Italy Oscillates on China
While some recent moves, from trade to coronavirus aid, may suggest Italy is moving closer to China, the reality is that the country's China policy continues to seesaw between assuagement of traditional Western allies and closer ties with China.
When Italy became the first G7 nation and the first founding member of the European Union to sign a memorandum of understanding on China’s Belt and Road Initiative (BRI) on March 23, 2019, its embrace of Chinese President Xi Jinping’s signature foreign policy initiative weakened the European Union in its drive to frame a common position vis-à-vis the Asian giant. The signing of the MOU was also a strategic setback for the United States in its tug-of-war with China over trade and global leadership.
One year after the signing of the MOU, Rome-Beijing relations are back in the spotlight following the outbreak of the coronavirus epidemic in Italy – the first major outbreak of the COVID-19 outside of China. In March 2020, the Italian government imposed a strict lockdown to contain the virus and began reaching out to Beijing for help since the country lacked critical medical supplies. In April, China donated masks and other medical supplies to Italy, for which it received grateful acknowledgement from Janez Lenarčič, the EU’s commissioner for crisis management, who also noted donations had gone the other direction in February. But the mainstream media, in particular the national broadcaster RAI, presented the entire operation as a big donation, even though some of the supplies were part of a commercial deal, and Italian Foreign Minister Luigi Di Maio was quoted as saying, as the supplies were unloaded, “[We] are not alone, there are people in the world who want to help Italy.”
Italy’s signature of an MOU on China's Belt and Road Initiative last year and recent bilateral exchanges over coronavirus “aid” might suggest Italy is closer to China. The reality is that Italy’s China policy continues to seesaw between assuagement of traditional Western allies (the EU and the US) and promoting closer ties with China.
This oscillation is likely to continue in the coming months and years, making Italy an uncertain player on a range of issues, from investment to 5G security. While Italy has signaled to the Trump administration that it is cooperating in restrictions on Huawei, vested interests inside Italy taking a more pro-China stance have so far prevented real action.
For Brussels, Italy’s oscillating China policy has different implications whether it is made by a center-left coalition or a center-right executive led by far-right and sovereigntist forces which tend to emphasize national politics in foreign relations.
The support provided by China – together with a well-orchestrated media campaign – has arguably translated into increased positive perceptions of the country among Italians. On April 20, an opinion poll by SWG research institute (one of Italy’s major polling companies) showed that 52 percent of Italians would consider China their “best friend,” an astonishing rise of 42 percent from the 2019 survey. China was followed by Russia, which was considered a friend by 32 percent of those interviewed (up 17 percent over last year’s survey). Meanwhile, the United States was seen as a friend of Italy by just 17 percent of those polled, a drop of 12 percent. This is possibly the most visible result of the propaganda campaign launched by China following the outbreak of the coronavirus pandemic.
But despite this apparent new depth in the friendship between China and Italy, the relationship is still strongly conditioned by China’s often contentious role in Italian national politics – a complex knot of hopes, fears, and the vested interests of political parties and key players – and it is further complicated by a triangle of relationships involving two other major powers, the United States and the European Union. This article examines the shifts in Italy’s policy toward China over the past two years, and how that policy is likely to continue oscillating as Italy’s complex national politics intersect with larger geopolitical pressures.
The MOU on China’s BRI was finally signed in March 2019 by Italy’s populist coalition government, formed between the anti-establishment Five Star Movement (M5S) and the far-right Northern League (in power between June 2018 and August 2019). While this is sometimes viewed as stemming from the “China-friendly line” of the new Italian government, it was actually Italy’s center-left politicians who prepared the ground for the country’s endorsement of China’s connectivity project almost two years earlier.
In May 2017, Paolo Gentiloni, Italy’s former Prime Minister of a center-left coalition government, attended the first Belt and Road Forum in Beijing, where he floated the idea of signing an MOU on the BRI. Support for an Italy-China MOU came also from Sergio Mattarella, Italy’s president (and a member of the center-left Democratic Party), during his state visit to China in 2017.
After the M5S-League coalition was sworn in in June 2018, preparations began through several high-level visits for the signature of the MOU. Italy’s then economy minister, Giovanni Tria, made his first trip abroad to China in August 2018. He was followed by Luigi di Maio, then head of the M5S (the senior party in the coalition) and vice-premier and minister for economic development, who suggested the signature of the MOU during a visit to China in September 2018.
The economic context surrounding the signature of the MOU must not be overlooked. By pushing forward heavy spending plans, Italy’s populist government sparked a spat with the EU in December 2018 that pushed up bond yields, making it more costly for Italy to refinance its huge public debt. This happened against the backdrop of uneasiness among investors about the possible impact of weaker growth on Italy’s high debt to GDP ratio. As Italy risked further downgrading of its credit status, Italian populists bet on China to continue buying Italian bonds. Moreover, by endorsing the BRI the populist government in Rome hoped to obtain more market access in China for Italian companies and “Made in Italy” products, as well as more Chinese investments in Italy under the BRI framework.
