As Vote On ZTE Sanctions Looms, Some U.S. Lawmakers Focus On A Bigger Chinese Telecom

The U.S. Senate is set to vote as early as next week on whether to reinstate crippling trade sanctions against Chinese telecommunications company ZTE. With that move in sight, a number of U.S. senators are taking aim at a much bigger Chinese target: Huawei — the world's third-largest seller of smartphones, behind Samsung and Apple.

Top U.S. security officials have warned for years that Huawei could pose a security risk to America by using its technology to spy on behalf of the Chinese government. Huawei has consistently denied that it gives intelligence to Chinese authorities, though many U.S. senators remain unconvinced.

Huawei is a massive company compared to ZTE. Huawei reported more than $90 billion in revenue in 2017 — five times the amount ZTE brought in. About one in eight smartphones sold worldwide in the first quarter of 2018 were Huawei phones, according to the market analysis firm IDC.

Huawei is also the world's biggest seller of telecommunications infrastructure equipment, which includes routers, modems and equipment to support cellphone towers. All that adds up to a company with 180,000 employees.

And Republican Sen. Tom Cotton of Arkansas wants to keep it out of the United States.

"These companies have proven themselves to be untrustworthy," Cotton said on the Senate floor Wednesday, lumping the fate of Huawei in with ZTE. "And at this point, I think the only fitting punishment would be to give them the death penalty — that is, to put them out of business in the United States."

A fellow Republican senator, Florida's Marco Rubio, agreed.

"Now is a good time to start getting rid of your #Huawei investments," Rubio tweeted Wednesday. "Because while #ZTE poses a very serious threat to the U.S. Huawei is 100 times worse."

Rubio and Cotton introduced legislation in February that would ban U.S. government agencies from purchasing equipment from either Huawei or ZTE. That measure is now included as part of the amendment to restore the strict trade sanctions against ZTE.

"It's unfortunate we continue to be mentioned alongside ZTE for their sanctions-issue just because our headquarters is based in China," Huawei spokesperson Jannie Tong wrote to NPR in an email. "For the record, Huawei complies with all applicable laws and regulations where it operates, including the applicable export control and sanction laws and regulations of UN, US and EU."

So far, there have been no official allegations that Huawei violated U.S. law, though several published reports indicate the company has been under investigation since at least 2016. The U.S. government wants to determine whether Huawei violated U.S. trade sanctions by sending American-made components to Iran and North Korea, The New York Times reported.

The Commerce Department says it uncovered clear evidence that ZTE was guilty of those violations. In March 2017, ZTE agreed to pay a $1.2 billion fine; then, in April of this year, the department announced ZTE had violated the terms of the initial agreement. The agency banned ZTE from buying U.S. components for seven years.

ZTE is heavily dependent on U.S. companies for the internal hardware in its phones, so the ban may well have been a death sentence. ZTE halted trading of its stock, and idled operations while the ban was in place.

But earlier this month, the Trump administration reached a deal to lift the penalties. ZTE said it would pay a $1 billion fine, replace its entire top management team and allow in an oversight team appointed by U.S. regulators.

Commerce Secretary Wilbur Ross claimed the deal amounted to "the largest penalty ... ever levied" by the department in charge of trade violations.

But there was swift, bipartisan opposition to the deal with ZTE. An amendment to reinstate the earlier penalties is now attached to a must-pass bill on defense spending. And, the legislation doesn't just seek to punish ZTE. It lumps in Huawei as well. Specifically, it would ban any federal agency from purchasing from either ZTE or Huawei.

Even if the provision becomes law, it would be far from a "death penalty" for the world's third-largest smartphone company. And it's unclear whether members of Congress could do anything that would cripple Huawei in the same way ZTE was.

"They're a much bigger organization, much more powerful," says analyst Neil Shah of Counterpoint Research.

Shah says Huawei also makes most of the hardware in its own phones. Even if the actions against Huawei escalated to a complete ban on doing business with U.S. companies, Huawei would likely survive.

"Huawei is less vulnerable because it is a more vertically integrated company," Shah says.

And, he adds, Huawei is better prepared because it has faced efforts to derail its U.S. ambitions for years.

Much of the trouble came from a 2012 report issued by the House Intelligence Committee. The report focused on the potential security threat posed by both ZTE and Huawei, and it alleged both companies have ties to the Chinese government that could pose national security concerns if they were allowed to expand in the U.S.

"During the investigation, the Committee received information from industry experts and current and former Huawei employees suggesting that Huawei, in particular, may be violating United States laws," the report said.

In April, the Federal Communications Commission proposed a rule that would ban anyone in the U.S. from using FCC funds to buy equipment from companies that pose a "national security threat" to the U.S. The ban would likely affect both ZTE and Huawei.

And last month, the Department of Defense halted the sale of Huawei phones on all its bases, citing security risks.

Even private companies in the U.S. have been wary of working with Huawei because of the political risks. The Wall Street Journal reported in January that a deal with AT&T to sell Huawei phones in the U.S. broke down. Verizon also backed away from a deal with Huawei, after feeling pressure from the government, Bloomberg reported.

After these setbacks, Huawei has seemed to back off some of its U.S. pursuits in recent months. The company laid off a number of employees in its Washington, D.C., communications office.

In April, Huawei's rotating chairman Eric Xu suggested to a group of analysts that the company's prospects in the U.S. are out of its hands.

"There are things we cannot change its course, and it's better not to put it on top of your mind," Xu said. "In some cases, just let it go and we'll feel at ease."

It seems clear that some U.S. senators aren't ready to "let it go" with Huawei for now.

Rubio, in particular, has kept up his rhetoric against the company on Twitter for most of this week.

But with Huawei already mostly locked out of the U.S. market, and with less dependence on U.S. suppliers, it has a lot less to lose than ZTE.

Copyright 2018 NPR. To see more, visit http://www.npr.org/.