The port of Trieste in Italy, one of four in the country that are opening to Chinese investment as a result of the March 23 Memorandum of Understanding.
Italy’s endorsement of China’s ambitious Belt and Road Initiative — by being the first major European economy to officially come on board the colossal infrastructure project — has drawn widespread but mixed responses. While some herald the deal as a diplomatic win, others lament that Italy’s move risks fanning tensions within the European Union.
Scrutinizing historical ties and recent trade flows between both countries more closely, however, one may conclude that the furore was overrated. That is because the non-binding Memorandum of Understanding signed on March 23 also may not be such a landmark deal after all — at least not in economic terms.
“I don’t think that Italy will suddenly become China’s main link between the Chinese market and the market of developed Europe,” said Kelsey Broderick, an analyst with political risk consultancy Eurasia Group. “China is invested in over 15 ports in Europe and at this point, companies can choose whichever is most convenient for them. The MOU probably won’t bump investment or trade, which was already increasing.”
If anything, this partnership could be a test case for what China might have to do, or to let go off, to fend off the risks that come with such a massive project.
“In terms of the BRI, Italy’s choice has been over-emphasized. Italian policy is being continuous and consistent, but it’s the other countries’ foreign policy that changed direction.” —Enrico Fardella, Peking University
Italy and China have enjoyed friendly relations for almost half a century now, history professor Enrico Fardella pointed out. The Italian government had recognized China back in November 1970, almost five years before the European Community — and eight years before the United States — established diplomatic relations with China.
Fardella said Italy’s choice to establish relations with China back in the 1970s was historic, but also a “delicate moment.”
“In terms of the BRI, Italy’s choice has been over-emphasized,” said the scholar, who studies China’s strategy and influence in the Mediterranean at Peking University.
“Italian policy is being continuous and consistent, but it’s the other countries’ foreign policy that changed direction,” he said.
Italy’s move drew criticism from officials in the U.S. and Europe, and even Italy’s own former prime minister Paolo Gentiloni aired concerns that the agreement will not only not advance trade in Italy’s favor, but could adversely affect relations with other European Union members that are skeptical of Beijing’s economic expansionist bent.
China needs Italy less than the other way around, said former Italian ambassador to China Alberto Bradanini, stressing that economic relations between the two countries are unbalanced.
TRADE UNBALANCED, FOREIGN INVESTMENTS SLIDING
Italy records one of its largest trade deficits with China at about 20 billion euros ($22.4 billion). “Italian greenfield investments in China created hundreds of thousand [sic] jobs, while Chinese investments in Italy created few jobs” said Bradanini.
“In past years, China has bought Italian companies falling within the fence of its interests. Now Chinese companies don’t find any more interesting assets in Italy and are moving to Germany and America, even though they will have to deal with growing restrictions there,” he said.
China’s National Bureau of Statistics recorded a dramatic 60.5 percent slump in foreign direct investment from Italy between 2008 and 2017 — from $493 million to $195 million — even as trade exchanges between the two countries grew 30 per cent over the same period. Chinese foreign direct investment in Italy also went down, by about 21 per cent last year to $800 million, according to figures from multinational law firm Baker McKenzie.
China recorded a dramatic 60.5 percent slump in foreign direct investment from Italy between 2008 and 2017. FDI in Italy also went down, by about 21 per cent last year.
Still, some observers feel that the agreement will give Italy — which is wrestling with its worst economic crisis since World War II — a shot at revitalizing its economy.
On top of Italy signing up to China’s BRI in late March, the two countries signed ten additional deals in sectors including port management, energy, steel, and gas.
“I expect much more substantial trade flows,” said political scientist Maria Adele Carrai, who is based at Columbia University’s Italian Academy. “Italy also needs a better balance in trade with China, currently Italy imports more than it exports to China.” She expects the food and beverage industry to benefit the most from the bilateral partnership.
