The US military shot down a suspected Chinese spy balloon, and things only got weirder from there

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Jordan Heath-Rawlings This is all you really need to know about just how quickly Canada has reversed course on its dealings with China. Yesterday, Foreign Affairs Minister Melanie Jolly laid out a long expected Indo-Pacific strategy. Earlier this year, there were reports that that strategy would not even mention China for fear of poking the bear. Yesterday, however, the minister poked the bear repeatedly. I think more than ever, there is a battle for influence in the world. We need to engage at different levels. But China right now poses a geopolitical risk. We will put a national economic lens on foreign investments. We need to address the question of human rights and minority rights, and we’ll do so. The speech came just one week after Canada had changed its rules regarding foreign takeovers of Canadian companies, mostly Chinese takeovers in the critical minerals space, and even ordered three Chinese companies to divest their Canadian holdings. So, yes, this has been a pretty rapid about face. But where did it come from and why? How do national security experts who have long said that Canada needs a plan to deal with China feel about the course that’s now being chosen? And, of course, how will China respond to this? And where could Canadian businesses and consumers feel that pinch? I’m Jordan Heath-Rawlings. This is The Big Story. Stephanie Carvin is an associate professor of International relations at the Norman Patterson School of International Affairs. She’s the author of Stand Reassessing Threats to Canada’s National Security. And she’s the person we call about threats to national security. Hello, Steph.

Stephanie Carvin Hello.

Jordan The very first time we had you on the show, which I think was about four or five times ago, it was for an episode titled how Worried Should We Be about Foreign Takeovers? And that was more than two years ago. Now, can you summarize for people who didn’t hear that, but also, just to begin, what we’re going to discuss today, why were you are you so concerned about them?

Stephanie Carvin So, Canada is a country that needs foreign investment. We have a small population relative to the size of our country, relative to the potential of our country. So we do need states to come in and help provide us with money and resources and financing in order to basically engage in kind of mining minerals and engaging in forestry and things like this. But there’s been increasing concern that many of these are from China and that they are either state owned enterprises or state champions enterprises. And it’s important the kind of companies that are coming in. These are not market driven entities. They’re not about profit. They usually have some kind of geopolitical goal in mind. And there’s a couple of business reasons why they’re not ideal as investors into Canada. They’re often inefficient. They can skew the marketplace because often they can come in. And if it’s a company that has the backing of the state. They can kind of undercut everybody. They can engage in uncompetitive practices. They can really skew the economic landscape of an industry, right? And especially if that industry is increasingly considered to be strategic. So that’s the real concern here, is that really that the skewing may be at the kind of whims of a country to either gain dominance of an industry or to gain some kind of strategic asset. And what we have seen with Chinese companies recently is, of course, that President Xi was just confirmed for a third term in China, which is somewhat unprecedented in the modern era, and he’s exerting more and more control over these companies and state owned enterprises as time goes on. So there was concern before, and there seems to be increasing concern as Xi does entrance this new third era of his role.

Jordan You focus then and just now on China in particular. Is it the biggest player in this space? And are concerns more urgent with them than they would be? And I’m just throwing it out there and say, I don’t know, French companies or Dutch companies or African companies investing?

Stephanie Carvin Yeah, I mean, China is by far the biggest player and I would say the biggest source of concern, not sole country of concern. We do worry about companies that say right now in particular that may have ties to the Russian state or say a country like Iran. But China by far outnumbers everything, right? And if you think about it, in 2020, for the first time ever, there were more Chinese companies than any other country on the Fortune 500 list, beating out even American companies. And of the 124 companies on that 500 list, 91 of them were state owned enterprises. By far the largest companies coming out of China right now are actually ones that have direct ties to the state. And to be fair, we encourage them. Right? We talked about Team Canada trips by Prime Minister Jean Cristian in the 1990s. We bet hard on China, and China showed up, right? And so, you know, up to about 2012, we really did encourage this. But after the Chinese national overseas oil corporation, or CNOOC, made a bid for Nexen, which was out in Alberta, it was a canadian company. Questions started to be raised about whether it was a good idea for Chinese companies to be coming in and kind of buying up, you know, chunks of what was considered to be Canadian strategic resources. So I think then Prime Minister Stephen Harper said, we didn’t get the Canadian government out of Canadian businesses only to have them replaced with the governments of another country. Right.

Jordan We’re going to talk about the specifics of takeovers and divestments and the changing rules around them today, but maybe to set the stage for that. Yesterday, Canada’s Foreign Affairs Minister, Melanie Jolly, delivered an Indo Pacific strategy. A new one. And I think the takeaways are, and you can correct me if I’m wrong is that it seems a lot tougher on China than this government’s previous rhetoric has been. Can you outline what she said? And just the government’s changing approach to China?

