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Illustration: Rebecca Zisser/Axios

When the U.S. announced new trade sanctions against Chinese tech giant ZTE last month, it didn't intend to strengthen China's domestic semiconductor industry. But trade fights can have unexpected consequences.

"The Trump administration probably didn't think twice about sanctioning ZTE, but it's going to have real effects," said Jim Lewis, senior vice president at the Center for Strategic and International Studies and a former head of the Commerce Department team dealing with national security issues in high tech trade with China.

The broad strokes: In mid-April, the U.S, which says ZTE has illegally traded with North Korea and Iran and covered up its actions, barred the company from access to all U.S. exports for 7 years. ZTE is dependent on American microprocessors to build its wares.

  • On Friday, the Wall Street Journal reported China would invest $47 billion to develop its own semiconductor industry to cut reliance on the west.
  • That appears to be in play whether or not ZTE is successful in this week's request for the U.S. government to suspend its penalty.

The intrigue: Skirmishes over semiconductors and those involving China's two leading hardware firms, Huawei and ZTE, always happen under a cloud of national security and cybersecurity fears.

  • The U.S. blocked the sale of semiconductor firms to Chinese owners for national security reasons.
  • ZTE and Huawei phones were recently banned from U.S. military base stores for cybersecurity concerns and the House draft of the annual National Defense Authorization Act released Monday bars military purchases of equipment from the Chinese companies.
  • The U.S. has long warned telecom firms not to use the Chinese firms' products, which the FCC moved to formally ban the use of federal funds to purchase in April.

The big picture: China represents 60.6% of the global semiconductor market, but lacks both the design and production capacity to make anywhere near enough for its own needs. U.S.-based firms like Intel and Qualcomm tend to benefit from this lack of capacity.

  • In 2014, China launched a $22 billion fund to grow indigenous semiconductor companies.
  • That was enough to raise U.S. concerns that China was putting its finger on the scale of tech markets.

Be smart: China's government isn't going to let ZTE fail.

  • Beijing will need to give ZTE gigantic low- or no-interest loans to weather the storm — something Lewis gives a roughly "100% chance" of happening.
  • Though ZTE is still deeply dependent on Qualcomm and Intel, Huawei has been preparing to distance its operations from the west for some time and has developed its own less-advanced-but-good-enough processor to use in lieu of American components. To survive, ZTE might need a hand from Huawei's tech.

Go deeper

Mike Allen, author of AM
6 hours ago - Politics & Policy

Biden adviser Cedric Richmond sees first-term progress on reparations

Illustration: "Axios on HBO"

White House senior adviser Cedric Richmond told "Axios on HBO" that it's "doable" for President Biden to make first-term progress on breaking down barriers for people of color, while Congress studies reparations for slavery.

Why it matters: Biden said on the campaign trail that he supports creation of a commission to study and develop proposals for reparations — direct payments for African-Americans.

Cyber CEO: Next war will hit regular Americans online

Any future real-world conflict between the United States and an adversary like China or Russia will have direct impacts on regular Americans because of the risk of cyber attack, Kevin Mandia, CEO of cybersecurity company FireEye, tells "Axios on HBO."

What they're saying: "The next conflict where the gloves come off in cyber, the American citizen will be dragged into it, whether they want to be or not. Period."

Cedric Richmond: We won't wait on GOP for "insufficient" stimulus

Top Biden adviser Cedric Richmond told "Axios on HBO" the White House believes it has bipartisan support for a stimulus bill outside the Beltway.

  • "If our choice is to wait and go bipartisan with an insufficient package, we are not going to do that."

The big picture: The bill will likely undergo an overhaul in the Senate after House Democrats narrowly passed a stimulus bill this weekend, reports Axios' Kadia Goba.