ZTE: A Shot Across the Bows

At first blush, the lifting of the US export ban on ZTE after just 15 days might look like a climbdown in the face of Chinese pressure.

The Department of Commerce (DoC) announced on March 7 it was prohibiting the export of US components to ZTE because of the Chinese firm's breach of Iran export sanctions. Now it has offered temporary relief to the Chinese firm as long as it upholds its commitments. (See US Lifts ZTE Export Ban – Report.)

It certainly looks like a diplomatic success from the Chinese perspective. The issue has barely been out of the headlines in China, where it has been reported as yet another attempt by the US to maintain technology hegemony. Domestic media have meticulously recorded Beijing's stern reactions and the progress of a ZTE Corp. (Shenzhen: 000063; Hong Kong: 0763) delegation to Washington.

What no one has mentioned is the smoking gun published by the DoC in the form of ZTE internal documents describing how the company was evading international sanctions in Sudan, Iran, North Korea, Cuba and Syria through a series of intermediaries.

One document describes the sanctions-breaking efforts of another company, referred to only as F7. Helpfully, it tells us that F7 had been rebuffed in an attempt to buy a US company called 3Leaf Systems Inc. , suggesting F7 is likely to be Huawei Technologies Co. Ltd. , which had unsuccessfully attempted to buy 3Leaf's assets in 2010.

This revelation points to a likelier scenario that the whole affair has been engineered as a sharp warning to Chinese firms that might see sanctions as an obstacle to be skirted rather than a legal obligation.

The ban, if sustained, would have meant a hefty financial penalty for ZTE, whose stock has not traded since the original announcement. But it also would have taken its toll on a number of small US suppliers, like Oclaro Inc. (Nasdaq: OCLR) and Lumentum Holdings Inc. . That's not the kind of self-harm governments commit during an election year.

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The idea that this was a shot across the bows might account also for the curious timing, a long four years after the probe into ZTE had begun, and despite ZTE's promise to halt trading with the sanctioned companies, not to mention the imminent easing of Iran sanctions. It may explain too the unusual step of posting the internal documents, which appear to incriminate Huawei as well as ZTE.

Both ZTE and Huawei have prior form in this area. Indeed, the ZTE documents describe several incidents in which the company and other Chinese firms had been caught violating sanctions rules. Huawei was accused of trading with Iran in 2012 and in 2001 pulled out of a $28 million mobile equipment deal with Iraq because of a likely breach of international sanctions.

But it is perhaps no wonder the Chinese are repeated sanctions breakers when information about actual or alleged breaches is so heavily edited. It is difficult to see how China can have an open trading economy while obstructing the flow of essential information about how the world economy works.

In any case, technology trade between the world's two biggest economies is a neuralgic issue for both. It surely won't be long before the next flap.

— Robert Clark, contributing editor, special to Light Reading

mendyk 3/23/2016 | 11:59:26 AM
Take a bow shot These kinds of things are rarely about the violation itself -- they are more about the overall geopolitical picture.
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