Trump gave the giant Chinese cellphone maker a stay of execution

In the ongoing saga between the United States and Chinese telecom giant ZTE, President Donald Trump has directed Secretary Wilbur Ross and the U.S. Department of Commerce to grant a temporary, 30-day reprieve for ZTE, enabling it to procure vital American parts and software so it may resume its operations.

In essence, this latest action is nothing less than a stay of execution. The seven-year export ban imposed by the Commerce Department’s Security and Enforcement Bureau on April 18 plunged the company into crisis resulting in the immediate shutdown of its assembly lines and curtailment of its operations.

{mosads}In its desire to comply with U.S. mandates, ZTE has taken a number of corrective actions. First, it has paid over $1.4 billion dollars in fines and is in the process of depositing an additional $400 million dollars in escrow as a compliance guarantee.

ZTE has also replaced all of its board members and also hired an outside counsel to specifically address future compliance. Lastly, it has fired its CEO, CFO, CTO and head of human resources. It was recently announced that Xu Ziyang will assume the position as the company’s new CEO.

With $17 billion dollars in annual sales and a head-count of over 80,000 employees, the threat facing ZTE is by no means trivial. As one of China’s two largest telecom equipment makers, ZTE has been heralded as one of the country’s “national champions” that will lead China into its next phase of technologically driven growth.

The seven-year ban on ZTE curtails its ability to source vital parts and software from U.S. producers, amounting to a virtual “death sentence” against the company. Realizing the existential threat facing ZTE, China’s President Xi Jinping made a personal appeal to President Trump for equitable relief.

The 30-day reprieve will allow U.S. companies to resume selling parts and software to ZTE and it is assumed that ZTE will order a year’s worth of parts as the sanctions on ZTE will resume after the 30-day reprieve is over.

So this is the great deal we have on #ZTE? They replace board members with new directors hand­picked 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? https://t.co/5RNWcT3Sth

— Marco Rubio (@marcorubio) June 29, 2018

As the events unfolded, ZTE has experienced billions in losses and most recently lost a $700-million bid to service Italy’s Wind Tre networks due to fears surrounding ZTE’s ability to fulfill. As a company on life support, ZTE is not out of the woods yet.

Complicating matters is the impending Defense Appropriations Amendment sponsored by Senators Chuck Schumer (D-N.Y.), Chris Van Hollen (D-Md.), Marco Rubio (R-Fla.) and Tom Cotton (R-Ark.).

The Senate Defense Appropriations Amendment singles out ZTE for its misbehavior, citing ZTE as a national security threat proposing higher penalties and elevated trade sanctions against ZTE in contravention of President Trump’s proposals to lift the bans imposed against the company.

ZTE serves as a case study of the challenges China faces as it seeks to enter its next phase of growth. The much-heralded China 2025 initiative stated by President Xi Jinping envisions a Chinese economy less driven by the manufacture of cheap exports but one driven by the design, manufacture and sale of products that are both innovative and high in technological content.

China wants to borrow a page from the Japanese playbook noting Japan’s economic transformation from once being a producer of low-end consumer products to scaling the heights of sophisticated cutting-edge consumer and industrial products.

China 2025 is part of the grand strategy of China’s policymakers and one that has provoked hostility on the part of President Trump. China 2025 has become part of a broader debate within the Trump administration as to the long-term competitive challenges posed by China and ultimately its impact in weakening the very foundations of American competitive strength.

With frequent references to Chinese theft of American intellectual property, President Trump has initiated Section 301 trade actions against China and called for the curtailment of a variety of technologically advanced products to China on national security grounds.

The ZTE episode is tied to the ongoing trade war that the United States and China are engaged in. On Friday, $34 billion dollars in tariffs against select Chinese goods will be initiated. That follows the tariffs already imposed against Chinese aluminum and steel.

Financial markets are waiting with baited breath as the trade war is about to get real. As in the laws of physics, for every action there is an equal and opposite reaction. The world waits as China prepares its next move.

Arthur Dong is a professor at Georgetown University’s McDonough School of Business. He specializes in legal and business engagements between China and the United States.