Leaked disclosures about a probe into possible Iran transactions by Huawei clearly show that China's big two telecom vendors are in the eye of the US-China trade storm.
A week after ZTE Corp. (Shenzhen: 000063; Hong Kong: 0763) was penalised for breaching penalties imposed for sanctions violations, Huawei Technologies Co. Ltd. is now reported to be under investigation by the FBI and two other US government agencies regarding illicit sales to Iran. (See ZTE in Existential Crisis as It Slams 'Unfair' US Ban, Considers 'Judicial Measures'.)
Quoting an unnamed source, Bloomberg said the criminal inquiry by the DoJ grew out of the earlier ZTE sanctions case.
The Treasury Department's sanction unit, Office of Foreign Assets Control (OFAC), and the Department of Commerce are investigating Huawei's transactions. (See US Investigating Huawei for Sanctions Violations – Report.)
The report says the FBI and OFAC investigations have been underway "since at least early 2017."
Huawei appears to be the company referred to in ZTE documents as a rival firm also selling gear to Iran.
If charged with wrongdoing, Huawei could face a hefty financial penalty and most likely other sanctions.
ZTE accepted a $892 million fine in 2017 for repeated breaches of sanctions against Iran.
But the Commerce Department has now banned the firm from importing US components after finding ZTE had failed to take appropriate steps. Among other things, it appears to have promoted executives who were responsible for the illicit sales.
The embargo effectively halts ZTE's production lines, leaving the state-owned vendor in "shock," according to chairman Yin Yimin.
In a statement issued yesterday, ZTE hinted at possible legal action against the Commerce Department, declaring it would "take certain actions available" to it under US law.
But while China's two biggest electronics exporters might be the target of the US agencies, they are not the ultimate objective.
These trade blows are part of a belated attempt by the US to push back against China's state-driven, quasi-protectionist industry policies, where local champions are subsidised and foreign companies are forced to transfer technologies.
Telecom executives point to the still-closed $190 billion services market, a breach of China’s 2001 WTO commitments.
It may be an astute move by Washington to leverage China's reliance on foreign chips. Last year, the country imported $260 billion in semiconductors -- more than it spent on oil -- and exported just $93 billion worth of chips.
The US side may be hoping this all plays out in the same way as its efforts to tame North Korea -- a few wild punches thrown, followed by talks.
But the clock is running for the Trump administration, which, unlike Chinese leaders, faces an election at the end of the year. If the embargo on ZTE remains, its suppliers in the US look certain to let the world know as they shutter plants and lay off staff.
The timing of the news about the 16-month-old Huawei probe is also designed to add to the pressure on Beijing negotiators. A Huawei spokesman said there was no confirmation of an investigation.
For all the brave talk in China about building up its own chip sector, Beijing will no doubt be willing to make concessions to ensure ZTE's factories are supplied -- but are they going to change the way they manage their economy?
China has a good deal of leverage of its own: Market access, purchasing power, and its role in the center of the US supply chain. The factories supplying Apple may find themselves closed down for a couple of weeks.
As Tom Holland, an economics commentator for the South China Morning Post, writes: "Washington's attempts to get China to open its markets and adopt international best practices are likely to achieve exactly the opposite. Instead of scrapping subsidies and opening up, Beijing will double down on centrally planned mercantilism."
This is uncertain, uncharted territory for all parties.
— Robert Clark, contributing editor, special to Light Reading