Trump Backs Down On China Threat: Instructs Commerce Dept To Rescue ZTE

It appears the impact of "unintended consequences" has hit the Trump administration once again. Following the 'rescue' of Rusal - driven almost into the ground by Trump's aluminum tariffs and oligarch sanctions (which sent aluminum prices skyrocketing, crushing margins for end-users); it appears China's threats of retaliation against Trump's ban on giant Chinese telecoms company ZTE have sunk in.

As a reminder, in response to Trump's 7-year ban of component sales by US companies to China's ZTE (in retaliation for "tech IT theft and distribution"), a tide of angry populist rhetoric swept across China's social media and press, amid warnings from Chinese officials (and the company itself) that

"The Denial Order will not only severely impact the survival and development of ZTE, but will also cause damages to all partners of ZTE including a large number of U.S. companies."

China's foreign ministry spokeswoman Hua Chunying lashed out at the US, saying that "the U.S. is thinking and acting like a bully - only it can have high tech and others cannot. With regard to the high tech restrictions, they are citing the reason of national security, but their motivation is protectionism. Is the U.S. really that fragile?"

Additionally, at the time we pointed out that ironically, the US could be hurting its own interests through the export ban: as the WSJ reports, according to  international trade experts, the sales the will affect not just exported items, but also software and components marketed by American companies but manufactured in other parts of the world.

That would include a broad slate of hardware critical to ZTE, including Qualcomm semiconductors. It also potentially covers software like the Android operating system, which powers ZTE smartphones. ZTE is working to find ways to preserve its access to Android, according to a person familiar with the matter.

“If they’re unable to use Google Android, I think that’s a big blow because there’s no real viable alternative at this point,” said Neil Shah, an analyst with research firm Counterpoint.

And those "unintended consequences" have already started. China has made the semiconductor industry a key priority as part of its "Made in China 2025" initiative aimed at reducing dependence on foreign technology imports. The plan calls for at least 40% of all Chinese smartphones to contain domestically manufactured chips - which the government is plowing billions of dollars into. 

Analysts say money is now “raining down” from Beijing and state-backed funds to support the chip market, while the country’s state chip fund, known as the “Big Fund”, raised an estimated $32 billion in a new round of financing last month.  -Reuters

China won’t allow the U.S. to use chips as a stick against it. China can take steps to replace foreign-made chips with domestic,” reports China's hawkish Global Times newspaper in a commentary this week. “The Trump administration is helping us Chinese make such a decision.”

All of which perhaps explains why President Trump appears to have backed down from his most vociferous threats this morning, tweeting that he and President Xi "are working together to give massive Chinese phone company, ZTE, a way to get back into business, fast." Trump went on to explain that "too many jobs in China [had been] lost," perhaps noting subliminally that the same may apply to American workers, as Trump then concluded that the " Commerce Department has been instructed to get it done!"

Whether this is some quid pro quo to Xi for his help with Kim is unclear but it sure makes things awkward for some US allies who have voiced extremely strong negative opinions about ZTE in the vassal manners...

Last month UK warned business not to use ZTE equipment or services as it would have a “long term negative effect on the security of the UK," and UK's Cyber security chief warned "the use of ZTE equipment or services would present risk to UK national security that could not be mitigated effectively or practicably."

So does that mean that Washington is now supporting the rescue of a company that represents a threat to UK security?

For now the response is positive - as the editor of the Global Times, unofficial PRC mouthpiece, called it a good decision...