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Italy’s belt road embrace

With Italy becoming the first G7 country to enter an MOU with China and its Belt Road Initiative (BRI), there are claims that the sky is about to fall in. Despite countries such as Germany and France already enjoying significant trade with China, Italy is accused of somehow letting the EU side down. Some context needs to be added in order to make sense of what transpired over the weekend.

Historically, Marco Polo, the Venetian merchant and explorer travelled the old Silk Road in the middle ages. As Xi Jinping was quick to point to, this was part of the “first bridge” between Italy and China. The modern-day version of the Old Silk Road is more ambitious and now envisages a network of ports, railways, tunnels and other infrastructure spanning 60 countries.

Initial reactions to the MOU signed between Italy and China seem to ignore that the document is a statement of intent to cooperate to build economic and social connections between the two. It is a non-binding agreement, meaning they are not legally obliged to abide by their terms. Similar MOUs signed by China with Latvia, New Zealand, the Cook Islands, the state government of Victoria in Australia and the UN Economic Commission for Europe (UNECE) have not faced the same level of scrutiny, suggesting that comments directed at Italy are more emotionally charged than factually based.

Taking a closer a look, it should be noted that Italy does not have a unified stance when dealing with China. For example, dissent within the Italian government saw the deputy prime minister, Matteo Salvini, who heads the right-wing League in the coalition government, was conspicuously absent from all official ceremonies. He has on numerous occasions warned that he does not want to see foreign businesses “colonising” Italy. He is wary of foreign investment in the ports of Trieste or Genoa.

However, the Five Star Movement, the Eurosceptic party that came to power alongside the far-right League last June, believes the agreement will revive Italy’s stagnant economy. They argue that it brings much-needed investment for the country’s ports and infrastructure that will boost exports to China’s market.

Did Italy really have a choice?

Italy’s share of Chinese investments has lagged in recent years compared with France and Germany’s. Meanwhile, southern European states have tended to benefit less from deals with China because their companies are smaller and finances weaker.
A total of 29 deals amounting to €2.5bn ($2.8bn) were signed during Chinese President Xi Jinping’s visit to Rome.

Ministers then signed deals over energy, finance, and agricultural produce, followed by the heads of big Italian gas and energy, and engineering firms – which will be offered entry into the Chinese market.

China’s Communications and Construction Company will be given access to the port of Trieste to enable links to central and eastern Europe. The Chinese will also be involved in developing the port of Genoa.

By signing an MoU, Italy would look to win the favour of Beijing and potentially tap into the flow of Chinese funds in Europe, which has been trending downwards.

The collapse of the Genoa bridge in August killed dozens of people and made Italy’s crumbling infrastructure a major political issue for the first time in decades.

And Italy’s economy is far from booming. The country slipped into recession at the end of 2018, and its national debt levels are among the highest in the Eurozone. Italy’s populist government came to power in June 2018 with high-spending plans but had to peg them back after a stand-off with the EU.

The ‘made in Italy’ label carries a reputation for quality worldwide, and is legally protected for products items processed ‘mainly’ in Italy.

In recent years, Chinese factories based in Italy using Chinese labour have been challenging that mark of quality.
Better connections for cheap raw materials from China – and the return of finished products from Italy – could exaggerate that practice.

The agreements signed in Rome come amid questions over whether Chinese firm Huawei should be permitted to build essential communications networks – after the United States expressed concern they could help Beijing spy on the West.
That was not part of the negotiations in Italy. They contend that doing so will help Italy reduce its bilateral trade deficit with China, which was around $12.1bn in 2018. But France and Germany have far more balanced trade with China, and neither has officially endorsed the BRI. Moreover, the EU member states that have already signed onto the initiative – namely, Poland and other Eastern European countries – have since complained that the promised economic opportunities never materialized.

Italian leaders have argued that there is nothing to be concerned about. Italy, they say, will avoid China’s debt traps, and its laws prevent foreigners from taking control of its ports, as China has done in Piraeus, Greece. Prime minister Conte has defended the deal, saying Germany and France have considerably more business with China

Italy’s economic development undersecretary Michele Geraci argues that the signature of an MoU on BRI would help Italian companies increase exports to the Chinese market. In 2018, Italy registered a $12.13bn trade deficit with China. However, the MoU is unlikely to change that. European countries whose trade relations with the Asian giant are more balanced, such as France and Germany, have not signed any BRI endorsements. Those EU member states that have signed up to the BRI in the past, such as Poland and other Eastern European countries, have complained that Beijing’s promises of economic opportunities have largely failed to materialise.

The Italian government would be well advised to devote more resources to devising a more balanced China strategy that takes into account not just economic interests but EU unity, geopolitical considerations and risk assessments. While Geraci’s China Task Force has promoted closer political and economic ties with Beijing, a more sophisticated approach would focus on strengthening Italy’s own industrial base and domestic competitiveness while nudging China towards greater market openness. It is also important to remember that as a bloc the EU has more economic and political negotiating power vis-à-vis China than any EU country has alone.

The Dutch prime minister, Mark Rutte, warned Italy against “naivety”. “You have to take into account the possibility that China, through the policies, is also pursuing some of its national interests,” he warned.

Andre Wheeler

CEO of Asia Pacific Connex with more than 20 years’ experience in international business, with a diverse network throughout the USA, Asia, SE Asia , Africa and the United Kingdom. Holding a B. Science (Hons) degree and an MBA, he is currently working towards his Doctorate on the Impact of the China One Belt One Road initiative. Andre has expertise in oil/gas, construction, marine services and mining.
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