Cybersecurity & Tech Foreign Relations & International Law

SinoTech: Congress Gets Involved in Tech Trade

Wenqing Zhao, David Stanton
Wednesday, June 13, 2018, 2:11 PM

The U.S.-China trade spat may have taken a backseat to President Trump’s summit with North Korean leader Kim Jong Un and kerfuffle with American allies surrounding the G-7 meeting, but Congress has begun to assert its own role in the tech trade conflict, which could return to the headlines if the Trump admin

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The U.S.-China trade spat may have taken a backseat to President Trump’s summit with North Korean leader Kim Jong Un and kerfuffle with American allies surrounding the G-7 meeting, but Congress has begun to assert its own role in the tech trade conflict, which could return to the headlines if the Trump administration follows through on a promise to implement tariffs against $50 billion of Chinese imports in the next week.

Senate Moves to Block ZTE Deal

A bipartisan group of senators has reportedly agreed to amend the annual National Defense Authorization Act in order to block the Trump administration’s settlement with beleaguered Chinese telecom giant ZTE. The carefully calibrated amendment would prohibit the administration from modifying any sanctions penalties levied against Chinese telecommunications companies until the executive branch can verify that the company has abided by American laws and penalties for at least one full year. The Senate is likely to vote on the amended NDAA later this week; if the bill passes as expected, it will still need to be reconciled with the House version and signed by the president. The Trump administration appeared willing to concede on Tuesday, but reports on Wednesday say it is planning to fight the Senate’s proposal at a later point in the legislative process.

The Commerce Department had announced the settlement, which would relieve ZTE from the seven-year denial order issued by the department’s Bureau of Industry and Security (BIS) in late April, on June 7. Under the terms of the settlement, ZTE agreed to pay a $1 billion fine, the largest single penalty in BIS history, and would place an additional $400 million in escrow against potential future violations. ZTE would also replace its entire board of directors and all senior leadership, and would host BIS-selected overseers to “monitor on a real-time basis ZTE’s compliance with U.S. export control laws” for a ten-year period. All this would be in addition to the $892 million penalty that ZTE paid last March for violating U.S. export controls against Iran. That penalty also required ZTE to discipline executives responsible for the sanctions-busting; the Commerce Department ordered April’s denial order after determining that those involved had instead received bonuses.

The settlement, if it still goes through, would put ZTE back in business, although the firm’s long-term future remains uncertain. ZTE is the world’s fourth-largest smartphone manufacturer, but has struggled to convince foreign governments and investors that its products and processes can be trusted. Over 80 percent of ZTE’s products use American components, and the company was forced to shut down operations in early May after the Commerce Department’s denial order prevented it from sourcing parts from U.S. firms. ZTE will reportedly now need at least a month before it will be able to begin resupplying retailers. ZTE shares had also been frozen since April, and immediately lost 40 percent of their value after resuming trading on June 12. The Chinese government has long been ZTE’s patron, but last week Chinese state media took the rare step of publicly castigating ZTE as a “giant baby” which had “use[d] commercial interests to force the government’s involvement.”

Congress Demonstrates Increasing Willingness to Act in Tech Trade Conflict

The Senate’s effort to block the ZTE deal reflects growing congressional assertiveness on important tech-trade issues. In addition to blocking the ZTE deal, the current version of the NDAA includes provisions that would ban federal agencies from relying on, or contracting with parties that rely on, equipment from ZTE, fellow Chinese telecom giant Huawei, or selected Chinese radio and video surveillance companies after 2021. The NDAA also substantially incorporates the provisions of the Foreign Investment Risk Review Modernization Act of 2018, which would expand the powers of the Committee on Foreign Investment in the United States (CFIUS) by allowing the CFIUS to consider a broader range of foreign investment strategies and to exercise greater control over matters brought to its attention. The 2018 NDAA already prohibited the Department of Defense from using Huawei or ZTE equipment or services in any systems responsible for nuclear deterrence or homeland defense. And Sen. Bob Corker (R.-Tenn.) introduced a bill to limit President Trump’s authority to unilaterally initiate tariffs, although the Senate majority leadership has blocked that proposal.

Congress’s eagerness to wade in on China’s technology industry coincides with new efforts to prod the policies of American tech companies. On June 5, Facebook announced that it had been sharing data with at least four Chinese electronics companies—including Huawei, which top U.S. intelligence officials have consistently linked to the Chinese government—since at least 2010. Huawei responded on June 6 that it had never collected or stored Facebook user data, and Facebook said that it would terminate its data partnership with Huawei by June 10. Lawmakers excoriated Facebook CEO Mark Zuckerberg for failing to mention the partnerships during his congressional testimony in April, and indicated that he might be summoned back. Google’s operating-system partnership with Huawei also attracted congressional concern, as Sen. Mark Warner (D.-Va.), the vice chairman of the Senate intelligence committee, sent a letter to Alphabet, Google’s parent company, demanding more information on any data-sharing agreements between Google and Chinese firms Huawei, Xiaomi and Tencent. The Senate intelligence committee is reportedly considering summoning Zuckerberg, Google CEO Larry Page and Twitter CEO Jack Dorsey for testimony on their data agreements with Chinese tech companies.

