Trump Concessions on ZTE Doing Little to Mitigate Small Carrier Concerns

“Our members are starting to talk to other equipment vendors to see how much it’s going to cost if they rip the [Chinese] equipment out and have to replace it and have to replace with something that’s acceptable,” said Carri Bennet, counsel of the Rural Wireless Association, in an interview. Small carriers “don’t know what’s going to be acceptable because the FCC hasn’t conducted its rulemaking yet," she said. "There are a lot of white boxes out there that have different names on them that are made by the same companies that the FCC is investigating.”

RWA members are “very concerned,” Bennet said. “They’re also watching what’s going on in the House with the Defense Act. That looks even worse than what the FCC is doing because the FCC is only talking about universal service.” Trump’s actions are “puzzling,” she said. “His rationale for helping ZTE is directed to saving Chinese jobs, when it would be more helpful for him to preserve internet access and E-911 services in rural America which is where his rural base lives and works. I hope he connects those dots before the FCC completes its rulemaking.”

Commissioners voted 5-0 in April to launch an NPRM proposing to bar use of money in a USF program to buy equipment or services from companies that “pose a national security threat” to U.S. communications networks or the communications supply chain (see 1804170038). The National Defense Authorization Act for FY 2019 (HR-5515), includes provisions barring any U.S. government agency from using “risky” technology produced by Huawei or ZTE.

Characterizing the seven-year ban on exports to Chinese telecom giant ZTE as "our initial thought," Commerce Secretary Wilbur Ross said officials will examine alternative punishments. "We will be doing that very, very promptly," he said at a Q&A session with journalists. Commerce's Bureau of Industry and Security earlier levied a $1.19 billion fine on ZTE, though $300 million of it was suspended, because ZTE sold equipment to Iran and North Korea, in violation of U.S. sanctions.

Ross, although he said the department is re-evaluating, tried to argue that Commerce officials are resisting linking trade concessions and the ZTE ban. "It also wouldn’t surprise me if [Chinese officials] bring up ZTE [at negotiations], but our position has been that is an enforcement action, separate from trade," he said. The Chinese Ministry of Foreign Affairs hailed Trump's tweet at a news conference May 14. "We highly appreciate these positive remarks on the ZTE issue, and we are currently in close communication with them on how exactly to implement it," a spokesman said.

Trump asked Ross to look into the department’s actions “consistent with applicable laws and regulations,” said White House Principal Deputy Press Secretary Raj Shah during a Monday news briefing. Shah said U.S. sanctions against ZTE are “part of a very complex relationship” between the U.S. and China “that involves economic issues, national security issues and the like. And it’s an issue of high concern for China that’s been raised with the U.S. government and with our administration at various levels.” Shah deflected questions about whether Trump is intervening in Commerce’s decision now to curry favor with the Chinese government before a June 12 U.S.-North Korea summit.

Puzzled

Several we interviewed were puzzled by the latest turn of events.

“I can’t explain the president’s tweet,” said Grant Seiffert, former president of the Telecommunications Industry Association. “The administration certainly cares about its trade relationships.” Seiffert told us small carriers do face a challenge. In past years, small carriers “didn’t have anywhere else to go,” he said. Chinese equipment makers “were their best route to deploy a network,” he said. “There are some challenges relative to the NPRM, relative to this national security debate, relative to the trade debate,” he said.

Doug Jacobson, an export sanctions control attorney with Jacobson Burton, has followed the ZTE case for six years, representing some U.S. companies that sell to ZTE. A full ban "is obviously the most extreme punishment, and it’s reserved for use in a very small number of cases," he told us. "The one thing I’ve learned as a defense lawyer in this area, they [BIS officials] don’t like being lied to, they don’t like being deceived, and that’s what led to the penalty in the first place. BIS has a long memory."

Jacobson said he found Trump's tweet "completely shocking," and that in his 25 years in export control work, he'd never seen a president intervene in an enforcement case. "No. 1, it undermines the law enforcement community," he said. He wondered how BIS can reverse itself, after it issued such a strongly worded enforcement action: "How does that work with their ability to enforce the law in the future?" Trump's support for lifting the ban is particularly ironic, Jacobson said, because last week he reimposed sanctions on Iran -- the exact sanctions ZTE flouted."

“ZTE and its suppliers are trapped in the middle of a much larger trade swirl” between the U.S. and China, said Doug Brake, director-telecom policy at the Information Technology and Innovation Foundation. “The big question is whether this boils over to involve other companies specifically, or de-escalates from here. Stakes are high.”

Capitol Hill

A report by the majority staff of the House Communications Subcommittee, prepared for a Wednesday hearing on national security issues, mentions rural concerns. “Much of the vulnerable equipment … is found in rural America, predominantly in the networks of smaller providers,” the report says. The report notes that by some estimates, less than 1 percent of equipment deployed by carriers is from the Chinese companies. “Even if penetration of our domestic telecommunications equipment market is less than one percent, the Subcommittee remains cognizant of the global nature of the equipment market, and that this market is characterized by scale,” the report says.

Telecom sector lobbyists see possible linkages between Trump’s interest in the ZTE issue and attempts to advance other areas of the White House’s Asia policy agenda. “ZTE was an easy target for the U.S. to take down and then potentially bring back to life” depending on what China can deliver on other policy issues, said a lobbyist.

Trump’s comments drew criticism Monday from lawmakers in both parties. “The toughest thing we could do, the thing that will move China the most, is taking tough action against actors like ZTE,” said Senate Minority Leader Chuck Schumer, D-N.Y. “Before it’s even implemented, the president backs off. This leads to the greatest worry, which is that the president will back off on what China fears most -- a crackdown on intellectual property theft -- in exchange for buying some goods in the short run. That’s a bad deal if there ever was one.” The “problem with ZTE isn’t jobs & trade, it’s national security & espionage,” tweeted Sen. Marco Rubio, R-Fla. Any Chinese telecom firm “can be forced to act as tool of Chinese espionage without any court order or any other review process," he said. "We are crazy to allow them to operate in U.S. without tighter restrictions.”

Senate Majority Whip John Cornyn, R-Texas, tweeted he agrees with Rubio on ZTE and fellow Chinese telecom firm Huawei, “too. Any telecom firm in [China] can be and is forced to act as tool of Chinese espionage.” U.S. “intelligence agencies have warned that ZTE technology and phones pose a major cyber security threat,” tweeted House Intelligence Committee ranking member Adam Schiff, D-Calif. “You should care more about our national security than Chinese jobs.” The House Intelligence Committee warned beginning in 2012 about ZTE’s ties to the Chinese government (see 1210100053 or 1210100091).