In the fast-moving poker game that is the U.S.-China trade relationship, Donald Trump has dealt Xi Jinping a wildcard. Sunday morning he tweeted that he was looking for “a way to get” China’s ZTE “back into business, fast.”
Zhongxing Telecommunications Equipment Corporation–better known as ZTE–is one of China’s leading technology exporters, and its exclusion from the U.S. market has brought it close to bankruptcy.
It was Trump’s Commerce Secretary Wilbur Ross who put ZTE “out of business” in the first place. In March, Ross’s Commerce Department fined ZTE $1.19 billion for violating U.S. sanctions on North Korea and Iran. Ross followed up in April with an order barring U.S. companies from doing business with ZTE.
The New York Times called Trump’s Sunday ZTE tweet an “about-face on trade,” but the reality is more subtle. Trump hasn’t suddenly switched sides with a new plan to protect jobs in China. He’s playing for bigger stakes.
It’s all about jobs–Chinese jobs
Until being hit with U.S. sanctions, Shenzhen-based ZTE employed more than 80,000 people. Priced out of the Chinese market by fierce domestic competition, the U.S. is (or was) the major market for its smartphones. The company also reportedly relies on U.S. suppliers for more than 80% of its technology and components.
If ZTE goes under, tens of thousands of Chinese people will be out of work. But ZTE is not the only card in play. Alongside ZTE, Huawei is also under regulatory pressure from the Federal Communications Commission, and AT&T has dropped plans to sell its phones. Chinese smartphone maker Xiaomi may face similar pressures.
“Stickiness” is the name of the game
China relies heavily on exports to the U.S. to keep its economy afloat–and its people employed. Chinese exports to the U.S. topped $500 billion last year. That’s more than 4% of China’s entire economic output. But the role of the U.S. in the Chinese economy runs much deeper than trade.
When it comes to the tech industry, California’s Silicon Valley and China’s Shenzhen are tied together in a single production ecosystem: call it Calichina. China may be the world’s low-cost producer of smartphones, but Chinese companies can’t operate without American components, technology and operating systems.
China can always find a market for its products in Europe and the rest of the world, but it can’t make those products in the first place without cooperation from the United States. And although the U.S. relies equally on China, it doesn’t have to.
The assembly work that is now done in China could be shifted to Mexico or Vietnam in the unlikely scenario of a Chinese embargo. China’s reliance on the U.S. is much “stickier” than American reliance on China.
Just one card
In this high-stakes game of trade poker, Donald Trump doesn’t particularly want to break ZTE–but Xi Jinping very much wants to preserve it. And not just ZTE. The tit-for-tat trade war talk between the U.S. and China has hardly had any impact on U.S. companies, because they can live without China. China’s top tech firms can’t live without the United States.
That makes ZTE just one card in a much larger game that includes companies like Huawei, Xiaomi, Alibaba (recently barred from buying MoneyGram), game programmer NetEase, and many others. They all need access to both U.S. markets and U.S. technology to succeed.
For decades China has been forcing American companies to joint venture with local partners as the price of doing business in China. The deal on the table has been technology transfer in exchange for access China’s 1.4 billion consumers. Trump is trying to change the terms of that deal.
It looks like he just might succeed. If he does, it won’t be at the cost of a trade war with China. Trump doesn’t want a trade war, and Xi can’t afford one. A last minute deal–or a series of last minute deals–is much more likely.
As Trump himself tweeted on Sunday, “be cool, it will all work out!”