Industry Committee on Jan. 26th, 2022

[The Chair, Liberal, Joël Lightbound]

I call the meeting to order.

Good afternoon, everyone.

Welcome to meeting No. 03 of the House of Commons Standing Committee on Industry and Technology.

Pursuant to Standing Order 108(2) and the motion adopted by the committee on Thursday, January 20, the committee is meeting to begin its study on critical minerals.

Today’s meeting is taking place in a hybrid format, pursuant to the House Order of Thursday, November 25, 2021. Members may attend in person or remotely using the Zoom application.

I would like to take this opportunity to remind all participants of this meeting that taking screenshots or photos of your screen is not permitted.

Given the ongoing pandemic and in light of the recommendations from public health authorities, as well as the directive of the Board of Internal Economy on October 19, 2021, to remain healthy and safe, all those attending the meeting in person are advised of the following recommendations. Anyone with symptoms must participate by Zoom and not attend the meeting in person. Everyone must maintain physical distancing of two metres. Everyone must wear a non-medical mask when circulating in the room. Everyone present must maintain proper hand hygiene by using the hand sanitizer at the room entrance. Committee rooms are cleaned before and after each meeting. As the Chair, I will be enforcing these measures for the duration of the meeting, with the help of the clerk, who is in Ottawa in person.

I would also like to take this opportunity to introduce and thank the witnesses joining us today virtually. They are Jeffrey B. Kucharski, Adjunct Professor, Royal Roads University, Guy Saint‑Jacques, former Ambassador of Canada to the People's Republic of China, Wesley Wark, Senior Fellow, Centre for International Governance Innovation, Flavio Volpe, representing the Automotive Parts Manufacturers' Association, and Nikos Tsafos, James R. Schlesinger Chair for Energy and Geopolitics at the Center for Strategic and International Studies.

My dear witnesses, let me remind you that you will have five minutes to present your remarks. After that, committee members will be able to ask you questions.

Finally, I would like to inform my fellow committee members that I would like to take five or 10 minutes at the end of the meeting to adopt the report that has been submitted and sent to the members. This is the subcommittee report from yesterday. So I would ask members to keep that in mind.

With that, I give the floor to Mr. Kucharski for his comments.

[Dr. Jeffrey B. Kucharski, Adjunct Professor, Royal Roads University, As an Individual]

Good afternoon, honourable members. It's a privilege to be able to speak to you today.

Lithium is on the list of 31 minerals that Canada considers to be critical to the sustainable economic success of Canada and its allies, and that position Canada as a leading mining nation. The Neo Lithium takeover is not the first time a Canadian lithium company has been acquired by a Chinese firm. I have submitted several examples of Canadian lithium company acquisitions by Chinese firms over the past three or four years.

The Chinese government's “made in China 2025” industrial policy seeks to make China dominant in global high-tech manufacturing, including in batteries, electric vehicles and renewable energy technologies. The program's policy aims include mobilizing state-owned enterprises to acquire intellectual property, technologies and assets abroad, with the overall aim to surpass western countries. Securing access to lithium and other critical mineral reserves is essential to the achievement of made in China 2025.

I'm not arguing that this deal should have been denied because the lithium from this company would necessarily have been used in Canada. Currently, we don't have a lithium industry here to use it, but we never will if we allow all of our lithium companies to be sold off and don't have a strategy to build a supply chain at home. If we allow our lithium industry to be sold off, it also undermines efforts to support the development of clean energy technologies that we will need for the clean energy transition.

Part of the problem may be that the government is assessing these acquisitions on a case-by-case basis. As the minister has said, each is assessed “on its own merits”, as it were. The problem with that is it seems to miss the big picture. This takeover is part of a broader pattern of acquisitions that Chinese companies have been making in this sector in Canada.

How can Canada build a lithium supply chain, or any other critical mineral for that matter, when it allows the assets of Canadian companies to be acquired by a country that seeks to cement its dominance in this sector? If each deal is evaluated on an individual basis alone, without regard to what the past record of acquisitions has been or where we need to go as a country to build a strong supply chain over the long term, how can we expect that we will ever be a player in this sector?