Stephanie Carvin I guess, yeah, I think it’s come in fits and starts. Sometimes I like to refer to the strategy as godit because we always do seem to be waiting for it. This policy has been announced for some time. We’ve been waiting for it for, I don’t know, at least two years. But I think that’s because the government is now being faced with a situation it doesn’t like, which is that it has to make some pretty hard decisions about how it wants to engage in the IndoPacific, but mostly with, of course, China, right? What is it going to do about China? And there’s been all kinds of rumors about this strategy. Different people have seen different pieces of it. At one point, it was rumored that it didn’t even mention China in the document, that he’s actually taking it all together because it’s such a hard question. And there is this is one area where there is, I think, disagreement across different parts of government. There’s lots of people who want to continue with China and say the best way forward with China is to continue to engage with them, to continue to trade with them. And then there’s others who are saying, look, look at other Western countries. They’re all coming up with IndoPacific strategy. They’re all backing away from China. We can’t stand alone in the west as having this kind of pro China policy. So I think this is why it’s taken so long. And it seems pretty clear that if there was a decision to take China out earlier this year, that the Foreign Minister has decided to put China very much back in. And what we’re seeing now is some interesting choices. We’re seeing, of course, that Melanie Jolie announced basically, that you can’t ignore China. It’s a 6th of the world’s population. It is a major trading partner. We get many of our electronics from China. You can’t ignore it. We can’t have an ostrich strategy. But at the same time, we need to think really hard and really clearly about the kinds of trading that we’re going to be doing with that country. And then on top of that, you know, we do need to also have a greater presence in the region. Generally, there’s a lot more focus on having more analysts in the region, having a better understanding of not just China but also the AsiaPacific. And based on what we’re seeing, I think the government is betting pretty hard that we’re going to see more investment from countries like Japan and South Korea, particularly as Canada and other countries are turning towards building green technologies which are going to be relying on a lot of the things, particularly critical minerals and certain technologies that Canada actually has.

Jordan You segued perfectly into what I was going to ask you about which is the kinds of businesses these Chinese companies are buying and what our government is focused on. And you mentioned critical minerals. So I’ll just ask, first of all, quickly, what are they and why are they so why are they so critical?

Stephanie Carvin Yeah. So there’s no set definition of what a critical mineral is. Recently the government came up with a list of 31 minerals that are considered to be critical, which effectively match three criteria. The first is that they are essential to Canada’s economic security. Secondly, they’re required for Canada’s transition to a low carbon economy. And thirdly, they’re a sustainable source of critical minerals for our partners. And by partners they probably mean countries in the west, especially in the United States. And so some of the minerals range from ones that people have probably heard of. So things like nickel and zinc and particularly lithium, which of course is really important in batteries, but also, like, there’s some rare minerals, gallium, Germanium, things like that, that I actually couldn’t tell you what they’re used for. But they’re critical. Exactly, they’re critical. I’ll take their word for it. But again, the emphasis here is that these are really the minerals that will help power the technologies of the future, specifically greener technologies, especially for things like electric vehicles, which the government is really, really big on. I had the chance to speak with a Canadian official recently and they said that, look, Canada has the potential to make electric vehicles. We can start from the mining process through to the recycling of electronic batteries. Right. We have absolutely everything we need in this country alone. And this is why we need to be working with countries like South Korea, like Japan and investing in these areas in order to produce these cars.

Jordan So ahead of the speech that Minister Jolie gave, the government had already made a couple of moves related to these companies and critical minerals. Now, one was very specific and the other was more general. And let’s start with that one. Can you explain the general changes to the rules around foreign takeovers in this space that the government has implemented?

