Italy’s Belt and Road play

Italy’s Belt and Road play

With Italy becoming the first G7 country to enter into a memorandum of understanding (MOU) with China and its Belt and Road Initiative (BRI), there are indications that China is preparing the groundwork to open its economy and move swiftly to financial and regulatory reform. This is contrary to claims by many in the Western media that the global geopolitical sky is about to fall in. Despite the failure of countries such as Germany and France to acknowledge that they are already enjoying significant trade with China, the EU portrays Italy as letting the side down. What is not seen are the building blocks that have been put in place that could possibly trigger significant reform based on recognition by a G7 country of the ambitious Belt and Road infrastructure project 

There is a need to look past the noise surrounding the China-Italy MOU, particularly seeing the agreement for what it is. Initial reactions ignore that the document is a statement of intent to cooperate to build economic and social connections between the two. As with all MOUs, it is a nonbinding agreement. Parties to the agreement are not legally obliged to abide by the terms contained therein. Furthermore, 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. 

By accepting that the terms of the agreement are not binding, this allows Italy to engage despite not having a unified stance when dealing with China. Dissent within the Italian government saw Deputy Prime Minister Matteo Salvini (head of the right-wing League in the coalition government) conspicuously absent from all official ceremonies. In a sense, this behavior gives Italy a fallback position as he warns that he does not want to see foreign businesses "colonizing" Italy. He is particularly wary of foreign investment in the ports of Trieste or Genoa

Taking an economic and geopolitical perspective, it could be argued that Italy felt itself being pulled in many directions. Particularly troubling was that Italy had fallen into recession by mid-2018, with its national debt levels among the highest in the Eurozone. Furthermore, the collapse of the Genoa bridge in August, killing dozens of people, highlighted Italy's crumbling infrastructure. This made it a major political issue for the first time in decades.

China’s BRI, on the other hand, was looking for international recognition by having a G7 member sign on to the program. While China had shown that it was flexible with whom it engaged as it sought better connectivity to markets in Eurasia, an important public relations element was missing. The agreement with Greece saw tremendous economic development in Piraeus, much to the consternation of Italy as it saw its maritime influence decline. Furthermore, Italy has had to reassess its previous anti-BRI stance as the ports of Koper (Slovenia) and Rijka (Croatia) actively pursue Chinese investment funds by offering an alternative rail/port pairing with the Adriatic and Baltic trade network. Simply put, Italy could not afford another Piraeus port setback.

With a commitment to a potential $20 billion in project funds, a total of 29 deals amounting to $2.8 billion were signed during Chinese President Xi Jinping's visit to Rome. The deals included projects in energy, finance, and agricultural produce with potential for oil and gas and engineering firms entering into the Chinese market. The two sides agreed to work with each other on cooperation in fields such as environment and sustainable energy, agriculture, sustainable urbanization, health, and aviation. China can leverage G7 participation by making the economic pie bigger and sharing it through openness and cooperation, instead of pursuing a "zero sum" game.

The two sides realize the huge potential of the BRI in promoting connectivity and stand ready to strengthen the alignment of the BRI and Trans-European Transport Networks (Ten-t network) and deepen the cooperation in ports, logistics, marine transportation, and other areas. There is a willingness to join efforts under the Asian Infrastructure Investment Bank (AIIB) to advance connectivity in line with the AIIB's mission and functions.

The activity over the last six months has been of strategic importance, suggesting that China may have positioned itself for the agreement and set the platform for further rapid economic and structural reform. Chinese and Italian authorities, directly influenced by the MOU, started investigating storage and packaging systems — particularly cold storage and phytosanitary aspects — in the latter half of 2018. This was done with the view to open markets from tariff barriers. The discussions also saw the opening of trade methods whereby product could now be freighted by air rather than only by ocean. However, there is still a need for agricultural products to find cheaper ways to reduce transit times — and this is where the BRI comes in. By enabling Italy to connect with the rail network, it will allow foodstuff to get to the Chinese market within 11 to 13 days as opposed to the current 38 to 45 days taken by ocean.

Other indications of an opening up include the changes to foreign investment and property ownership as well as foreign ownership of Type A shares on the Shanghai Exchange. Steps have been taken to reduce the number of listed economic activities that are prohibited by foreign interests. This movement is highlighted by Tesla’s entry into China. Announcements in the week leading up to the agreement included making relevant rule changes to foreign investment law, leveling the playing field for foreign and domestic enterprises, and balancing the structure of foreign trade.

It is no coincidence that all this has been followed up by the China Development Forum (CDF) 2019 hosted by the Development Research Centre (DRC), a ministerial-level body of the State Council, the country’s cabinet. Commencing on the day the Italy/China MOU was signed, it follows the theme of “Greater Opening-up for Win-Win Cooperation” as well as looking at how China will participate in global governance. 

Contrary to the current “win-lose” perspective of the Italy-China MOU, it is conceivable that participation by a G7 country in the BRI is the catalyst to open China’s engagement on an equal footing and encourage open global trade based on respect and transparency. It could be argued that the agreement has served as a catalyst for increasing economic reform in China, particularly with regards to opening the Chinese economy. 

On the negative side, the agreements signed in Rome did not discuss whether Chinese firm Huawei should be permitted to build essential communications networks after the United States expressed concern that it could help Beijing spy on the West. This raises security concerns. 

Andre Wheeler is director of Wheeler Management Consulting, Australia. Contact him at: andre@wheelermanagement.com.au.