The strange case of US v. ZTE: a prosecution, a ban, a fine and a presidential intervention
| DOI | https://doi.org/10.1108/DPRG-04-2019-0029 |
| Pages | 550-573 |
| Published date | 09 September 2019 |
| Date | 09 September 2019 |
| Author | Ewan Sutherland |
| Subject Matter | Information & knowledge management,Information management & governance,Information policy |
The strange case of US v. ZTE:
a prosecution, a ban, a fine and
a presidential intervention
Ewan Sutherland
Abstract
Purpose –The purpose of this paper is to review the prosecution by US authorities of Zhongxing
TelecommunicationEquipment (ZTE) Corporationfor its violation of sanctions against the sale of systems
to Iran and North Korea; the violationof the plea agreement; and, following presidential intervention,the
impositionof a further fine and restructuring of its management.
Design/methodology/approach –An analysis of the materials used in court proceedings and
speechesby officials in the case against ZTE
Findings –The US president intervenedin a quasi-judicial matter in which a foreign firm had violatedUS
sanctions that he had supported to lessen the penalties it faced. The firm had also violated its plea
agreement. This personal intervention weakened enforcement of US sanctions on human rights and
weapons of mass destruction (WMD). However, it revealed the excessive reliance of Chinese
manufacturerson US-domiciled suppliers of semiconductorsand software.
Research limitations/implications –Neither was access to Chinesedocuments possible nor would it
have been practicableto interview managers at ZTE.
Practical implications –Enforcement of US sanctions on the sale of telecommunications equipment
have now been moved fromstrict enforcement on matters of human rights and WMD into political,trade
and even personalnegotiations with the US president.
Originality/value –A first analysisof a telecommunications sanctionscase.
Keywords China, United States of America, Iran, Government policy, Telecommunications industry,
Telecommunication
Paper type Research paper
Introduction
Zhongxing Telecommunication Equipment (ZTE) Corporation, a state-owned Chinese
manufacturer, was found to have sold network equipment and surveillance systems to
operators in Iran and North Korea (formally the Democratic People’s Republic of Korea
[DPRK]) in violation of sanctions imposed by successive US administrations. The Department
of Commerce fined ZTE, but held back from banning US-based firms from continuing to sell
components and software to it for a probationary period. It was quickly discovered that ZTE
had breached its probation, causing the ban on its purchases of US components and software
to be activated. Surprisingly, President Trump intervened to set aside the ban,with ZTE paying
a further US$1bn fine, putting another US$400m in escrow as surety against future violations,
replacing its senior management team and being put under observation by two monitors for a
decade. As a result of the litigation details of the unauthorised trade, it s concealment and the
prosecution were made public, providing insights that otherwise would not be available. The
questions raised concern the effectiveness of sanctions in the telecommunications sector and
the rationale for weakening sanctions against ZTE.
Ewan Sutherland is based at
the LINK Centre, University
of the Witwatersrand,
Johannesburg, South Africa.
Received 10 April 2019
Revised 17 June 2019
Accepted 25 July 2019
PAGE 550 jDIGITAL POLICY, REGULATION AND GOVERNANCE jVOL. 21 NO. 6 2019, pp. 550-573, ©Emerald Publishing Limited, ISSN 2398-5038 DOI 10.1108/DPRG-04-2019-0029
USA is no longer a major player in the supply of radio access network (RAN) equipment to
telecommunications operators, following the disappearance of Lucent and Motorola,
whereas it is “home” to Broadcomand Qualcomm, making it a major designer, if no longer a
manufacturer, of the microprocessors used in network equipment and smartphones.
Additionally, Google supplies smartphone manufacturers with its Android operating system,
the associated app store, and its own suite of apps. The importance of these firms enables
the US Government to control the sale of network equipment and smartphones by Chinese
manufacturers, as it can impose licence conditions on US-designed components and
software, potentially banning their sale to specific third countries or even shutting down
production.
Globalisation has supported the rapid and sustained growth of the information and
communication technology (ICT)sector, with factories built in a wide range of countries, but
especially in East and Southeast Asia, as part of global supply chains, based on local
economic advantages (Searle et al.,2013). The growth of trade in ICTs has been boosted
by the multilateral work at the WTO, especially its Information Technology Agreement (ITA),
removing billions of dollars of tariffs on ICT goods (Anderson and Mohs, 2011;Henn and
Gnutzmann-Mkrtchyan,2015;EC, 2016).
Either unilaterally or as part of the United Nations Security Council (UNSC), USA has
imposed sanctions against a range of governments for systematic violations of human
rights and development of weapons of mass destruction (WMD). Given the presence of US
semiconductors and software it has embargoed the sale of telecommunications equipment
to operators in several countries. A particular concern has been that they enable
surveillance by sanctioned regimes, violating the human rights of their citizens and
bolstering their resistance to sanctions. The ZTE case saw USA impose sanctions to
penalise a firm for its violation of sanctions against a third country, but also exposed the
dependency of Chinese manufacturers and so opened the way to the use of sanctions in
trade negotiations.
The next section of this paper addresses the oligopolistic structure of the markets for
telecommunication handsets, network equipment and semiconductors. This is followed by
an analysis of sanctions by USA and their violation. Thereafter, there is an analysis of the
intervention by President Trump. Finally, conclusions are drawn and issues identified for
further research.
Three oligopolies
The rapid pace of advances in technology and the high level of competition in the network
equipment market saw the bankruptcy of Nortel (Canada) and of Motorola (USA), and the
consolidation into Nokia (Finland) of Alcatel (France), Lucent (USA) and the Siemens COM
Group (Germany) (EC, 2007;EC, 2008;EC, 2011;EC, 2015). USA retained a strong
presence through Cisco Systems and in telecommunications semiconductors through
Broadcom and Qualcomm. Manufacturers of mobile phones had similar difficulties,
especially following the June 2007 entry of Apple Computer, an exemplar of global value
chains (GVCs), with its headquarters in the US,its phones assembled in China by Foxconn,
from components purchased throughout Asia and the USA, and its app store selling
content globally, all held in a complex multi-jurisdictional financial structure that minimises
its tax payments (Buckley, 2014;Denicolai et al., 2015;Clarke and Boersma, 2017;EC,
2017). In China, “bandit” manufacturers rose very rapidly (e.g. Xiaomi), together with the
more conventional Huawei and ZTE, all reliant on foreign chipsets and the Android
operating system and App Store, plus pre-installed Google apps (Chen et al.,2013;Lee
and Hung, 2014).
Initially, the manufacture of semiconductors was dominated by USA, but developed into a
trans-Pacific activity, with their design, fabrication and packaging evolving with foreign
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