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ZTE of China to Pay $1 Billion Fine in Deal to End U.S. Sanctions

ZTE of China to Pay $1 Billion Fine in Deal to End U.S. Sanctions

The United States announced a deal on Thursday to lift tough American sanctions on the Chinese telecommunications giant ZTE, a company that has been at the center of a conflict between China and the United States.

The Commerce Department said that ZTE had agreed to pay a $1 billion fine and permit the United States to more closely inspect the company by effectively having a handpicked compliance team embedded inside.

It is not clear what the United States received in return. ZTE had been a bargaining chip in negotiations between the two countries, which have been striving to reach a trade deal that would secure tit-for-tat tariffs from going into effect.

But the company’s fate has gotten caught up in a larger web, including an upcoming summit between President Trump and North Korea’s leader and the success of an American telecom company, Qualcomm, which sells a huge amount of semiconductors to ZTE and is awaiting Chinese approval of a deal to acquire a Dutch telecom firm that will assist it build the next generation of wireless technology, known as 5G.

Mr. Trump softened his approach to ZTE several weeks ago after Chinese President Xi Jinping asked Mr. Trump to consider easing penalties on the company, which was headed toward collapse after American sanctions barred it from buying any American-made goods. That request appeared at a sensitive diplomatic moment for Mr. Trump, who is heading to Singapore next week to meet with North Korea’s leader, Kim Jong-un. Mr. Trump has made Mr. Xi his partner on North Korea while condemning China’s trade practices.

Mr. Trump has said the ZTE move is part of “the bigger trade deal we are negotiating with China and my personal relationship with President Xi.”

The settlement with ZTE is likely to inflame lawmakers, including top Republicans, who have objected to assisting a Chinese company that has been accused of posing a national security threat. Defense officials have long been concerned that the company’s products may be vulnerable to espionage or disruption. Major American wireless carriers have for years been effectively blocked from purchasing its network equipment.

The deal also puts the United States in an even more awkward position as it punishes allies like Canada, Mexico and the European Union with tariffs on steel and aluminum.

“I assure you with 100% confidence that #ZTE is a much greater national security threat than steel from Argentina or Europe,” Florida Senator Marco Rubio wrote on Twitter on Thursday. “#VeryBadDeal.”

“When it comes to China, despite his tough talk, this deal with ZTE proves the president just shoots blanks,” New York Senator Chuck Schumer, the Democratic leader, said in a statement. “There is absolutely no good reason that ZTE should get a second chance, and this decision marks a 180 degree turn away from the president’s promise to be tough on China. It’s up to Congress now to act to reverse the deal.”

During trade talks in Beijing last weekend, the Chinese offered to make nearly $70 billion of purchases of American agricultural goods, natural gas, coal and manufactured products, people similar with the discussions said. But that offer was conditional on the Trump administration not proceeding with tariffs on $50 billion of Chinese goods. The Trump administration has not yet announced plans to suspend those tariffs, which the White House has said would go into effect shortly after June 15.

Administration officials have stressed that the penalties on ZTE are still tough and will not compromise American national security. But the administration’s sudden change of heart on the company has still left the White House vulnerable to criticism that it is walking back its tough stance on China.

On Wednesday, lawmakers from both political parties took their largest step yet against the Trump administration’s trade agenda, introducing legislation that would require Congress to approve tariffs issued under a legal statute known as Section 232. The Trump administration has utilized the law to impose sweeping tariffs on metal imports from around the world, and proposed familiar measures on automobile imports.

Both houses of Congress have drafted legislation that would block the ZTE deal, though those efforts remain in initial stages. The House passed a bill last month that would prevent the administration from easing restrictions on the company, while the Senate Banking Committee approved an amendment that would prevent the president from modifying penalties on Chinese companies that had recently violated U.S. law. Mr. Rubio has also introduced a provision into an appropriations bill that would restrict government funds from being utilized to purchase telecommunications equipment produced by Huawei and ZTE.

ZTE has been at the center of a wide-ranging and complex trade dispute between Washington and Beijing, and its survival has been used as a bargaining chip between the two sides as each imposed tariffs and restrictions on the other’s products and services. The Trump administration privately told lawmakers last month that it had reached a deal to keep the company alive. On Thursday, the administration went public with its decision.

“At about 6 a.m. this morning, we executed a definitive agreement with ZTE,” Wilbur Ross, the Commerce Secretary, said in an interview on CNBC’s “Squawk Box,” adding “This is a pretty strict settlement.”

“We are literally embedding a compliance department of our choosing into the company to monitor it going forward. They will pay for those people,” Mr. Ross said. He went on to say that ZTE would pay a $1 billion fine, as well as $400 million in escrow to cover “any future violations.”

The company will also be required to change its board of directors and executive team within 30 days.

“We still retain the power to shut them down again,” Mr. Ross said.

In April, the Department of Commerce banned American companies from selling components and other technology to ZTE, saying the company had failed to reprimand employees who were involved in violating trade controls in Iran and North Korea.

The export ban left ZTE unable to manufacture its smartphones and telecom equipment, which contain a variety of components from American suppliers, including the giant chip maker Qualcomm.

Recently, Chinese regulators have moved closer to approving Qualcomm’s plan to acquire NXP Semiconductors, a Dutch firm. China is the last of several governments to sign off on the deal, and the protracted antitrust review has been seen as a way for Beijing to maintain leverage over the negotiations.

The Trump administration has expressed concerns about China gaining a leading role in the development of 5G wireless technology and has singled out Qualcomm as key to helping the United States retain an edge.

In China, ZTE’s travails catapulted the previously little-known company — a second-tier player in both smartphones and network equipment — into the public consciousness. Many people were surprised to learn that China relied so heavily on American technologies. The Chinese government has for decades tried to make the country more self-sufficient in advanced microchips, with only modest success.

Others in China expressed anger that Washington would use American companies’ technological superiority to bludgeon another country’s industry.

“These big companies use their monopoly over technology to engage in commercial blackmail,” said Li Su, a veteran crisis management consultant, at a recent talk in Beijing. “That’s why this incident has aroused such a populist mood in China. Everybody is now talking about what the country should do about chips, what China should do about software, these sorts of things.”

China’s leaders, too, have recently redoubled their rhetoric about vaulting the country to the leading edge of science and technology.

“If China wants to flourish and be rejuvenated, it must vigorously develop science and technology, and work diligently to become a major world center for science and an innovative highland,” Mr. Xi said in a recent speech in Beijing. “Only by having key core technologies in our own hands can we thoroughly guarantee economic and national security.”

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