The Trudeau government has approved a Chinese takeover of a Montreal high-tech firm, a deal that national-security agencies had warned Ottawa in 2015 would undermine a technological edge that Western militaries have over China.
Hong Kong-based O-Net Communications announced on Monday that Prime Minister Justin Trudeau’s cabinet had given it the green light to acquire ITF Technologies, a leader in fibre-laser technology.
Applications for such technology include directed-energy weapons.
The deal’s fate has been up in the air since the Harper government in July, 2015, acting on advice from national-security agencies, rejected the transaction and ordered that O-Net abandon the deal.
After they took power in November, 2015, the Liberals set aside the Conservative order, and conducted a second review of the O-Net transaction. On Monday, the Trudeau government said it reached a different conclusion: to allow the takeover.
The new green light amounts to a reversal of the 2015 cabinet order and signals a clear shift in Canada’s approach to Chinese investment under Mr. Trudeau, who has made deepening relations with China a key foreign-policy objective and has begun free-trade talks with Beijing.
In 2015, an assessment prepared for cabinet warned this deal would hurt national security.
“If the technology is transferred, China would be able to domestically produce advanced military laser technology to Western standards sooner than would otherwise be the case, which diminishes Canadian and allied military advantages,” a national-security report by the Department of National Defence and CSIS said then.
The Liberals say they too listened to national-security experts and conducted their own, undisclosed, assessment. That is why, the government said on Monday, it has attached conditions to the transaction that O-Net must meet.
“These conditions are … designed to limit the potential risk that could compromise national security,” said a government official, who requested anonymity because they were not authorized to speak publicly on the specifics of the transaction.
Innovation Minister Navdeep Bains, the minister responsible for scrutinizing foreign investment, was unable to divulge these conditions, the government official said, saying such disclosure itself could compromise national security.
Mr. Bains, for his part, released a statement on Monday defending the decision. “Our government has a balanced approach of openness to ideas, people and trade,” he said. “The government acted on the full record of evidence and advice provided by Canada’s security and intelligence experts.”
Conservative public-safety critic Tony Clement accused the Liberals of acting to appease China, which is on its way to surpassing the United States as the world’s biggest economy.
“This is just political cover by a government that is bending over backwards to accommodate the People’s Republic of China,” Mr. Clement said. “The government is ignoring national-security concerns that were valid two years ago and are valid now.”
National-security officials were particularly concerned in 2015 about O-Net, according to a source familiar with the earlier assessment, because they considered the Hong Kong firm to be effectively controlled by the Chinese state.
A corporate presentation prepared by O-Net in 2015 indicates more than 25 per cent of its shares are owned by a company that is a subsidiary of Chinese state-owned China Electronics Corporation.
Mr. Clement said he did not believe the conditions the Liberal government has attached to the deal would prevent the feared transfer of technology.
“They haven’t proved anything has changed that would merit reconsideration.”
Mr. Clement was once the federal minister responsible for scrutinizing foreign investment in Canada.
“I know the difficulties of enforcing conditions after the fact. You have to have a buyer who can be trusted and with whom you will be able to enforce conditions.”
National-security reviews of corporate takeovers are a source of friction between Canada and the Chinese – scrutiny that China believes has “unfairly targeted” the Asian country, according to briefing books prepared for the international trade minister.
China’s new ambassador to Canada, Lu Shaye, told The Globe and Mail last week that “if we abuse the excuse of national security – this is the manifestation of trade protectionism.”
Mr. Bains offered no rationale for reversing the decision. But the same government official speaking on a not-for-attribution basis said Ottawa felt ITF employees would have taken their knowledge elsewhere if it refused the transaction.
“The company was facing an uncertain future with no obvious buyers,” the official said. “If the company had gone under, the expertise and knowledge residing with the company’s employees would have scattered. And the government would have had no idea where that knowledge would have ended up.”
The government official added: “By keeping the company whole, there is a better chance the employees would remain with [ITF] and keep that knowledge within Canada.”
Mr. Bains rejected the notion the Liberals overturned the first cabinet order, saying the Trudeau government merely “consented to an order from the Federal Court requiring us to conduct a new review.”
In fact, Ottawa did not need to agree to a new security review. The federal government has extremely broad power under law to approve or reject foreign investments and it is extremely unlikely Ottawa would have lost the O-Net court case if it had fought the challenge instead of undertaking a second review. Foreign-investment lawyers publicly expressed surprise last November when the Liberal government consented to the new national-security assessment.
Fibre lasers are used in one category of directed-energy weapons. A report published by the research firm MarketsandMarkets in October, 2016, projected the market for such military goods would rise to $24.5-billion (U.S.) in 2021 from $6.9-billion in 2016, driven by increased demand for laser weapons from naval forces and a shift to more urban warfare from conventional warfare.
The report said the United States is the largest developer and exporter of directed-energy weapons, but that the Asia-Pacific market is forecast to grow significantly because countries including China have begun programs to develop such weapons.
U.S.-based Lockheed Martin has produced a fibre-laser weapon system it says has precision “equivalent to shooting a beach ball off the top of the Empire State Building from the San Francisco Bay Bridge.”Report Typo/Error