Italy’s China policy has traditionally been based on economic considerations. For its part, China has sought to emphasize the trade benefits of the relationship, state media stressing last year around the MOU signing that "China is now one of the largest cooperative partners of Italy in terms of imports and exports," and that BRI has "already helped expand the shipping trade in the Mediterranean region, creating unprecedented development opportunities for Italy's major ports."
But while bilateral trade has undoubtedly increased in the last decades, data from the Italian National Institute of Statistics (ISTAT) indicates that the importance of the Chinese market for Italian exports remains rather small – 2.8 percent in 2018 – and that the trade gap has further widened in recent years. According to the Italian Embassy in Beijing, two-way trade reached 43.9 billion euro in 2018. Italian exports to China amounted to 13.2 billion euro, while imports reached 30.7 billion for the year. Meanwhile, Between 2014 and 2018, the trade gap increased just over 8 percent, from 19.3 billion to 20.9 billion, according to the World Bank.
Proponents of closer Rome-Beijing ties maintain that China offers Italy great potential, given the size of the Chinese market and its expanding middle class, which has a growing appreciation for “Made in Italy” products. Luigi Di Maio several times referred to the Chinese market as “a great opportunity for Italian companies.”
China-friendly politicians and corporate leaders in Italy have also tended to present Chinese investments as a boon for Italy’s ailing economy and as a sign of the country’s international attractiveness. According to a 2018 report by the Italy-China Foundation (Fondazione Italia-Cina), more than 600 Italian companies have received some Chinese investment since 2000, for a total value of 13.3 billion euros. Acquisitions have been facilitated by the small size of most Italian companies, although Chinese investors have also targeted big companies.
Germany, France, and the United Kingdom have traditionally been the preferred destinations for Chinese foreign direct investment (FDI). However, in 2015 Italy overtook France for cumulative Chinese FDI calculated from the year 2000. The sudden increase in Chinese FDI in Italy in 2015 was due to the 7.9 billion dollar acquisition of a 16.89 percent stake in Pirelli, the world’s fifth largest tire maker, by state-owned ChemChina.
Aside from the Pirelli acquisition, Chinese firms have made investments in some of Italy’s key strategic industrial and financial companies. According to data from S&P Market Intelligence elaborated by Il Sole 24 Ore, an Italian national daily business newspaper, Chinese portfolio investments have surged. The investment arm of the People’s Bank of China, the State Administration of Foreign Exchange, has invested almost 3.5 billion euro representing about 2 percent each in ten of Italy’s largest companies in the banking (Monte dei Paschi di Siena, Unicredit, Intesa SanPaolo, Mediobanca), energy (Saipem, Enel, Eni), auto (Fiat Chrysler Automobiles), telecommunication (Telecom Italia), cables and systems (Prysmian) and insurance (Assicurazioni Generali) industries.
The promoters of closer Italy-China ties have declared on several occasions that the signing of the MOU could translate into an increased flow of Chinese investments into Italy, in part because under the BRI framework outward investments tend to receive smoother approvals from Chinese authorities – in particular towards those countries with which Beijing has signed MOUs.
While Paolo Gentiloni was the first to float the idea of signing an MOU on the BRI while attending the first Belt and Road Forum in Beijing in May 2017, the Gentiloni government was also staunchly pro-EU and supportive of the more hawkish voices inside the General Confederation of Italian Industry – commonly known as Confindustria – that demanded a tougher approach to China. Therefore, the same center-left coalition that floated the idea to endorse Xi Jinping’s signature foreign policy initiative in May 2017 had also backed, a few months earlier, the creation of a EU-wide investment screening mechanism. By doing so, the Gentiloni government was able to square the circle, reaching out to China and its potential market, while at the same time joining with key European partners (Germany and France) and Confindustria in promoting stricter rules regarding Chinese investments into the bloc.
The center-left coalition in power in Rome at that time consisted of both pro-China elements, emphasizing a narrative of China as opportunity, and a number of proponents of the idea that China posed an economic threat due to its state-dominated economy and unfair trade practices. According to the latter argument, China’s practices had contributed to de-industrialization and a declining standard of living across some parts of Italy. For this reason, Italy led the campaign to avoid relaxing EU anti-dumping measures against China, under pressure from powerful industrial lobbies, in particular Confindustria.
In April 2019, Confindustria issued a position paper advocating for a more strategic and cohesive EU approach to dealing with economic challenges in the relationship with Beijing. In the document, Confindustria accused Beijing of withholding its domestic market for its national champions and restricting access by European companies. It also accused China of subsidizing domestic competitors, and failing to protect intellectual property rights. The Confindustria paper followed a similar report from the Federation of German Industries (BDI) issued in January 2019, in which the group argued in favor of a more assertive position toward Beijing on trade and investment.