UPDATE 1-Huawei faces exclusion from planned Canada government network

* Canada invokes national security exception

* It suggests Huawei may be excluded from building network

* EU holds fire on Huawei, ZTE telecom trade case

(Adds context of Huawei's business, implications for Nexen, EUdetails)

By Randall Palmer

OTTAWA, Oct 9 (Reuters) - Canada indicated strongly onTuesday it would exclude Chinese telecom equipment giant HuaweiTechnologies Co Ltd from helping to build a secureCanadian government communications network because of possiblesecurity risks.

Meanwhile, the European Commission has delayed a trade caseagainst Huawei and another Chinese telecom equipment maker, ZTECorp , easing tensions between the EuropeanUnion and China, its second-biggest trading partner.

Canada has invoked a national security exception to let itdiscriminate, without violating international trade obligations,against companies deemed as too risky to be involved in puttingtogether the network for carrying government phone calls, emailsand data center services, Canadian Prime Minister StephenHarper's spokesman told a news conference.

"The government's going to be choosing carefully in theconstruction of this network, and it has invoked the nationalsecurity exception for the building of this network," AndrewMacDougall, spokesman for the Conservative prime minister, said.

"I'll leave it to you if you think ... Huawei should be apart of a Canadian government security system," MacDougall said.

MacDougall was speaking in reaction to a report on Mondayfrom the U.S. House of Representatives Intelligence Committee,which urged American firms to stop doing business with Huaweiand ZTE.

It warned that China could use equipment made by the twocompanies to spy on certain communications and threaten vitalsystems through computerized links.

CBC television reported that the House committee chairman,Representative Mike Rogers, is also urging Canadian companiesnot to do business with Huawei.

Huawei and ZTE are the world's second- and fifth-largestmakers of wireless telecoms gear.

EU Trade Commissioner Karel De Gucht is gathering evidencein order to launch an anti-dumping or anti-subsidy case. Hisefforts have been hindered by the fact that no Europeanproducer, such as Ericsson and Alcatel-Lucent, has complained. A formal complaint is normally aprerequisite for an investigation.


Huawei has a thriving business in Canada. It won a contractin 2008 to build telecommunications networks for domesticoperators Telus Corp and BCE Inc's Bell Canada,and it has even received a C$67 million ($68 million) researchgrant from the province of Ontario.

"The national security exception only applies to foreigncompanies," said Huawei Technologies Canada Co Ltd spokesmanScott Bradley.

"Huawei is fully incorporated in Canada, and operates as asubsidiary Canadian company. This alone effectively enables usto bid on any potential procurement opportunities," Bradleyadded.

Huawei has 130 engineers in its Ottawaresearch-and-development facility and has 300 employees in itsCanadian head office in Markham, Ontario, the company said. Thecompany says it has so far procured C$400 million from Canadiancompanies.

Its services may be in particular demand by Canadian firmsnext year after an auction of valuable wireless spectrum of 700MHz frequencies, compatible with the new mobile broadbandtechnology known as long-term evolution (LTE), one of Huawei'sfortes.

In invoking the security exception for the governmentnetwork, Canada has not gone as far as Australia, which hasbarred Huawei from taking part in contracts to build thegovernment's $38 billion national broadbandnetwork.

Bradley suggested the Australian decision was made for otherreasons.

Bradley said that Australia has made pretty clear that it is"trying to cozy up to the United States right now in terms oftheir trade relationship," noting that Australia has also agreedto have 2,500 U.S. troops stationed there.

David Skillicorn, Internet security expert at Queen'sUniversity in Kingston, Ontario, said he supports the U.S.recommendation not to deal with Huawei and said the Canadiangovernment should revisit its decision to let it operate inCanada.

"The Harper government is putting Canadiantelecommunications companies at risk. We shouldn't be rollingout the red carpet for this company," Skillicorn said.

The negative publicity in Canada for Huawei and for China ingeneral may have ramifications for a $15.1 billion bid byChina's CNOOC Ltd for Canadian oil firm Nexen Inc.

The Canadian government must decide if the takeover would beof net benefit to Canada. Some politicians have said a Chinesestate-owned firm should not be allowed to scoop up a Canadianoil firm.

Canada's spy agency Canadian Security and IntelligenceService has put out a report saying investment in strategicsectors by some foreign state-owned firms could threatennational security.

($1=$0.98 Canadian)

(Additional reporting by Philip Blenkinsop in Brussels; Editingby Peter Galloway and Will Dunham)


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