The US government’s concerns about China did not start with Trump of course. Hacking and theft of intellectual property by Chinese interests has long been a concern, and Trump has only turned up the US response to more offensive measures. The US government’s latest move to impose a seven-year ban on exports to ZTE will have major consequences for the global telecom industry. Not only will US-based suppliers to ZTE be affected, the Chinese company’s customers and suppliers in other countries may also find it increasingly difficult to do business with the group. Taiwan has already announced increased export controls for its companies doing business with ZTE.
The reason for the export ban on ZTE is a violation of a compliance agreement reached with the US government last year. ZTE agreed to changes in its organisation, in addition to paying a nearly USD 1 billion fine for violating economic sanctions against Iran several years ago. However, the speed and severity of the US penalties suggest this case is about more than upholding US sanctions. ZTE and Huawei were already facing calls from US lawmakers for a ban on business with the company due to alleged ties with the Chinese military, something they have repeatedly denied. While no evidence has been made public of ZTE or Huawei collaborating with the Chinese authorities to spy on customers, the US clearly fears the companies would not be able to say no if so asked.
US vs China security risks
Such concerns have not been made public by any European governments, despite ZTE’s extensive footprint among network operators in Europe. ZTE has built mobile networks across Europe and also established itself in the fibre, TV and smartphone markets. When the ZTE ban was announced in the US, the UK’s National Cybersecurity Centre confirmed press reports of an earlier warning to operators about ZTE. However, this was deemed “technical advice”, and did not suggest any government action was needed.
So is there really a security risk from using ZTE equipment? We cannot know for sure, but it is a convenient argument for the US as part of its broader campaign against Chinese trade. For Europe, we already know that the US government is not beyond hacking telecom networks or co-opting operators to collect information, as Edward Snowden informed the world in 2013. The EU made a stand on this that resulted in the so-called Privacy Shield, putting limits on the transfer of personal information between Europe and the US, but has not resisted US investment or trade.
European response
Europe has of course also had issues with Chinese hacking, but in the telecom sector the issue has more often been concerns about price dumping. In 2013, the European Commission launched an investigation into alleged unfair competition from ZTE and Huawei. They were accused of benefitting from cheap financing from the Chinese state in order to dump low-cost products on the European market, hurting local players such as Alcatel and Ericsson. However, the EU’s free-trade dogma prevailed and the probe was dropped a year later, with the only result an agreement for the EU and China to cooperate more closely in the telecom market.
It appears unlikely the EU will take such overt action as the US against Chinese telecom companies, given the latter are already well-established in Europe and continue to invest significantly, also in local R&D. The European Commission and several EU members are discussing stricter oversight of takeovers by foreign companies, but pre-emptive action to restrict trade is not the preferred method of operation. The risk though is that European companies are swept up in the broader trade war between the US and China. This could create opportunities for some – see Nokia announcing accelerated 5G investment by its customers in the US, where it faces no competition from Huawei.
It could just as likely turn out negative, as European governments face pressure to compromise with the US on telecom matters in order to protect other interests, such as an exemption from US tariffs on steel and aluminium. China has already pushed back one takeover – Qualcomm’s acquisition of Netherlands-based NXP Semiconductors. As Deutsche Telekom prepares to make the US is biggest profit-making market with the takeover of Sprint, it better have Mrs. Merkel’s support, as the Trump administration is not beyond withholding regulatory approval in order to satisfy its other aims.