I believe the government should review the national security review process and provide more extensive guidance on what types of investments and situations would automatically trigger national security reviews. For example, should acquisitions by state-owned or -controlled companies, especially ones from China, be automatically subject to a national security review? There are also questions about the extent to which our national security review process is aligned with Canada's critical mineral strategies.

That's all I have for today. Thank you very much for your kind attention.

[The Chair, Liberal, Joël Lightbound]

Thank you, Mr. Kucharski.

I will now turn it over to Mr. Saint-Jacques for five minutes.

[Guy Saint-Jacques, Former Ambassador of Canada to the People's Republic of China, As an Individual]

Thank you, Mr. Chair.

Good afternoon, ladies and gentlemen of the Standing Committee on Industry and Technology.

Thank you for inviting me to testify before you today.

I will give my presentation in English, but I will be happy to answer your questions in both official languages.

First, let me speak about China's economic development policy. Since the early 2000s, China has encouraged its state-owned companies to invest abroad to secure long-term supplies of oil and natural gas and minerals, including critical minerals. I would note that the majority of the some $90 billion invested by China in Canada is related to these commodities. To be fair, I should add that many communities have benefited from these investments.

As we heard previously, China is pursuing a dual circulation strategy whereby it wants to become less dependent on foreign technology and products—clearly the goal of the made in China 2025 policy, which aims at increasing China's self-reliance in 10 key technological sectors—but also to become a net exporter of high technology. As we have heard, this includes new vehicles, electric batteries and renewable energy. This policy has increased the need to secure access to critical minerals, including lithium.

To achieve these goals, China supports its state-owned enterprises by providing subsidies, tax breaks, cheap loans and so on. We also know that it does not play by international trade rules. For instance, there is no level playing field for foreign companies in China. Many sectors remain closed to them, or access is severely limited. China also uses trade as a weapon, as we saw after the arrest of Meng Wanzhou. Canada lost $4.5 billion in exports to China in 2019. More recently, Australia has been the victim of unjustified tariffs in five sectors, because it asked for a full investigation on the origin of COVID-19.

That being said, Canada is looked at by China as a reliable supplier of minerals. Our exports to China in 2021 will likely have established a new record, as at the end of November they were up 17.5% year on year to $26.6 billion, which is just $1.12 billion below the previous record, established in 2018. This is thanks in large part to increased exports of metallurgical coal, copper and iron ore. I would also note that many Chinese private mining companies are listed in Canada, as it is easier to raise money here than in China.

Now let me turn to the acquisition of Neo Lithium by the Zijin Mining Group. The key question for me is where is Neo Lithium active? It has no mine in Canada, but it has one mine project in Argentina. I must say that it is not obvious to me to see how Canadian national security would be directly threatened by this acquisition. As well, we have a free market policy, and companies are allowed to manage their business as they wish.

Should the government have been more concerned about this matter, about this acquisition? I think this raises a more general and important question: What is the policy of the Canadian government to support the production of critical minerals in Canada, and what concrete actions can be taken with our allies, for instance, under the U.S.-led energy resource governance initiative or the Canada-U.S. critical minerals action plan? That should be where we need more attention and more efforts.

Thank you for your attention. I would be happy to answer your questions.

[The Chair, Liberal, Joël Lightbound]

Thank you very much, Mr. Saint‑Jacques.

The floor now goes to Mr. Wark, for five minutes.

[Dr. Wesley Wark, Senior Fellow, Centre for International Governance Innovation, As an Individual]

Chair and members of the committee, thank you for this opportunity to appear in your important study of the national security review of the acquisition of Neo Lithium by Chinese company Zijin Mining.

I'm going to skip over the timing and details of this transaction. I think they're familiar to the committee, but I'm happy to come back to them in questions.

To cut to the chase, The decision not to conduct a formal Governor in Council-approved national security review of this transaction was, I believe, a mistake. It is worth noting that the minister did not even take advantage of the extra 45-day period of scrutiny allowed under the act to determine whether the Zijin Mining takeover could be injurious to national security.

The decision cannot be undone, but it seems to me that this case offers important lessons for the conduct of national security reviews in the future. I'd like to lean forward to quickly identify four such lessons for the committee.

