China is getting closer and closer. In the Italian government, some welcome it whereas others fear it. After returning from the Belt and Road Forum at the end of April 2019, Italian Prime Minister Giuseppe Conte, with his proverbial tact, did not fail to feed the hopes of those who would like the Bel Paese to be engaged in a concrete dialogue with Beijing under conditions of a bilateral win-win. This visit from an Italian Prime Minister was not ground-breaking, as Paolo Gentiloni (premier of the previous government led by the Democratic Party) had participated in the first edition of the Forum.
Only one month before Conte’s tour in China, during President Xi Jinping’s visit in reaction to a ‘solicitation’ from the United States, the executive branch was divided between those in favour of and against the Memorandum that resulted in Italy becoming the first G7 country to officially join the new Silk Road. The agreement was officially named “Memorandum of Understanding [MoU] between the Government of the Italian Republic and the Government of the People’s Republic of China on Cooperation within the Framework of the Silk Road Economic Belt and the 21st Century Maritime Silk Road Initiative”.
It is true that themes in the MoU on the Italy–China relationship are broad. Topics include dialogue around policies for greater connectivity between countries; transport, logistics, and infrastructure; removal of barriers to trade and investment; financial cooperation; interpersonal connectivity; and cooperation on environmental issues. Italy should consider the European dimension in its dialogue with China, which the EU has deemed a negotiating partner, commercial competitor, and political rival. At the same time, other major EU partners have developed favourable relations with Beijing despite not always demonstrating a community spirit, which Rome does not fail to emphasise. Italy is an allied country and NATO founder, firmly anchored in the West. This impetus towards China seems to suggest that in many people’s hearts and minds lives the thought of a transition to an unprecedented equilibrium, witnessed by the agitation characterising acute phases of the commercial war between the Trump administration and China: a battle of duties interpreted as an opportunity for Italian brands to replace American ones in the immense Chinese market.
Let’s add one more factor: today’s Italian government is experimental, supported by two political parties, Five Star Movement and the League. These parties have never governed together and are now linked by a document known as a ‘government contract’ – one that is always at stake in every recurrent crisis with the implicit threat that this ‘contract’ can be terminated. Under this scenario, the interpretation and management of relations with China can easily become a lever for settling internal political accounts with or without pressure from Americans (although they understand quite well what’s happening).
So what is Italy’s current interest in relations with China? Is it true that the signing of the MoU on the new Silk Road represents a great novelty, a change of striking course?
This Italian turn towards China is not truly new; rather, it is one step in a long history of relations between two countries, marked by exchanges since the times of Marco Polo and of the Jesuits Matteo Ricci and Martino Martini – not to mention that Beijing had an Italian bishop in 1308, Franciscan monk Giovanni da Montecorvino, and that contacts with the Chinese empire date back to ancient Rome. This history saw the establishment of diplomatic relations in November 1970, which have continued to develop with increasing focus on China as a partner from the Italian side.
It is also true that attention has been paid to the backwardness of the Italian system relative to China, coupled with an incomplete understanding of the opportunities and challenges posed by China’s growth.
Furthermore, a cultural gap persists in the Italian system in confronting a universe as powerful as the Chinese. Paradoxically, the hype following political contradictions and clashes around the need to sign the MoU on the Silk Road implored the Italian political and business classes to consider whether signing the MoU would be in the country’s best interest. And so it was.
So what are the advantages and possible disadvantages of this MoU? The agreement is aimed at strengthening economic cooperation between the countries. A memorandum that does not create real legal constraints or influence workers’ rights will not lead to lower standards for environmental protection or open doors to predatory acquisitions by Chinese companies (as many people fear). Not being an international treaty, the MoU in no way supersedes Italian and European law. On the contrary, thanks to this agreement, Italy led Beijing to positions close to international and European standards regarding Europe–China connectivity and respect for the environment. In this sense, the MoU can be held as a repeatable precedent. Rome actually did European partners a favour when Italy gave a hand to their Chinese friends, who are rising in the international arena and slowly starting to operate in accordance with global standards. Even in this sense, Beijing can be proud of signing the MoU with Italy.
The main reason for Italy to sign the MoU is obvious: over the last five and a half years – since the launch of the New Silk Road in September 2013 during President Xi’s visit to Astana – all arrows on the Silk Road maps indicated that the paths of goods ran mainly from China to Italy, which benefited Chinese export. This agreement establishes a consensus between the countries to balance commercial relations. Italy wants it; China wants it and demonstrates every interest in maintaining the new Silk Road up to its ultimate Western terminal, namely Italy. Nearly all European countries, including Italy, are suffering from a trade deficit with China. Notable exceptions include Germany, which has a substantial surplus; and Ireland and Finland, which each have a reduced surplus.
If France’s export to China is worth €21 billion, that of the United Kingdom exceeds €20 billion, Switzerland boasts €26 billion, and Germany occupies the throne with €94 billion, then no one can legitimately blame Italy if it claims to have a more significant role in trade with China to exceed only €13 billion in exports to China last year.
Even the origins and influence of Chinese investments towards Italy explains the wise decision of Rome’s government in consolidating and balancing a partnership with Beijing. Throughout the last 15 years, Italy has been the object of Chinese acquisitions for a rough €18 billion (€7 billion of which were allocated to acquiring Pirelli in a single transaction). At the same time, Germany, Switzerland, and Great Britain have received cumulative value from direct Chinese investments, far superior to those in Italy. The United States alone has investments of €180 billion.