Most Recent Trade Talks End with Little Progress

U.S. Commerce Secretary Wilbur Ross and Chinese Vice Premier Liu He held an additional round of trade talks in Beijing on June 2 and 3. The two sides reportedly discussed China’s promise, made during the previous round of negotiations in mid-May, to buy more American products and services in order to narrow the countries’ trade gap. After the June meeting, China issued a statement claiming that the two sides had made “positive and concrete progress,” but media reports indicated that little had been achieved. The two parties failed to reach a settlement, with Chinese officials reportedly refusing to increase imports unless the Trump administration canceled its tech tariffs, and promising to retaliate against any new U.S. sanctions. The White House has promised a list of those tariffs by the end of the week, and may choose to put them into immediate effect.

If the Trump administration agreed to suspend those tariffs, however, China would offer to buy nearly $70 billion of energy, agriculture, and manufacturing products from U.S. firms in the first year of the deal. While U.S. agricultural negotiators were “pleasantly surprised” by China’s $70 billion proposal, which could lift some pressure from American soybean farmers, the White House appeared unsatisfied with the offer, suggesting that it might move ahead with the $50 billion tariff package on Chinese goods if no further agreement on the $375 billion trade deficit is reached. Other American complaints, such as China’s practice of allegedly forcing U.S. companies to transfer valuable intellectual technology, remained pressing, as China has refused to budge on its technology development tactics.

In Other News

  • American officials revealed that Chinese hackers had breached the computer systems of a U.S. Navy contractor in January and February of this year, seizing more than 600 gigabytes of highly sensitive data related to undersea warfare, including secret plans for a supersonic anti-ship missile to be installed on U.S. submarines by 2020. A U.S. official said anonymously that the Navy and FBI were investigating the attack, while Sen. Jack Reed (D.-R.I.) described the hacking as “very serious.”
  • Chinese regulators are investigating three major foreign DRAM (dynamic random-access memory) chipmakers for price-fixing allegations. The three firms—Samsung, SK Hynix of South Korea and American Micron Technology—control 96 percent the DRAM chip market, where prices have doubled over the past two years as cryptocurrency mining has spurred demand. The firms have pledged cooperation with the Chinese authorities, despite concern that Beijing might leverage the investigation to force technology sharing.
  • The U.S. Department of Energy announced that its new supercomputer, produced by IBM and nicknamed ‘Summit’, will be the world’s fastest, reclaiming the title after a five-year Chinese reign. The title was traded between the United States and Japan until 2010, when China’s research laboratories first claimed the lead. Supercomputers have become emblematic of national technological prowess, but are also critical to data-intensive fields like artificial intelligence and computational biology. The Energy Department plans to use the supercomputer for “research in energy, advanced materials, and artificial intelligence.”
  • Chinese e-commerce giants Alibaba and have been investing billions in drones and robots to hasten and economize China’s courier industry. On March 30, attempted to update its logistics operations by demonstrating that its newest automated trucks are capable of handling open road driving. Other companies have quickly followed suit, and are starting to test civilian drones that could carry a tonne of cargo anywhere within a 1500-kilometer range.

Analysis & Commentary

Elsewhere on Lawfare, Duncan Hollis and Matthew Waxman argue that John Bolton’s Bush-era Proliferation Security Initiative could provide a model for the adoption of international cybersecurity norms. Jack Goldsmith and Stuart Russell link their essay on how asymmetries in the digital landscape, including Chinese cyber-enabled theft of American intellectual property, harm the United States. In this week's Cyberlaw Podcast, Stewart Baker and guests discuss Congress’s attempts to stymie the ZTE deal (at 3:55) and China’s cyberespionage operations (at 18:05); last week’s episode also touched on congressional resistance to the ZTE deal (at 20:30). Saturday’s Lawfare Podcast reviews the Trump administration’s legal basis for initiating trade action against China and other nations; last Tuesday’s discussed the CFIUS bill currently in Congress.

In the Diplomat, Charlotte Gao briefly analyzes Chinese state media’s decision to formally scold ZTE. At the Center for Strategic and International Studies, William Reinsch examines the currents of the Trump administration’s trade moves, and Jim Lewis places Facebook’s data-sharing agreements in context. Shazeda Ahmed and Bertram Lang detail the application of China’s data protection regime for ChinaFile. Elliott Zaagman writes on China’s attempts to spread its ‘cyber sovereignty’ model abroad for the Jamestown Foundation’s China Brief; New America’s DigiChina team also provides perspective on how to interpret the Chinese government’s “cyber superpower” slogan.

In the New York Times, Li Yuan suggests that ZTE’s dependence on U.S. technology may solidify the Chinese government’s determination to strengthen its own capacity. In the Financial Times, Megan Greene analyzes the likely economic effects of the expected first wave of tech tariffs, as well as the Trump Administration’s steel and aluminum tariffs. For Wired, Elise Thomas reports on developing nations' open-arms acceptance of tech products donated by the Chinese government. In the South China Morning Post, Wang Xiangwei argues that ZTE’s fate should give other Chinese firms reason to reexamine their practices in the United States.

Wenqing Zhao is a first-year student at Yale Law School and a student fellow of the Paul Tsai China Center. She was born in China and holds a bachelor's degree in Physics and Philosophy from the College of William and Mary.
David Stanton is a second-year student at Yale Law School and a student fellow of the Paul Tsai China Center. Before law school, he worked as a Peace Corps volunteer in Guizhou, China. He holds a bachelor's degree in Economics and Psychology from the University of Pennsylvania.

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