Trump in reversal says U.S. to help China's ZTE stay afloat

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(Bloomberg) -- President Donald Trump ordered the U.S. Commerce Department to get ZTE Corp. back into business, weeks after cutting off the massive Chinese telecom equipment maker from its U.S. suppliers with a condemnation of ZTE’s “egregious” behavior.

Trump said in a Sunday morning tweet, posted minutes after arriving at his golf course in Virginia, that he and Chinese leader Xi Jinping are working together to give ZTE “a way to get back into business, fast.”

In a major reversal for a president who has accused China many times of stealing U.S. jobs, Trump said the “Commerce Department has been instructed to get it done!” because “too many jobs in China lost.” The tweet comes as China plans to send Vice Premier Liu He to Washington this week to discuss trade tensions.

The U.S. blockade has choked off the revenue of the No. 2 Chinese telecom gear maker, which employs about 75,000 people. The firm said last week it’s suspended all major operations, and its shares stopped trading in Hong Kong last month.

With ZTE facing possible ruin, Chinese officials have stepped in. The U.S. delegation that held talks with China this month was expected to be told that reversing the Commerce Department’s action was a condition for discussions to continue, said administration officials who asked not to be identified discussing private deliberations.

ZTE suppliers rallied after the Trump tweet. Mobi Development Co. jumped as much as 18 percent in Hong Kong, while Nextronics Engineering Corp. rose as much as 8.5 percent in Taiwan and Zhong Fu Tong Co. surged the daily limit of 10 percent in mainland trading.

More Talks

This week’s Washington trip by China’s vice premier comes after the U.S. delegation to Beijing, led by Treasury Secretary Steven Mnuchin, didn’t produce a deal following Trump’s threats to impose tariffs on $150 billion of Chinese imports with promised Chinese retaliation.

While Trump said in his tweet he’d “instructed” the Commerce Department to “get it done,” the White House said the president expects Secretary Wilbur Ross to “exercise his independent judgment, consistent with applicable laws and regulations, to resolve the regulatory action involving ZTE based on its facts.” Specific questions were referred to the Commerce Department, and a spokesman could not be immediately reached Sunday. The State Department referred comments to the White House and Commerce.

ZTE has been trying to resolve the blockade that Trump’s Commerce Department imposed in April as punishment for violating the terms of a 2017 sanctions settlement related to trading with Iran and North Korea, then lying about it. That seven-year ban prohibited ZTE from buying American technology it needs to build most of its products, including Qualcomm Inc.’s semiconductors and optical chips from Lumentum Holdings Inc.

Illegal Conduct

In a sharply-worded statement on April 16, Ross said ZTE made false statements to the U.S. government and “covered up the fact” that the company paid full bonuses to employees that had engaged in illegal conduct.

“ZTE misled the Department of Commerce,” Ross said. “Instead of reprimanding ZTE staff and senior management, ZTE rewarded them. This egregious behavior cannot be ignored.”

U.S. military exchanges also have stopped selling smartphones made by ZTE and Huawei Technologies Co., China’s largest mobile and telecommunications company, after the Pentagon warned that the devices pose a security risk to military personnel and operations, the Defense Department said earlier this month.

Representative Adam Schiff of California, the top Democrat on the House Intelligence Committee, said in a tweet that U.S. intelligence agencies have warned that ZTE technology and phones “pose a major cyber security threat.” He told Trump “you should care more about our national security than Chinese jobs.”

‘Be Cool’

The president’s most recent call with Xi was on May 8. A White House readout at the time said the president “affirmed his commitment to ensuring that the trade and investment relationship between the United States and China is balanced and benefits American businesses.”

In another tweet on Sunday, Trump said the U.S. and China “are working well together on trade” but past negotiations “have been so one sided in favor of China, for so many years, that it is hard for them to make a deal that benefits both countries.”

“But be cool, it will work out!” Trump said.

Trump’s apparent directive to the Commerce Department was stunning, said a former Commerce official who worked on the ZTE case during the Obama administration.

Exacerbating Tensions

“That’s never happened before, because the rules are not designed this way. I don’t know how to even think through this,” said Kevin Wolf, a partner at Akin Gump Strauss Hauer & Feld LLP in Washington who helped oversee export controls as an assistant secretary at the Bureau of Industry and Security.

ZTE’s precarious position is exacerbating tensions between the world’s two biggest economies, now involved in sensitive negotiations to try and forestall a trade war. Trump is also weeks away from a high-stakes summit with North Korean leader Kim Jong Un, where having China on his side would be beneficial.

The company also has been working on new, faster fifth-generation wireless technology, along with local rival Huawei. That’s a key technology battle between the U.S. and China -- and one that China has a chance to win.

Networking Gear

The U.S.’s only major telecom-equipment maker, Lucent Technologies, was acquired by France’s Alcatel SA in 2006, with the combined company later absorbed into Finland’s Nokia Oyj. Nokia and Ericsson AB have floundered as their Chinese rivals churned out capable and relatively cheap gear for wireless networking customers such as China Mobile Ltd. and Telefonica SA.

But ZTE still relies on U.S. companies to supply it with components for its networking gear. Qualcomm and Micron Technology Inc. provided chips. Lumentum Holdings and Acacia Communications Inc. sold key optical equipment. ZTE’s smartphones used Google’s Android operating system. The moratorium disrupted these relationships, putting the Chinese company on life support.

Even though Trump is reversing course, the blockade will make Chinese companies more reluctant to rely on U.S. firms on grounds that “the U.S. is an unreliable supplier,” said Andrew Bartels, an analyst at Forrester Research.

The move by Trump, who’s bragged about the relationship he has forged with Xi, also has larger implications for Trump’s threats to impose sanctions and tariffs, Bartels said in a telephone interview.

“People might say the only thing you have to do to counter those is have a relationship with Trump,” he said.

Patrick Moorhead, founder of Moor Insights & Strategy, a technology research firm that works with ZTE suppliers including Qualcomm, said he thinks it’s the right move to give a company another chance, because no one wants to see it die or go bankrupt.

“I think we can be sure that Trump is going to get something out of this,” Moorhead said. “It’s all part of the big picture, which is to get a fair shake for U.S. companies.”

--With assistance from Noah Buhayar and Shahien Nasiripour

Bloomberg News