A small, bipartisan Senate initiative will see a couple of stateside legislators attempt pressuring the White House into once again investigating Chinese technology company ZTE over possible violations of trade sanctions imposed by the United States government. Senators Chris Van Hollen (D-MD) and Marco Rubio (R-FL) penned a letter to the Trump administration wherein they’re suggesting ZTE might have violated Commerce Department sanctions by helping Venezuela build a database meant to be used for the surveillance of its citizens. The letter is specifically addressed to the secretaries of commerce, state, and treasury, demanding that the sitting administration probes ZTE’s dealings with Venezuela and determine whether the aforementioned project was carried out using technologies — both hardware and software — from American companies.
ZTE is suspected of using memory storage solutions from Dell Technologies to set up the said Venezuelan database in collaboration with Cantv, a state-owned telecom giant in the South American country. Dell previously denied having records that indicate it sold such hardware to ZTE for the purpose of building a surveillance mechanism, though the company isn’t legally obligated to demand information on how its equipment will be used before it’s sold. Senators Van Hollen and Rubio also asked the administration to investigate whether the said transgression are in direct violation of ZTE’s settlement with the Commerce Department reached earlier this year that essentially saved the company from bankruptcy following another elongated episode revolving around similar issues – broken trade embargoes.
Background: ZTE has a rough year behind it, having spent months watching its operations grind to a halt due to a denial order the Commerce Department used to prevent American companies from buying or licensing their technologies to the Shenzhen-based firm. The measure was issued in response to a violated 2017 settlement the government and ZTE reached after the latter broke trade sanctions imposed on Iran and North Korea. While it originally paid close to $1 billion in fines and agreed to discipline certain employees involved in the incident, ZTE failed to do the latter and repeatedly lied to investigators. The company said the issue was an accident and not an intentional act of defiance, citing the fact it self-reported it as proof of that claim and arguing the Commerce Department’s response was hence too strict.
Washington wasn’t convinced by those arguments, which led to the aforementioned denial order, and it wasn’t until President Trump personally intervened with the Commerce Department that the federal government reached a second settlement with ZTE which was significantly stricter than the original one. As part of that agreement, ZTE paid another $1 billion in fines, made a $400-million escrow payment, threw out its board of directors and management, and agreed to a wide variety of other concessions. One of them was paying for an independent auditing team that will be supervising it for other potential violations of stateside trade embargoes, whereas another one was agreeing to increase the volume of components it purchases from American companies in the short term.
Without access to American technologies in a period from April to late August, ZTE was forced to halt the majority of its operations as it was unable to continue operating its core business – manufacturing smartphones; smartphones that use Qualcomm’s Snapdragon chips and Google’s Android operating system. Its telecom equipment unit also had to pause its day-to-day business and the entire episode is believed to have already cost it in excess of $3 billion, and that’s not accounting for future lost business. Following the ordeal, ZTE’s new management opted to take out a $10 billion loan to help weather through the troubled period, raising concerns that the firm is now overleveraged.
That state of affairs is why some industry watchers still believe in a “ZTExit” of sorts, at least in the U.S. where the firm’s repuration took a massive hit due to the incident. While the ordeal was still ongoing, the Chinese government made the issue part of its trade negotiations with Washington, insisting that ZTE is saved from bankruptcy before other subjects can be discussed. While the U.S. administration obliged, the matter still resulted in an all-out trade war that’s ongoing to this date. Some analysts previously suggested ZTE should at the very least look to rebrand its American arm and separate itself from the name of its parent that’s majority owned by a Chinese state company.
Impact: The latest turn of events doesn’t spell good news for ZTE; in case the company is found to be in yet another violation of stateside trade sanctions, it’s likely to be put out of business for good with a new denial order from the Commerce Department. Coupled with the always-present calls for the firm to be blocked from doing business in the U.S. due to allegations that it poses a national security risk, the Chinese company could be in a world of hurt several months down the line.
Naturally, that’s all assuming the U.S. government obliges and agrees to investigate ZTE’s dealings with Venezuela on the request of Senators Rubio and Van Hollen. With the political climate in the U.S. currently being rather polar, bipartisan efforts are a rarity, and the Trump administration so far showed little willingness of working with Democratic legislators (and vice versa) due to their diametrically opposite beliefs. The fact that the new initiative is backed by Senator Rubio does give it some extra weight in Washington, though the Florida Senator was also calling for ZTE to be put out of business earlier this year to no avail, so his political pull certainly isn’t without limits.
The latest turn of events also illustrates how much trouble Google could be facing further down the road due to Project Dragonfly, a controversial initiative aiming to create a censored version of its Search engine for China. Much like ZTE could be facing sanctions for using American technologies to aide a regime to move against basic democratic principles and human rights, so could a case be made against Google for doing the same, much like some of its disgruntled and disillusioned employees said earlier this week.