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Apr 17, 2018 | 19:33 GMT

3 mins read

U.S., China: A New Tech Export Ban Targets Chinese Innovation

(Stratfor)
The Big Picture

The United States and China are in a battle for tech dominance, but no single country's tech supply chains can avoid crossing borders. China will find that out the hard way as one of its largest tech firms, ZTE Corp., faces an export ban from the United States after sending U.S.-made products to Iran and North Korea. The United States, however, will be met with plenty of other Chinese competitors that are waiting in the wings.

In the ever-evolving spat between the world's two largest economies, the United States is reaching for yet another tool to pressure China. On April 16, the U.S. Commerce Department announced that it is reinstating an order barring U.S. companies — including tech giants such as Google, Qualcomm and Intel — from selling parts, software and equipment to the Shenzhen-based telecommunications giant ZTE Corp. The move will undeniably be felt in ZTE's operations throughout the world.

The United States originally slapped its export ban on ZTE in 2016, after an investigation determined that the Chinese tech giant had run afoul of U.S. sanctions by buying U.S.-produced technology and exporting it directly — or embedded in ZTE's products — to Iran and North Korea. ZTE earned a few waivers as it tried to comply with the U.S. sanctions, and it eventually reached a full settlement in early 2017. Now, however, the United States is arguing that ZTE has violated the pact: Though the company fired four employees involved with the sales to the sanctioned countries, it did not follow through with its promise to reduce the bonuses paid to others involved. The White House is exploiting an opportunity that ZTE Corp. itself created — perhaps at the behest of Beijing, as ZTE Corp. is partially owned by a state-owned enterprise.

The development is a huge blow for ZTE, as an estimated 25 to 30 percent of its supplies and components come from U.S. companies. ZTE likely cannot, for example, use U.S.-produced semiconductors or include Google's Android-based operating system in its smartphones. ZTE has emerged as one of the five largest suppliers of telecommunications equipment in the world, but that status may be in jeopardy now, especially as it faces these challenges during the critical 5G testing, development and rollout period.

ZTE is one of the most important companies in China's ongoing tech innovation strategy, and the United States is engaged in an overall push against those efforts. As it did in 2016, the company will likely try any and all options to forestall or freeze the ban — though with the U.S.-China economic spat in full gear, it may find that the United States is less than accommodating.

If ZTE's pleas for leniency fail, other Chinese companies are likely to emerge from the background. China has adopted a strategy of supporting several tech giants with overlapping products that compete with one another. ZTE, one of the world's largest smartphone makers, has seen rivals Huawei, Oppo, Xiaomi and Vivo jump ahead as the leading Chinese companies in the space, for example. And while ZTE is a telecommunications leader right now, Huawei is a far bigger company and could be in a position to overtake its rival in the industry.

Copyright © Stratfor Enterprises, LLC. All rights reserved.

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