Banning Huawei from Canada's 5G networks could be costly for taxpayers

As the Trudeau governmentdecides whether to join its security and trading partners in banning Huawei Canada from supplying technology to build Canada's 5G wireless network, itrisks an expensive lawsuit under the terms of a foreign investor protection agreement signed by its predecessor.

Stephen Harper's Conservative government concluded negotiations on the CanadaChina Agreement for the Promotion and Reciprocal Protection of Investmentsin 2012. At the time, it was seen as a necessary precursor to the comprehensive free trade talks the two countries hoped eventually to explore.

Now,those trade talks areon ice due totense diplomatic relationswith Beijing.And the investor protectiontreaty now threatens to complicate any plans the Liberal government has to keep Huawei out of Canada's high-speed 5G network.

Thatmight explainwhy Canada is taking so long to make a decision about Huawei even as the U.S. and other members of the Five Eyes intelligence alliance, as well as major European players like Germany, have moved to shut the company out of their wireless infrastructure, despite warnings about increased costs and rollout delays.

Under Canada's investment agreement with China, HuaweiCanada as an existing investor that already owns assets and has business relationshipshere "can bring a claim at any time against Canada, for any kind of regulatory action," said Gus Van Harten, a professor atOsgoode Hall Law School who specializes in the investor-state dispute settlement (ISDS) mechanisms in treaties like this one.

"If you're dealing with a big company in a high-valueasset, it can be a veryserious deterrent. Unlike other areas of international law ... they can access an extraordinarily powerful remedy, which is an uncapped damages award that includes compensation."

That award could take into account not just a ban's impact oncurrent investments, but also Huawei's reasonable expectation of future earnings from 5G as well, VanHarten said. If Canada blocks Huawei from 5G,taxpayers could face a lawsuit claiming hundreds of millionsof dollarspossibly billions.

The most dangerouspart of the treaty from Canada's perspective is Article Four, which requires "fair and equitable treatment and full protection and security" for Huawei's investments, Van Harten said.

"It sounds benign," he said, but "those protections have in many cases been interpreted very broadly to require compensation for even general regulatory measures that didn't target a specific investor in any way.

"IfHuaweicould show that they were operating normally and then, out of the blue, they were simply barred from futureoperations, I think they'd have a pretty good Article Four claim. [Federal ministers]have to be considering this liability."

Telus seeking compensation

Public Safety Canada, which is leading the federal government's review of the"associated security and economic considerations" of 5G technology, is careful not to comment on specific companies.

But it's an open secret that a Huawei ban is being considered by the Trudeau government. The U.S. Defence Department and various American officials have warned that future relationships are at stake if countries like Canada don't follow its lead.

Recent media reports suggest the White House, which accusesBeijing ofcyber-spying,is preparing a broad executive order to bar Chinese telecommunications technology from U.S. networks. It might be an attempt to force concessions in ongoing trade talks, but U.S. carriers have already received the message: shun Huawei equipment.

Canada's Telus and BCE, on the other hand, have relied on Huawei gear fortheir radio access networks.

TelusCEO DarrenEntwistlehad a closed-door meeting with Prime Minister JustinTrudeauin Vancouver on Monday.

"A decision prohibiting the deployment of Huawei technology, without compensation or other accommodationsbeing made by the government of Canada, could have a material, non-recurring, incremental increase in the cost of Telus's 5G network deployment, and, potentially, the timing," Telus said in its quarterly results reportThursday.

That report did not say what sort of compensation or accommodation Teluswants.

Last month, asHuawei executives were promoting their technology and defending their security reputation at theWorld Economic Forum in Davos, Switzerland, Canada's Innovation Minister Navdeep Bains was also at the Swiss resort finalizing a $40-million deal with rival Nokiato fund 5G research by the Finnish-owned competitor.

Hiding 'chill'

Van Harten, a sharp critic of the Harper government'streaty, said this couldbe the first useof the agreement's arbitration measuresbut he can't be sure because the agreement allows for more confidentiality than any other ISDS treaty Canada has signed since the North American Free Trade Agreement's Chapter 11 came into force.

The government is not required to disclose anything until it'sforced to pay compensation.

VanHarten said that, in his experience, the government won'tdiscuss what ISDScritics call "regulatory chill" the threat of government decisions being driven by therisk of being sued.

"They are very coy about chill," he said. "They go out of their way to hide chill."

"We will be taking appropriate decisions in due course," said Scott Bardsley, a spokesperson for Public Safety Minister Ralph Goodale. "Itis premature to speculate on the outcome of the review."

In a separate statement, International Trade Diversification Minister Jim Carr's office said Canada has not received a notice of potential arbitration from Huawei Canada or the Chinese government.

That doesn't mean there haven't beeninformal and confidential exchanges between Canadian and Chinese officials on the possibility of arbitration.Last month, Chinese Ambassador to Canada Lu Shayeurged Ottawa to "make a wise decision" and suggested "there will be repercussions" if Huawei is banned. He did not specifically mention a lawsuit.

No broad security exemption

Luke Eric Peterson, a Canadian based in California who writes for theInvestment Arbitration Reporter, reported Monday on a threat Huawei recently madetosue the Czech government. The Czech Republic's cybersecurity authority askedcompanies in sensitive sectors to weigh the risks ofChinese technology.

Huaweiobjected to being deemed a security threat merely because of its country of origin. The Czechs were accused of harming Huawei'sreputation in other jurisdictions without real evidence or regard for the steps the company takes to preventstate interference with its technology and equipment.

The bilateral investment treaty in place between the Czech Republic and China does not have a broad security exemption.

Neither does Canada's agreement with China. Like the Czech Republic, Canada probably would not be able to defend itself inthis kind of arbitration by citing national security concerns.

Article 33 of Canada's investment agreement with China does exempt from penalty "any actions that [Canada]considers necessary for the protection of its essential security interests," but goes on to definethose interests in military terms, citing arms trafficking and nuclear weapons.

"This exemption is probably too narrow" to permit a Huawei ban justified only byespionage risks,Peterson said.

The onus would be on Canada to prove that Huawei has a relationship with the Chinese military and security services. Based on Huawei's reaction to other spying allegations, Canada could expect a vigorous denial.

"If it's just a suspicion or a precaution, I'm not sure this treaty would allow them to [ban Huawei]," Peterson said.

By comparison, the U.S. insists on broad security exemptions in its treaties and makes them self-judging:if the Americans say something is a security risk, it is, with or without public evidence.

Canada did not negotiate thatkind of language with China.

As this article was being prepared for publication,HuaweiCanada hadnot responded to inquiries from CBC News on whether it's considering its options under the investment treaty.