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TORONTO — The move by the federal government to force Chinese companies to sell their investments in three critical mineral companies is being called a meaningful and necessary escalation of Canada's defensive posturing on strategic assets.

The order Wednesday from Innovation Minister François-Philippe Champagne, which followed an announcement last week that he would be limiting foreign state-owned companies in the industry, shows the government is responding to a changing world, said Aaron Shull, managing director at the Centre for International Governance Innovation.

"They're on their front foot now," said Shull.

The decision to force Chinese divestment of critical mineral companies Ultra Lithium Inc., Lithium Chile Inc. and Power Metals Corp. comes in sharp contrast to the government allowing a Chinese state-owned investor to take over Neo Lithium Corp. in January without an in-depth security review.

The shift comes as hostile states use every tool short of armed conflict, whether diplomatic, informational, or economic, to advance their interests that are often not aligned with Canada's, said Shull. 

"The world is fundamentally different," he said. "Adversarial states are leveraging every aspect of state power that they possibly can."

The timing of the move comes weeks after Deputy Prime Minister Chrystia Freeland gave a speech at the Brookings Institute in Washington, D.C., expanding on the 'friend-shoring' strategy she and U.S. Treasury Secretary Janet Yellen have been speaking about for months, which focuses on the need to close ranks on trade issues with countries whose interests are aligned. 

It also comes after the U.S. moved in early October to restrict the exports of microchips and chipmaking equipment to China, as well as restrictions on U.S. citizens working for Chinese chipmakers, as economic actions gain momentum.

"This is all connected. I don't think there's a coincidence here," said Shull.

Canada has taken actions against Chinese state-owned investors in the past, including blocking efforts to take over TMAC Resources Inc. in 2020 and Aecon Group Inc. in 2018, and orders for China Mobile to divest its Canadian affiliate CMLink in late 2021, but this latest move comes as Canada increasingly recognizes mineral production as a security issue.

In announcing the latest decision, Champagne said in a written statement that the government will act decisively when investments threaten national security or critical minerals supply chains.

Critical minerals and metals, such as lithium, cadmium, nickel and cobalt, are essential components of everything from wind turbines and electric cars to laptops, solar panels and rechargeable batteries.

China is the dominant player in critical minerals refining and processing, as well as in the manufacturing supply chain of battery cell components. But China does not produce a lot of the minerals itself, and has instead invested heavily in overseas mines to acquire the raw materials it needs.

This hunger for raw minerals has meant significant investments in Canada's mining sector and helped allow for increased production.

Pierre Gratton, chief executive of the Mining Association of Canada, hinted at the tension between security and economic considerations in an emailed statement, saying that while the industry is very sensitive to the geopolitical context and difficult choices of government, access to capital and markets is also essential to increase production.

Lithium Chile said in a statement that the investments by Chengze Lithium, completed in January and May this year, gave the company a significant cash position, but that the government order doesn't affect the company's operations. 

The company says it has already had several companies reach out with interest in acquiring Chengze's block of ownership. 

Funding from state-owned firms means influence from the Chinese Communist Party, so Canada has had to move forward with that in full view, said Lawrence Herman, international trade counsel at Herman & Associates.

"You can't run after Chinese money and think it's going to be a panacea for all kinds of financial issues," said Herman, who is also a senior fellow at the C.D. Howe Institute.

The divestment order is an important first step, said Herman, though he thinks more should be done including wider strategic reviews in areas such as technology and cybersecurity.

"This is an important step and it shows, finally, that the federal government is waking up to the threat posed by China."

This report by The Canadian Press was first published Nov. 3, 2022.

Ian Bickis, The Canadian Press