By David Ljunggren and Steve Scherer
OTTAWA (Reuters) - Canada could see the end of a nasty diplomatic dispute with China if the United States reaches a deal to release a Huawei executive from house arrest in Vancouver, but the affair shows that without the heft of its southern neighbor, Canada has no bargaining power with Beijing.
And even if Huawei Technologies Co Ltd Chief Financial Officer Meng Wanzhou does return to China, bilateral relations still face major challenges.
Shortly after Meng was picked up on a U.S. arrest warrant in December 2018, China detained two Canadian men - Michael Kovrig and Michael Spavor - who now face spying charges.Having failed to secure their immediate release, Canadian Foreign Minister Francois-Philippe Champagne has talked for months about a formal "reset" of relations with China.
The idea was to balance taking a firm line on human rights issues and defending Hong Kong's independence, while working together with China on issues such as climate change.
Four people directly familiar with the matter said the effort stalled amid internal disagreements over what approach to take, and the realization that Ottawa has very little leverage over Beijing.
"The only way to put real pressure on China is for a number of like-minded nations to form a common front. The United States are the key player here and without them, nothing will happen," said one person directly familiar with the policy reset talks.
U.S. prosecutors are discussing a deal with Meng's lawyers to resolve criminal charges against her, a person familiar with the matter said.
"Let's hope that the discussions are serious and that a solution can be found because otherwise I think we would be in a mess for a long time," Guy Saint-Jacques, former Canadian ambassador to China, told the Canadian Broadcasting Corporation.
Canadian officials are silent over whether they are playing any role in the Meng talks, and Prime Minister Justin Trudeau declined to comment when asked about it on Friday. His "top priority" is the release of the detainees, he said.
Foreign policy experts said Canada would have to insist the administration of U.S. President Donald Trump - which has not always had good relations with Ottawa - secure from China a guarantee it would release the Canadians as part of any deal.
"Without the two Michaels being part of the package, we have no leverage at all if Meng should return to China," said Phil Calvert, a former Canadian diplomat in China and now a research fellow at the University of Victoria.
Even if Meng were released, the remaining challenges include a decision on whether to allow Huawei to supply equipment for next generation 5G telecoms networks. Other major allies have imposed a ban but Ottawa says it is still deciding what to do.
Sources say Canada has effectively blocked Huawei but does not want to say so publicly for fear of harming the fortunes of the two detainees.
Trudeau's minority Liberal government, which relies on other parties to govern, is under pressure from the official opposition Conservatives to take a much firmer line with China.
"There has been no reset. I can't point to one thing that has changed with respect to China," Conservative leader Erin O'Toole said in an interview on Nov. 19.
Champagne's office referred to comments the foreign minister made last week in which he said Canada would take a flexible approach to China. He also said "tough and irresponsible rhetoric" would not help the detainees.
U.S. President-elect Joe Biden this week said one of his priorities would be to gather with allies "so we can develop a coherent strategy" on China. What role Ottawa would play in such talks is unclear.
Like-minded democracies in the region such as Japan or South Korea, are important allies for any coordinated China policy, said a person familiar with the matter, adding: "Without the United States, Canada doesn't have a China policy."
(Reporting by David Ljunggren and Steve Scherer; editing by Grant McCool)