The White House and senior Chinese officials are discussing a targeted economic deal that would relax severe penalties on ZTE, a major Chinese telecom company, in exchange for unspecified demands from President Trump, two people briefed on the discussions said Sunday.
The talks are fluid, and Trump has shown a willingness to veer between extremes in how he interacts with Beijing. But Trump said Sunday on Twitter that he wanted federal regulators to take the unusual step of relaxing penalties on ZTE, even though the Chinese company has been accused of illicitly shipping goods to North Korea and Iran.
What Trump didn't reveal publicly is how much the company has become a bargaining chip as the White House tries to extract trade-related concessions from China while pushing for cooperation on sanctions against Iran and North Korea, the people said.
Trump pledged Sunday to help ZTE return to business, days after the company said it would "cease major operating activities" because of the U.S. government's recent trade restrictions. Those restrictions bar U.S. firms for seven years from exporting crucial microchips and other parts to ZTE.
"President Xi of China, and I, are working together to give massive Chinese phone company, ZTE, a way to get back into business, fast," Trump tweeted. "Too many jobs in China lost. Commerce Department has been instructed to get it done!"
The comment marked a sharp shift in tone for a president who has long accused China of stealing U.S. jobs. The Treasury and Commerce departments have been strongly aligned against ZTE as recently as several days ago in one of the toughest actions to date against a Chinese company.
With Trump's tweet, some officials familiar with the ZTE issue believe a compromise is possible. "A mini-deal is in sight," said a person familiar with the matter. "China gets relief for ZTE, and in exchange agrees to return to the status quo for U.S. agriculture," easing tariffs and implementing other non-tariff remedies.
But the talks have not been amicable. Chinese President Xi Jinping has been irate about the sanctions on ZTE, and his top economic advisor, Liu He, has told U.S. negotiators that there is no chance of a deal without the United States removing the seven-year ban on ZTE, said the person, who spoke on condition of anonymity to discuss a sensitive matter.
In a statement, White House spokeswoman Lindsay Walters said, "The President's tweet underscores the importance of a free, fair, balanced, and mutually beneficial economic, trade and investment relationship between the United States and China. The administration is in contact with China on this issue, among others in the bilateral relationship. President Trump expects [Commerce] Secretary [Wilbur] Ross to exercise his independent judgment, consistent with applicable laws and regulations, to resolve the regulatory action involving ZTE based on its facts."
ZTE did not respond to requests for comment.
Trump's tweet on Sunday comes just before U.S. officials expect to meet with Liu in Washington this week or next to discuss the strained trade ties.
A high-level Chinese delegation was in Washington on Friday and raised the issue of whether the Trump administration could relax its stance on ZTE. The law firm Hogan Lovells, which has represented ZTE, has also been asking people close to the administration for ways to alter the U.S. position, according to a veteran lobbyist who spoke on condition of anonymity due to the private nature of the discussions.
Nonetheless, the president's shift on Sunday caught many advisors flat-footed because there had not been a broad agreement to change the administration's position.
"This act appears to pull the rug out from under those in the administration trying to pressure China to restrain its industrial policies and better protect intellectual property," said Scott Kennedy, an expert on business and China at the Center for Strategic and International Studies.
"China has been making a variety of arguments against the ZTE penalties, including referring to the U.S. action as ''commercial terrorism,' which is ironic given who ZTE was doing business with," Kennedy added. "They also have played the sympathy card by referring to the many ZTE employees who will potentially lose their jobs."
It's highly unusual for a president to personally intervene in a regulatory matter, which could undercut the leverage of Treasury and Commerce officials seeking to enforce sanctions and trade rules. A former senior Obama administration official said Trump's tweet set "a horrible precedent" and violates the basic principle that the White House avoid involvement in law enforcement matters.
"Now we've opened up every law enforcement action that the United States takes, where other countries will think 'Aha, I can impose this economic pain or this tariff or this market access restriction, and I can use this as a chit to trade off against more favorable treatment with the law enforcement case," said the former official, who spoke on condition of anonymity because he was not authorized to speak on the matter by his current employer.
In addition, ZTE's business in the United States has long raised concerns among national security officials. Shortly after Trump's first tweet on ZTE, Rep. Adam Schiff (D-Burbank) responded on Twitter: "Our intelligence agencies have warned that ZTE technology and phones pose a major cyber security threat. You should care more about our national security than Chinese jobs."
The former official added that any potential harm to national security arising from Trump's directive to the Commerce Department would depend on what steps the department takes. "They could come up with some clever way to allow U.S. companies to continue shipping while still having confidence that ZTE is not transferring U.S.-origin items to Iran and North Korea," he said. "The principle is maximum leverage over ZTE with minimum pain to U.S. companies."
The U.S. government initially penalized ZTE in 2017, requiring it to pay $1.19 billion to settle charges that it violated U.S. sanctions in selling equipment to Iran and North Korea. As part of the settlement, ZTE also was required to punish employees involved in the matter and tighten its internal monitoring.
But U.S. officials said this year that ZTE didn't discipline all the employees involved in the violations. "This egregious behavior cannot be ignored," Ross said last month, as the U.S. announced its punishment to ban U.S. firms from supplying ZTE. The company, which is the fourth-largest smartphone maker behind Apple, Samsung and LG, relies on microchips, glass and other parts from U.S. firms such as Qualcomm, Intel and Corning. ZTE generally makes inexpensive smartphones, which have grown in popularity in recent years.
In addition, the Defense Department in April ordered military exchanges to cease selling ZTE phones on U.S. bases. And the Federal Communications Commission recently moved toward prohibiting U.S. internet providers that receive federal funds from spending them on equipment made by companies such as Huawei, another major Chinese telecom player.
"It was clear to me that there was a range of options between a hand slap and 'I destroy you as a company' and Secretary Ross decided to go with 'I destroy you as a company,'" said Chris Johnson, a former CIA analyst and a senior advisor at the Center for Strategic and International Studies.
Trump's international economic policies have been marked by ultimatums and threats that are frequently followed by exemptions and reversals. For example, he has said that he would impose tariffs on steel and aluminum imports, but he has temporarily exempted Canada, Mexico, the European Union and several other countries while leaving China and Japan searching for answers.
"This whiplash-like approach to the Commerce Department's exercise of such far-reaching authority is unusual and unwise, particularly if it wasn't the product of careful interagency discussion and analysis weighing all the pros and cons," said David Laufman, a former Justice Department official responsible for the criminal enforcement of U.S. export control and sanctions laws.
The United States buys more than $500 billion in goods from China each year, but Trump has proposed to force China to buy an additional $200 billion in goods from the U.S.
Several weeks ago, as tensions between the White House and Beijing escalated, both sides promised to impose increasingly severe trade restrictions on the other, spooking financial markets amid fears of a trade war.
Chinese leaders have tried to resist Trump's demands, but recently have shown a willingness to negotiate. The economies are inextricably linked, as China relies on U.S. consumers to buy many of its products, and the United States relies on Chinese producers for a range of goods.
Trump has repeatedly cited a "friendship" with Xi, though they've met only a few times, and he has said that this relationship will endure no matter what happens with the trade talks.