Canada is caught in the middle of the raging trade war between the US and China. The re-elected government under the leadership of Justin Trudeau will soon decide the role of Huawei in the development of 5G networks.

But the decision on Huawei goes far beyond the company’s role in building the 5G network in Canada. The decision is likely to define the Canada’s political stance in the US-China trade conflict. Both US and China have been pushing to turn the decision in their favor.

Politics at Play

The decision comes amid ongoing diplomatic strife between Canada and China, while recent events also indicate some awkwardness between the US and Canadian heads of state.

Canada-China relations are on thin ice. In December 2018, Huawei’s global CFO and the founder’s daughter, Meng Wanzhou was arrested in Vancouver on suspicion that she had been involved in violating U.S. trade sanctions with Iran. Canada was bound to arrest her thanks to Canada’s extradition treaty with the US. Meng Wangzhou was eventually released on bail but has not been able to leave Canada and lives under house-arrest in Vancouver.

This event proved to be a turning point in the China-Canada relationship. In July 2019, China retaliated by arresting a former Canadian diplomat and a businessman in China on espionage charges. Another two Canadian citizens were arrested, and who still remain under threat of trial in China without access to lawyers. Later, China also blocked imports of canola seeds from Canada. In view of the events, the Canadian government has formed a committee to review its relationship with China.

Canada’s relationship with the US is also under strain. At the NATO summit in December 2019, US president Trump described the Canadian prime minister “two faced” concerning Canada’s low contribution to defense spending. And Trudeau was filmed apparently joking about Trump with other NATO leaders.

Since 2016, the Trump administration has been threatening to pull-out of the NAFTA agreement that eliminates most trade barriers between the US, Canada and Mexico. Such a move would be harmful for the Canadian economy.

The US Continues to Mount Pressure on Canada

The decision regarding Huawei’s potential involvement in 5G is likely to be one of the toughest for the newly re-elected government. The criticality of the situation can be gauged by the Canadian government’s move in July 2019 to delay the decision on Huawei’s participation until after the federal elections in October 2019.

At an international security event in Halifax, Nova Scotia, in November 2019, the US national security advisor, Robert O'Brien, commented that having Huawei infrastructure in Canada’s 5G network would be like a “Trojan Horse” compromising national security and potentially enabling espionage.

He said, “Huawei trojan horse is frightening, it’s terrifying. When they get Huawei into Canada (through 5G) or Western countries, they’re going to know every health record, every banking record, every social media post; they’re going to know everything about every single Canadian. I find it amazing that our allies and friends in other liberal democracies would allow Huawei in.”

Canada is a part of the decades old intelligence-sharing network – The Five Eyes, which comprises the US, Australia, New Zealand and the UK, as well as Canada. The US government representatives have indicated that intelligence sharing will be impacted if Canada chooses to allow Huawei to build the 5G network in the country. So far, the US, Australia, New Zealand have taken a strong stance against Huawei, completely banning its participation in building the 5G network, while the UK has allowed Huawei in non-sensitive (other than network core) infrastructure.

Why China and Huawei are important to Canadian economy?

China is Canada’s second largest export partner accounting for 4.3% of its exports, worth more than $20 billion each year.  Top export categories include wood pulp, oil seeds and soybeans. China is also one of the most important import partners, accounting for 12.6% of total Canadian imports, worth $71 billion. Among imports, most popular product categories include computers, telecom equipment, smartphones and accessories. These numbers make the trade deficit between Canada & China, slightly bigger than Canada’s overall annual trade deficit.

China is also a significant source of capital flows in Canada’s real-estate market. According to National Bank of Canada estimates, Chinese homebuyers accounted for one-third of Vancouver’s real-estate market by value during 2015, spending approximately $9.6 billion of the $29 billion of total real-estate sales. Patterns are similar in other metropolitan areas in Canada, including Toronto, which is also counted among one of the costliest cities in North America.

Furthermore, Huawei has heavily invested in Canada since 2008. Out of Huawei’s 21 R&D centers worldwide, six are in Canada, compared to three in Japan. Canada has also benefitted from Huawei relocating its US workforce to Canada. In 2019, Huawei Canada announced a 15% hike in its CAD$180 million R&D budget, already one of the highest in Canada, and the hiring of an additional 200 engineers, a one-third increase in its Canadian R&D workforce.

But apart from the financial and strategic importance of China and Huawei, Canada is also locked into a free trade agreement (FTA) with China. So, breaking an FTA would have further repercussions and would mean a direct conflict with China at the WTO.

What’s at Stake and Position of the Big Three Carriers

Huawei has earned a reputation for making high-quality network equipment, with significantly lower costs than its competitors. Its strong R&D spend has ensured strong intellectual property within 5G portfolios with more than 2,700 patents; a higher number than its competitors, though questions remain about the nature of all the patents. Huawei also leads in 5G base station shipments globally, though again, it’s early days in 5G roll-outs.

Canada already has among the costliest mobile data rates globally, so keeping Huawei out would likely imply an uptick in capital expenditure for the Canadian carriers. Cost increases would either hit carriers’ bottom-lines or be passed on to consumers.

At present, Bell and Telus both use Huawei equipment, while Rogers uses Ericsson equipment. In February 2019, Telus stated that Huawei had been good for Canada and that a ban on its 5G wireless network could potentially add costs and delays to its rollout. A 5G ban without compensation or other accommodation could lead to a “material” increase in the cost of Telus’s 5G deployment.

Meanwhile, Bell Corp. which shares infrastructure with Telus indicated that a decision on Huawei was unlikely to impact its short-term capital expenditure or 5G launch plans. In February 2019, George Cope, the CEO of Bell Canada, said,

“It’s important to know we’ve made no selection yet of our 5G vendor, and if there was a ban or if we chose a different supplier than Huawei for 5G, we’re quite comfortable all those developments would be addressed within our traditional capital intensity envelope, and therefore no impact from a capital expenditure outlook. Nor would the government decision affect the timing of Bell’s 5G service. No launch date has been announced. Bell is doing 5G tests.”

Another one of The Big Three carriers in Canada, Rogers Communications, has already decided not to use Huawei equipment and is going ahead with its current partner, Ericsson. The company executives have been quite vocal about limiting the role of Huawei in Canadian network infrastructure.

So, considering the current political scenario and rising anti-China sentiment, it makes the situation look unfavorable for the Chinese telecom equipment giant. Allowing Huawei to participate as a 5G vendor will put pressure on Prime Minister Justin Trudeau, who runs a minority government and has already been accused of a soft stance towards China. But Trudeau’s administration will remain wary of Chinese aggression and potential repercussions that the decision will entail to the Canadian economy. So a compromise approach, like that of the UK, remains a strong possibility. At the same time, the Canadian government cannot afford to infuriate the US administration, as the stakes are even higher with its neighbor.