Congressional negotiators reconciling the annual defense authorization act decided not to reinstate penalties on Chinese cellphone company ZTE, despite criticism that the company is a potential conduit for cyber espionage.

It is a victory for the Trump administration, who urged Congress not to impose harsh penalties on ZTE that would have crippled the company amid trade negotiations with Beijing. But the decision could also endanger national security, according to intelligence officials and lawmakers.

A 2012 House intelligence report warned that Chinese telecommunications products like ZTE should be viewed with suspicion.

“Huawei and ZTE cannot be trusted to be free of foreign-state influence and thus pose a security threat to the United States and to our systems,” the report said.

“No nation steals American intellectual property or spies on America more than China, and Chinese telecommunication companies are among the most powerful tools they use to do this,” said Sen. Marco Rubio, R-Fla., in a statement after the recent defense act was released July 23. “I am so shocked that some of my colleagues decided to let ZTE continue to do business.”

The decision to spare ZTE is a boon for the Chinese government, which has embarked on a strategy of homegrown technological development. At the center of Chinese leader Xi Jinping’s global ambitious is a desire to build a domestic digital empire that serves as a cybersecurity safeguard.

“Without cybersecurity there is no national security,” read a 2017 report by the Cyberspace Administration of China, according to a translation.

The saga between ZTE and American lawmakers has further convinced Chinese officials that homegrown technological innovation is a centerpiece of the country’s cybersecurity strategy, according to the DigiChina project.

“Indigenous innovation” can help to “move forward the construction of China as a cyber superpower,” Xi said during an April 20 speech in Beijing, according to a translation.

The push for homegrown technological innovation through companies like ZTE may be a reaction to what China perceived as America’s cyber dominance, according to experts.

It was in a bland room at the Mira Hotel in Hong Kong where, in 2013, former National Security Agency contractor Edward Snowden exposed some of America’s closely guarded secrets and cyber capabilities. Snowden revealed that America was mapping the internet, autonomously responding to cyberattacks, and had broken into the encryption of many cellphones worldwide.

"From China's perspective, the U.S. was the first mover in the cyber domain with the establishment of Cyber Command, and then the Snowden leaks allegedly revealed the extent of American network penetration in China,” said Elsa Kania, an adjunct fellow at the Center for New American Security. Chinese leaders “were really reacting to concerns that China was a very big country in cyberspace and a very vulnerable one.”

U.S. businesses and government officials have for years accused the Chinese of stealing American intellectual property, including designs for the F-35 fighter jet. But Congress’ decision not to impose the harsh sanctions on ZTE comes as China is slowly moving away from its corporate espionage activity, according to Kania. "China is achieving a stage of its development where it wants to move beyond IP theft to pursue truly original innovation.”

Already, ZTE has benefited from U.S. lawmakers' decision. The company’s stock has increased more than 26 percent since June 11, after it became clear that Congress would not cripple the company. This provides the Chinese company a new reserve of cash to boost investments.

About Justin Lynch

Justin Lynch is the Associate Editor at Fifth Domain. He has written for the New Yorker, the Associated Press, Foreign Policy, the Atlantic, and others. Follow him on Twitter @just1nlynch.

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