As defense bill approaches finish line, future of Chinese company ZTE hangs in the balance

When House and Senate negotiators sit down next week to iron out their differences in the annual defense bill, the fate of Chinese telecom giant ZTE will be a key issue.

Select lawmakers from both chambers are headed to a conference committee to reconcile the House and Senate versions of the National Defense Authorization Act (NDAA) for fiscal 2019. One notable discrepancy is ZTE-related language: Broadly speaking, the Senate version calls for stricter rules that would curtail the Chinese company’s ability to do business in the U.S..

The House NDAA would restrict the Department of Defense and its contractors from procuring equipment from Chinese telecoms ZTE and Huawei. The Senate version, taking stock of ZTE’s continuous flouting of U.S. sanctions, would explicitly block ZTE from doing business in the country writ large.

The ongoing ZTE issue is particularly sensitive because lawmakers and senior U.S. intelligence officials charge that the company poses a national security risk.

Experts claim ZTE, like Huawei, could be easily leveraged by the ruling Communist Party of China as an espionage capability; providing Chinese intelligence services with direct access to their user base. The companies have consistently denied any wrongdoing, although existing and clearly visible Chinese law already compels domestic companies to cooperate with China’s spy agencies.

The Senate’s version of the NDAA, with the ZTE ban tucked into it, passed with broad bipartisan support, 85-10. But given pressure from the White House to stick with the House’s language, it is unclear whether the Senate’s crackdown on ZTE will make it through to the final version.

In April, the United States imposed a seven-year ban on ZTE, China’s No. 2 maker of telecom equipment, for violating the terms of a sanctions settlement. This denial order, which would sever Chinese access to U.S. tech until 2025, was a virtual death sentence for ZTE due to its reliance on American-made chipsets and microprocessors.

However, President Donald Trump stepped in recently, seeking a solution to save the Chinese telecom as a personal favor to Chinese Premier Xi Jinping. The move has been described by the White House as being part of a larger negotiations strategy regarding the existing trade imbalance between the U.S. and China. ZTE can continue operating in the U.S. if it pays a $1 billion fine, reshuffles its management and embeds a compliance unit, the White House previously stated.

Some of these demands are already reportedly being met. But critics say Trump is risking national security by working to score a foreign policy win with Beijing.

Veto threat?

On Thursday, the dispute came to a head as the two countries traded multibillion-dollar tit-for-tat duties and China’s commerce ministry ratcheted up the rhetoric, charging that the U.S. had just “launched the largest trade war in economic history to date.”

The White House, which does not want to exacerbate mounting trade tensions with the Chinese, has signaled its support for the House version of the NDAA, given the softer stance on ZTE.

“We’ve made clear to them what we think needs to happen,” White House legislative affairs director Marc Short told reporters on Capitol Hill last week. Short declined to comment on whether Trump would veto the defense bill if the Senate language wins over, the Washington Post reported.

“The sanctions against ZTE were the most stringent against any private company that I think have ever been imposed, not just in the size of a financial penalty but also removing the entire board and putting in our discretion and compliance team,” Short said. “So we are more comfortable, clearly, with the House language that was passed.”

In June, Trump directly pressed GOP lawmakers for a legislative solution that would not endanger his efforts to throw ZTE a lifeline. Trump told the assembled Republicans that he sought to keep pressure on ZTE but wanted greater flexibility to negotiate with China, which would mean preserving ZTE’s access to the American market.

Some GOP lawmakers remain unpersuaded.

“So this is the great deal we have on #ZTE? They replace board members with new directors hand-picked by the controlling shareholder who in turn is backed & controlled by the #China government. Why are we allowing them to continue to play us like this?” Sen. Marco Rubio, R-Fla., tweeted June 29.

The ZTE showdown comes on the heels of a recent Commerce Department decision clearing the Chinese telecom to temporarily resume some business activity in the United States. On July 2, the Commerce Department announced it was lifting sanctions on ZTE until Aug. 1. Until then, ZTE can continue operating its networks and equipment, provide support to existing handsets, conduct security research and vulnerability disclosure and transfer funds.