Australia feels chill as China and US trade blows over microchips

Beijing: The US and China are keeping Australian diplomats in Beijing informed in the face of a looming trade war that has already disrupted Telstra's global supply chain of low-cost ZTE phones.

The US Commerce department last month stopped the supply of microchips to the Chinese manufacturer, which was accused of violating a settlement with the US government over illegal shipments to Iran and North Korea. The ban stopped ZTE's production of smart phones, including for Telstra, because it had no alternative supply of chips.

The ZTE Corp stand at the Mobile World Congress in Spain in 2017.
Photo: Bloomberg

But in a dramatic overnight intervention, President Donald Trump reversed that decision, pledging in a tweet to find the Chinese smartphone company "a way to get back into business, fast", because, "too many jobs in China lost [sic]".

The about-face was welcomed in China on Monday, with a foreign ministry spokesman saying: “We highly commend the US positive remarks on the ZTE issue and are communicating with the US side on the details”.

However, the episode hardened resolve in Beijing that it must become self-sufficient in high technology products, including the crucial semiconductors.

This represents an own-goal for Trump's trade hawks, who had demanded during during trade negotiations in Beijing on May 3 and 4 that China end support for technology industries – part of its Made in China 2025 plan.

"Although the ZTE incident has undergone a major turn, the shock it brings to the Chinese people should still be far-reaching," said commentary published on the People's Daily WeChat account.

"Chinese leaders have said: The core technology is the country's most important device. No matter how beautiful a house built on someone else's wall, it might not stand winds and storms."

The Global Times newspaper wrote: "The [ZTE] 'death sentence' has shaken Chinese society so much that it has been forced to make the painful realisation that China must develop its semiconductor industry."

In the US, Trump's intervention was viewed with alarm, and a sign he may strike a deal with China to reduce the trade imbalance without solving US business complaints about intellectual property theft.

Chinese vice premier Liu He will arrive in Washington on Tuesday for more trade talks.

Lowy Institute senior fellow Richard McGregor said the ZTE decision was "so Trumpian it is almost a parody of Trump, especially the bit about saving jobs in China".

US President Donald Trump - sending conflicting signals on ZTE.
Photo: AP

McGregor said it was "unprecedented for a president, without consultation, to unwind a decision to sanction a foreign company arrived at by an independent agency after a lengthy and forensic investigation".

He said whether or not the commerce department penalties were "overly harsh", ZTE had not disputed the facts of the case – it had broken sanctions on Iran and North Korea and misled the US government.

The ZTE case had been raised by Chinese negotiators during the Beijing trade talks, although it was, strictly speaking, unrelated to the $US150 billion ($198 billion) in punitive tariffs threatened by Trump.

Australian diplomats were briefed by the US embassy on May 4 about the trade talks, and have also been briefed by the Chinese government.

It is likely that Chinese president Xi Jinping also raised concerns about ZTE in his May 8 phone call with Trump in which the pair also discussed North Korea.

McGregor questioned the timing of the Trump tweet if the move was designed to be "a bargaining chip in the greater game of denuclearising the Korean peninsula".

A day after the Trump phone call with Xi, ZTE announced it would cease "major operating activities", and Telstra said on Thursday it would stop selling ZTE smartphones because the US denial order prevented the Chinese company from manufacturing Telstra-branded phones.

The ban has served as a taste of the global disruption likely to be caused if punitive tariff packages threatened by the US and China come into effect next month.

ZTE told Reuters the US ban would mean US technology companies, including Intel, Qualcomm and Broadcom, would lose sales worth $US2.3 billion.

Imports of integrated circuits worth $US260 billion made up 14 per cent of China's total imports last year.

Chinese experts have debated why China did not have a mature microchip industry that could step into the breach.

The Chinese Academy of Sciences's Ni Guangan told China Quality Daily: "In the supercomputer field our chips are not worse than others; the chips for desktop products are still worse than those in developed countries, with about three to five years' gap.

"Some chips do have a big gap with foreign countries. We don't have many chips used in the telecommunications field. It's because in the past we didn't attach importance to it."