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Prime Minister Justin Trudeau meets Chinese President Xi Jinping at the Diaoyutai State Guesthouse in Beijing, China on Tuesday, Dec. 5, 2017SEAN KILPATRICK/The Globe and Mail

Canada was going to have some sort of a Huawei crisis in 2019, one way or another. And it was going to be explosive. The Chinese telecommunications giant was on a collision course with the federal government, and it was increasingly likely that there would be an ugly and intractable showdown with the Chinese private sector that would trigger a telling response from President Xi Jinping’s regime – a response that would strike a damaging blow to what remains of the Trudeau government’s once-hopeful China policy.

Three years after Justin Trudeau began his prime ministership with a bold bid for a new opening with China, including the negotiation of a comprehensive free-trade agreement, the Huawei crisis has revealed just how dramatically China’s government has changed. More importantly in this election year, the crisis has shown how the central idea behind the Liberals’ China policy – the ability to separate China’s authoritarian state from its more liberal private sector and other institutions, and deal with them through separate channels to the mutual benefit of both countries, without compromising liberal principles – has collapsed on itself.

Read also: Still in school: Universities vow to keep working with Huawei

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The Huawei crisis, while inevitable, has exploded earlier and even more dramatically than many insiders had expected – and it was triggered in a way that took the Liberals by surprise. On Dec. 1, Canadian officials in Vancouver arrested Meng Wanzhou, Huawei Technologies’s chief financial officer and daughter of its founder, on a request from the United States in an extradition case related to U.S. fraud charges tied to allegations that her company had traded with Iran.

This week, China escalated its punishments against Canada. A third Canadian, Ti-Anna Wang, was arrested and detained in China, along with her infant daughter (she was deported to South Korea). Two other Canadians, Michael Kovrig and Michael Spavor, remain in detention without any charges or formal legal process and reportedly have endured tough interrogation. Another Canadian, Robert Schellenberg, had his 2018 prison sentence for drug smuggling escalated to a death sentence without due process. And Chinese officials spent the week firing accusations and threats at Ottawa.

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A man walking past a Huawei logo, at a shopping mall in Shanghai, China December 6, 2018.ALY SONG/Reuters

But there was going to be a Huawei crisis anyway, of one sort or another, and it was going to severely damage the Liberals’ attempts at an economic opening with the superpower, for two reasons.

First, the Liberal cabinet appears to have started taking more seriously the idea of restricting Huawei’s access to Canadian networks before the crisis erupted. Government officials, and Canada’s information-intelligence agency, the Communications Security Establishment, had previously been skeptical of the claims made by intelligence allies, including the United States and Australia, that Huawei equipment was being used for state-directed spying against users (some members of cabinet remain skeptical). The CSE had declared in October that it saw no risk in use of Huawei equipment in wireless networks. But some more ominous Canadian intelligence findings related to the equipment, as well as a Dec. 20 revelation from the CSE that its allies had detected Chinese government spying in Canadian networks going back to 2016, as well as direct pressure on government officials, including the Prime Minister, from Canada’s intelligence allies have caused a change in attitude in Ottawa, people involved with the issue say. They were granted anonymity because they were not authorized to speak on the subject.

It is likely that at least some restrictions will be placed in coming months on the use of Huawei equipment in future mobile-data networks (using 5G technology), following the lead of several countries including Australia, New Zealand and Japan. That decision might have been announced earlier, but the Meng Wanzhou case has created a dilemma – as long as this crisis remains in play, any action by Canada to restrict use of Huawei equipment will look like a tit-for-tat escalation of the showdown, a perception federal officials are eager to avoid.

But even the possibility of restrictions is now being portrayed by Beijing as an act of retaliation. This week, China’s ambassador to Canada, Lu Shaye, warned of “repercussions” if Canada restricts the use of Huawei equipment in 5G wireless networks. In other words, any change in Canada’s attitude toward Huawei network equipment is viewed by Beijing as a direct attack on the Chinese state and people – a problem that Ottawa was going to confront in 2019, one way or another.

And that statement reveals the second, larger reason why Canada-China relations were headed for a crisis: Because Ottawa can no longer view Chinese private-sector companies, or other relations with Chinese organizations and people, as being distinct and separable from Mr Xi’s Communist Party regime.

Before, it was possible to argue that China’s government and its state-owned enterprises were one thing, and its private-sector entrepreneurs quite another. But, if a Canadian legal or policy challenge to Huawei – the largest of those supposedly independent private-sector companies – provokes the Chinese state to imprison and demand the execution of Canadian diplomats and citizens, as well as provoking angry threats directed at the Canadian state from Chinese ministers and an ambassador, then there is no easy separation of private sector and authoritarian government.