The moral is that Italy lags behind its European partners in terms of both trade and investment.
Moreover, care is needed because ‘not all investments are the same”. The Italian government – particularly Deputy minister of Economic Development Michele Geraci, the guardian of bilateral commercial relations between Italy and China – has made a mantra and a flag on the theme.
In fact, looking at investments in mergers and acquisitions (M&A), we see that €100 billion passed from Europe to China and €220 billion passed from China to Europe. However, M&A investments do not exert immediate impacts on the receiving country; such investments only represent an exchange of secondary actions between old and new shareholders. Therefore, not even €1 goes into companies’ pockets, and there is no immediate increase in productivity. If the new shareholder possesses genuine management skills and decides to make an additional capital infusion, an advantage would result, but this would be a follow-up operation. What engenders an immediate advantage – as the Italian government often reminds China – is greenfield operations ex novo, which create productive activity abroad. For every euro invested, these operations produce €1 in GDP. What’s the moral again? Even in this regard, Italy is struggling: the country has only received €900m greenfield investments from China against the billions of Chinese FDI obtained from Greece, Hungary, Spain, Finland, Poland, and Romania – all aside from the usual European partners such as the UK (€16 billion), Germany (€6 billion), and France (almost €5 billion).
Italy therefore lags behind in trade and investments, including greenfield investments. There is parity in numbers, because China has invested €20b in Italy and Italy has invested 20 billion in China. But while Italy was focused on greenfield investments, China has made M&A nearly exclusive. Italy, with its 20 invested billion, created about 80,000 jobs in China, whereas China created about 3,000 jobs in Italy – 3,000 against 80,000, compared to the same FDI value.
It is easy to understand why signing the MoU on the Silk Road is Italy’s priority: it is useful for attracting Chinese investments. This goal is also shared by members of the Government who stand for their sovereignty as a non-negotiable identity – first and foremost the League party led by Matteo Salvini.
However, the next European elections will show us how many doses of sovereignty can withstand the community framework. In this regard, the target-shooting by the Italian Chinese MoU was symptomatic, as if it were the root of problems in relations between EU and China and not a possible solution.
There has been talk that the MoU is evidence of Italy’s growing detachment from its European partners, not to mention that Italy is not the first EU country to sign that agreement; it is the fourteenth. Italy is not even the first of the founding countries of the EU to sign it – that was Luxembourg, the birthplace of EU president Jean-Claude Juncker, who criticised Italy in the months preceding the signing of the MoU by launching alarms about potential disasters derived from it. But nobody noticed he was so unhappy when the Luxembourg Prime minister quietly signed the same type of MoU in Hainan in April. Who knows what they thought of it in Beijing?
Switzerland has also signed this agreement. Furthermore, all 28 countries of the EU have strong economic interests in the Asian Infrastructure Investment Bank (AIIB) – the largest, if not the only, financing channel for the Belt and Road. When the bank was launched in 2013 and Great Britain took the initiative to provide it with capital, Europe had already chosen to be part of it and did so concretely, taking billions out of its own pockets and investing them into AIIB share capital. Italy has a 2.7% share, equal to €2.57 billion; naturally, Beijing’s share is heavy at 27%.
One point should be made clear: for a fruitful relationship with China, one must apply the rule of golden compromise. Europe has a common trade policy on tariffs and barriers to the importation of goods. When Italy negotiates with China, it does so convincingly from Brussels, so that Italy’s interests are better taken into account and Italian companies have minimum duties. However, all 28 EU member countries compete to promote their products in China. There cannot be a ‘common European promotion policy’ because everyone has a right to promote their products, and it is normal to compete. To paraphrase Michele Geraci, the goal of the Italian government is “to sell an extra bottle of Italian wine and one less bottle of French wine”. Isn’t it clear enough? At the same time, with regard to Italian ports in the Mediterranean and the need to attract Chinese commercial traffic, the truth is that Italy’s desire to become the final point of the Silk Road cannot be the subject of a European policy – there is no place for Brussels mediation here. Of course the standards, quality of incoming goods, control, and duties will be the same for all EU ports; however, commercial traffic will differ for each hub, and each country tends to attract as much traffic as possible. No one in Europe can go to the port of Rotterdam and tell that, starting today, there will be one more freighter in Trieste and one less in Holland or vice versa.
Therefore, Italy–China relations have been enriched by the new MoU on the Silk Road as a fair promotional tool rather than an act of commercial policy, which remains a community competence. Yet Italy has the freedom – and indeed the duty – to promote ‘Made in Italy’ as much as possible! Italy stated that the country’s goal is not to change the current geopolitical axis (i.e., EU and NATO). Not much noise surrounded the signing of this MoU at all. However, it shows that Italy has a new direction, which is an inevitable premise: the Italian fabric industry is composed of small and medium-sized companies, which compete well in Germany, France, and the United States. They are well-known markets with a similar culture featuring a strong Italian diaspora. All this neither works nor exists in Asia. Moreover, among the 28 European countries, Italy shares the greatest similarities in exports with China: approximately 60% of Italian and Chinese exports trade the same things. Therefore, Italian companies should benefit from 40% being complementary – and here the Italian government wants to assert itself, trying to unite and associate companies to make them understand the challenges and opportunities inherent in working well with China.
In Italy, 13 is a lucky number. Italian–Chinese relations were certainly strengthened by the MoU on the New Silk Road, and the current €13 billion in Italian exports to China could (conceivably) multiply.
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