ZTE Hit Hard, It Is Beyond Trade War

NARRATION: ZTE got hit hard. Will China learn its lesson?

MR. ZHAO: A prevailing mindset in China is that cheating is not shameful; it is a shame only when you get caught.

NARRATION: How damaging is intellectual property theft to America?

MR. WALTERS: There are concerns, I think, that the United States might potentially lose its competitive edge over emerging technologies.

NARRATION: Can China become a tech superpower by stealing other people’s technology?

MR. ZHAO: It’s a blunder to assume that stealing away design drawings or secret data means mastering knowledge.

NARRATION: And if national security issues elevate, can it be resolved?

Title: ZTE Hit Hard, It Is beyond the Trade War

MS. GAO: Welcome to Zooming In. I’m Simone Gao. China has long been involved in unfair trade practices that are illegal under free-trade rules. Chinese companies are also known for violating regulations and stealing intellectual property. China has said it wants to become the world’s leader in technology. But can a country that relies on stealing research instead of innovation ever become a true tech leader? What should the U.S. be worried about? And will China’s economic expansion replace Western business ethics with the Chinese Communist Party’s way of doing things? We’ll explore these questions and more in this episode of Zooming In.

Part 1: U.S. Bans Sales to ZTE

NARRATION: The state-owned enterprise, ZTE, is China’s second-largest telecommunications equipment company. It uses Google’s Android system and incorporates U.S. chips and technology in its smartphones. It has violated U.S. export regulations for several years by shipping telecommunications equipment to Iran and North Korea.

NARRATION: In 2010, ZTE sold the Iranian regime a surveillance system capable of spying on its own citizens through landline, mobile, and internet communications. ZTE continued selling U.S. technology to Iran despite America’s longtime ban on selling non-humanitarian items.

NARRATION: In March 2016, the U.S. restricted sales to ZTE for exporting U.S.-made high-tech goods to Iran. The Commerce Department released memos from ZTE’s legal department showing a step-by-step guide to setting up shell companies to skirt U.S. export controls.

NARRATION: In March 2017, Secretary of Commerce Wilbur Ross announced a $1.19 billion dollar penalty for ZTE’s export violations to Iran and North Korea.

WILBUR ROSS: With this action, we are putting the world on notice: improper trade games are over. Those who flout our economic sanctions, export control laws, and any other trade regimes, will not go unpunished – they will suffer the harshest of consequences. But this case is just the beginning: Under President Trump’s leadership, we will be aggressively enforcing strong trade policies with the dual purpose of protecting American national security and protecting American workers. ZTE, whose brazen disregard for our laws was as insulting as it was dangerous, will, if approved by the court, first pay an immediate out-of-pocket monetary penalty of 892 million dollars. ZTE has then further agreed to a 7-year suspended denial order and a 7-year 300 million dollar suspended fine, both of which provide long-term deterrence. If they step out of line, those penalties will be immediately imposed.

NARRATION: And they did step out of line. The Department of Commerce determined that ZTE made false statements in 2016 and in 2017 during the probationary period. ZTE covered up the fact that they paid full bonuses to employees who engaged in illegal conduct. They were supposed to have punished them instead. The DOC announcement said ZTE admitted committing 380 regulations violations. On April 16, 2018, the Department of Commerce banned U.S. companies from selling technology to ZTE for 7 years.

NARRATION: Following the DOC’s announcement, several Mainland Chinese media reported one of ZTE’s upstream companies has ordered over 1,000 employees who are working for ZTE to take an indefinite vacation. A number of the ZTE production lines have stopped operating. However, this report was quickly removed from all Mainland Chinese media. An NTD TV reporter contacted a ZTE service partner, who confirmed the indefinite vacation.

SOUNDBITES: ZTE is my client, I saw they sent out the message that they were asked to go on vacation, but I don’t know how many days.

NARRATION: According to the report, 80,000 ZTE employees, together with its service providers, channel providers, and partners are all heavily affected.

