The Big Read

How Canada became the battleground for America’s tech Cold War with China

A monitor displays the logo for "Huawei" behind Secretary of State Mike Pompeo as he speaks during a news conference at the State Department in Washington, Wednesday, July 15, 2020. AP Photo/Andrew Harnik, Pool
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The conflict between the world’s two superpowers was on full display this week in a British Columbia courthouse. Lawyers for Meng Wanzhou, Huawei’s CFO and daughter of the Chinese telecom giant’s founder, urged Associate Chief Justice Heather Holmes to release 37 key documents they believed will show that the RCMP violated Meng’s rights when they arrested her in Vancouver’s airport in December 2018 on fraud charges at the request of the American government.

Talking Point

Tensions are mounting between the U.S. and China over technological dominance, and Canada is far from a neutral spectator. It faces a long-delayed decision over whether to ban Chinese telecom giant Huawei from its 5G networks, which effectively means choosing a side between the U.S. and China—Ottawa’s two most important trading partners, from which a break either way could land a devastating blow to Canada’s economy and position on the global stage.

Meng’s extradition hearing is at the centre of a geopolitical quandary. In the nearly two years she’s been under house arrest in Vancouver, tensions between the U.S. and China have ratcheted up to a near snapping point. U.S. President Donald Trump’s May 2019 executive order effectively banning Shenzhen-based telecommunications giant Huawei, and Washington’s subsequent pressure on its allies to do the same, kicked off what academics and policymakers have described as a new Cold War over technology. The U.S. has applied new tariffs to US$550 billion worth of Chinese goods; China responded with tariffs on US$185 billion worth of American products. More recently, Trump’s ire has turned to Chinese firms TikTok and WeChat, ordering bans on the wildly popular social media apps and warning others could be next in his pursuit of a “clean” internet free of Chinese influence. 

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Canada is far from a neutral spectator. On top of being the battleground for Meng’s hearing, Ottawa has long delayed a decision on whether to ban Huawei’s technology from its 5G networks, postponing action while the likes of the U.K. and Australia have followed Washington in barring the company. With the escalation of the Trump administration’s rhetoric against Huawei, the decision will effectively mean Ottawa choosing a side between the U.S. and China—the country’s two most important trading partners, from which a break either way could land a devastating blow to Canada’s economy and position on the global stage. The country has already faced retribution for appearing to side with the U.S. Though China has denied any connection, its detention of Canadians Michael Kovrig and Michael Spavor on espionage charges and limits on the import of Canadian canola are widely viewed as retaliation for Meng’s arrest. 

“It’s a big decision and a hard one, around Huawei, but it’s about something much bigger; it’s about how we position ourselves globally,” said Paul Evans, a University of British Columbia professor who spent the past year in China and the U.S. studying techno-nationalism as a driving force in the conflict between the countries. “Do we want a global innovation system of which China is a part? Or do we want to join the United States in a technological Cold War against China?” 

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Until recently, China was widely viewed in the West as a country not equipped for innovation. In an article titled “Why China Can’t Innovate” published in the March 2014 issue of the Harvard Business Review, academics Regina Abrami, William Kirby and F. Warren McFarlan describe the country as “a land of rule-bound rote learners—a place where R&D is diligently pursued but breakthroughs are rare.” The problem, they argued, stemmed in part from the clash between China’s heavy-handed communist rule and the free-thinking creativity at the heart of invention. The government’s authoritarian control over all aspects of life and business was seen as a barrier to China’s goal of becoming “an innovation-oriented society” by 2020 and a leader in science and technology by 2050. “There was almost a smugness that China could be a taker, a stealer, a modifier of technology, but not an innovator,” said Evans. 

China is instead outpacing its own timeline to lead in the space. “What allows China to innovate is exactly what five years ago Americans were saying would hold China back: that they were run by a communist party, that they are doing too much state involvement in these sectors,” said Evans. 

