to agree on concessions that address the concerns of the US Trade Representative office. The USTR’s tariffs against China target high-tech products that are top priorities in Beijing’s industrial modernization plan, including instruments and apparatus used in telecommunications networks. This type of punishment to China‘s largest publicly traded telecoms equipment manufacturer plays a vital role in the PRC’s ability to compete globally in the industry.
America companies like Qualcomm and Micron Technology are now prohibited from selling their components to ZTE, a move that is already having down stream financial effects with shares of smaller companies that rely on sales to ZTE seeing sharp declines after the announcement.
Commerce also mentioned ZTE’s equipment sales to North Korea but gave no details.
In March of 2018, the FCC announced a proposal for new rules to bar the use of funds from any government program to purchase equipment or services from companies that pose a security threat to US telecommunications networks. That proposal followed the introduction of legislation by Republican Senators Tom Cotton and Marco Rubio in February that would block the US government from buying or leasing telecoms equipment from Huawei, the world’s largest telecoms equipment supplier, along with ZTE Corp, citing concerns the companies would use their access to spy on US officials.