NARRATION: On April 20, at a ZTE press conference, its president Yin Yimin described the U.S. Department of Commerce’s decision as utterly unfair. He said ZTE has the backing of the entire nation.

SOUNDBITES: ZTE products have a market here domestically, with the backing of 1.3 billion people. We are confident that we can overcome this challenge.

NARRATION: 25-30% of ZTE’s parts are made in the US. Yin Yimin said the ban will put ZTE into shock.

MS GAO: I discussed the ZTE incident with senior political commentator Wen Zhao. Here’s what he has to say.

MS. GAO: The DOC letter states that ZTE admitted 380 regulation violations and 96 evasion violations, including the fact that they gave out bonuses to employees involved. ZTE protested they would never take the risk of a penalty of $300 million U.S. dollars for those employees, as though the U.S. allegations were ridiculous. It’s indeed very hard to understand why they still give out bonuses to those employees, why they still sell technologies to Iran and North Korea knowing they would be severely punished if they get caught. What mentality was in those state-owned enterprises?

MR. ZHAO: For Americans, it doesn’t matter whatever motives these Chinese companies had for choosing to repeatedly cheat. What does matter is that they did it. They actually did it and therefore must pay for it. Various possibilities. Maybe their management department just thought Americans wouldn’t mind trivialities like bonuses and wouldn’t follow up. Or they might believe those employees just did what they’d been told to, and punishing would harm their morale. A common mentality in China’s state-owned enterprises or those with governmental backgrounds is they are special and can act like kings. They thought they have the Chinese government behind them, no matter what they do, everything will be fine. And their experience at home and abroad impressed them more so. Since they had never learned a lesson or paid a price, they would go on cheating recklessly. Moreover, a prevailing mindset in China is that cheating is not shameful; it is a shame only when you get caught. ZTE assumed it knew how to cope with the US government, knew their logic of doing things. Speaking of selling technologies to Iran and North Korea, I think this might be under the instruction from the Chinese government. I’m afraid they never dreamed that this U.S. administration would take it seriously.

MS. GAO: Riley Walters is a policy analyst at the Heritage Foundation’s Asian Studies Center. He specializes in emerging technologies and cybersecurity as well as Northeast Asian macroeconomics. Here’s what he has to say.

MS. GAO: Another Chinese reaction to the DOC’s punishment of ZTE was that the Chinese magnate Ma Yun vowed to make China’s own chips. Do you think by developing these core technologies China can become independent of the international business regulations?

MR. WALTERS: Yeah. It’s certainly possible for China to either become an indigenous innovator or autonomous innovator. There, of course, are costs with this. China, just like the United States, has become very reliant on the international market and innovation ideas from outside of their own borders. And so, while China, I think, could potentially domestically create the machine and software that ZTE requires, it’s going to be costly. And doing so will – it’ll have a heavy cost and it could potentially limit innovation and future growth prospects.

MS. GAO: China is the 2nd largest economy in the world, it is investing and purchasing a large number of Western companies. Do you think by expanding economic power, the Chinese Communist regime will eventually be able to replace the Western countries and become the standard setter for information technologies?

MR. WALTERS: Yeah. I think China will have its limitations as it seeks to become the leader in a lot of these technologies. There’s talk about how China wants to become the standard setter and sort of the global powerhouse for a lot of emerging technologies. And I think what a lot of people, even within the United States, don’t understand is there’s still competition in standardized setting with all technologies. And almost in every sector. While China might be able to indigenously, as we were talking about, indigenously, domestically develop its own 5G, that doesn’t necessarily mean it will be implemented abroad. Some countries might be willing to adapt these standards, such as other emerging economies, but when we look toward the developing world, when we look toward Europe, especially Western Europe, United States, Canada, North America, it’s not necessarily something that’s for sure. So there will be competition, I think. And I think the Chinese government and Chinese companies will continue to see this going forward.

