In his trade showdown with the People’s Republic of China, President Donald Trump may finally have found the pressure point necessary to extract real concessions. Zhongxing Telecommunications Equipment Corporation, the Chinese telecom giant known as ZTE, finds itself at the intersection of just about every lingering problem between the Trump administration and China, including trade imbalances, intellectual property protections, consumer data privacy, cyber security, Iranian sanctions… and even potential espionage.
The saga of ZTE and its fellow Chinese manufacturer Huawei has been dragging on quietly for more than a year, but has only recently come to the fore. A series of U.S. government decisions have put ZTE on the brink of shutting down. Bloomberg News reported Tuesday that since the Department of Commerce announced in April that the government would not allow ZTE to buy the chips it needs from U.S. maker Qualcomm, that most of ZTE’s 75,000 employees “sit idle,” and the company is projecting losses of $3 billion.
Even in a country of nearly 1.4 billion people, the loss of 75,000 jobs is nothing to dismiss lightly.
Although Trump tweeted on May 13 that he was working with Chinese President Xi Jinping to resume business with ZTE, there is no deal yet. In his press availability with Korean President Moon Jae-in Tuesday, Trump denied making a deal to save the company, saying, “there is no deal. We will see what happens.”
“A pattern of deception”
ZTE’s problems began when it engaged in what the Commerce Department called “a multi-year conspiracy to violate the U.S. trade embargo against Iran.” It was also shipping telecom equipment that contained U.S.-made parts to North Korea. In March 2017, the company agreed to pay $1.19 billion in civil penalties to the U.S. Government and submit to a seven-year audit program.
Last month, the Commerce Department determined that ZTE had not made the required internal corrections, lied to the government about steps it had taken, and that its actions “demonstrate a pattern of deception, false statements, and repeated violations” of the law. It prohibited any U.S. company from selling an export-controlled item to ZTE, cutting off the company’s supply of the chips it needs to build its phones.
ZTE phones are, for now at least, widely available at stores like Walmart and Best Buy. They were also, until this month, available at the military exchanges, the department stores on military installations worldwide. Huawei phones are not yet sold in the U.S., but were sold in military exchanges overseas.
A May 2 order from the Pentagon landed another blow against ZTE, prohibiting the sale of phones from either manufacturer. Pentagon spokesman, Maj. Dave Eastburn, told the newspaper Stars and Stripes, “Given the security concerns associated with these devices, as expressed by senior U.S. intelligence officials, it was not prudent for the Department’s exchange services to continue selling these products to our personnel.”
The concern over Chinese cell phones is reminiscent of the scandal surrounding Chinese computer manufacturer Lenovo. Lenovo acquired the rights to the popular “ThinkPad” laptop computer brand from IBM in 2005 when IBM decided to stop making the personal computers it had invented, and quickly became one of the world’s leading PC makers.
In 2014, Lenovo began shipping ThinkPads that contained an application called VirtualDiscovery, a spyware product developed by Palo Alto-based tech firm Superfish. VirtualDiscovery did not just monitor searches like Google does; it monitored users’ activity.
According to the Federal Trade Commission’s complaint against Lenovo, VirtualDiscovery “delivered pop-up ads to consumers of similar-looking products sold by Superfish’s retail partners whenever a consumer’s cursor hovered over the image of a product on a shopping website.” It also, much more dangerously, installed a “man-in-the-middle” proxy between the user and secure websites, giving the developers access to the user’s private information — encrypted information the user would otherwise expect to be shared only with the intended recipient.
In the context of China’s ongoing cyber campaign against the U.S., including the theft of sensitive personnel files from the Office of Personnel Management, the Lenovo discovery was unsettling. It drew attention to the very real possibility that virtually any electronic device made in China could be sending information directly to Beijing.