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We need to be better at balancing national security and Chinese investment

Stephanie Carvin is an assistant professor at the Norman Paterson School of International Affairs at Carleton University

Last week, the Canadian government rejected the takeover of Aecon Group Inc. – a major construction firm that contributes to the building of critical infrastructure in Canada – by China Communications Construction Co. Ltd, a state-owned infrastructure firm. This was the correct decision, albeit surely a difficult one that had to balance Canada’s need for foreign investment with security concerns over access to Canada’s critical infrastructure.

The mantra of Justin Trudeau’s government has been to encourage investment in Canada and it was no doubt aware that rejecting this takeover bid was sending a message not in line with its stated goals.

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This will hardly be the last difficult case – tough foreign-investment decisions are likely to become more frequent. A Globe and Mail investigation revealed last week that Chinese corporate giant Huawei Technologies is being aided by Canadian universities, governments and phone companies to develop its 5G mobile technology. Indeed, the scale of Chinese interest in Canadian technology research only appears to be growing.

From a national-security perspective, Chinese investment raises at least three concerns. The first relates to intellectual property and technology transfers. This is an obvious problem when the technology is sensitive and may have military or national-security applications. Already, we have seen ferocious debate over takeovers such as Norsat, a satellite company that produced sensitive military technology.

However, even with civilian technology, a second issue arises – namely, that the Chinese government could be using its close ties with its large telecommunications companies as a way to clandestinely collect strategic information and intelligence that could pass through their systems and equipment. This concern is behind recent controversies regarding firms such as Huawei and ZTE. The U.K.’s cybersecurity watchdog, the National Cyber Security Centre (NCSC), has gone so far as to blacklist ZTE as it “poses a risk to U.K. security.” There have been similar claims in the United States, with the Pentagon banning Huawei and ZTE phones from retail stores on military bases.

The third issue is more nebulous and challenging from a national-security perspective. Chinese companies are seeking the knowledge and know-how of Western technology, including Canadian companies, in order to improve upon their patents and then produce these goods at a far cheaper rate. This is hardly a secret plan – President Xi Jinping’s declared “Indigenous Innovation” and “Made in China 2025” policies are aimed at using the technology of other countries to upgrade and enhance the country’s manufacturing capabilities, bolster innovation and establish dominance of key technological sectors.

But if Chinese companies are legitimately funding research and purchasing firms and technologies on the open market, to what extent can this really be considered a national-security threat? With its relatively small population, Canada is dependent on foreign investment in order to grow its economy. Simply blocking Canada off from one-sixth of the world’s population is not feasible.

Herein lies the challenge for Canada: What should the response of the government be if Chinese companies are engaging in legitimate transactions that may cumulatively create a negative impact on the Canadian economy?

With more than 150,000 Chinese state-owned enterprises (SOEs), not all engage in behaviour that might be problematic from a national-security perspective. However, the issue with certain SOEs, as well as companies with close links to the Chinese state, is that they are not subject to the pressures of the market. With government loans, funds and, occasionally, clandestine forms of support, these companies may engage in predatory pricing to drive competitors out of business or to gain market dominance in ways that skew our economic landscape.

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Some might say the answer is for Canadian companies to become more competitive, innovative and business-savvy. But this misses the point – Canada needs to develop a strategy for dealing with companies that at best are immune to the pressures of the market and at worst cannot fail – and the impact that this may have on our economy. While the Investment Canada Act (ICA) review process decides on individual cases, it seems that a broader strategy is needed.

A starting point could be government officials, academics, business leaders and Canadians starting a conversation about the relationship between national security and the economy. What aspects of our economy does the government have a legitimate security interest in and how should it address them?

The mantra of the 1980s was that, as a capitalist society, the Canadian government should get out of the market and denationalize. Today, the challenge of foreign investment from states that can also act in an adversarial manner means that we need to rethink this relationship once more. While no one is calling for a massive renationalization in the name of security, it is also true that the government may have to take new and creative steps to protect the well-being of our economy.

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