The first is with regard to strategic vision, which others testifying have referenced. In my view, a national security review needs to be guided by a coherent economic security strategy for Canada. An economic security strategy remains under development, but it is not in place. There is also a promised critical minerals strategy, which is also not ready. The strategy will be important to address Canadian potentialities, especially with regard to northern development; to detail a Canadian approach to joint efforts with the United States; and to account for disturbing trends, which we've heard about, in the global concentration of critical minerals processing, where China has established a very formidable lead, perhaps a near monopoly. The absence of this strategic framework leaves the application of a national security review under the Investment Canada Act in a state of confusion.

The second point I'd make is on translating policy intentions into action. The revised guidelines on a national security review of investments issued on March 24, 2021, state that all foreign investments by state-owned investors will be subject to enhanced scrutiny and that the minister may take into account, “The potential impact of the investment on critical minerals and critical mineral supply chains.” Lithium is included, of course, in the government's list of critical minerals.

The ISED minister's mandate letter, published on December 16, 2021, contains multiple relevant directives, including the use of the Investment Canada Act “to ensure the protection and development of our critical minerals.” It calls for the creation of a critical minerals strategy. It talks about the promotion of economic security, the need to modernize the Investment Canada Act to strengthen national security reviews, and the safeguarding of intellectual property-intensive businesses. However, it seems to me there are significant gaps between these recent policy statements and promises and their implementation. These must be urgently addressed.

The third point is conducting more national security reviews under the section 25.3 provisions of the Investment Canada Act. The latest annual report of the ICA for 2019-20 shows that historically—that is, going back to 2009—less than 1% of investment findings have been subject to an order under the act. They are rare but they shouldn't be, especially given the changing nature of threats to our economic security and the advantages that more in-depth scrutiny brings. Any foreign direct investment with national security sensitivities, such as the Neo Lithium case, should be subject to at least an additional 45-day review period, as provided by section 25.2 of the act, so that a proper determination of the need for a full national security review could be made.

The fourth and final point is enhanced transparency. The national security review process under the ICA is a secretive undertaking. It is rare that Canadians learn anything about the reasons behind national security review decisions at any stage of the process. The explanations provided by the parliamentary secretary to this committee last week were, in my view, unconvincing and deserve to be subject to critical examination. As the Neo Lithium decision suggests, greater transparency leads to contestability—which is valuable—and to the potential avoidance of poor outcomes and wrong thinking in the future. I would also add that greater transparency reporting requirements for decisions on national security reviews would be in keeping with the government's national security transparency commitment announced in 2017.

Finally, in conclusion, a national security review under the ICA urgently needs to be rethought to deliver greater economic security for Canada going forward. I believe the government addressed the Neo Lithium acquisition using too narrow a framework; misjudged its significance to Canadian national and economic security, now and in the future; failed to translate policy promises into action; and was caught up in a protracted period of political transition while the transaction was being reviewed—all of which, I believe, led to a wrong decision.

Thank you.

[The Chair, Liberal, Joël Lightbound]

Thank you very much, Mr. Wark.

I'll now turn the floor over to Mr. Volpe for five minutes.

[Flavio Volpe, President, Automotive Parts Manufacturers' Association]

Thank you.

Thank you to the chair and members for having me to this committee again.

I'm very happy to be preceded by my former professor at the University of Toronto, where one of my first lessons in international relations was the Taiwan Strait crisis. That was the first real foray into the U.S.-China balance of power dynamic. Here we are, almost 30 years later. We're here because of the dominance of that interplay on Canadian industrial and foreign policy and, more acutely, on our critical minerals strategy.

I think you invited me here because the world is electrifying. In the transportation world, I represent $35 billion a year in shipments, with 100,000 people employed. Another 86,000 people are employed by Canadian parts and systems suppliers in the U.S. and Mexico. That's central to this electrification and this dance between the major jurisdictions of the world and automotive manufacturers, who are all in the race to get to a zero-emissions future.

