Connectivity Italian Style

March 28, 2019 China , Europe , Opinion , OPINION/NEWS

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By

Elena Alekseenkova

Xi Jinping’s historic visit to Italy on March 21–23, 2019 was marked by the signing of a memorandum on Italy’s joining the Chinese Belt and Road Initiative. Despite the fact that 13 other EU countries have signed similar memorandums with China, the significance of Italy’s decision cannot be overstated, as it is the first G7 country and the first founding member of the European Union to officially confirm its readiness to participate in Silk Road projects.

Ever since Undersecretary of State at the Italian Ministry of Economic Development Michele Geraci announced the imminent signing of the document on March 5, 2019, warnings have flooded in from Brussels and Washington about the possible consequences of such a rash step. On March 6, U.S. National Security Council Spokesman Garrett Marquis said that the actions of the Italian government would end up harming Italy’s global reputation in the long term. Similar statements could be heard coming out of Brussels. On the eve of Xi Jinping’s visit, President of the European Parliament Antonio Tajani said that Italy was committing a grave mistake and that “selling ‘Made in Italy’ does not have to mean giving up your sovereignty to the Chinese.” As European leaders try desperately to form a common line of defence against China’s penetration into strategic sectors of the European economy in the run-up to the EU–China Summit on April 9, Italy is again showing no signs of European solidarity.

Italian Logic

“I am convinced that Italy must respect its Atlantic allies and always fulfil its obligations. However, it may also choose how and where to go. We need to make a choice consciously and responsibly,” Deputy Prime Minister of Italy Luigi Di Maio said in the Five Star Movement blog in response to the alarmist signals coming from the United States. “I hope that the League adheres to the same principles, because I have seen various positions over the past few days, some of them shaped by what other countries want and not for the benefit of Italy.” “Today,” the Deputy Prime Minister continues, “the idea of ‘Made in Italy’ wins. With the Belt and Road Initiative, Italy has made the decision to be more sovereign… It is not a political union with China, but rather a business opportunity. The United States remains our main ally, and NATO continues to be our home. But the Belt and Road Initiative is a step forward for Italy.”

According to Prime Minister Giuseppe Conte, Italy’s participation in the Silk Road project is completely in line with the country’s membership in NATO and the European Union, since it is not a political union, but simply the possibility of trade and economic cooperation. What is more, by interacting with Beijing, Rome is determined to get its new partner to adopt European standards and norms in the bilateral relationship.

“The main task is to help Italian companies develop and expand exports to China comparable to that of France and Germany… Clearly, Italian security is of paramount importance to us, which is why we will analyse and assess extremely carefully what is going on in sectors that are of strategic importance for Italy and its allies – telecommunications, energy, ports and infrastructure. The security of the Italians comes first, followed by economic interests,” claims the League, so as not to scare its alarmist-minded electorate.

“I want to control the strategic sectors, to ensure national security. Because the keys to the house should belong to the Italian people,” Deputy Prime Minister Matteo Salvini stresses. Minister of Foreign Affairs Enzo Moavero Milanesi has traditionally tempered the discourse, assuring Italy’s European partners that it will act in line with EU documents and decisions, with the understanding that issues of security are a priority for all EU member countries. But the leader of Forza Italia, Silvio Berlusconi, does not share the enthusiasm of the current government, calling China a “communist and totalitarian” country “that seeks both economic superiority and political hegemony.” A fierce discussion is raging in the Italian media about the benefits and risks of the new partnership with China.

The idea of building up cooperation with China is not new. Paolo Gentiloni’s cabinet worked actively on developing ties with the country. Italy’s new “government of change” contains at least two people who actively support deepening cooperation with China, namely Minister of Economy and Finances Giovanni Tria and Undersecretary of State at the Italian Ministry of Economic Development Michele Geraci.

When he was still a student at the University of Rome, Giovanni Tria studied the success of the Chinese economy, and in the late 1970s he had the opportunity to observe the initial results of the economic transformation in Beijing first hand. His first official visit as Minister of Economy and Finances was to China. Michele Geraci is very familiar with China, having lived there for over ten years. According to Giovanni Tria, the new stage of relations between Italy and China will not only provide them with new opportunities to expand cooperation in sectors of mutual interest, but will also allow Italy to become a champion of developing cooperation between the European Union and China in addressing the key issues of globalization and international cooperation. In other words, Italy wants to significantly increase its role in the dialogue between the European and China, taking the initiative and positioning itself as a driving engine in the process. Despite the fact that 13 EU countries have already signed similar memorandums with China (Bulgaria, Croatia, the Czech Republic, Estonia, Hungary, Greece, Lithuania, Latvia, Malta, Poland, Portugal, Slovakia and Slovenia), they are, as far as Italy is concerned, peripheral countries that carry little weight in the EU economy and are incapable of becoming drivers of EU–China cooperation. Unlike Italy, which after Brexit will be the third largest economy in the European Union and which, moreover, is one of its founding members.