Stephanie Carvin So recently the government announced that it was using its powers under the Investment Canada Act. And I love the Investment Canada Act, which is a very nerdy thing to say, but it really is our most important national security tool. That’s so interesting. I know when people always think of like James Bond or Seal Team Six, but no, in Canada it’s the Investment Canada Act. It’s the tool we effectively use to really protect our economy and certain areas of interest for the government, such as critical minerals. But we’ve seen this used before in other kind of mining decisions. I think one of the times that we came on, we talked about the Shandong mine up north. Right? Again. The Investment Canada Act was used. We’ve used the Investment Canada to restrict investments in certain health care facilities and healthcare resources during the Pandemic. Right? Fearing that other countries would come in, possibly seeing different companies in distress and then wanting to buy up their stuff during the Pandemic in order to export it out of Canada or gain access to, again, to a strategic industry. So, again, we’ve seen the Investment Canada invoked in order to basically change the rules upon which foreign governments are allowed to invest in mines in Canada, particularly with regards to these critical minerals. And, you know, so what ends up happening is you can’t just sit there and say, no, we don’t want you particular company. We saw this with the 5G actually, you can’t just say no to Huawei. You actually have to come up with a list of reasons why a company wouldn’t qualify. And then that company, you can then say, okay, company X, you don’t qualify. You can’t just list companies you don’t like. That’s not how our system works. What they did is they came up with a series of rules which basically say these are the companies that qualify or don’t qualify to basically be allowed to invest in some of these critical mineral sectors. So that was the change of the rules under the Investment Canada Act. The more specific decision is that basically three of China’s state controlled companies were then asked to sell their steaks in Canadian lithium mines. And that’s a pretty significant decision, and it certainly sends a message to China.

Jordan What does that decision actually mean? On the ground? You said they asked them to sell them. Do they have to sell them? Who do they have to sell them to? What happens if they don’t?

Stephanie Carvin Right now, they own these businesses, right? So this is a divestment order. So under the Investment Canada Act, the government can conduct a review. It can take up to 180 days, sometimes up to a full year and longer if the government so decides. And then what happens is they can say, okay, we accept the application for this foreign investment in the sector. They can say, okay, well, we like some of this investment, but other parts of it we want you to change or change the ownership structure or things like that. And then the third option is divestment. Right? It’s a rejection and says, we don’t like this, you have to divest. In other words, you have to sell your stake in this particular operation to another company. That would be acceptable.

Jordan Do we know what China has said in response to those divestment orders? I mean, with the rules changed and then these particular companies singled out and then Minister Jolie’s message today, should we be worried about blowback from them?

Stephanie Carvin Yeah, I do think we should be worried in some sense. I mean, this is a very, very clear message. And we do know that China is very interested in these critical minerals for its own electric car industry, which, let’s be honest, is very large. We are seeing messages now from the Canadian government that were far more bold than had really been predicted. I mean, to the point where earlier this year it looked like we weren’t even going to say China in our IndoPacific policy. To the point where the foreign minister is coming out and saying, yes, we will continue to deal with China, but we will still continue to criticize a lot of their policies towards, for example, Hong Kong, towards the mass detention and suppression of Uyghurs. And I never want to miss a chance to highlight the case of Canadian Hussein Salil, who is, of course, a Uyghur activist who has been detained in China for years. Threats to Taiwan. Maybe this is a partner because of the size of the economy, but it’s not in some ways a natural partner for Canada.

Jordan Right.

Stephanie Carvin It’s a difficult partner, and we have to kind of balance our human rights and concerns about democracy and concerns about things like foreign interference, which we’ve certainly heard a lot of concerns about recently with our economic interests. I mean, Canada does still export quite a lot to China in terms of our agriculture, right? Whether it’s pork, canola oil, or other products as well. It’s a difficult balance. But we’re starting to see, I think, some steps. And I’ll be cautiously optimistic here in the right direction.

Jordan So, speaking of you personally being cautiously optimistic, how has this new direction and when I say that I’m speaking of all the things we’ve just discussed kind of at once, this new approach to China, how has that been received in national security circles? Is their concern? Is there support for it?