If we're going to continue to be a major auto player in Canada—and right now we are the world's 10th-biggest producer of automobiles, even though we do not have a Canadian automaker—we need to do two things. We need to be able to transition the companies that supply the current automakers through that $35-billion-a-year shipment to the new zero-emission vehicle component supply chains. Thirty per cent of what is assembled in Canadian plants are traditional powertrains, internal combustion engines and transmissions. We need to bet on those local companies making the transition to making motors and e-gears and batteries.

On the battery end of it, we need to extract, process and convert critical minerals into deployable components locally. Before this role and on this journey, between the first time I saw Professor Wark and this time, I taught international business at Humber College, practised it in Canada as the country head of the biggest European renewable energy developer, worked very closely with the minister of economic development and international trade provincially during a global financial crisis and was a key industry player in the two biggest trade negotiations in which Canada has taken part in the last five to 10 years, the TPP and CUSMA.

In all of these, China has been the biggest market disrupter, the elephant in the room and the factor that we've needed to balance against opportunities we pursue as part of the U.S. sphere.

We're here because of the Neo Lithium deal and the question of a national security review. I'll leave the principles of national security review to experts there, and I'll layer in our view on it from a components point of view.

The potential deployable assets are in a mine in Argentina. It's lithium carbonate, versus the preferred lithium hydroxide. While we're not in production yet in Canada for cells that could go into batteries that are deployed into electric vehicles and we're not making those electric vehicles yet, there is a real capacity coming online, we think between 18 and 36 months, especially in the province of Quebec.

Critical mineral strategies in automotive means local, local, local. We need extraction. We need processing. We need cell manufacture, and then we need battery assembly, because we all signed on in this country to the new CUSMA, and in that CUSMA, in the rules of origin, there is a regional value content equation that must be met for EV components and for batteries. All of them are underpinned by local, local, local. None of that lithium or other critical materials can come from outside North America and qualify for tariff-free export through the region.

Canada's auto industry and its supplier industry do not benefit from sourcing lithium from outside North America, and there is no profitable advantage to incurring the cost of importation. These are the highest-cost components of the vehicle, both in terms of processing and assembly, and they are also the biggest and most difficult products to move from their point of production to the final point of assembly.

Furthermore, businesses rely on forecastable, stable regulatory behaviour. Some in our business saw the potential for the blocking of this deal as blocking the sale of foreign assets.

[The Chair, Liberal, Joël Lightbound]

Mr. Volpe, I'll have to ask you to conclude very quickly.

[Flavio Volpe]

Sure. I have two more sentences.

There are many ways to do our part in combatting China's increased dominance in this space. Picking a fight over assets on the other side of the world is not an action that our industry would recommend, given the current fragile nature of trade between our countries in automotive.

[The Chair, Liberal, Joël Lightbound]

Thank you very much, Mr. Volpe.

I'll now turn the floor over to Mr. Tsafos for five minutes.

[Nikos Tsafos, James R. Schlesinger Chair for Energy and Geopolitics, Center for Strategic and International Studies]

Mr. Chair, thank you very much for inviting me to address this committee.

My name is Nikos Tsafos. I hold the James R. Schlesinger chair for geopolitics and energy at the Center for Strategic and International Studies in Washington, D.C. I have spent my career at the intersection of energy and geopolitics, so I am grateful for the opportunity to share some thoughts on the importance of critical minerals for the energy transition. I have four points that I'd like to leave you with.

First, we cannot lower greenhouse gas emissions without critical minerals. These two go hand in hand. By some estimates, the global demand for critical minerals could increase sixfold up to 2050. For some products, like cobalt, nickel and lithium, the forecasted growth is even greater. No matter what the actual numbers end up being, there is no doubt about the direction of travel. Based on current technologies, there is no pathway to decarbonization without more mining.

Second, critical minerals will, over time, become more important than hydrocarbons. Today the international trade in energy consists mostly of oil and gas. One day the trade in critical minerals will supersede that trade in fossil fuels. People like me who study energy security, who today look at the Middle East or Russia, will one day be looking at the lithium triangle in South America. They will focus on Australia, Chile, Indonesia and the Democratic Republic of Congo. We will need new mental maps to process and to think about this world.

