The U.S. and China are moving closer toward resolving their trade dispute, with the two sides agreeing on the broad outlines of a reprieve for embattled Chinese telecom giant ZTE Corp. and Beijing easing tariffs on imported cars.
The two sides had declared a truce this weekend, accompanied by a pledge from China to buy more U.S. farm products, energy and services.
For ZTE, China’s second-largest telecom-equipment maker and the fourth-largest vendor of mobile phones in the U.S., negotiators are figuring out a plan to save it from extinction, according to people familiar with the matter in both countries.
ZTE relies on U.S. suppliers like Qualcomm Inc. for key components, and the proposed deal would lift the Trump administration ban on sales to the Chinese company, according to the people. ZTE would be forced to shake up its management and possibly pay significant fines, they said.
In remarks at the White House on Tuesday, President Donald Trump said he envisioned a fine of more than $1 billion for ZTE, potentially reaching $1.3 billion, and that he believed ZTE should install new leadership and buy more American products. He said he was concerned about any action against ZTE hurting American companies that already sold parts to it.
News last week that such a deal was in the works prompted a backlash. The ban on sales to ZTE is a penalty for its failure to comply with a settlement it had reached after evading U.S. sanctions against Iran and North Korea.
“What bothers me about ZTE is seeing a law-enforcement matter become trade policy,” Max Baucus, who was U.S. ambassador to China under the Obama administration, said in an interview before news of the tentative deal was first reported by The Wall Street Journal Tuesday.
A person close to the negotiations on the U.S. side said “the White House was meticulous in affirming that the case is a law-enforcement matter and not a bargaining chip in negotiations.” But the ZTE reprieve came as China offered to remove newly imposed tariffs on products from the U.S. Farm Belt—a bastion of support for Mr. Trump—and speed up its reviews of deals involving U.S. technology companies, actions trade and U.S.-China experts said were clearly meant to encourage a ZTE settlement.
China offered further sweeteners Tuesday, announcing that tariffs on imported autos will be cut to 15% from the current 25% starting July 1. That is expected to boost sales of vehicles made by companies like Ford Motor Co. and Tesla Inc.
That move also aids auto makers in other nations.
“The Chinese have done something that’s of course also benefiting our automotive industry,” said a senior German government official, who declined to be named. “Everything that goes in the direction of tariff reductions is better than tariff increases.”
Unresolved issues remain. Beijing has resisted U.S. demands that it slash by more than half the vast U.S.-China trade deficit. And despite official statements from both sides that threatened tariffs have been put on hold, a divide between Trump administration factions casts doubt over how long the trade truce can last.
A faction led by Treasury Secretary Steven Mnuchin and National Economic Council Director Lawrence Kudlow has been pushing for a deal centered on boosting U.S. exports to China, while one led by U.S. Trade Representative Robert Lighthizer is looking for more significant changes in how China treats foreign companies—and is more willing to resort to trade sanctions even if they disrupt the market.
In Beijing, senior officials represented by Vice Premier Liu He, President Xi Jinping’s economic envoy, are using the U.S. pressure to accelerate plans for market liberalization.
They have had the blessing of Mr. Xi, who sees solving the trade spat as his top economic priority. But a prolonged dispute could embolden interest groups with a stake in the status quo, such as the guardians of China’s vast state sector.
ZTE emerged as a key early issue, in part because it is seen as a national champion in the global battle to develop the next generation of mobile networks, dubbed 5G. When the U.S. sanctions threatened to put it out of business, Mr. Xi and others responded by calling on Chinese companies to become less reliant on foreign parts.
“The sanction just gives the hard-liners in Beijing another reason to see the U.S. as an enemy and cut off dependence on the U.S. as a supplier,” said Jacob Parker, vice president of China operations at the U.S.-China Business Council.
But amid all the tough rhetoric, Mr. Xi also reached out to Mr. Trump to relax the sanctions against ZTE. On May 13, Mr. Trump tweeted that he and President Xi were working together to give the company “a way to get back into business, fast.” In a tweet a day later, he said the ZTE issue “is also reflective of the larger trade deal we’re negotiating with China.”
U.S. lawmakers from both parties have criticized any effort to ease restrictions on the company, calling ZTE a security threat.
In an interview with CNBC Monday, Mr. Mnuchin said the administration never intended to put ZTE out of business and defended Mr. Trump’s decision to keep it alive. It is “not a surprise President Xi asked President Trump to look into ZTE,” Mr. Mnuchin said. “That’s no different than [the] president [calling] up world leaders on behalf of American companies all of the time.”
Chinese Foreign Minister Wang Yi is due in Washington this week and will continue talks on ZTE, said officials involved in his trip. Commerce Secretary Wilbur Ross, who oversees the ZTE case, is scheduled to go to Beijing next week.
The people familiar with the talks cautioned that the agreement could still fall apart. Any relaxation of the ban will need to pass U.S. national-security reviews, they said.
Write to Lingling Wei at lingling.wei@wsj.com and Bob Davis at bob.davis@wsj.com
