"It's going to be three strikes, you're out on ZTE," Navarro was quoted as saying by media. "If they do one more additional thing, they will be shut down."
ZTE originally was fined $1.3 billion in 2017 for making sales to Iran and North Korea in violation of US sanctions, Presstv Reported.
However, after it was caught violating terms of its 2017 penalty agreement, including by paying bonuses to some employees involved in the illegal activities, Commerce Secretary Wilbur Ross in April banned ZTE from doing business with American firms for seven years, effectively shutting it down.
That prompted Chinese President Xi Jinping to make a personal appeal to President Donald Trump to modify the penalty and put ZTE back in business.
After Trump tweeted his intention to do that, both Republicans and Democrats criticized the president for being weak on China and national security.
Under the new agreement announced last week, ZTE agreed to pay an additional fine of $1 billion, change its management team and to allow a compliance team, chosen by the US, to be embedded inside the company at ZTE's expense in exchange for the Commerce Department lifting the ban, according to a report by Politico.com.
"We have a bad actor in ZTE," Navarro said.
"The president did this as a personal favor to the president of China as a way of showing some goodwill for bigger efforts, such as the [nuclear summit with North Korea] in Singapore. But it will be three strikes, you're out for ZTE, and everybody understands that within this administration."