These global flows will create new linkages and dependencies. We can also expect them to create tension. Who can develop this resource? Who benefits from it? Who bears the costs? We can already see the fault lines of mining across the world, from Serbia to Bolivia and from Indonesia to Nevada here in the United States. This is a global story, but the politics and the tensions are local.

Third, China has already built a commanding position in critical minerals. China produces some minerals, but its dominance really comes from the processing part of the value chain. China is where commodities go to be turned into useful products. This capacity gives China and Chinese industry a competitive edge in many of the sectors that will be essential for the energy transition. We cannot talk about critical minerals without talking about China.

That brings me to my fourth and final point. The west really needs a strategy for critical minerals. The end goal, as far as I can tell, is clear. We want adequate supply that is produced responsibility, with a fair allocation of costs and benefits among companies, governments and local populations. We also need supply chains that are resilient, not ones that run solely through China. There's a lot of work to do that—to grow supply, to build capacity, to strengthen governance—but the most important objective we have is to ensure that western companies have access to the minerals needed for the green economy.

Supply chains without China are impossible, but supply chains dominated by China are unacceptable. Critical minerals and the industries they enable are too important to be left alone. Western governments should tackle these questions together, because the stakes are too high for any other approach.

Thank you for the opportunity to address the committee on this important topic. I look forward to your questions.

[The Chair, Liberal, Joël Lightbound]

Thank you very much, Mr. Tsafos.

We will start our first round of questions with Mr. Ed Fast, who's in person in Ottawa.

Mr. Fast, the floor is yours for six minutes.

[Ed Fast, Conservative, Abbotsford, BC]

Thank you very much, Chair.

My first question is for you, Dr. Wark. You've expressed serious concern about the government not following its stated policies. During the COVID pandemic, the government has supposedly beefed up its policies on protecting our supply of critical minerals and our access to critical minerals. Canada has also been working with the United States to establish a more coherent approach to the supply and the supply chains that deliver critical minerals to many of our industries, including automobiles.

Do you believe the Neo Lithium transaction is consistent with the ministers' mandate letters or the policies that are currently in place to protect critical minerals?

[Dr. Wesley Wark]

Mr. Fast, thank you for the question.

Mr. Chair, thank you for the opportunity to respond.

I would say, to repeat my testimony, that I don't find that the decision not to conduct a formal national security review was appropriate in the circumstances of this acquisition, the value of which has been reported in the media as close to a billion dollars. I would say in particular it seems to me some of the guidelines that have already been set out by the government as to how they want to approach this issue, quite apart from promises made to create things like an economic security strategy, to beef up the resourcing of national security review and to create a critical minerals strategy.... You know, these are all important promises, but as I said in my testimony, I think there's a significant and I fear perhaps a widening gap between the promises and their delivery in reality.

I would just, in response to your question, make one particular point, and it also references some of the other testimony the committee has heard. I don't regard it as terrifically significant to a national security review that Neo Lithium possessed a significant mine asset in Argentina and was engaged in a pilot plant project for extraction.

I think it's very important—and this references my own comments about the need for a broader, more strategic, more future-oriented approach to national security reviews—to understand what's lost when we allow a Canadian company, or a company that at least trades in Canada and is based in part in Canada, to go into the hands of a Chinese SOE. We're losing future capabilities. We're losing intellectual property. We're losing technological know-how, and we're losing an unknowable future, which I think all the witnesses you've heard from will agree is going to be very important to Canada's economic development and to our transition to a green economy. In that context, I think the narrowness of the approach apparently taken in this review process was fully on display and shown to be inappropriate.

[Ed Fast, Conservative, Abbotsford, BC]

Thank you.

Mr. Kucharski, you mentioned that there are also other transactions relating to lithium that have occurred over the last three or four years. Are you aware of any of those undergoing a national security review?

[Dr. Jeffrey B. Kucharski]

Yes. I am aware of a few. I did some basic research into other acquisitions in the lithium space in Canada and came up with two or three examples, which I've included in my brief to the committee.

I'm not aware yet of whether those underwent national security reviews. I couldn't find any reference to reviews being undertaken in those instances, but I'm not currently in possession of all the facts on that. I'd actually like to look into that a little bit more.

