Last month, President Donald Trump blocked U.S. chip manufacturer Qualcomm from selling its products to Chinese telecommunications firm Zhongxing Telecommunications Equipment Corporation, better known as ZTE. The move was ostensibly a reaction to ZTE’s violation of Iranian and North Korean sanctions, and the company’s subsequent failure to take promised steps to rectify the situation. But security — both the security of American intellectual property and the security of users of Chinese-made phones — played just as large a role.
The intellectual property issues are serious in and of themselves. Knockoffs are not just cheap copies of Rolex watches and designer luggage sold on Manhattan street corners. Producing counterfeits of expensive technologies has been a long-running problem for U.S. companies, including Apple. In February, Jianhua “Jeff” Li, a 43-year-old Chinese national living in the U.S. on a student visa, pled guilty to trafficking in counterfeit goods for selling more than $1 million worth of fake iPhones and iPads.
Forcing American companies to give up their secrets
China often forces American companies who want to do business there to form a joint venture with a Chinese company. For those not familiar with the concept, which is also frequently used in the defense contracting world, a joint venture is an arrangement wherein two companies agree to form a third company, sharing the risk and reward. Often, it involves the sharing of technology.
In the case of Chinese joint ventures, the arrangements have often led to the sharing of sensitive intellectual property like source codes and circuit designs, allowing the Chinese to steal that property to produce knockoffs. In March, the Office of the U.S. Trade Representative officially determined that “China uses joint venture requirements, foreign investment restrictions, and administrative review and licensing processes to force or pressure technology transfers from American companies.”
This determination came 10 days after the Trump administration blocked Singapore-based Broadcom’s planned takeover of Qualcomm on largely the same grounds.
Espionage fears are real
Last week I mentioned the case of Chinese computer manufacturer Lenovo, who installed middleware on its laptops that enabled third parties to intercept sensitive, encrypted web traffic undetected. Those same kinds of fears exist with cell phones.
In a May 2 Pentagon statement to newspaper Stars and Stripes following the announcement that the Department of Defense was prohibiting the sale of phones from Chinese makers ZTE and Huawei in the exchange stores on military installations, Maj. Dave Eastburn said, “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.”
Eastburn was referring to a February 13 hearing on world threats before the Senate Select Committee on Intelligence featuring the top leadership of the intelligence community, including Director of National Intelligence Dan Coats, then-Director of the CIA Mike Pompeo, then-Director of the National Security Agency Adm. Mike Rogers, and Director of the FBI Christopher Wray. In the hearing, Arkansas Republican Sen. Tom Cotton specifically asked Wray about the security risks associated with Chinese cell phones.
Wray’s answer was blunt. He said he was “deeply concerned about the risks of allowing any company or entity that is beholden to foreign governments that don’t share our values to gain positions of power inside our telecommunications networks.” Doing so, he said, “provides the capacity to exert pressure or control over our telecommunications infrastructure. It provides the capacity to maliciously modify or steal information. And it provides the capacity to conduct undetected espionage.”
When Cotton asked, not one of the officials said they would use a Chinese cell phone, or recommend that an any American use one. This sentiment was repeated in testimony on May 15 from William Evanina, the director of the National Counterintelligence and Security Center. Evanina told the Senate Intel committee that he would not use a Chinese cell phone either.
Forcing Chinese concessions
Cotton and Florida Republican Sen. Marco Rubio introduced legislation in the Senate, matched by a bill from Rep. Michael Conaway (R-Tex.) in the House, to ban government employees from using ZTE and Huawei phones, or federal agencies from using any of the companies’ other telecommunications equipment. Conaway’s bill made its way into the National Defense Authorization Act for Fiscal Year 2019, which passed the House May 24. The Rubio and Cotton language should make its way into the Senate’s version of the bill, all but ensuring its inclusion in the final bill that will pass later this year.
Could China Soften?
China has shown some willingness to soften its trade policies in the face of this and other hardline Trump initiatives. While the Chinese government’s recent grant of trademarks to Trump’s daughter (and official adviser) Ivanka certainly makes it look like there’s a quid-pro-quo at play, this simplistic reading of the state of affairs ignores the importance of ZTE to China’s economy.
Without Qualcomm chips, ZTE cannot make any of its current phones, imperiling more than 75,000 jobs. Even China could not easily absorb that kind of hit. So while Trump talks about going easy on ZTE to save those jobs, don’t get fooled by the suggestion that he’s just being fickle. I’m certain there will be no change in U.S. policy that doesn’t involve serious and significant reciprocal concessions from the Chinese government. Trump will get what the country needs from China.
But I still won’t buy a ZTE phone.