The Italy-China MoU: opportunity or risk for Rome?

The Italy-China MoU: opportunity or risk for Rome?

As the US-China trade war gathers pace, both powers have been courting Europe, and especially Italy.

WHAT’S HAPPENING?

Michele Geraci, the man considered the driving force between tightening trade relations between Italy and China, has called on the EU to make it easier for member states to make deals with Beijing.

KEY INSIGHTS

– Italy and China adopted a Memorandum of Understanding (MoU) in March to strengthen mutual cooperation on economic matters in the medium to long-term
– The Italian Parliamentary Committee for the Intelligence and Security Services have raised the possibility of national security risks — focusing around a potentially hostile country gaining access to sensitive data — if Chinese 5G technology is installed in the country
– China may wish to exert influence over strategic hubs like Trieste and Genova’s ports because of their role in international networks
– Negative impacts on transatlantic relations are expected, with a potential reduction in US-Italy information sharing being one possible consequence

ITALY IN THE BELT AND ROAD INITIATIVE

On March 23, 2019, Italy and China signed a Memorandum of Understanding (MoU) in support of China’s Belt and Road Initiative (BRI), aimed at building a network of infrastructure to link Beijing with Europe and Africa. The MoU represents the first step to strengthening mutual cooperation in logistics, infrastructures, transportation, trade, environmental protection, and finance. It is also an opportunity for Italy to increase exports to Asia and create economic benefits within the country. For example, the Italian city of Cagliari will become Italy’s first 5G smart city based entirely on Chinese technology.

Italy is the first member of the G7 to join the BRI. As such, the MoU has had a huge political impact, especially because of how it diverges from the EU-China 2020 Strategic Agenda for Cooperation. The Strategic Agenda defines conditions and guarantees that Europeans should get from China, such as rule of law, fair trade, and investments. However, the Italy-China agreement prioritises bilateral strategic and economic cooperation, with little attention to the rule of law and fair economic competition. The European Commission has expressed concern about the MoU, highlighting China’s lack of transparency in international trade, which favours unfair economic competition. But with Chinese finances flowing into Europe, particularly into infrastructure, it is not possible to exclude Beijing from the European market. China is thus both partner and competitor.

THE NEED FOR NEW OPPORTUNITIES

Concreteness at the BRI MoU: in Beijing we obtained from the Chinese Deputy Minister S&T Zhang Jianguo that the startups of our # GlobalStartupProgram will also be able to make field trips to Shenzhen and Beijing. / Italy-China MoU

Photo: @ michele_geraci / Twitter

As a major part of the Italian economy is export-based, joining the Belt and Road Initiative might represent an opportunity to increase exports to Asia and attract Chinese investments, such as plans to strengthen the Trieste port as a global hub. Reuters has reported the MoU has a potential value of up to €20 billion. Italian Prime Minister Giuseppe Conte has called the MoU an opportunity to create a level playing field between Italy and China as well as a chance to make Italy a bridge between Europe and Asia. China and Italy will also cooperate to oppose protectionism and unilateralism.

According to several Italian newspapers, the main supporter of deeper relations with China is the Italian Undersecretary for Economic Development, Michele Geraci, who spent over 10 years in China. While the decision to join the BRI has been a major step forward in bilateral relations, previous governments also established important economic and commercial agreements with China, signing contracts with Beijing worth nearly €8 billion.

At the same time, the MoU looks like a significant victory for China because it has been able to include the world’s eighth-largest economy in its $1 trillion global infrastructure-based initiative. Conte attended the Second Belt and Road Forum in Beijing which concluded on April 27, likely seeking to capitalise on declining Chinese investments in the US market.  The trade war started by US President Donald Trump to protect national industry from China’s allegedly unfair practices may drive investments towards Europe.

President Trump’s protectionist policy towards global trade underscores a second potential driver behind Italy’s decision to sign up to the BRI. Trump’s ‘America First’ approach could also affect Italian exports. Some Italian agricultural products, an export industry to the US accounts worth $4.3 billion, are on Trump’s blacklist. China offers an emerging market to offset this lose, particularly for the Made in Italy brand, a worldwide merchandise campaign aimed at increasing quality Italian exports. Even as concerns about China being a ‘systemic rival’ to the EU grow, Trump’s economic policy may force traditional US allies like Italy to look for other lucrative markets in Asia.

Despite criticising the MoU, France and Germany have also established very strong economic cooperation with Beijing over the years. Germany–China business accounted for nearly $180 billion in 2017 and France recently signed fifteen business contracts worth more than $33 billion with Beijing. Although France and Germany have not joined the BRI, they have important agreements with China accounting for much more than the Italian deal. The diverging positions among the EU member states ultimately make it easier for China to extend its influence into Europe.

NATIONAL SECURITY CONCERNS AND POTENTIAL CONSEQUENCES

Trieste / Italy-China MoU

The Italy–China MoU has both positive and negative aspects. It can be an opportunity for Italian state-owned and private companies to access an emerging market. At the same time, it does not include significant contracts for Italian exports and only mentions areas of mutual cooperation. It may be the first step on a positive road but terms and conditions of this cooperation are not yet clear.

Italian intelligence agencies are concerned about national security risks that might result from closer cooperation with Beijing and the consequences for strategic infrastructures and hubs like Trieste and Genova ports. These hubs are important for Italian national security due to their connections with international networks. Chinese investments in these ports could provide China with a gateway into Europe — Chinese companies are interested in turning these ports into hubs for Euro-Asiatic connection, with direct access to railway networks and transport goods into the EU.

As Italy draws closer to China, there will be knock-on effects for the Euro-Atlantic community. US concerns about Italy-China relations have focused on 5G technology. Though Italy uses several 5G suppliers, the MoU could help China expand its 5G footprint in Europe, with significant resulting security risks. According to the US Deputy Assistant Secretary for Cyber and International Communications and Information Policy, Robert Strayer, ‘Chinese firms could be forced to hand over data to the Communist Party without democratic checks and balances’. If a US-allied and NATO member state like Italy uses Chinese 5G technology in its national security apparatus, sensitive data could therefore be at risk. This might ultimately affect Italy-US information-sharing and NATO interoperability.

Although this MoU is only the first step for better cooperation with China, there are clear concerns about national security. Criticism from both the EU and US and even some criticism within the Italian government — Deputy-Prime Minister Salvini is not so in favour of the MoU — may force Rome to slow down the implementation of the MoU in the medium to long-term.