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A public policy blog from AEI
In a blog this morning, I pushed for the Trump administration to stick to its guns on a wide variety of Chinese trade and investment barriers that block foreign competition, particularly in the information and communications technology sectors. In the upcoming negotiations, however, this tough line should be tempered by an upfront willingness to make deals on key areas of conflict. One obvious item relates to the administration’s decision to place a 7-year ban on any sales by US companies of parts and software to ZTE, the large Chinese telecoms manufacturing company.
The US Commerce Department imposed the ban after the company failed to live up to a promise to punish all employees who had been responsible for illegally shipping US goods and equipment to Iran. It has already fined the company $1.9 billion.
Briefly, the ban has had the following results. First, the ban has had devastating consequences for ZTE, which this week announced it had ceased main business operations. The reason is that ZTE obtains about one-third of its parts and components for smartphones and other devices from American companies, and for the foreseeable future there are no alternate suppliers around the world. Its supply chains were immediately interrupted by the ban. In a highly unusual public move, the Chinese government has joined ZTE in requesting the US government to review and revise the draconian order. It did so in the opening US-China trade talks last week.
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There are a number of reasons why the Trump administration should respond positively — but with a price attached. First, the ban has not only hurt ZTE but also important US firms, not least Qualcomm, which has emerged as the Trump administration’s “national champion” for 5G development. It is estimated that 65% of ZTE smartphones (45 million sold annually) contain Qualcomm chips. So the company instantly lost millions of dollars in future chip sales when the ban was imposed. Other US suppliers similarly hurt by the ban such as Acacia Communications also have taken stock hits. The fear over the medium to long term is that other suppliers such as Korea’s Samsung or Taiwan’s MediaTek Inc., will fill the gap left by Qualcomm’s removal from the competition.
When serious negotiations begin again with China, the Trump administration should respond positively to the Beijing/ZTE plea, and place ZTE’s future in the US on the negotiating agenda. But it should exact a price. The Chinese government is currently holding up a crucial Qualcomm $44 billion takeover of NXP Semiconductors. This merger will be central to Qualcomm’s move to diversify and become a leading supplier of chips for the fast-growing automotive sector.
At a minimum, the US should demand that China remove (bogus) antitrust objections to this merger. In addition, US negotiators should use this issue as a lead into questions about Beijing’s announced $40 billion subsidy program for the Chinese semiconductor industry. This is an issue ripe for investigation by the World Trade Organization and the US should not miss an opportunity to pursue this linkage.
Just a page out of the “art of the deal.”
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