By Keith Norbury

The trade relationship between Canada and China is the worst it’s been in decades, according to experts who have studied the machinations of trade between the two nations. “No doubt, Canada-China relations are at a very low point,” said Jia Wang, Deputy Director of the China Institute at the University of Alberta in Edmonton. “Probably one of the lowest points since the Tiananmen incident in 1989.”

The impetus for the deteriorating relationship was the arrest in Vancouver of a senior executive with state-owned Chinese electronics giant Huawei. Meng Wanzhou, the company’s Chief Financial Officer, has been in custody since her arrest on December 1 at the behest of the United States Department of Justice. The U.S. is seeking to extradite her on charges that a Huawei subsidiary allegedly committed bank and wire fraud charges that violated sanctions against Iran. On March 1, the Canadian government announced it would hold an extradition hearing.

Following Ms. Meng’s arrest, two Canadians — businessman Michael Spavor and former diplomat Michael Kovrig — were arrested separately in China on unrelated charges. This led to allegations that the Chinese government had ordered the arrests in retaliation for Ms. Meng’s arrest, a charge Beijing has denied. However, on March 4, the two were charged with theft of Chinese state secrets.

Hugh Stephens, a distinguished fellow with the Asia Pacific Foundation of Canada, also invoked the 1989 Tiananmen Square protests as the closest point of comparison with the current diplomatic crisis. “But at that time it was not just Canada and China that were at loggerheads, but China and the world,” said Mr. Stephens, who worked in Asia for about 25 years, including a few years in Beijing and a decade in Hong Kong.

Future uncertain

It’s too early, however, to assess what impacts tensions over the Huawei allegations and the arrests of the two Canadians are having on trade between Canada and China, or other relations — much less what will happen in the future.

“Everybody of course is preparing for the best but expecting the worst,” said Mr. Stephens, who now lives in Victoria, B.C., where he runs a consulting business.

Ms. Wang, who was still a child at the time of the massacre, was born and raised in Beijing but has been a Canadian resident now for 16 years. She also said it would take time for any repercussions from the crisis to be reflected in trade numbers. “I would say maybe on the business side, we would see more impact on Chinese investment in Canada than trade, unless the Chinese government suddenly announces trading bans on particular products, say, oil seeds from Canada or something like that,” Ms. Wang said.

We did not have to wait long: In February, the government of Australia banned Huawei and ZTE Corporation from participating in the upcoming build-out of 5G telecommunications infrastructure, and it did not take long for China to respond: by late February, Australian coal shipments into China were being held up, or banned altogether, and days later government sources in Australia suggested that Australian exports to China of barley were at risk. On March 1, citing “quality concerns”, China revoked the shipping licence of Canada’s biggest canola supplier, Richardson International, Canada’s largest agribusiness and worldwide handler and merchandiser of all major Canadian-grown grains and oilseeds. China had voiced concerns over excessive levels of “dockage” in Canadian canola as early as 2017, but this dispute was temporarily resolved by mutual agreement to work on a permanent solution to be put in place by 2020. China buys virtually all of its canola (about $2.5 billion annually) from Canada. Is China’s action truly about product quality, or is it a manifestation of its growing discomfort with Canada?

Investment impacts

However, Wang noted that since 2017, there has already been a global trend toward declining Chinese investment overseas. That was due to Chinese government policies to limit overseas investment in certain sectors, such as commercial real estate and entertainment, in order to curtail capital flight from the country. “That put sort of a damper on Chinese overseas investment. So, Canada is experiencing that as well,” Ms. Wang said.

For a Chinese firm to invest overseas, it would need government approval, possible from multiple levels of government. Anecdotally, she has heard examples of Chinese companies having their requests to invest in Canada “met with less enthusiasm.” However, on the trade side, she said, “We haven’t seen clear signs that China is stopping or reducing imports from Canada yet.”

Pedro Antunes, Chief Economist with the Conference Board of Canada, said one area where the dispute will have an immediate impact is on travel. Both countries have issued advisories warning their citizens about visiting the other. “So the longer those travel advisories last, that’s going to be costly for Canada,” Mr. Antunes said. The Chinese warning, which Mr. Antunes characterized as tit for tat, appears comical on its face — Canada is dangerous? But Mr. Antunes noted that Chinese book their travel through official travel agents. Chinese are also very patriotic, he said. “And if there’s an advisory saying not to go to Canada, that will affect or could affect travel,” Mr. Antunes said.

