As the dust settles on the signing Italy’s MOU with China, focus now shifts as to how this new arrangement between China and a G7 country will evolve. There is no doubting that the structure of China’s economic has undergone significant change over the last two years. Whilst China’s industrial output expanded 6.2% year-on-year in 2018, it has slowed from the 6.6% in 2017. However, the mix within this decline is interesting, suggesting a more balanced industrial structure. G7 countries, such as Italy see increased opportunities as production in high-tech industries have grown at a higher rate. Strategic emerging industries and the equipment manufacturing sector expanded by 11.7%, 8.9% and 8.1%, respectively.
As for the Belt Road Initiative (BRI) the high growth rates in rail freight, particularly between China and Europe, has seen a 35% increase in rail traffic and volume. Drilling down into this growth, we see that an important correction is taking place, namely that there is an increasing balance between the west and eastbound traffic. Whilst westbound (China to Europe) rail traffic grew by 37%, the eastbound traffic has grown by 90%, with 75% through Kazakhstan. Transit volume of 370,000 teu is not lost on nations that are now coming to see the significance of port/rail network pairings under the BRI.
Italy understandingly sees the connection to the BRI rail network as an opportunity to redress its economic woes. However, there are already indications that the recently celebrated MOU, a few skeletons in Italy’s closet have the real possibility of undoing this new G7 / China relationship. Significantly, a number of these skeletons revolve around the port of Trieste. This is important as throughout the negotiation process Italy has pushed the port of Genoa for development focus, whereas China has expressed a preference in Trieste.
The potential flashpoint is the degree to which China upholds its commitment to community engagement under its people to people objectives. Many of the BRI public relations problems have been beset by community concerns that have seen projects derailed and put on hold. Myanmar’s Myitsone Dam is a case in point.
A reason for the Italians pushing Genoa is the existing rail network behind its location, connecting into to the region’s hinterland. That rail network is developed and has been developed for the last 100 years as it supplies the Italian industrial heartlands of the Turin and Milan regions, Switzerland, southern/central Germany and even eastern France. It is probable that the German, Swiss and French governments are pushing Genoa in backroom dealings. As a G7 nation that has stated throughout the negotiating process that it strongly identifies as a Eurozone nation, it makes sense Italy sees this constituency as a more powerful and important area than that of the Trieste port.
On the other hand, Trieste port has been neglected for the last 100 years, notably since the Habsburg monarchy was forced to withdraw. Whilst it sits near the Baltic / Adriatic rail network, this connects to the hinterland of Austria, Czech Republic, Hungary, Slovakia and Slovenia. However, since the mid-1990s, the catch-up game has started. However, Italy itself has not shown an interest in investing into Trieste despite Slovenia developing Koper port, as is Croatia developing Rijeka. Furthermore, the Austrian and Hungarian rail networks can be supported by all three of these ports.
The skeleton in the closet that is already emerging is based squarely in the history of Trieste and can explain why Italy has not taken steps to develop the port facilities. Whilst a better connection from the Free Port of Trieste to the Košice terminal in Slovakia is a positive development, it is seen as being a “little too late” by the Trieste NGO. The NGO argues that this changes almost nothing, and it does not touch the core of the issue that is currently preventing any real development of the free port. The refusal by Italy to apply the international obligations it formally adheres to (in case of the free port, this is annex 8 to the Treaty of Peace of 1947) is becoming a pressing issue.
Whether one sees the Trieste NGO as an irritating sideshow, the legal issues they now raise are gaining traction.
As China has experienced in previous engagements, it is vital that local communities need to be fully engaged or they can do untold damage. One need only look at community issues raised in the Kyauk Phyu region of Myanmar or Hambantota in Sri Lanka that have set back connectivity project by many years. The Trieste community argues that profitable investment in Trieste, for both Triestines as well as for the international community, can only be possible if the free port provisions are thoroughly applied. Not only do they see them as not being applied, they see it as being actively being violated. For example, by having a port director who is an Italian citizen is currently forbidden by article 18.3. Furthermore, imposing, Italian taxation standards goes directly against articles 16.1 and 3.2, among others.
The Trieste NGO are now making moves at a UN level, as it is the United Nations (UNSC resolution 16) that guarantees the application of international law over Trieste. They have made direct representation to members of the UN, including the US, Germany and France to establish an international commission, as provided by article 21 of annex 8, that has been temporarily frozen to be reactivated at the request of any state party.
So before celebrating too hard at this stage, both China and Italy need to reflect on potential fallout from this very vocal group. Life for both parties would become complicated should a UN member, such as the US, that is suspicious of China’s intent, petition the UN to uphold the sovereignty of the port and territory of Trieste.