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Will COVID-19 Shift the Huawei 5G Debate to Economic Security and Global Competitiveness?

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Image credit: Canadian Press

POLICY PERSPECTIVE

by Amy Karam
CGAI Fellow
June 2020

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Table of Contents


Introduction

The debate on whether Huawei should be allowed in Canadian 5G networks centres around national security concerns that opening Canada to the Chinese telecommunications company would create an opportunity for espionage and interference by the Chinese government.

The Chinese Communist Party’s (CCP) access could pose a larger threat to national security, as 5G’s robust functionality and applications could allow obstruction or cause havoc to utilities and other critical safety functions. China’s response to COVID-19 has further added to Canadians’ distrust of China. 

The growing sentiment is that Huawei should be banned to keep Canada secure. Sounds simple. If China, and by extension Huawei, are such a threat, then why not just shut them out of Canadian 5G networks as some of Canada’s Five Eyes allies already have? Why the hold-up in the Canadian government decision?

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Why Canada has Not Yet Decided on Huawei

Economic security is one major, but less discussed, reason for the lack of a decision. 

Canada has benefited economically from Huawei, as well as from China’s purchase of commodities and products – the adverse consequences of China’s ban on Canadian canola are a strong example of this. Pulling the plug on Huawei, and by extension China, would have some implications for the Canadian economy, and the government is taking this into consideration. It is not only developing countries that have been attracted by China’s financial brawn; developed countries like Canada have, too.

Huawei published a report in the fall of 2019 outlining the impact of the company’s presence on the Canadian economy in 2018: the company created 970 direct jobs and a large number of indirect and induced jobs, and contributed $304 million to GDP. Huawei has also stepped up to support the Canadian government’s initiative to provide rural connectivity, a less lucrative, but necessary service. These statistics and contributions have some weight in the Canadian government’s assessment of Huawei.

Further, and more astonishing, given the national security debate, is that Huawei has invested over $50 million over the last 10 years in Canadian academic 5G research and development, which Huawei uses to build its leading 5G solutions. These 5G R&D sponsorships fill the void left by Nortel’s demise through bankruptcy.

This short list of economic dependencies on Huawei (and China) begs the following questions: Is the financial return on these exchanges actually enough, or is Canada selling short? Is Canada prepared for the potential economic trade-offs of banning Huawei? Is there a contingency or transition plan to replace lost jobs or to diversify into new trade partners in order to ease the dependence on China, if need be?

The Huawei economic security considerations are a symptom of Canada’s greater macro-economic challenges. Canada’s economy was on the decline prior to the COVID-19 crisis. Its decision to ban or allow Huawei in 5G networks is an important one. However, Canada’s broader problem is its economic security and waning global competitiveness, which the Huawei 5G debate brings to light.

Canada’s economy, GDP and global competitiveness ranking were weakening long before the COVID-19 crisis hit. One reason is that Canada lacks a long-term strategic plan and industrial policy steering its global innovation leadership. Canada used to be a global telecom leader; that innovation advantage needs to be reclaimed and commercialized.

Complacency is another factor in Canada’s economic erosion, impacting not only economic security but also contributing to the national security issue. Canadians have become too comfortable and too passive for this new, highly competitive global economy with emerging competitors.

COVID-19 has served as a catalyst in exposing some of these economic challenges and weaknesses, as we experienced supply chain deficiencies, and as certain geopolitical dependencies proved to be unreliable. Most relevant to this discussion is that Canada’s innovation advantage has been slipping, particularly as it relates to the commercialization of innovation.

Exacerbating Canada’s prior economic weaknesses will be the recovery from the COVID-19 bailout funding, large-scale job losses and the recessionary slide nationwide. Optimistically, this may catalyze the Canadian government to review its operational strategies and institute a more aggressive industrial policy framework to stimulate the economy, build national and economic security and raise its global competitiveness, particularly on the technology innovation front.

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Huawei and Canadian Competitiveness

At the specific level of the Huawei 5G debate, many of Canada’s economic shortcomings are apparent in policy and in practice.

In addition to whether Huawei should be banned or not, the bigger question that should be asked is: “Why doesn’t Canada have a leading 5G telecom equipment provider and top three player in 5G?” The answer is often: “We had Nortel, but Nortel died, so now we don’t have a player or position.”

This is a revealing example of Canada’s diminishing global competitiveness nature, especially since our academics are researching 5G for Huawei’s research and development.

Many believe that Nortel died because of Huawei’s intellectual property theft. Even if that happened, Nortel might still have survived if it had a stronger competitive drive and strategy, in addition to more prudent operational practices. Nortel might also still exist if the Canadian government had had a longer term, bigger picture strategy for Canadian technology leadership (as China now does), had implemented an industrial policy and granted a bailout for a mere $2 billion-$4 billion. 

The Canadian government’s decision not to salvage Nortel’s intellectual capital and potential in the strategically important wireless market has contributed to its economic dependency on Huawei funding. Instead, Canada is satisfied with deploying its researchers to fuelling Huawei’s 5G growth, short-selling its potential and value.

Further adding to Canada’s complacency and waning economic drive is Canadian researchers’ decision to forgo licensing revenues from research developed in partnership with Huawei. 