In a similar vein, Canadian products and brands are also at risk of being snubbed by patriotic Chinese customers. One oft-cited example of a Canadian company caught the crossfire of the crisis is Canada Goose. The luxury apparel firm was set to open a flagship store in Beijing on the weekend of Ms. Meng’s arrest. But that opening was postponed for two weeks, raising eyebrows that it was in response to the arrest. However, the company said it was just due to construction, according to news reports. “There were already Chinese talking about boycotting it,” Ms. Wang said. “But it turns out the business is actually booming.”

Commercial pressure

Ms. Wang also put Canada’s travel advisory to China in perspective. Canada has issued a similar advisory for the U.K., she pointed out. Both urge travellers to “exercise a high degree of caution.” The U.K. advisory cites the threat of terrorism, while the advisory for China warns about “risk of arbitrary enforcement of local laws.”

Tens of thousands of Canadians are working, studying and doing business in China without incident, Ms. Wang pointed out. Yes, China is an authoritarian country and visitors who research sensitive issues related to certain ethnic or religious groups, such as the Uighur Muslims or Falun Gong followers, might face questioning by authorities. “But we haven’t seen a trend of somehow Canadians just getting picked up by the Chinese authorities,” Ms. Wang said.

However, Mr. Stephens noted that “the Chinese are not averse to using commercial pressure for political ends,” citing the example of the South Korean Lotte department store chain. Annoyed that South Korea was going to install a missile defence system at the behest of the U.S., China mobilized its consumers. “Lotte in effect was driven out of business in China and has exited the market,” Mr. Stephens said. (China’s state-owned Global Times had a different take, arguing Lotte’s “flawed business model” was to blame rather than political friction.)

Huawei and hockey

Despite the arrest of a top executive, Huawei appears not to have lost its enthusiasm for Canada. Throughout the imbroglio, Huawei has continued to advertise prominently on Hockey Night in Canada TV broadcasts. The company has also invested over $657 million in research and development at Canadian universities, according to a recent Toronto Star article. “The message that Huawei is on your side in hockey is very shrewd,” the Star quoted David Mulroney, Canada’s ambassador to China from 2009 to 2012. “Hockey is as close to the Canadian psyche as you can get.”

Mr. Stephens said it’s interesting to compare Huawei’s reaction to the arrest with that of the Chinese government. “Huawei has played it very correctly, very cool. Their official statements were to the effect of we’ll trust the judicial process,” Mr. Stephens said. The Chinese government, though “went ballistic,” accused Canada of stabbing Ms. Meng in the back, and then arrested two “innocent Canadians” and are effectively holding them hostage, he said.

Huawei has always maintained that it’s a private company that behaves like a local company, like many international companies do, Mr. Stephens said.

“Well, the Chinese government has basically given the lie to that,” he said. They’ve done Huawei no favours by their over-the-top reaction to this.”

Ms. Wang worries that the situation has put a bitter taste in the mouths of many Canadians, which she fears could lead to the Canadian government taking a hardline position on China.

5G concerns

Besides the specific charges against the Huawei executive, the arrest has brought to the forefront concerns about the company’s ties to the Chinese government. In addition to being Meng Wanzhou’s father, Huawei founder Ren Zhengfeir was formerly an engineer in the People’s Liberation Party, as noted in many news reports.

In addition, strong worries have emerged about the implications of the application of Chinese laws to China-based telecom providers whose systems could become the principal conduits of western telecommunications traffic. Specifically, Article 7 of China’s National Intelligence Law states that “Any organization and citizen shall, in accordance with the law, support, provide assistance, and cooperate in national intelligence work, and guard the secrecy of any national intelligence work that they are aware of [emphasis added]. The state shall protect individuals and organizations that support, cooperate with, and collaborate in national intelligence work.”

Similarly, Article 22 of the 2014 Counter-Espionage Law states that during the course of a counter-espionage investigation, ‘relevant organizations and individuals’ must ‘truthfully provide’ information and ‘must not refuse’. The implementing regulations, released in November 2017, clarified the law’s provisions: “When State Security organs carry out the tasks of counter-espionage work in accordance with the law, and citizens and organizations that are obliged to provide facilities or other assistance according to the law refuse to do so, this constitutes an intention to obstruct the state security organs from carrying out the tasks of counter-espionage work according to law.”

That has fuelled worries that Huawei’s equipment poses security risks for other countries, like Canada. Among those concerns is whether or not Canada should allow access to the next-generation high-speed 5G wireless network, which is expected to enable widespread adoption of driverless vehicles and other wonders of the so-called Internet of Things.