Dingding Chen, an international relations professor at Jinan University in Guangzhou, is optimistic about the prospects of Sino-Italian collaboration on 5G technology and more in the telecommunications field. “Italy possesses deeper technical strength and brands in the fields of aerospace, automotive, renewable energy and high-end consumer goods, while China is on the pursuit of cutting-edge information technology and artificial intelligence across the world,” he said.
Andrew Nathan, political scientist at Columbia University’s School of International and Public Affairs, agreed. “There’s an American saying, ‘Money talks’. Italy needs money and China has money. Neither the U.S. nor the EU is willing to invest that kind of money, so we might say that nature has taken its course,” he said.
LUKEWARM RESPONSE FROM THE GROUND
Despite the high-level rhetoric about the recent partnership, merchants on the ground seem neither as hopeful nor excited.
Fan Shen, who works for Chinese export agency Shenzhen Huapai, noted that Italy is a saturated export destination well-covered by mainstream delivery firms like UPS and FedEx. “Air and sea freight services like ours are more popular right now for countries like Laos, where there’s a growing number of clients. Italy is already a saturated market.”
Hu Jianfeng, a fashion merchant based in Milan, thinks the deal will be beneficial primarily for Chinese businesses in the food and beverage sector looking to export to Italy. Hu, who has been in Italy for two decades, cites rising costs of operation, competition, and ethnic discrimination as among the challenges of running a business there.
“Amidst the Sino-U.S. trade war, many European countries have also slapped sanctions on Chinese firms. Our operating costs have gone up by a third,” he said.
Irina Minzione, an exports manager at Fitness Coffee, based in the Italian city Teramo, said the company, which is present in 30 countries around the world, is still monitoring the Chinese market. “For the time being, we have left China untouched because it is a difficult market. We are already present in some thirty countries around the world, and China requires a particular commitment, so we are waiting for the right opportunity,” she said.
ITALY MUST HOLD CHINA ACCOUNTABLE TO “EQUAL FOOTING” IN PARTNERSHIP
What has been signed in March is a non-binding MOU — drafted in fairly generic terms — which gives both parties the opportunity to seek an equal footing in the partnership, the observers noted.
Noting that it is “customary” for China to sign formal agreements with no willingness to implement them, the former ambassador Bradanini said: “We have to bear in mind that projects need to be economically viable, since the countries involved will have to repeat their debts. This path is far from obvious and requires professionalism and efficiency from participating nations, since China tends to leave to others the less economically sound investments.”
The MOU alone is unlikely to alter the trajectory of economic ties, but Chinese president Xi Jinping’s visit to Rome may have set the stage for Beijing’s greater foothold in Italy, particularly via its ports.
However, if the agreements with China does not improve employment or business orders for local firms, then to Italy, they will be “just another shooting star that lights up for a few seconds and then dies,” said Bradanini.
While acknowledging that having a G7 country sign on the BRI is a nice feather in China’s cap, some said China should be cautious that its political ambitions for the project could overwhelm economic viability.
“What I question is the long-term workability of this, because how many ports does China want to run in the Mediterranean Sea? China doesn’t need to be able to run so many ports. From a business perspective, it’s not gonna work,” said Philippe Le Corre, a senior fellow at Harvard Kennedy School’s Mossavar-Rahmani Center on Business and Government.
China has snapped up stakes in several ports and terminals from Greece to Belgium over the last decade, often under the name of the BRI, stirring concern within Europe. But this approach is risky to China too, said Le Corre, noting that China should not be putting all its eggs into one basket.
If the BRI is to be economically sustainable, he added, China must let the private sector play a larger role in the project.
“More Chinese firms should be encouraged to do business in Europe, and they need to become more European while at it. This means employing more Europeans into their bases [in] Europe, giving them more control, showing that they are intentional in working long-term in Europe, not just dealing with state-to-state visits,” he said.
Albert Han, Yian Ke, and Cassie Zheng contributed reporting.