Another contributor to Canada’s economic insecurity is the disjointed co-ordination across departments making independent decisions that do not coalesce into a unified Canadian position. For example, if Huawei 5G equipment could pose a national security threat as CSIS suggests, then why are the researchers contributing intellectual capital to Huawei’s 5G development, and why is the government subsidizing the research?

In the case of the academics’ 5G research and development for Huawei, the federal and provincial governments subsidize a combined 75 cents of every 5G R&D dollar from which Huawei benefits. Huawei only contributes 25 cents for every research dollar. Furthermore, Huawei also receives Canadian tax credits for this research funding, so Huawei ultimately pays from six to eight cents on the dollar for 5G R&D from Canadian academics. Great deal for Huawei. Not so great deal for Canada. The short-sighted goal of sustaining academic research activities has a high price for Canada, not only in revenues, but also in competitive advantage.

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Recommendations for Canada

The economic distress to the Canadian economy caused by the COVID-19 crisis will hopefully catalyze Canada into more aggressive economic policies and stimulate entrepreneurship in industry, which will ameliorate the long-run practices and trajectory of the previously diminishing economy.

Canada needs to create a unified and co-ordinated strategy across all departments (see Hill Times article), e.g., ISED, global affairs, foreign direct investment, academia, industry, etc., in order to solidify a stronger national and economic security position. This in turn will amplify its global competitiveness and strengthen its GDP ranking.

Canada also needs to develop a comprehensive foreign direct investment (FDI) policy to ensure that individual nations are not singled out, and to ensure that Canada is optimizing its returns in partnerships.

The decision to ban or allow Huawei will be an opportunity for Canada to practise a “co-opetition” (co-operative competition) strategy with partners.

If Canada decides to continue its economic relationship with Huawei, it should seek out a bigger return on the partnership. Licensing revenues should be claimed for the research and development that academics generate, and larger profit sharing could be explored with Huawei.

If Canada chooses to ban Huawei, then it needs to develop initiatives to replace the economic trade-offs that will ensue. It is an opportunity to foster job creation, diversify trading partners, and foster entrepreneurship by applying its intellectual capital and brawn to commercial opportunities. Further, it is an opportunity to create a co-opetition play with the U.S., by partnering with its ally to create a 5G joint venture.

Regardless of direction, Canada needs to start thinking and operating more assertively in economic terms. Canada needs to start operating like one big company, co-ordinating across all departments with a unified mission, vision and strategy, with goals for greater returns on investments. All capital outlays, especially as they apply to fostering innovation, entrepreneurship and intellectual capital development, need a more comprehensive involvement and ownership by the government, and that includes industrial policy. Canada can no longer afford to fuel the growth of other nations without commanding a higher return on assets and investment outlay.

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About the Author

Amy Karam is a global competitive strategist and principal at Karam Consulting. She is the author of  The China Factor: Leveraging Emerging Business Strategies to Compete, Grow and Win in the New Global Economy, based on her experience at Cisco USA leading a Huawei competitive intelligence program. She is a fellow at the Canadian Global Affairs Institute, a TEDx speaker on global China trade, and lectures for Stanford and Duke University CE. She worked in Silicon Valley for 15 years and is an authority on globalization, innovation and the shifting power dynamics in international business. She founded the Global Business and Innovation Academy of courses and workshops to share her insights and strategies.

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Canadian Global Affairs Institute

The Canadian Global Affairs Institute focuses on the entire range of Canada’s international relations in all its forms including (in partnership with the University of Calgary’s School of Public Policy), trade investment and international capacity building. Successor to the Canadian Defence and Foreign Affairs Institute (CDFAI, which was established in 2001), the Institute works to inform Canadians about the importance of having a respected and influential voice in those parts of the globe where Canada has significant interests due to trade and investment, origins of Canada’s population, geographic security (and especially security of North America in conjunction with the United States), social development, or the peace and freedom of allied nations. The Institute aims to demonstrate to Canadians the importance of comprehensive foreign, defence and trade policies which both express our values and represent our interests.

The Institute was created to bridge the gap between what Canadians need to know about Canadian international activities and what they do know. Historically Canadians have tended to look abroad out of a search for markets because Canada depends heavily on foreign trade. In the modern post-Cold War world, however, global security and stability have become the bedrocks of global commerce and the free movement of people, goods and ideas across international boundaries. Canada has striven to open the world since the 1930s and was a driving factor behind the adoption of the main structures which underpin globalization such as the International Monetary Fund, the World Bank, the World Trade Organization and emerging free trade networks connecting dozens of international economies. The Canadian Global Affairs Institute recognizes Canada’s contribution to a globalized world and aims to inform Canadians about Canada’s role in that process and the connection between globalization and security.

In all its activities the Institute is a charitable, non-partisan, non-advocacy organization that provides a platform for a variety of viewpoints. It is supported financially by the contributions of individuals, foundations, and corporations. Conclusions or opinions expressed in Institute publications and programs are those of the author(s) and do not necessarily reflect the views of Institute staff, fellows, directors, advisors or any individuals or organizations that provide financial support to, or collaborate with, the Institute.

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