[Ed Fast, Conservative, Abbotsford, BC]

Mr. Tsafos, you're from the United States, but I believe you have a keen interest in ensuring that the United States works with its allies to secure its supply of critical minerals for our key industries. Given the fact that this transaction was approved without a national security review, do you believe that decision not to do a national security review was consistent with the understandings that the United States and Canadian governments have had about co-operation in this area?

[Nikos Tsafos]

Thank you for the question, Mr. Chair.

As you've pointed out, I live in the United States—I'm not a Canadian—so I will answer this from a certain distance. The key point I would like to make is the broader question here: Should we care who owns lithium and who produces lithium in the world? I think that over the last couple of years, especially in the United States, there's been a growing awareness that indifference to that question, that not paying attention, has come at a huge cost.

I will be very candid that Washington has not come up yet with a comprehensive strategy to address critical minerals, to safeguard them and secure them. That's some of the work that we are trying to do as a think tank here in Washington. In my view, what that strategy would entail would be to work with key allies like Canada, like Australia and like the European Union in trying to think about how these supply chains can evolve over time so that they become much more diversified from China than they are today.

That would be the strategic posture that I would expect from the United States. We've seen various U.S. institutions, including the development finance corporation, give money to companies that are trying to diversify these supply chains. That would be a core U.S. objective to be pursued in partnership with allies like Canada.

[Ed Fast, Conservative, Abbotsford, BC]

What you're saying is that it really doesn't matter where these minerals are located.

[The Chair, Liberal, Joël Lightbound]

Mr. Fast—

[Nikos Tsafos]

This is a global market. It's the same way we think about oil. If in one place in the world something happens, it affects us all. Over time this is what is going to happen with these critical minerals. We may not see it today because they're a smaller part of the market, but that is where we're headed. The strategic question is this: Should we care about who owns this multi-hundred billion dollar market and access to the critical minerals that will empower a dozen industries in the future? Should we care who controls those industries? I think we should.

[Ed Fast, Conservative, Abbotsford, BC]

Thank you.

[The Chair, Liberal, Joël Lightbound]

Thank you, Mr. Tsafos and Mr. Fast. That's all the time. We're a little overboard.

The floor now goes to Mr. Fillmore, followed by Mr. Lemire.

Mr. Fillmore, you have the floor for six minutes.

[Andy Fillmore, Liberal, Halifax, NS]

Thank you, Chair.

Thanks to the witnesses for making time to share knowledge and perspective. It's greatly appreciated.

I want to just connect to something that professors Kucharski and Wark mentioned about the ICA guidelines for a national security review. I'm happy to share that the guidelines were updated in March 2021. The new updates take into account the potential for the impact of investments in and divestments of critical minerals. The changes also address concerns related to investments involving sensitive technology areas in critical minerals and also investments by state-owned and even state-influenced investors.

The departmental review that was, in fact, conducted on the transaction had the benefit of these updates and changes. In that context, the national security review was not triggered. I think that's important to point out.

I will say that all members of this committee want Canada to make the most of our critical minerals, including by having a strong presence in the transition to a green economy and the role that batteries are going to have in that transition. That is, of course, why we're anxious to get to our critical minerals study, which will then inform the critical minerals strategy. We're all in a rush to get there. That study is waiting in the wings.

I will go to lithium now, if I may.

Professor Kucharski, I would like to ask you to address two questions. I'll say that lithium is a specialty mineral that's tied to and tailored very specifically to the needs of consumers. It's different from a flexible commodity, like iron ore, for example, that could take on so many different forms. Lithium hydroxide, as opposed to lithium carbonate or lithium brine, is the preferred form of lithium for electric vehicles. A case in point is that Tesla is currently building a lithium hydroxide refinery in Texas, adjacent to its battery factory. It will supply that exclusively with hard rock lithium.

First, do all lithium sources or types have the same strategic value to Canada? Second, the way you look at this, is there any lever that, had the sale not occurred, Canada could have controlled such that these Argentinian miners mining lithium in Argentina would be forced to sell that in Canada?

Thank you.