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Foreign Policy

Italy’s Belt and Road Romance Is Coming to An End – But This Need Not Damage Ties with China

Sep 08, 2023

The Italian government seeks closer ties with Washington but wants to maintain good economic relations with Beijing. Whether this will be successful, or not, depends much on how Italian Premier Giorgia Meloni will handle the question of the memorandum of understanding (MoU) under which the previous government led by Giuseppe Conte joined China’s Belt and Road Initiative (BRI) in March 2019.

According to the agreement, an official decision as to whether to renew or cancel the MoU must be taken by year-end. Officially, the conservative coalition in power in Rome has not yet decided what to do. However, Giorgia Meloni has declared on various occasions her intention to exit from Beijing’s infrastructure project so as to align Italy’s China policy with that of the U.S..

Meloni met with Biden in the White House on 27 July 2023. In their joint declaration issued at the end of the meeting, the two sides committed to strengthen bilateral consultations on China-related issues. While the Biden administration would certainly welcome Italy’s exit from the BRI, the leadership of the EU is also in favor of Italy’s canceling the agreement, since this would reduce dependence on Beijing and give substance to the notion of ‘de-risking’ ties with China as described by European Commission President Ursula von der Leyen in a speech in March. Renewal of the accord, by contrast, will – according to the critics of the BRI - embolden the Chinese leadership at home and abroad at a time of growing tensions between the West and China.

At the end of July, Italian Defence Minister Guido Crosetto – a close political ally to Meloni - said in an interview that the previous government made an ‘improvised and atrocious’ decision when it joined the BRI, a statement that was well received by Italy’s Euro-Atlantic allies but strongly criticized in an editorial by the Global Times which concluded by hoping that ‘Italy can make a rational decision without external interference,’ clearly referring to alleged U.S. and EU pressure on the Italian government to put an end to the MoU on the BRI.

Italy is the only G7 nation to have officially endorsed Chinese President Xi Jinping’s signature foreign policy project. Xi invested significant political capital in bringing Italy into China’s orbit, with facilitation from local elites eager to foster commercial ties in disregard for the implications that this could have for Rome’s western allies. Beijing is currently lobbying hard in favor of a silent renewal of the MoU for five more years, while Washington and Brussels hope that Meloni will break off the agreement for strategic reasons.

But how effective has the China-Italy MoU been? A clear assessment of the benefits, and risks, of the MoU has never been produced. Yet, there is evidence that the agreement delivered some results for several important Italian companies, while disappointing with regard to the greater business opportunities expected when the MoU was signed.

A total of 29 agreements, divided among institutional and commercial deals, were signed at the margin of the broader strategic MoU between the two governments in March 2019. Some of these 29 agreements – penned in the presence of President Xi Jinping and Italian Prime Minister Giuseppe Conte on the occasion of the Chinese President’s state visit to Italy - have been implemented, while others have not moved forward – or if they have, their impact has been quite limited.

Among the successful agreements is one involving Ansaldo Energia, a society controlled 88% by Cdp Equity (Italy’s sovereign wealth fund) where Shanghai Electric has a 12% stake. The agreement reached in March 2019 with the Chinese counterpart has been fully implemented: in 2021 the AE94.2 KS turbine made by Ansaldo Energia as a result of the partnership with Shanghai Electric has become fully operational.

Another success story is the one related to Intesa Sanpaolo - Italy’s largest bank by total assets – which in the context of the broader strategic MoU signed an agreement with the Municipality of Qingdao for the development of a designated wealth management Pilot Zone. As a result, Intesa Sanpaolo became the first foreign bank to offer wealth management services in China through a wholly-owned subsidiary. In December 2019, the bank received the Silk Road Award for its work in fostering Italy-China ties.

However, when it comes to bilateral trade the MoU has not delivered the results expected, according to the latest report by the Italian Trade Agency. Rome’s share in China’s market has remained constant (and relatively low) at around 1.1% since 2020, dropping to around 1% in 2022. The total value of bilateral trade has grown from $55 billion in 2020 to nearly $78 billion in 2022, but with a trade imbalance in China’s favor whose exports to Italy increased by around $18 billion while Italy’s exports to China went up only $4 billion in the 2020-22 period.