Geraci also acknowledges the desire to take the initiative in the dialogue, emphasizing that it is a matter of tactics: “Italy should feel more free than the other 27 EU member countries. China prefers bilateral cooperation and does not like to wait for the approval of the EU, which often takes a long time. That’s why we need to take the initiative… The does not mean circumventing Europe, but rather leading it and showing it the way forward.” According to Geraci, Italy has much to learn from China: how to achieve GDP growth of 9.5 per cent; how to save 900,000 people from poverty; how to increase the income of the rural population from $130 per capita to $13,000 per capita; how to effectively control internal migration, which makes up 15–20 million people per year in China, etc. Italy, for its part, should become the main European terminal of the Maritime Silk Route. However, in order to avoid becoming a “terminal to nowhere,” Italy must help China build the land section of the Silk Road, including in Central Asia and the Caucasus.

According to Geraci, the Italian government faces two main tasks in terms of ensuring the country’s economic interests: attracting investments (and if willing investors can be found, the relevant agreements need to be put in place as soon as possible) and increasing exports (where small and medium-sized enterprises need help to start exporting their goods to China). To be sure, China has invested heavily in Italy, although mostly in the form of mergers and acquisitions and the purchase of shares, rather than setting up new projects and enterprises. Accordingly, the government’s task is to reorient the flow of investments in such a way that they help create jobs and increase productivity and, consequently, GDP. Geraci complains that Italian investments have created 50,000–60,000 jobs, while just 2000–2500 have been created in Italy. According to him, China should have a vested interest in this because, in addition to its favourable geographic location, Italy has another important asset, namely, “know-how.”

The Realities of Economic Cooperation: The Balance is not in Italy’s Favour

China is one of Italy’s key foreign trade partners. In 2018, China accounted for 3 per cent of Italy’s total exports, which amounted to approximately 13.7 billion euros. China ranks fourth in terms of Italy’s exports, behind the European Union (55.5 per cent), the United States (9.1 per cent) and Switzerland (4.6 per cent). In terms of Italy’s imports, China is second only to the European Union (7.1 per cent of the country’s total imports). China is the first destination market for Italian exports in the Asia Pacific, and eighth overall. However, the trade balance began to tip in China’s favour in 2001. Despite the fact that the trade balance increased by 7 per cent in 2007, and by a further 9.2 per cent in 2016–2017, it was still not in favour of Italy. As of year-end 2018, Italian exports to China totalled 13.2 billion euros, while imports from China amounted to 30.8 billion euros. Italy is the third-largest importer of Chinese goods in the European Union, behind Germany and the United Kingdom, and the fourth-largest exporter Behind Germany, the United Kingdom and France. Italy’s share in the Chinese market stands at 1.1 per cent, compared to 1.4 per cent for France and 5.4 per cent for Germany.

In 2000–2018, Italy was among the main targets of China’s purchases” alongside the United Kingdom and Germany, with Italy attracting 15.3 billion euros, compared to the United Kingdom’s 22.2 billion and Germany’s 46.9 billion. China is the United Kingdom’s second-largest importer and exporter and the largest importer and exporter for Germany. According to analysts at the Italian Institute for International Political Studies (ISPI), Brexit could have a positive effect on these dynamics for the European Union, given the fact that the United Kingdom can no longer act as an entry point for investments into the EU markets.

Chinese capital is already penetrating into Italian infrastructure facilities. For example, China’s COSCO Shipping has owned 40 per cent of the shares in the Vado Ligure terminal on Italian Riviera since 2016, with another 9.9 per cent of shares in this terminal belonging to the Port of Qingdao in China. Chinese investors are also interested in the ports of Genoa and Savona, where an agreement is expected to be signed with Chinese Communications Construction Company (CCCC). There is talk about the implementation of the “Trihub” project in Trieste on the Adriatic coast. China Merchants Group is expected to invest in the project. The giant CCCC intends to make a huge financial outlay (approximately 1.3 billion euros) on the construction of the Port of Venice. Remaining in the Adriatic, China Merchant Group invested 10 million euros in the Port of Ravenna in 2018. Chinese have become shareholders in recent years in a number of companies that are key for the Italian economy, including FCA Italy S.p.A., Telecom Italia, Enel, Generali, Ansaldo Energia, Cdp Reti, among others. In 2015, China National Chemical purchased Pirelli, one of the world’s largest tyre manufacturers. More recently, the famous Italian brand Candy was purchased by the Chinese giant Haier. However, the number of Chinese “purchases” in the European Union has started to drop over the past two years, which may be due to the latter’s suspicious attitude towards Chinese capital in the context of the trade wars between Washington and Beijing.