According to Evans, Huawei is the clearest example of how state intervention can boost innovation, and that’s why it scares the United States. The company proved itself on the global stage in 2009 after Norway tasked it with replacing its mobile phone network—originally built by Sweden’s Ericsson on Finland’s Nokia—and finished the job under budget and ahead of schedule. In the decade since, Huawei has leveraged billions of dollars in government funding to become the world’s biggest telecom-equipment firm. The company, which employs some 180,000 people in more than 170 countries, saw its revenue jump more than 19 per cent in 2019 to 858.8 billion yuan ($164 billion). In the second quarter of 2020, it overtook Samsung as the world’s biggest smartphone vendor. During this time, the company has positioned itself as a leader in 5G, the next-generation wireless technology that promises download speeds of up to 20 per cent faster than what’s currently available, per industry estimates, allowing for a more connected world. 

Huawei’s advantage with 5G is that its infrastructure and equipment is cheap relative to its rivals, thanks in part to subsidies from Beijing. But with the new technology more vulnerable to malicious attacks than legacy wireless networks, the company’s state ties have inspired legitimate wariness around the security implications of letting it into global 5G networks. “I fully recognize the evidence behind the endless list of hacking efforts by Chinese government parties—there are indeed national security threats from China,” said Anupam Chander, a Georgetown University law professor focused on tech regulations. 

A 2017 report estimated that the U.S. loses between US$225 billion and US$600 billion a year to intellectual property theft. In February, U.S. prosecutors charged Huawei with conspiring to steal intellectual property from six unnamed American companies. Critics worry the telecom could take advantage of its close research ties with Canada. A 2018 Globe and Mail investigation found that Huawei spent about a quarter of its $600-million R&D budget for 5G in Canada, leaving the firm to cash in on Canadian research while potentially advancing technology that will benefit the Chinese state. And while Huawei denies it, some cyber-security experts still believe the firm’s rise is tied to a 2012 hacking incident in which Chinese spies stole IP from rival Nortel, which folded soon thereafter.

Huawei’s threat to America’s national security is the official reason the Trump administration has banned the company from its 5G networks and issued sanctions limiting the sale of U.S.-made chips to the firm, restrictions one analyst called a “death sentence” for Huawei. It’s also the reason Trump has given in pressuring Canada and others to follow suit. The choice, however, leaves Canada in a no-win position, said Stewart Beck, president and CEO of the Asia Pacific Foundation of Canada. “It makes it difficult for us to make any sort of commitment on 5G that the U.S. is looking for and it makes it difficult for us to do anything with China. We’re stuck in neutral right now and the question is, ‘How do we get out?’” he said. “I think that’s the biggest strategic issue facing people in Ottawa right now.” 

The conflict compromises the productive relationship Canada has built with China over the past 20 years. The country is Canada’s largest trading partner after the U.S. According to Statistics Canada, it traded $75.43 billion worth of goods with it in 2018, up from $48 billion in trade in 2007. China has since walked back some of that progress, though, with Canadian exports to China down more than 15 per cent in 2019 year over year, and China’s investments in Canada dropping from $3.6 billion in the first three quarters of 2018 to $351 million over the same period last year. “It’s too bad because China could have been an alternative to the United States for Canada during the chill in U.S.-China relations, but that’s turned out to be unavailable,” said Chander. 

Beck said Canadian firms should now explore ways to diversify their supply chains beyond China in anticipation of more conflict with the country. “We have to focus on building new relationships in [Asia],” he said. “China has been so all encompassing and has provided such a good market for Canadian companies, but they need to start thinking about diversifying away from that to protect their opportunities.” 

While a ban on China’s tech darlings could trigger retaliation from Beijing, working with Huawei and other firms blacklisted in the U.S. could invite backlash from our closest ally. It could also pose national security risks, said Evans, not just from China. “What are we going to lose if we decide to go with Huawei, or at least not ban it? We could lose intelligence sharing with the United States, joint projects with the U.S., joint funding operations. Huawei is the tip of the iceberg,” he said. “There are dozens of other Chinese technology companies and other forms of investment in artificial intelligence, in robotics, in electric vehicles, that are all part of the America watch list, but that we’re going to want to deal with.” 

