Trieste’s shattered Chinese dream

When Italy signed up to the China Belt Road Initiative in 2019, it had dreams of becoming the key gateway for China into the Baltic, Adriatic, and Euro trading zone. The Port of Trieste, being a key component of the deal, envisaged a future state in which it would become the future maritime hub for the Adriatic, in a sense the new ‘Singapore’ of the region. However, recent developments point to the potential for a complete breakdown in the relationship.

Those dreams and subsequent Trieste celebrations were perhaps premature. Cracks in the relationship emerged shortly after the deal was done, revealing a gap in the understanding of what was agreed, particularly the differing priorities and intent.

In the first instance there was the geopolitical issue around the Free Port status of Trieste. Trieste does not see itself as being part of Italy and has mounted an ongoing campaign to have its independent status re-established by the United Nations. In summary, the issue centres on claims that Italy does not have sovereignty over the Free Territory of Trieste and that zone A of the Free Territory and the Free Port of Trieste was occupied manu militari and illegally annexed by Italy on 26 October 1954. It is claimed that there has been a failure 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). It is a vexed question and greater clarity can be found in this article. 

It is therefore understandable that Italy would prefer Genoa as the focal port development. Italy would also argue that the Genoa port development made greater commercial and economic sense. After all, Genoa has an existing rail network connecting it to the region’s hinterland. Italy has spent the last 100 years developing this rail system as it supplies the Italian industrial heartlands of the Torino and Milano regions as well as the established trading nations of Switzerland, Southern/Central Germany, and Eastern France. This was the gateway status that Italy aspired to, being the connector between the Chinese markets and its traditional trading partners of Germany and France.

China on the other hand saw Trieste as a better fit with the ambitions of the BRI. Despite the Trieste port having been neglected for the last 100 years, it was closer to the strategically important Baltic / Adriatic rail network. This network connects to the hinterland markets of Austria, Czech Rep, Hungary, Slovakia, and Slovenia and are of greater strategic interest to China.

Furthermore, Trieste took on greater strategic importance as the nearby ports in Slovenia (Koper port) and Croatia (Rijeka) had secured EU funding to develop these ports that offered an alternative to Chinese initiatives in the area. For example, Koper secured approval for a $500m integrated port / rail development plan.

These differing positions frustrated both parties leading to little progress in BRI development. Exacerbating the situation was the widening of Italy’s trade deficit with China. Chinese direct foreign investment into Italy is significantly lower than the likes of France and Germany, despite Italy being a signatory to the BRI.

The deterioration in the China / Italy relationship gained momentum when a new Government was elected in Italy towards the end of 2019. This new government raised questions as to the lack of progress with regards the promised Chinese investments and began a pivot back to seeking USA investment. It also started a more vocal attack on China’s human rights record.

The response by China was to describe the Italians as corrupt and bureaucratic and difficult to work with. This criticism has since been translated into action by China that has increased investment into Greece’s Piraeus Port as well as the recent 60% acquisition by Cosco of Greece’s railway company Pearl SA. It essentially deflects promises made to Italy by building an alternative to what was envisaged by Trieste. Pearl is a multimodal logistics provider, that connects to the strategic Ten-T rail network via the China-Europe Land-Sea express Line. By connecting to the hinterlands of eastern Europe, North Macedonia, Serbia, Hungary, Austria, Czech Republic, and Slovenia, it bypasses Italy as a gateway into Europe and establishes its Adriatic sea footprint – one of the key reasons for China’s interest in Italy in general and Trieste in particular.

However, developments on June 4 may make the China/ Italy relationship terminal. A ruling by the Italian national anti-corruption authority, ANAC, retrospectively revoked the role of the Italian appointed president of the Trieste Port Authority. He was found to be in breach of conflict of interest provisions, particularly as he held the position of president of the Trieste Terminal Company. All deals, contracts and plans for the development over the last five years are now deemed as null and void. Importantly, the China / Italy / Trieste port development is now null and void.

Potential significant ramifications come out of this new ruling, not least of which is the tearing up of the BRI MOU and subsequent construction agreements that came out of the MOU. This is a realistic possibility as Trieste was the intent behind China’s expansion into Italy. Perhaps there is another lesson to be learnt by China i.e. there is risk associated signing MOU’s with nations that have regular elections as government changes.

China does have options to secure the Adriatic economic corridor and has taken steps to achieve this through Greece’s Piraeus and Pearl port / rail pairing and increasing levels of investment. An option that is open to them is to back the Trieste NGO claims and support them in their UN challenge to get Trieste declared an International free port and free territory. This is unlikely as it would expose China to claims around the status of Taiwan. This does not prevent other UN members taking up the cause of Trieste – who knows, this could present an interesting dilemma for those who trade through and along the Adriatic Sea corridor.

It looks like Trieste has become the skeleton in the closet after all.