There is a very clear message from Mr. Xi in his government’s response to the arrest of Ms. Meng: If you have any dealings with Chinese companies or organizations, you are dealing directly with the Communist Party of China. That makes conventional trade relations, which depend on the existence of independent and relatively impartial organizations, almost impossible.

What has happened, in short, is that the reality of 2019 China had long since overtaken the Trudeau government’s 2015-era China policy. At some point, the Liberals’ attempts to have more open relations with China’s private sector were going to collide with a new reality where that sector, and virtually every Chinese sector, are now intimately tied up with Mr. Xi’s increasingly authoritarian regime.

In 2015, a very different sort of Canada-China relationship seemed possible, and even sensible. Fresh from a majority election victory, Prime Minister Justin Trudeau and his cabinet began sketching out a plan to reboot Canada’s relationship with China, which had soured under nearly a decade of Stephen Harper’s Conservatives. It seemed possible, in those early months, to square the Liberals’ two key foreign-policy priorities – the promotion of humanitarian ideals including the rights of women and minorities, and the expansion of trade relations and liberal economies beyond Canada’s traditional partnerships – in a single deal that reinforced both.

There was a great appetite in Canada’s big corporations, in its universities and among many of the two-million Canadians of Chinese descent for some sort of agreement. During talks with those constituencies in 2015 and 2016, Mr. Trudeau spoke repeatedly of the unprecedented opening with China launched by his father, prime minister Pierre Trudeau, in the late 1960s and early 1970s, when Mao Zedong was at the height of his power and the repressions of the Cultural Revolution were in force, years before U.S. president Richard Nixon managed something similar between Washington and Beijing.

Chrystia Freeland, the Foreign Affairs Minister, was more cautious – she would remind people that her Ukrainian family had suffered under the brutal repressions of the Soviet Union and that she was instinctively wary of closer ties with a communist regime. But the possibility that tighter engagement with the West could help guide China in a more politically tolerant direction still seemed to be a genuine possibility when Mr. Xi had been in office for less than three years.

But Justin Trudeau’s China policy was also intended to cast a stark contrast to the Harper approach to China, which had been seen as ineffective. Mr. Harper had begun his term in office as a policy idealist – he believed that democratic countries should not have close relations with communist dictatorships. (That itself was a response to the Chrétien and Martin Liberal governments, which built their relationship with China exclusively and obsessively on Team Canada business deals).

Mr. Harper acted on those beliefs repeatedly – giving Canadian citizenship to the Dalai Lama, imposing retaliatory steel tariffs on China and refusing to attend the Beijing Olympic opening ceremonies.

The reaction shocked the Conservatives. Canada’s big corporations were furious (exports to China had reached $16-billion, making China Canada’s second-largest trading partner), and made their views known repeatedly; Canada’s huge Chinese-Canadian community was offended, and universities pointed out that the 150,000 Chinese students in Canada are crucial to their operations. Mr. Harper learned that China-Canada relations are a lot more than government-to-government matters, and spent his last five years in office attempting to back away from his idealist policy and have a more business-oriented relationship with Beijing, with only limited success.

The Liberals had that lesson firmly in their minds in 2015. But, they also thought a trade opening with China would easily squared with the more idealist, liberal-values-oriented side to their policy vision – because, in late 2015 there were two assumptions that seemed safe to make:

First, that China was still capable of moving in a liberalizing direction. Although Mr. Xi had taken a more repressive line in his People’s Congress addresses and propaganda campaigns, many observers believed there were still opportunities for China to become more open. Businesspeople who worked with the regime, such as Barrick Gold Corporation chairman John Thornton, believed strongly that Mr. Xi’s harsh approach was just an opening gesture to clean up corruption in the Chinese government, and would lead to a more liberal and potentially democratic era. Those voices had a receptive ear in Ottawa.

Second, that Canada’s relationship with China was a polyphonic symphony, not a two-stringed Chinese erhu. This was the lesson Mr. Harper had learned the hard way: It’s not just a matter of two governments and some state-owned companies. It’s China’s thousands of private enterprises, which were being championed as important forces of entrepreneurship; its hundreds of cities, which had considerable autonomy and in many ways more policy power than the national government; its media, which were often critical and independent; its organizations, its universities, the hundreds of thousands of putative émigrés and their highly desirable flight capital, as well as the two-million-strong Chinese diaspora in Canada. We could ignore the government if it went sour, the thinking went, and still build ties to the other branches of China.