One of those companies is TikTok. The short-form video app has rapidly gained popularity since Beijing-based ByteDance bought the firm—then known as Musical.ly—in 2017. TikTok now has 100 million users in just the U.S. and more than 2.3 billion downloads worldwide. The firm has recently found itself in Trump’s crosshairs, with the administration ordering a ban on the company in the U.S. if it isn’t sold to a local buyer within 45 days of the ban’s announcement. The administration has also issued an executive order against messaging app WeChat, owned by Shenzhen-based Tencent and widely used by the Chinese diaspora in the U.S. and Canada. 

Trump’s rationale for the emergency orders is familiar: he claims the firms’ access to user data threatens Americans’ privacy and leaves the country vulnerable to security threats. He’s also concerned they could censor political speech and spread misinformation. 

Chander said issuing an executive order for what he calls a “long-term, low-level threat” is dubious and destabilizing—not just for U.S.-China relations, but for the global economy. “This is not an appropriate way for a country committed to the rule of law to operate,” he said. “It creates absolute instability in international investment law and international investments, period. It makes [the U.S.] unreliable, generally, and really gins up the tech trade war in a significant way.” 

“It’s truly problematic, and I want our democratic neighbours to complain vociferously when they see these kinds of actions in the United States.” 

Meanwhile, Canada and other U.S. allies are facing implicit pressure to do the opposite, said Chander, referencing the Clean Network program that U.S. Secretary of State Mike Pompeo announced earlier this month, which aspires to a China-free internet in the U.S. In the announcement, Pompeo said more than 30 countries and territories, as well as many telcos, had signed on to the initiative and committed to only using trusted vendors. 

The potential implications of such an initiative for Canada are speculative at this point, given how little detail the Trump administration has shared about it. The ideas floated, however, could pose challenges. For instance, the U.S. is proposing a ban on storing information of citizens and businesses on Alibaba’s cloud network, a service that the University of Toronto and University of Waterloo use to help international students access course materials. Tencent has a significant presence in Canada beyond its scores of WeChat users, including investments in Montreal-based artificial intelligence firm Element AI, Toronto-based story-sharing platform Wattpad and Vancouver-based machine learning firm Kindred. The firm also partnered with Telus in 2018 to build a SIM card for Chinese tourists visiting North America.

Ottawa hasn’t commented on the program. When asked about it following the announcement, Global Affairs simply told The Logic the U.S. had not contacted the government about it. 

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Beck isn’t surprised Canada has tried to delay picking sides. “This is a position we’ve never intended to be in and it creates problems for us with both countries,” he said. On the Huawei 5G decision, Ottawa was initially meant to announce its position before the October 2019 election; now it looks as though it might wait until after the U.S. presidential election this November, said Beck. In the meantime, Canada’s biggest telecommunications providers have themselves been shutting Huawei out. In February, Bell said it would use Nokia in its 5G networks and added Ericsson as a provider in June. Telus announced that month that it, too, would work with Ericsson and Nokia, and Rogers has already been using Ericsson for its network buildout. “Telcos aren’t getting the messaging they need from the government to make these critical decisions, so they’ll just make those they consider the safest,” said Beck. “If it means going to Ericsson and Nokia, that’s what you do. It works for the government. For the telcos, it means they may end up spending more, and that ultimately means the consumer pays more money.” 

Evans said Canada can’t delay forever. He thinks the only real option is to ban Huawei, and that a version of that decision may come down before November. “People in Canada are angry about Huawei and especially about what China has done in the hostage-taking of [Kovrig and Spavor],” he said. Beyond the domestic pressure, the U.S. and China will want an answer, too. “I think what is crucial for Ottawa is a very nuanced series of decisions, not a single decision. We may see what is, in essence, a reversible decision”—one that could be softened or even reversed depending on whether November’s election brings a new administration to the White House.