Canada should “de-risk” from China by updating its foreign-investment screening

Combine it with ramped-up funding for intelligence and law enforcement agencies to investigate and neutralize other attempts at foreign interference.

by Nicolas Pellicer-Garcia , Simon Hogue and Benjamin C. M. Fung

Questions about how the West should re-envision its economic relations with China have been answered recently through “de-risking” – a term that suggests a nuanced, sector-by-sector approach to minimizing economic vulnerabilities while maintaining ties in other strategic areas.

That approach, it is hoped, will prove less confrontational than the “de-coupling” of Western economies previously advocated by the Trump administration.

First used by the European Commission president Ursula von der Leyen prior to a trip to Beijing in March, the concept of de-risking has since been appropriated by numerous countries, including the United States .

Von der Leyen says “diplomatic de-risking ” is central to the bloc’s approach. It allows the EU to be tough on China over issues such as Russia but leaves channels open for trade and for dialogue on concerns such as global warming.

“Diplomatic de-risking is also important because we want to keep open communication lines with China on issues where we agree,” she said.

In Canada, the discussion centres around the National Security Review of Investments Modernization Act – legislation that would amend the Investment Canada Act (ICA). The new act has been approved by the Commons but is still being considered in the Senate.

The new legislation strengthens the requirements for approving foreign investment in strategic areas in the economy in the hope it will succeed in preserving Canada’s reputation as a foreign investment-friendly country and preserving relations with China while preventing harm to national security.

Canada has seen many high-profile foreign buyouts of major brands – Tim Hortons, CCM, Eaton’s, Molson and the Hudson’s Bay Co. – as well as the controversial acquisition of real estate by foreign investors and considerable foreign interest in key industries such as mining and construction .

This willingness to sell to the highest bidder fitted post-Cold War globalization when prospects of high returns took precedence over risks of undesirable foreign influence . Yet, recent geopolitical power shifts are bringing about fundamental re-evaluations of those risk-reward perceptions, particularly when they involve China.

Friend and foe? Anticipating an aggressive China

China’s rapid ascension and “wolf warrior” diplomacy have prompted the U.S. to try to contain it by rallying allies and drumming up an us-versus-them narrative. As a close U.S. ally, Canada has been directly hit by the deterioration of Sino-American relations and forced to do a delicate balancing act, repositioning itself within this new context.

On the one hand, trade has been booming, with imports from China reaching a record $100 billion in 2022. Chinese companies ogle Canada’s vast natural resources and mining sector. Overall Chinese foreign direct investments in Canada hit close to $1 billion in 2021.

Canada values the Chinese heritage of millions of its residents and hosts hundreds of thousands of international students from China.

On the other hand, China’s recent track record of retaliatory imprisonments of the “two Michaels,” running covert police stations on Canadian soil, interfering in elections , using federally funded organizations as instruments of propaganda and the state-sanctioned hacking of the National Research Council all have severely damaged Sino-Canadian relations.

An additional plethora of ethically questionable actions by the ruling Chinese Communist Party (mass detentions of Uyghurs , bugging of the African Union headquarters in Ethiopia and chest-thumping in the South China Sea and Taiwan ) are stoking fears that no one is safe once in its crosshairs. Canada needs to do more to protect its interests.

From an economic perspective, one of the main concerns is whether China intends to weaponize its investment portfolio to take control of critical Canadian industries. These concerns materialized last year when three Chinese companies were ordered to divest their interests in Canadian lithium mining businesses – a move that antagonized Beijing.

Unease surrounding Chinese “debt trap diplomacy ” in the context of its Belt-and-Road Initiative may have contributed to the rationale behind the divestment orders despite recent evidence that this label is not entirely justified.

Biting panda, toothless ICA

Although legislation such as the current Investment Canada Act sets guidelines for determining whether to authorize certain foreign investments, based on their added value to the Canadian economy and their potential to harm national security, very few takeover bids have ever been denied .

Only one in 100 foreign-investment filings were subjected to an extended or full national-security review in the 2018-19 fiscal year, and only 21 such screenings occurred in the 2016-20 period.

Moreover, questionable investments, such as the takeover of the Vancouver-based satellite tech company Norsat by Hytera, a publicly traded, partly state-owned Chinese telecommunications company, slipped through the cracks. Thus, a lawsuit accusing Hytera of proprietary technology theft several months before the purchase did not raise any red flags.

Prime Minister Justin Trudeau cited recommendations by Canadian national security agencies in support of the decision not to upgrade the bid’s routine security screening to a detailed national-security probe – a move with which two former CSIS directors and a former Canadian ambassador to Beijing disagreed.

The decision caused some spillover of Sino-American tensions into Canada-U.S. relations. The relinquishing of a domestic satellite technology company to a foreign power known for its penchant for cyberwarfare and with a reputation for siphoning data and proprietary rights drew the ire of Norsat’s main customers in the American military-industrial complex and triggered a security probe by American lawmakers who wanted the U.S. to reconsider Norsat as a defence contractor.

Bill C-34 – Turning de-risking into law

The National Security Review of Investments Modernization Actpromises a response to these concerns. The act would give the minister of innovation, science and industry more control over the national security review process of foreign investments in which “sensitive assets, information, intellectual property or trade secrets ” are involved.

In such cases, the minister would no longer need an order from the Governor-in-Council to expand the time and conditions necessary for a national security review, guaranteeing greater reactivity to the issues that certain investments present.

Investors will also be able to include fail-safes and restrictions to their access to sensitive assets in their investment bids, which the minister can approve and include as binding clauses of the investment agreement, providing an opportunity for investors to show their good faith.

In addition, sensitive investments would be subject to additional filing requirements, with the information disclosed by potential investors offering reviewers a clearer picture of the true nature and motives behind the investments.

Having young Canadians in China is valuable as tensions rise

The legislation sets out harsher penalties in cases of non-compliance with the existing ICA conditions or failure to complete the filing requirements, further discouraging investors from taking advantage of the system or reneging on their commitments.

Finally, the legislation proposes a framework for sharing information about suspicious investors with allied countries’ intelligence communities and for selectively disclosing sensitive information to judges who may need it when reviewing investment-related national security decisions.

This pooling of intelligence resources with allies would reinforce the scrutiny surrounding investments with questionable motives, track their possible patterns and make the agents behind them more exposed to discovery.

Furthermore, controlled disclosures to the courts of sensitive information would increase the quality of judicial decision-making without jeopardizing the national interests tied to the secrecy of the information.

Toward mutual distrust?

Combined with measures such as ramping up funding for Canadian intelligence and law enforcement agencies to investigate and neutralize foreign attempts at interference, strengthening the ICA will hopefully help Canada navigate a global context of distrust.

Questions remain, however.

Would the proposed legislation help avoid another sensitive situation such as Norsat’s buyout? Will empowering political actors with extra ministerial latitude effectively promote national security?

Political resources are spent on reinforcing legal arsenals against foreign threats. Yet despite claims that they are more conciliatory than de-coupling, Beijing will receive de-risking manoeuvres with suspicion. The cycle of mutual distrust is unlikely to move to an end.