China-Italy ties: as Rome looks for belt and road exit it's expected to be 'punished twice' without reaping benefits

Italy's participation in Chinese President Xi Jinping's flagship foreign policy tool, the Belt and Road Initiative, is drawing to a close, with Rome expected to pull the plug on the four-year saga by the end of the year.

By not renewing a memorandum of understanding signed in 2019, Italian Prime Minister Giorgia Meloni will ensure no country is a member of both the Group of 7 rich countries and China's infrastructure bonanza.

The final nail in the coffin appeared to be hammered into place last week, when Italian Defence Minister Guido Crosetto called the decision to join the initiative "improvised and atrocious".

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Meloni is expected to travel to Beijing in autumn to explain the decision to Xi in person after meeting US President Joe Biden in Washington last week.

The writing has been on the wall for some time. Even on the campaign trail, Meloni described the decision to join as a "big mistake". Managing the fallout of the situation, however, puts the country's first far-right leader since World War II in an unenviable position.

The decision comes as most of western Europe is trying to rebalance ties with China. But while Brussels has left its de-risking strategy deliberately vague - partly to offer EU members diplomatic cover when disentangling themselves from parts of the Chinese supply chain - no such ambiguity is available to Meloni.

"The issue for Italy right now is how to move out of the [belt and road], which is a political and not an economic tool, while maintaining or maybe strengthening the economic links with China. That is the challenge Meloni faces," said Lorenzo Codogno, chief economist at the Italian Ministry of Economy and Finance from 2006 to 2015.

US President Joe Biden meets Italian Prime Minister Giorgia Meloni at the White House in Washington in late July. Photo: EPA-EFE alt=US President Joe Biden meets Italian Prime Minister Giorgia Meloni at the White House in Washington in late July. Photo: EPA-EFE>

In effect, Italy faces being punished twice for joining the initiative, and without harvesting any of the economic rewards it might have hoped for.

"When we signed the memorandum, we didn't get any significant economic advantage. And now, since the overall geopolitical context is forcing us to go out, we again lose. We first lost reputationally as far as Western countries were concerned. Now, we lose reputation in the eyes of China," said Giuliano Noci, vice-rector at the Politecnico di Milano university and a former adviser to the Italian government on infrastructure matters.

Noci said that signing up to the belt and road programme without any side deals that would have, for example, granted Italian goods better access to the Chinese market was "a mistake". "Why can German products enter the market and ours not?" he asked.

This sort of logic was rife at the time. In 2019, Luigi Di Miao, then economy minister, said the reason for joining was to rebalance the trade deficit.

"Our goal with these accords is to start to rebalance an imbalance for which there is a lot of 'made in China' coming to Italy and too little 'made in Italy' that goes to China," Di Maio said, adding that he expected "a substantial and gradual increase of exports and we hope that in the next years we can balance out the trade imbalances".

The country suffered three recessions in a decade and was looking enviously at France and Germany, both of which enjoyed much more profitable relations with Beijing.

"At the time, many Italians felt abandoned by Europe, while its populist government was sceptical of the European Union and more than willing to turn to China to fulfil its investment needs," wrote David Sacks, a fellow for Asia studies at the Council on Foreign Relations, in a recent blog post.

The data shows an increase in overall trade, but the deficit was not rebalanced, nor did investment flow.

From 2018, the year before former prime minister Giuseppe Conte on-boarded Italy, to 2022, Chinese investments in Italy dropped by 81 per cent, according to statistics from Rhodium Group, a research house.

Calculations based on Chinese customs data show that while in the first half of this year, Italy's exports to China were 31.7 per cent higher than the equivalent period in 2018, imports from China surged 40.24 per cent, actually expanding the trade deficit by 55 per cent.

Observers caution crediting a memorandum that was light on specifics with a two-way surge in trade. Others bemoan the continued focus on trade balances as a metric of economic well-being.

"You don't get anything by signing up to the [belt and road] - it's a gesture of goodwill that may or may not make Beijing more likely to reward you. It's a necessary step in the right direction if you're looking to get closer to China and find funding for infrastructure projects, but it's not anything like a 'deal' or 'treaty,'" said Jacob Mardell, an analyst of EU-China relations based in Berlin.

For China, losing Italy - the belt and road's richest Western member and a key node on the original Silk Road - will be a symbolic blow, even if not unexpected.

Coinciding with his state visit four years ago, Xi wrote that the agreement would "cultivate the soil of bilateral relations and ensure that it can come to a new and richer flowering".

But even then, a new geopolitical reality was setting in. Eleven days before the agreement was signed, the EU branded China a "systemic rival" in a now infamous paper that established its triptych policy towards the world's second-largest economy.

The coronavirus pandemic was just around the corner. Add to this Russia's war on Ukraine, and Europe's relationship with China has been in a downwards spiral since Conte signed on the dotted line.

"This could not happen today," Codogno said. "Politically, today it would be unthinkable, especially after the Russian invasion of Ukraine."

For a decade, China's approach to expanding the belt and road was to target "pivot" or "lighthouse" countries, that would set a positive example to their neighbours, said Moritz Rudolf, an expert in the initiative at Yale Law School's Paul Tsai China Centre.

"But with Europe that just doesn't work any more. With the geopolitical situation, this just wouldn't happen today. We are in a time of reorientation with China. Economic relations are now viewed in terms of dependencies rather than opportunities," Rudolf said.

In 2019, Europe was caught between a rock and a hard place, with the new thinking on China clashing with frosty transatlantic ties with the government of then US president Donald Trump.

"Italy is a major global economy and a great investment destination. Endorsing [the belt and road] lends legitimacy to China's predatory approach to investment and will bring no benefits to the Italian people," the White House's National Security Council said in a tweet at the time.

But now, with friendlier ties with a Biden administration that has adopted a similarly hawkish stance on China, there is even less room to manoeuvre.

"Once the renewal of the memorandum became a public and international matter, it was not possible for Italy to avoid taking a political decision," said Francesca Ghiretti, a Brussels-based researcher of EU-China economic ties at the Mercator Institute of China Studies. "It became extremely difficult for that decision not to be turned into a geopolitical issue in the tensions between the US and China."

On Friday, the Chinese foreign ministry warned that "some forces continue to maliciously hype, politicise the Sino-Italian joint construction of the belt and road" while expanding on the economic benefits of taking part.

Meloni said that during her trip to Washington last week, Biden did not raise the issue. But her own rhetoric on the matter has grown more taciturn, as fears rise in Rome of repercussions from Beijing.

Looking to recent history, she may be hoping to emulate Latvia and Estonia, rather than Lithuania.

The former pair of Baltic nations left China's 16+1 grouping last year with little fanfare and faced no retaliation beyond a diplomatic dressing down. Lithuania, however, which left noisily and sought to simultaneously deepen ties with Taiwan, has become embroiled in a prolonged feud with Beijing.

"Beijing reads the Italian decision to not renew the MOU as a victory for the US," Ghiretti said. "If we consider that and the public profile of this story, targeted and symbolic retaliation is not off the table - even if members who left the 16+1, for example, were not subject to it."

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2023 South China Morning Post Publishers Ltd. All rights reserved.

Copyright (c) 2023. South China Morning Post Publishers Ltd. All rights reserved.