NARRATION: Coming up: Why is intellectual property theft a security issue, and what should America be worried about?

Part 2: Should America Worry?

MS. GAO: ZTE isn’t the only Chinese company the U.S. has been worried about. Huawei, China’s number one telecommunications company, has been involved in multiple controversies. Many involve stealing intellectual property rights from U.S. tech companies.

NARRATION: Both companies face criticism over potential ties to the Chinese Communist regime. Recently uncovered internal company documentation suggests that Huawei and ZTE receive support, financial subsidies, and large contributions for R&D research from the Chinese government. In an interview with Voice of America, Chinese economist Xia Yeliang said that a private company like Huawei actually has ties to the Chinese military as well. Huawei’s founder, Ren Zhengfei, even directed the People’s Liberation Army Information Engineering Academy. They provide technical products to the Chinese military.

NARRATION: On April 11, former national counterintelligence executive Michelle Van Cleave testified at a House committee about intellectual theft.

MICHELLE VAN CLEAVE: The United States is a spy’s paradise. Our free and open society is tailor-made for clandestine operations. As this committee is so well aware, American R&D — the engine for raw ideas and products and capabilities and wealth — is systematically targeted by foreign collectors to fuel their business and industry and military programs at our expense. China and Russia both have detailed shopping lists of targeted U.S. technologies and specific strategies for clandestine acquisition ranging from front companies to joint R&D projects to cyber theft to old-fashioned espionage.

MICHELLE VAN CLEAVE: U.S. academic institutions, with their great concentration of creative talent and cutting-edge research and open engagement with the world of ideas are an especially attractive environment for these types of activities. Let me say the numbers are, frankly, staggering. For every dollar we invest, some $510 billion annually, we lose most, if not all of that, to these kinds of illicit activities every year. Each year reports out of U.S. intelligence reports numbers are worse than the year before. Losses are growing. Numbers of foreign collectors are growing. Vulnerabilities are growing. And the erosion of U.S. security and economic strength is also growing.

MS. GAO: Among all the potential malicious players, Huawei’s name definitely stands out. It might become the next Chinese tech company the U.S. will punish. Some Chinese media say it is all about the U.S. weakening the competitive advantage of China’s telecommunications industry, but Riley Walters disagrees.

MS. GAO: The DOC’s next target might be Huawei. Some Chinese media reports that Huawei poses a threat to America’s IT industry because Huawei is the biggest telecommunications equipment company in the world. The U.S. is highly concerned with Huawei’s next wave of R&D efforts, which includes 5G, chips, and smartphones. So if the overarching strategy of America is to suppress the development of China’s high-tech industry, Huawei will be the biggest target. Do you agree with their views?

MR. WALTERS: I believe the United States’ government has more concerns with the cybersecurity concerns that Huawei and ZTE present. This was highlighted in a 2012 Intel. House report that noted both ZTE and Huawei, not only the nature of their company, the investments in telecommunications and infrastructure and that sort, but also the potential connections with the Chinese government could pose some potential risks. There are concerns, I think, that the United States might potentially lose its competitive edge over emerging technologies, 5G, the hardware and software development of these companies, but I don’t really think that’s so much for concern, especially from the United States government’s side. There’s very little that they can do. It’s more focused on the cybersecurity concerns, I think.

MS. GAO: I also talked to Wen Zhao about China’s long-standing policy of intellectual property theft. Let’s take a listen.

MS. GAO: One of the main reasons behind China’s intellectual property theft is that China is weak in innovation. Why is this so?