Stephanie Carvin I imagine support, but I’m sure there’s also risks. There is, absolutely. Right. I think the thing that has been missing is an overarching strategy. Right. So I’ve been on this podcast before. We’ve talked about different decisions with regards to China. We’ve talked about having no foreign policy, I believe. Yes, and that’s part of the problem. Right. So I feel like we’ve been taking these decisions in absence of a larger strategy, larger goal. What is it that we want with China, right? Like, what are the things we think we can achieve? How are we going to achieve it? Right. This is the basic outlines of any policy, and it also signals to our allies or seriousness too. Right? I mean, if you think about it, the EU has an IndoPacific strategy. The German minister has just visited China to some criticism in his own state, but has some ideas of what they want to accomplish there. And certainly the Americans are taking some very bold steps as well. And, you know, Canada, we just really haven’t said anything. And it feels, again, that our foreign policy towards China has largely been guided by the Investment Canada Act. But that’s not the way it should work. We should have a foreign policy which then guides how we’re going to be dealing with foreign companies. But again, Canada just really struggles, I think, in making choice. We want to be everyone’s friends and we don’t like saying, actually we’re going to be backing away from this country. It’s just not something that governments tend to be good at saying, whereas other countries are a little bit more bold. And again, I think I used the term ostrich approach, where we’re kind of burying your head and hoping it all gets better. But that’s just not something you can do with a country that represents such an economic power and also a world’s population. And so, again, I think there is always going to be concern. China’s a country that has a range of ways of responding to these kinds of policies. And we’ve seen this with Australia, that Australia made some decisions with speaking out about China’s kind of blocking of investigations during the outbreak of the COVID-19 virus. And what we saw was that there was massive economic retaliation against Australia and they targeted the wine industry, the coal industry, a whole bunch of other industries with a view of trying to punish them going forward. And that doesn’t seem to have worked. Other countries seem to have just simply bought up a lot of the stuff that Australia was selling to China. But it’s the kind of move that China could actually bring against Canada. They could say, oh, you’re not going to let us invest in this? Well, we’re suddenly not going to buy your pork products because we think that they have some kind of infection or there’s some kind of health risk, right? So they’ve often used health and safety mechanisms to try to ban Canadian products in a kind of suspicious way. And then there’s things like just stopping importing certain goods, taking it out on certain Canadian brands like Canada Goose. There could be measures whereby they decide not to sell us certain technologies or putting an export ban on things like this. And the worst case scenario is, of course, the Michael Covert Michael SPAWAR scenario, where you do see Canadians personally paying the price for decisions that the government makes, which I don’t think we’re going to be there. But I mean, this always has to be in the minds of policymakers now that this is the way that China is willing to show its displeasure. And you always have to keep that in mind.

Jordan So, last question then. What will you and other people who study national security be watching for over the next few months or into next year to see I mean, to see how this new policy is going over, both with China, but also with regards to Canadian businesses that we hope or want to stay Canadian owned. What’s next here?

Stephanie Carvin So, a couple of things. One is that it’s easy to come up with a policy, but then you have to actually act in a way that is consistent with that policy. I think we’re actually getting there. I mean, if you think about the Trudeau government, it’s gone from a place where it was actually trying to conduct a free trade agreement with China not so long ago, to a point Where we’ve now seen the finance. Minister and the Deputy Prime Minister Freedland calling for French shoring, which is a kind of a way of trading amongst our allies more than, perhaps, adversarial states. We saw the Minister of Innovation, science and Economic Development, french Montgomery, call for an actual decoupling with China. Right? I mean, this is huge, a huge change for this government. So will we actually see steps in this direction? It’s not just us. It means us having to work with our allies in order to make this happen.

Jordan Will we see grumplings from Canadian businesses who, by and large, do want to sell to China, or perhaps less concerned about some of the geopolitical risks that a government has to be concerned with? And then, finally, what will China do? Is it going to increasingly then realize that the future of its foreign policy isn’t the west? Is it going to spend more time in the Middle East, in Africa and the global south, trying to extend its ties?

Stephanie Carvin It still has a Belt and Road initiative which is trying to increase its infrastructure in other countries, helping it to export goods to and import goods from other parts around the world. So there’s a lot of pieces here that are still in motion. But I think the most important thing going forward for Canada is going to be the United States. We have seen a rare bipartisan agreement in the United States regarding China. Everyone agrees that this is something that they need to focus on. Recently, the Biden administration took incredible steps to basically kind of cut the Chinese chip manufacturing industry off at the knees through the United States Chips Act. And so the question will be, will Canada follow suit? Are we going to kind of tie ourselves to these US Policies going forward? And, you know, is there a risk, therefore, in doing that, given some political concerns in the United States, but perhaps given that the Republicans didn’t do as well as expected in the recent midterm elections, maybe some of those concerns will be abated?

Jordan As always, we’ll wait to see what the United States does too, I guess. Thank you, Stephanie, for this.

Stephanie Carvin OK. Thanks for having me on.

Jordan Stephanie Carvin is our first call on matters of national security. That was the big story. For more, including the episode that Stefanie and I talked about off the top, you can head to The Big Storeorpodcast CA. Pro Tip if you’re ever looking for a previous episode with a guest that you like, scroll down to the very bottom of the first page you land on and just put in the guest’s name. It will bring up all their previous appearances on the show. You can find us on Twitter at the bigstory FPN. You can also talk to us anytime via email at hello at thebigstorypodcast CA, and you can call and leave a voicemail 416-935-5935 you can find the big story in any podcast player you like, including the Sonos Media Player or Podcruncher or Pod Kicker, or even Beyond Pod, which sounds futuristic. I don’t know if any of those apps I just named let you rate or review podcasts, but if they do, you better do it for us. Thanks for listening. I’m Jordan Heath-Rawlings. We’ll talk tomorrow.