For example, Richard Fadden, a former Director of Canadian Security Intelligence Service, told the Star that the government should forbid the use of Huawei equipment on the nation’s 5G network. In the U.S., Republican and Democrat senators alike have called for keeping Huawei away from its 5G networks and have also been urging U.S. allies to do the same.

Mr. Stephens noted that Canada has not made a 5G decision yet. For its part, Huawei has invested $100 million in Canada, has a huge research facility in Ottawa, and bought up many of the patents of former Canadian telecommunications darling Nortel Networks, he said. “Most of their 5G research is actually conducted in Canada as well as the research that is going on in various campuses in Canada that we’ve been reading about,” Mr. Stephens said. “I don’t think they want to blow all that up over this. They want to kind of lower the temperature too. It’s the Chinese government that has raised the temperature — and the U.S. government. Canada, and to some extent Huawei, have been caught in the middle.”

Mr. Stephens said a lot of media hyperbole has surrounded Huawei. Both Canada and the U.S. have long banned the company from their government communications networks. But Canada hasn’t banned telecommunications companies from using Huawei equipment nor has New Zealand, nor the U.S., he said.

Clash of cultures

The arrest of Meng Wanzhou has underscored key differences in the political and legal cultures of China and the West. Canada has argued from the beginning that the arrest is a legal matter and that it would be improper to interfere politically. The Chinese government from the get-go has treated it as a political incident, and on March 1, China’s foreign minister questioned the independence of Canada’s judiciary by pointing to allegations that Prime Minister Justin Trudeau and his staff had attempted to intervene politically in the prosecution of Quebec engineering company SNC-Lavalin on bribery and corruption charges related to its business in Libya. Meanwhile U.S. President Donald Trump has undermined legal authorities in both Canada and the U.S. by musing aloud about a political solution to Ms. Meng’s arrest. “He’s basically playing this case as a card that could be part of this negotiations between U.S. and China on trade issues,” Ms. Wang said.

Meanwhile Canada is suffering the collateral damage as China punches Canada hard while trying to play nice with the U.S. “because there’s a larger stake for the U.S.-China trade issue,” Ms. Wang said.

Mr. Stephens was more blunt. “Let’s not kid ourselves, there’s a political motivation behind these charges that were brought as well in the U.S.,” he said.

In the background are concerns about China’s human rights record, such as its treatment of the Uighur Muslim minority in the west of the country. The Chinese government reactions to Ms. Meng’s arrest have merely served to validate the image of an evil empire in the minds of some Canadians, Ms. Wang said. “Any kind of suggestion that Canada and China have some sort of special relationship, or talking about a new golden era with the election of the Trudeau government, that’s gone,” Mr. Stephens said.

But he said Canada will continue efforts to build relationships with China, through continuing to welcome Chinese students, fostering trade, and making Canadian businesses aware of opportunities. He hopes that China, either for its own self-interest or through pressure from America, will reverse recent trends, and “will perhaps start walking the walk again in terms of opening up their economy, which they certainly have talked about a lot, but haven’t done very much about.”

Can China change?

Because of China’s huge size and the sheer size of its own internal market, “there will always be a Chinese way,” Ms. Wang said. And that way won’t always mesh with the wants and desires of western nations. One traditional Chinese way is to seek technology from a foreign company in exchange for market access, for example. “A lot of people say it’s not fair. Maybe it’s not, but in a way it’s a trade,” Ms. Wang said, and it’s trade that many companies, like Apple, have willingly made.

Even so, many misconceptions surround that. China doesn’t require that a company surrender all its intellectual property in order to form a joint venture with a Chinese firm, she said. However, any intellectual property developed in the joint venture becomes shared. “At this point, there hasn’t been any solid evidence showing that China, or Huawei or other Chinese company has used the back-door way to steal intellectual property or intelligence,” Ms. Wang said. Of course, there is a risk that could happen. But there are also risks involved the U.S. and its allies keeping their 5G networks separate from which Huawei and the Chinese develop, which will likely be half or a third of the cost of the western version.

Many companies in the developing world would be open to using a less costly Huawei 5G network to connect their rural areas quickly, she said. Further complicating matters is that elements of today’s complex technologies are made in many countries, including China. And 5G is likely to be no exception. “Canada has to decide what’s best for Canada, and not, of course, what the U.S. says or what China says,” Ms. Wang said. “China is tough to deal with,” she added. “It has very different systems, values, and way of doing things. But how can we still manage meaningful engagement with China and then benefit from that active engagement? I think that’s the big question.”