It is not so easy for Italian products to break into the Chinese market, however. For example, recent studies carried out by the Italian National Institute of Statistics (ISTAT) show that in 2018, imports of agricultural products from China exceeded exports to China by 35 per cent. One reason for this is that Italian apples, pears and grapes cannot make it onto the Chinese market because of the ongoing trade barriers that are designed to protect national production.

On the whole, however, the history of economic cooperation between Italy and China in recent years has clearly not favoured Italy. Despite the fact that the actual volumes have increased, Italian exports to China went down in 2018, and Rome is clearly not in the economic position to dictate terms to Beijing. According to the European Commission’s most recent forecasts of GDP growth in the EU countries for 2019, Italy is expected to have the worst growth rate of all 28 member states, at just 0.2 per cent, while incoming investments will not increase until 2021.

Connectivity Italian Style: Naivety or Sober Calculation?

On the one hand, Italy’s approach to the Belt and Road Imitative and the prospects for cooperation with China may seem somewhat naïve and even rather bold. According to some experts, the difficult economic situation in the country may make it dependent on Chinese investments, while the experience of Greece and Sri Lanka is confirmation of the fear that the facilities constructed may eventually fall into the hands of the primary investor. The economic situation in Pakistan clearly demonstrates the risk of becoming dependent on China economically. In summer 2018, the new government of Malaysia expressed its dissatisfaction with the terms of its deal on the Silk Road Economic Belt. The experience of Eurasian Economic Union (EAEU) countries that signed memorandums on the Silk Road Economic Belt over five years ago shows that exports to China have not increased several times over. What is more, the transport routes did not connect the EAEU as countries of the Union had hoped. And the thousands of new jobs that had been promised to the citizens of Central Asian states never materialized.

The lack of transparent rules of the game. Dumping. The use of “grey” practices by Chinese companies. The absence of guaranteed reciprocity in commerce and investment. The use of business standards that are alien to those in the west. The prevalence of discriminatory practices against foreign companies entering the Chinese market. This is just a small list of the risks that come hand in hand with Chinese investments. And it would seem that the Italians are all too aware of this. So, what exactly is Rome hoping for?

In the run-up to the President of the People’s Republic of China visit, a number of Italian media outlets speculated that the purpose of the trip may be to take on a part Italy’s national debt. However, Minister of Economy and Finances Giovanni Tria stated that this was not the case, and that the Chinese investors were there to assess the prospects of purchasing Italian government bonds on the same terms as other foreign investors. In addition, according to Tria, the financial situation in the country had stabilized since the budget had been approved by the European Commission.

Judging by the words of Tria and Geraci, it can be assumed that Italy hopes to reclaim its position as a “protagonist” in determining the European Union’s foreign economic and political priorities. However, the take-it-or-leave-it approach taken by the Italian leadership in its decision to sign a memorandum with Beijing is unlikely to elicit enthusiasm in Brussels about the Italian initiative. What is more, given the desire of Paris and Berlin to form a single EU position on the global stage, the Italian government’s attempt to “run ahead of the train” will hardly be seen as a blessing for the European Union as a whole. And the fact that the Italian government recently backtracked on its decision regarding new rules of the game for foreign investors by not supporting the European Union’s consolidated position on Chinese investments and Huawei effectively reduces the country’s chances of becoming a driver of cooperation with China to zero.

It would seem, however, that Italy was left with no choice, and Brussels certainly shares a portion of the blame for this. The economic situation in the country really is difficult. Meanwhile, the Italian government is openly described as a “leprosy” in Paris and Berlin, and not as a third party in the “tandem” that is constructing a new Europe. Brussels predicts a deepening of the recession, offering no way out of the economic deadlock. Economic cooperation with Russia cannot be intensified because of the sanctions and the risk of an open confrontation with Brussels and Washington if they are ignored. This is why the new partnership with China is the only opportunity available to Italy on which Brussels has not yet defined a categorical position, be it positive or negative. So, Italy has to seize the opportunity while there is still a chance and hope that Washington will put forward a better option at the last minute…

This article was originally published by the RIAC and is reproduced with their kind permission