What changed between late 2015 and late 2018, little noticed by many Canadian observers, was that both of these things ceased to be true.

Now, after years of harsh crackdowns on political dissent, social-media criticism and local autonomy, and the imprisonment of a million Chinese Muslims in Xinjiang re-education camps, hardly anybody believes Mr. Xi will become less authoritarian – especially after the 2018 People’s Congress, when he amended the constitution to allow himself to become president-for-life.

And the notion of a polyphonic relationship with China, divided into separate silos, collapsed on itself. The Xi administration imposed its rule directly on everything. In private-sector enterprises, every company now must have a Communist Party official in its operations, overseeing and reporting everything. In the media, formerly independent voices have been silenced, and social media are monitored and censored, often on a character-by-character basis. The cities, once potential forces of independent governance, have fallen under direct Beijing control. Even Chinese citizens abroad, and the money they move, are now closely watched by Beijing – the government has placed facial-recognition cameras in ATMs to keep track of citizens who might want to take cash out of the country. Basically, every interaction with China now passes through Xi Jinping.

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Chinese President Xi Jinping, second right, and Canadian Prime Minister Justin Trudeau, second left, hold their meeting at the Diaoyutai State Guesthouse in Beijing on Aug. 31, 2016.Reuters

It seemed possible to the Liberals in 2015 that China’s better instincts might be encouraged with free-trade negotiations, or at least that they might allow Canada to work around the Communist Party and trade with Chinese people and organizations. (There was less interest in an actual trade deal. It was generally understood that this would take many years – the European Union trade deal took a decade – and that the process was more important than the result).

And in 2017, when U.S. President Donald Trump took office, trade with China took on a new importance, offering the possibility of alternative trade avenues that could reduce dependence on the United States.

But the deal itself ran aground before it had even really started. One of China’s first demands, in late 2016, was that the deal include an extradition treaty between China and Canada. Given the lack of due process in the Chinese judicial system, and its dependence on capital punishment (China executes at least 2,000 people each year), there is no chance Canada would accept such an agreement.

Then, when Canada negotiated the replacement free-trade deal with the Trump administration last year, the United States-Mexico-Canada Agreement included a clause allowing the United States to review, and potentially reject, any trade agreements with a “non-market country.” Beijing saw that as a rejection of a deal.

Nevertheless, Mr. Trudeau has said as recently as Nov. 11 that he still hopes to negotiate a trade deal with China, and Beijing officials have echoed that sentiment in recent months.

But even if the Huawei crisis is somehow brought to a swift and uneventful end, it won’t be possible to return to that more optimistic view of relations with China.

The crisis has shown Mr. Trudeau and his cabinet that everything has changed. It’s no longer possible to say that Huawei is a private company dissociated with the government – in its over-the-top punishments, the Xi regime has shown that Huawei, and by extension any other big Chinese company or organization, will be viewed as an arm of the state. Trade agreements depend on the existence of independent adjudication bodies and dispassionate dispute-resolution mechanisms – and the new status quo in China offers no hope of such institutions taking shape.

This means that Mr. Trudeau and Ms. Freeland will not be able to return to a policy of balancing their belief in the benefits of engagement with authoritarian economies against their desire to make progressive principles their driving message in foreign policy. It’s now much more binary – as we saw in their moves last year to upbraid Russia (in retaliation for the poisoning of an ex-spy in Britain) and Saudi Arabia (for its repression of reformers), both of which effectively broke off relations with those countries.

But that sort of break will never be possible with China. Russia and Saudi Arabia are comparatively unimportant to Canadian economies and politics. On the other hand, two-million Chinese Canadians, $40-billion in annual trade, 150,000 students and billions in fleeing Chinese capital pouring into our banks and real-estate markets mean that there is going to be a relationship between Canada and China, no matter how ugly – and we now know it will run through Beijing.

Perhaps the Liberals were lucky that it exploded now, rather than later this year, closer to the election – and in a crisis that might be blamed on the United States, rather than their own actions. But if this drags on for months, and China continues to punish Canada and its citizens, then it could cast a dark light on the wider Trudeau policy. The situation could end up offending both those Canadians who are offended by Ottawa’s embrace of China (whose worst fears will be confirmed) and those who wanted a closer relationship with China as an alternative to the United States (who are seeing that relationship will not recover soon).

How Mr. Trudeau and Ms. Freeland choose to escape this seemingly endless dilemma could be a bigger test than their difficult relationship with the United States – one that could cast a shadow over this year’s election.

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