As a comparison, the trade balance between Rome and Washington has always been positive for Italy. In 2022, the trade balance in favor of Rome stood at $39 billion. In 2022 Italian exports to the U.S. reached $73 billion, while Italian exports to China were only $18 billion. The U.S. is the second-largest export market for Italy, making up 11% of all exports and more than 20% of non-EU exports, while China only accounts for 3% of Italian exports. For the Meloni government, there are thus compelling economic reasons – alongside strategic ones – for aligning closer with Washington and seeking to exit the BRI.

Meloni’s U-turn on the BRI also puts an end to previous engagements undertaken by centre-left politicians who opened the doors of Italy to Chinese interests and who were regular attendees to Silk Road events. For instance, former Prime Minister Paolo Gentiloni - who led a center-left coalition government between December 2016 and June 2018 – attended the first BRI Forum for International Cooperation in Beijing in May 2017. Gentiloni was the only leader of a G7 country to participate, and even took a closed-door meeting with Chinese President Xi Jinping the day after the closing of the BRI Forum. Italy’s participation in China’s infrastructure project was also endorsed by Sergio Mattarella, Italy’s president. During his state visit to China in February 2017, Mattarella declared that Italy firmly supports the BRI, adding that ‘Italy will actively respond to China’s initiative and be part of this plan.’ When the government by Giuseppe Conte - a coalition between the populist and leftist Movement 5 Stars and the conservative and nationalist League, in power between June 2018 and September 2019 - signed the MoU on the BRI in March 2019, it was merely bringing to fruition the seeds that had been planted by previous centre-left governments.

With the arrival of Mario Draghi, Conte’s successor, and then with further acceleration from the victory of a centre-right coalition in parliamentary elections in September 2022, Rome’s China policy has shifted back toward that of the EU and NATO. The Draghi government, in power between February 2021 and October 2022, put limits to BRI’s projects in Italy, blocking China’s attempts to acquire stakes in the port authorities of Genoa and the other ports in the North Adriatic Sea that had formed the backbone of the MoU. The Draghi government did so by invoking provisions in Italian law that forbid the sale of such infrastructure to foreigners and by threatening to use the Golden Powers Rule – essentially the power to intervene to block private investments in strategic companies.

Unlike the case of the port of Piraeus in Athens, where the Chinese state-owned COSCO Shipping secured the right to operate parts of the port in 2008, then acquired 51% of its Greek state-owned operator in 2016, and finally increased its stake to 67% in October 2021, Beijing has been unable to extend its reach over the ports in northern Italy. The arrival of the Meloni government stopped the remaining BRI’s infrastructural projects and blocked Chinese acquisitions of Italian assets considered of strategic significance.

The question has never been about keeping the strategic assets in Italian hands, but to choose which foreign companies will have a stake in them. For instance, the Meloni cabinet has decided to exclude Chinese companies, but has instead allowed U.S. firms to make inroads. In August, Rome signed a memorandum of understanding with U.S. private equity fund KKK which committed to offer €23 billion for Telecom Italia (TIM – the country’s largest telecommunications services provider) landline network, while the Italian government will retain a 20% stake in the company and strategic oversight of the phone network.

Meloni’s intention to exit China’s BRI is thus about strategic alignment with the traditional U.S. ally, both in the political and economic realms. The final question is: How could the Italian government cancel the MoU without damaging Sino-Italian ties? 

The conservative coalition in power in Rome wants to substitute the MoU on the BRI with a series of commercial agreements that would signal Italy’s intention to maintain good relations with Beijing. The model is what French President Emmanuel Macron did during his state visit to China in April, when he signed - in the presence of Chinese President Xi Jinping - 18 deals involving 36 Chinese and French companies to expand cooperation in several areas, including green technologies, renewable energies, and industrial innovation. The Italian government wants to emulate France, a country that has never officially endorsed the Belt and Road Initiative, yet it has succeeded in boosting economic ties and business opportunities with China.

Should Meloni succeed in replacing the MoU on the BRI with another set of accords that would convince Beijing of Italy’s good intentions - and should commercial reprisals from China against Italian companies not materialize - the Sino-Italian relationship would show to the rest of the world that it is possible for Washington’s allies to navigate the growing U.S.-China competition without damaging ties with Beijing. It will be a victory for those favoring coexistence over competition. 

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