Canada needs a plan to prevent hostile post-coronavirus foreign takeovers, experts warn

National security experts are warning that Canadian businesses struggling with the economic impact of the coronavirus pandemic — and what comes after — could be easy prey for hostile foreign takeovers.

And there are growing calls for the federal government to come up with a plan to protect companies vital to the Canadian national interest from being acquired by firms tied to authoritarian regimes, including those in the medical supply industry, energy and critical infrastructure.

“We can’t split the economy away from national security,” said Stephanie Carvin, a national security expert and assistant professor of international relations at the Norman Patterson School of Public Affairs at Carleton University.

“This is what we’re seeing with Huawei right now but Huawei isn’t the end — Huawei is the beginning. This is going to be possibly one of the biggest national security challenges that Canada faces for the next decade is trying to figure out how to manage these geo-economic threats.”

Huawei, the Chinese tech giant, is currently fighting to be allowed to build parts of the Canadian 5G telecom network. While the federal government is reviewing potential security risks from that, it has repeatedly delayed making a decision on whether to allow the firm to bid on contracts.

In an annual report released on Wednesday, the Canadian Security Intelligence Service highlighted the risk posed by foreign takeovers as a continued danger to Canadian national security.

Specifically, CSIS warned that Canada’s “economic wealth, open business and scientific environments, and advanced workforce and infrastructure” posed an enticing target to foreign investors.

The agency said that while many foreign investors are not hostile, those from state-owned enterprises and firms with close ties to governments or intelligence services need to be weighed very carefully.

“Corporate acquisitions by these entities pose potential risks related to vulnerabilities in critical infrastructure, control over strategic sectors, espionage and foreign influenced activities, and illegal transfer of technology and expertise,” the report stated.

“As difficult as it is to measure, this damage to our collective prosperity is very real.”

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Conservative MP Ed Fast, who was formerly the international trade minister, pressed the government during a virtual meeting on Thursday to commit to reviewing the Investment Canada Act.

He said the coronavirus pandemic is driving home the need to think more critically about foreign takeovers, particularly when they involve domestic critical infrastructure or supply chains.

Deputy Prime Minister Chrystia Freeland, however, would not commit to doing so.

“He raises a very important point that today, at a time when our economy is facing a very difficult situation, Canadian companies are particularly vulnerable and today’s also a time when we have particular reason to pay attention to the sanctity of our supply chains,” Freeland said.

“Let me assure the honourable member that our government, informed by the work of our excellent intelligence analysts, is very focused on ensuring the safety and sanctity of Canadian companies and on ensuring they are not acquired inappropriately.”

Fast asked two more times but Freeland did not answer the specific question

“It is never right for Canadian companies to be acquired by hostile foreign interests.”

Trudeau similarly dodged questions from journalists on Thursday about the CSIS report.

“Our national security agencies do excellent work in highlighting risks to our country,” he said when asked what steps the government is taking or will take to reduce the risk of Canadian companies being taken over by hostile foreign-owned actors.

“We will always support them and take on their recommendations and make sure that we are doing everything we can to protect Canadians from malicious actors, whether they be foreign or domestic.”

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Concerns about foreign takeovers of key Canadian companies gained public attention in 2012 and 2013 when China’s state-owned CNOOC Ltd. began its bid to take over the Calgary oil firm Nexen.

In the years since, repeated Chinese efforts to acquire Canadian energy firms have been met with criticism from security experts who warn that allowing state-owned enterprises to take over Canadian businesses endangers both the reliability of critical assets and the very nature of the free market itself.

As Carvin explained, the concern is that unlike private companies, state-owned enterprises cannot fail because they are backed by governments that will pull out all the plugs to prevent them from suffering the consequences of any bad financial decisions.

Many of those, in the case of China, Saudi Arabia and Russia, are diametrically opposed to the rules-based international order that it is in Canada’s strategic interest to preserve and protect.

There is also the ever-present fear that the state-owned firms will be used to spy or steal industrial secrets, as American authorities allege Huawei has been doing for years.

Foreign takeovers of Canadian businesses are evaluated under the Investment Canada Act, which weighs the “net benefits” of proposed takeovers with an eye to things like potential jobs versus potential risks.

To weigh those risks, national security agencies like CSIS and the RCMP can share their concerns with the government and when the federal cabinet shares those concerns, it can block takeovers.

Effectively, it forces officials to ask the question: jobs might be created, but at what cost?

That’s what happened in 2018 when Chinese-owned CCCC Ltd. tried to take over Aecon, a Canadian construction firm that works on nuclear facilities and telecommunications equipment, among other major public systems.

And it appears to be what led the government to announce last month that it will now keep a closer eye on “all foreign investments by state-owned investors, regardless of their value, or private investors assessed as being closely tied to or subject to direction from foreign governments.”

That announcement also said the government will pay closer scrutiny under the Investment Canada Act to any foreign investment in Canadian businesses “related to public health or involved in the supply of critical goods and services to Canadians or to the Government.”

“Many Canadian businesses have recently seen their valuations decline as a result of the pandemic, consistent with patterns in other major economies. These sudden declines in valuations could lead to opportunistic investment behaviour,” said the announcement.

“This enhanced scrutiny of certain foreign investments under the (Investment Canada Act) will apply until the economy recovers from the effects of the COVID-19 pandemic.”

Wesley Wark, a visiting professor at the University of Ottawa and a national security expert, said that’s a sign the government is realizing it needs to pay closer attention to the threats posed by foreign takeovers in a new, rapidly changing global landscape.

“There is an awakening concern about Canadian economic security and even economic sovereignty, which will be accelerated by the impacts of COVID-19 and challenges around maintaining critical supply chains for health-care supplies,” he said.

“There will be increasing focus on preserving Canada’s economic security in the midst of a turbulent global economy … We are already seeing a turn to creating greater economic security around health-care supplies, which will last well beyond COVID-19.”