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The Trudeau government’s rejection of a Chinese takeover of Aecon Group Ltd. won’t derail free trade talks with China, but other factors – a shakeup in China’s ruling Communist Party and the trade dispute between Beijing and Washington – are weighing on the progress of the talks, federal officials say.

While Canada expects a chill in Chinese investment, officials say there are no indications that Beijing intends to give up on its pursuit of free trade deal with a Group of Seven country, despite the federal cabinet’s decision this week to block the acquisition of one of Canada’s biggest construction firms by state-owned China Communications Construction Co. Ltd. (CCCC).

“This is one specific transaction, and, over all, I’m very confident that we can work together to strengthen our economic ties,” Innovation Minister Navdeep Bains told reporters on Thursday. “China is very important to Canada’s overall economic success.”

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Read more: Aecon ambiguity: In Ottawa, there are no easy answers to the China question

Read more: Aecon emerges from failed CCCC takeover with renewed outlook

McKenna: Canada is blocking China’s takeover of Aecon for all the wrong reasons

Read more: The doomed Aecon deal: Why it fell through and why it matters

However, a senior official told The Globe and Mail that there has been no serious activity on the Canada-China free trade file since December when Prime Minister Justin Trudeau came home empty-handed from Beijing without a deal to launch formal trade talks.

The Chinese had balked at Canada’s demand to prominently include labour standards in negotiations and Mr. Trudeau rejected China’s demand to make the Australian-China trade pact the template for a deal – an agreement that Canadian officials consider to be weighted in favour of Beijing.

The last ministerial-level trade talks occurred in February when Song Tao, head of the Communist Party’s International Liaison Department, met Trade Minister François-Philippe Champagne and Daniel Jean, then-national security adviser to Mr. Trudeau, as well as other senior advisers in the Prime Minister’s Office. In his talks with Mr. Song, Canada’s Trade Minister focused on how to move ahead on free-trade negotiations.

On Friday, a senior official said the “climate for discussion remains positive,” but noted that Canadian negotiator Bruce Christie and his Chinese counterpart, Wang Shouwen, have not held informal talks for months and none are scheduled for the immediate future.

One reason is that China is in the midst of an internal party shakeup from the 19th Party Congress – the twice-per-decade meetings to set policy goals – and Mr. Wang is expected to be shifted to another post. China’s leadership has also been focused on the U.S. trade dispute while Mr. Trudeau and his top foreign-policy team are preoccupied with North American free-trade agreement negotiations.

Despite the optimism from Canadian officials, China experts say there should be every expectation the rejection of the Aecon deal will affect relations with the increasingly combative Communist Party. One possible form of retaliation is to curb the flow of Chinese tourists to Canada, as it did to South Korea in 2017, when Seoul agreed to deploy American-made anti-missile launchers.

Wenran Jiang, a senior fellow at the University of British Columbia’s Institute of Asian Research, said he believes that Canada-China trade talks are on hold because Canada is too preoccupied trying to extract the best outcome from the NAFTA renegotiation demanded by President Donald Trump, and doesn’t want deal-making with Beijing to antagonize Washington.

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Mr. Jiang, who has advised Western governments on China, predicted this rejection by Ottawa will have lingering effects.

“They will remember this,” he said of Beijing. “It will definitely make potential free-trade agreement negotiations with China more difficult.”

Mr. Jiang said the rejection of the Aecon takeover represents a shift in the Trudeau government’s approach to China, especially after it previously allowed two companies with sensitive technology – a Montreal fibre-laser firm and a Vancouver satellite technology maker – to be purchased by Chinese companies. In the second case, the purchase of Norsat, the Liberals did not even conduct a formal national-security review.

“I would say this is a change of the overall attitude and concern within the Liberal government,” he said. “It was [previously] definitely a much more open … Trudeau government, more optimistic about relations with China.”

The Aecon deal represented by far the biggest attempt by a state-owned Chinese company to invest in Canada outside of the oil sands.

Mr. Jiang said Beijing will regard its rejection as protectionism and it will discourage Chinese state-owned companies from making investments in Canada.

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“Their view on Canada will actually change and they will see Canada as blocking future takeovers by state-owned enterprises.”

Stewart Beck, the president of the Asia-Pacific Foundation, a government-supported think tank, said Chinese investment in Canada has been declining in recent years. He said while the Aecon deal rejection may affect China’s view of Canada as a destination for investment, it shouldn’t affect Beijing’s view of Canadians as trading partners.

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