MR. ZHAO: It’s certainly a complicated and systematic issue. Each industry or field has its own causes for weak innovation. Globally, Chinese technology ranks fourth. The U.S. is at level 1, at the core place. The developed countries, say, the UK, France, Germany, and Japan are at level 2. And the average-developed countries — Canada, Australia, Norway, Israel and South Korea — are at level 3. And the lowest level includes developing countries like mainland China, Mexico, India. So it’s awkward for China’s economic scale. China also lacks creativity in humanities. I think both sides should be viewed. Creativity, either in science and technology or in humanities, is something revolutionary by nature — a constructive denial of our forefathers. But in China’s present education system, revolutionary or critical thinking is suppressed; people are taught to be submissive to survive. When all the minds are treated like that, a nation’s creativity will be choked. A historical fact is that whichever nation is in an era of great inventions also produces great philosophers and poets. However, today’s China is not innovation friendly; it encourages obedience rather than challenging; and the Chinese Communist Party controls, ideologically, its education and all other cultural fields.

MS. GAO: Can China become a tech superpower by stealing other companies’ technology?

MR. ZHAO: Well, to answer this question, we must understand that, actually, innovation does not mean merely acquiring a patent. It is a process of a great deal of trial and error. Such a setback-experiencing process is very valuable. It sharpens your ideas or insights in a certain field. It helps you build up experience and gives you insights. It’s a blunder to assume that stealing away design drawings or secret data means mastering knowledge. That sounds like a kung fu story in which a thief daydreams he’s the No. 1 martial arts master in the world if he seizes a rare, secret martial arts manuscript. But that’s not possible. Innovation is a process, and means quality, which will become a habit and an ethical value among scientists in the end. It has to be nurtured bit by bit in daily work. Another point: Innovation usually starts from a tiny, local beginning. It requires solid accumulation before a great breakthrough comes. However, if you exchange access to the market for technology and import complete sets of technology and capacity, as in China’s auto industry, you cannot assimilate them without local innovation as a support. You can never create a complete technical system at the very beginning. Then you’ll have to depend on forced technical transfer or theft again. When others’ technology is upgraded, you’ll have to keep stealing because you don’t have any innovation abilities. So, the conflict worsens. This is true with many of China’s fields. Under these circumstances, China will never be a top country in technology.

NARRATION: Coming up: In today’s trade-based foreign policy, what’s the future for U.S.-China relations?

Part 3: It Is Beyond Trade War

MS. GAO: The U.S.-China trade war has been in the news a lot recently. But some argue that the trade war started years ago. China’s unfair trade practices, which are illegal under free-trade rules, have put the U.S. at an unfair disadvantage. How did it get to this point? And can two fundamentally different ideologies coexist? Let’s take a look.

NARRATION: U.S.-China relations have fundamentally changed since Nixon reached out to China in the ‘70s. At the time, the U.S. wanted to use China to counter the Soviet Union’s threat. The Carter administration based its foreign policy on human rights. Reagan based his on anti-communism. Despite differences, their ideologies were still based on Democratic principles.

NARRATION: This changed during the Clinton administration. Clinton helped China join the World Trade Organization. Value-based foreign policy was exchanged for a trade-based foreign policy. Many hoped this would help China move towards democracy. It could also help the U.S. economically by selling U.S.-made goods to China.

NARRATION: A couple decades later, it’s U.S. jobs, not goods, that were shipped to China. Now China’s the 2nd largest economy in the world. Yet it’s still an authoritarian regime. Meanwhile, its economic power enables it to influence the U.S. in various ways. Its investment and purchase of American businesses and infiltration in media and government has caused America to compromise its fundamental values.

MS. GAO: The West and China have contrasting views on many things. Intellectual property rights is one of them. In the West, the birth of property rights accompanied the birth of capitalism. In 1787, the U.S. Constitution was drafted. Three years later the patent law was born. During the French revolution, the birth of patent law even took precedence over the Constitution. Protecting intellectual property rights is a necessary condition for the growth of capitalism. However, things are different in China. The first official Chinese patent law was made in 1984, 35 years after the CCP took power. But timing is not the point here. The point is how the two ideological systems look at people’s rights and freedom differently. That has been the source of many conflicts between the U.S. and China. I am afraid it will continue to be that way. Thanks for watching Zooming In. I am Simone Gao and see you next week.

 
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