RISK MANAGEMENT

US Executes ‘Definitive Agreement’ With China’s ZTE, But No Impact on the Global Trade War

It’s official. China’s second largest telecom equipment provider, Hong Kong listed ZTE, can now reopen its major operations and source components from America’s technology companies.

“At about 6 a.m. this morning [June 7], we executed a definitive agreement with ZTE,” US Commerce Secretary Wilbur Ross told US business network CNBC. The US agency and the Chinese company signed off on “all 23 pages” of the agreement, he said.

According to Ross, ZTE will pay a US$1 billion fine to the US government, on top of the US$1.2 billion the Chinese company paid in penalties in March, when it admitted exports to Iran and North Korea despite international trade sanctions. ZTE also agreed to place US$400 million in escrow, money which the US government can take if the Chinese company is found to be in violation again.

In April, the US accused ZTE of not living up to the terms of the March agreement and banned it from dealing with US companies for seven years – effectively a death sentence because up to 60% of the components of its mobile phones, for example, are sourced from American firms.

Chinese President Xi Jinping personally intervened with US President Donald Trump, who instructed Ross to find a solution. The June 7 settlement is seen as creating a positive environment for also negotiating an end to the current China-US trade war, but Ross said the enforcement action against ZTE is “quite separate and apart” from the trade issue.

Costly agreement

The June pact is costly for a company with revenues of US$17 billion a year. Also extraordinary, and indicative of its desperation, is its decision to sign off on the US demand to embed a compliance team within the organization, which can possibly compromise its commercial, business and technology secrets.

“We are literally embedding a compliance department of our choosing into the company to monitor it going forward,” said Ross on CNBC. “They will pay for those people, but the people will report to the new chairman, because we are also having them replace the entire management and the entire board.”

The compliance team will report jointly to the new ZTE chairman and the US Commerce Department. It will be made up of “individuals who are fluent in Chinese, because this is going to affect the total company, not just the American part of the company,” said Ross.

What about the trade war?

Asked whether the ZTE decision is a sign that an overall settlement with China is in the offing, Ross answered: “No, this is an enforcement action. It happens that I’ve been involved with the other negotiations with China. But that’s quite separate and apart from enforcement.”

The US has said it will impose 25% tariffs on US$50 billion of Chinese goods imported into the US on June 15, following the levy of tariffs on steel and aluminum exports from China and other countries in March. The Chinese have retaliated with tariffs on imports of US agricultural and other goods, and promise new retaliation.

Canada, Mexico and the European Union have also imposed tariffs on US goods in response to the aluminum and steel tariffs. Trump and other G7 leaders, including the heads of state of Canada, France and Germany, are meeting on June 9 and 10, and the tariffs are sure to be a flash point.   

Related Articles

The CNBC Global CFO Council's global economic outlook remains rosy despite...
Retail sales growth is forecast to grow 8% in 2018
Red flags are more prominent for Hong Kong than even during the peak of the...
The tit-for-tat escalation roiled the capital markets and added to corporate...