Resisting pressure from Washington and Brussels, who fear the already heavily indebted and economically uncertain NATO member might be walking into a debt trap, Italy on March 23rd became the first G7 country to join China’s Belt and Road Initiative. Consequently, this act throws the unity of the G7 into question and intensifying tensions between Italy and its neighbors. China and Italy signed over two dozens accords worth as much as €22 billion.

What is the Belt and Road Initiative (BRI)

To understand, the BRI project, one must look back to the original Silk Road, which connected Europe to Asia centuries ago. The Silk Road came into existence during the time of the Han Dynasty between 206 BCE–220 CE. Then, China forged trade links with what are today the Central Asian countries of Kazakhstan, Afghanistan, Tajikistan, Turkmenistan, Kyrgyzstan, Uzbekistan, India and Pakistan. These routes extended more than four thousand miles to Europe. Chinese silk, spices, and other product moved west to the Roman and Byzantine Empires, while China got precious metals, gold, and glass products. Unfortunately the Crusades and the Mongol Invasion and conquest of Central Asia from 1216 to 1221 diminished trade.

Announced in 2013, the BRI entails a “belt” of overland corridors and a “road” of maritime shipping lanes straddling Asia, the Middle East, Africa, and Europe. The plan was two branches; the overland Silk Road Economic Belt and the Maritime Silk Road both consisting of six different economic corridors. These commercial corridors aim to strengthen China’s trade and investment links with Asia, Africa, and Europe. Thereby, cementing its position as a major global economic power.

Belt & Road Route

BRI Six Economic Corridor

Chinese state-owned policy banks; the Agricultural Development Bank of China, China Development Bank and the Export-Import Bank of China

BRI projects finance the BRI. They do so by offering participating countries cheap credit and loans. Already, China has spent an estimated $200 billion and is predicted to invest over $1.3 trillion by 2027.

Why did Italy sign up to it?

With Italy’s economy lagging, mired in third recession in a decade, and dim outlook for growth, Beijing offers Rome something that Brussels and the West have been unwilling, or unable, to provide; extraordinary economic boom, trade, and investment. Already, Italy has received over $23 billion in financing from China, making it the third largest European recipient of Chinese FDI. In 2015, China National Chemical Corp and Silk Road Fund co took over tire maker Pirelli for $7.1 billion, the largest purchase by China in Europe.

Remember that Italy has still not fully recovered from the Euro-zone crisis due to EU political chaos, divisions and economic stagnation. Italy is anxious to revive its struggling economy, saddled with burdensome public debt and fell into recession at the end of 2018. Initially, Rome proposed an extravagant spending program for its 2019 budget to revive its economy. Unfortunately, Rome and Brussels engaged in a bitter budget battle with Rome last year that forced Italy to cut back its spending plans.

Italy signs the Belt and Road Initiative deal with China

By signing this landmark deal with China, Italy is hoping that it would occupy a favored place in Beijing’s trade plans. Thus China’s investment approvals flow its way. With exports to China and investment inflow increases into disintegrating Italian infrastructure, it would spur economic growth, tax revenue, employment, infrastructure development, and slash Italy’s trade deficit with China which stood at $20. 8 billion in 2017. Italy lags in exports to China and wants to catch up with Germany, the UK, and France — none of which are signatories to the BRI.

What does China hope to get out of these deals?

For Beijing, Italy’s central geographic position along the middle of the Mediterranean Sea could accelerate China’s trade with Western & Southern Europe, and North Africa as well. Among the agreements signed were plans to invest in port infrastructure in Trieste, Genoa, and Palermo, which could give Chinese goods faster access to Europe. While Genoa is a long-established port, Trieste the most strategic port for China. The Adriatic Sea port of Trieste is strategically critical for China. The port would connect the Mediterranean to interior countries (via railways) like Hungary, Austria, the Czech Republic, Slovakia, and Serbia, all of which are markets that China hopes to reach with the belt and road project.

Port of Trieste route to Europe

Located in the northwest of the island of Sicily, in the Tyrrhenian Sea, in the middle of the Mediterranean Sea is the Port of Palermo. The port handles cargo and cruise ships. An estimated €5 billion ($5.67 billion) investment would be required to increase the port’s handling capacity from a present level of 10 to 16 million TEU. With ports that offer secure gateways into Europe’s most prosperous markets in Western Europe, Italy is a geostrategic platform for China to expand trade in Europe. With the port city of Palermo, it is clear that China is focused on European shipping terminal options. Following Algeria’s joining of the BRI in mid-2018, Palermo could help establish a new North African trade corridor. Since 2000, China has acquired stakes in various ports in Istanbul-Turkey, Egypt, Rotterdam-Netherlands, Tangier-Morocco, Piraeus-Greece, Bilbao & Valencia-Spain, Marseilles & Le Havre France and Antwerp & Bruges-Belgium.

China’s interests in Italy are diverse — from access to new technologies, high-tech assets, and knowledge; to means of entry into the broader European markets and other third markets (United States, Canada) via European corporate networks. China is eyeing brand names in Europe to improve the marketability of their goods and services both at home and abroad. No wonder in Western Europe, Chinese investors have targeted Europe’s strategic assets, research and development networks. China has invested up to €46 billion in the United Kingdom, €22.2 billion in Germany, and €14.3 billion in France.

China FDI into Europe

However, Investment by China into Europe has dropped by 40% from 2017–2018 due to stringent controls imposed by Beijing on outward investments. China sees Italy joining the BRI as a way to efficiently and easily export more of its goods to lucrative markets in Europe and Africa.

What is the European Union is concerned about?

The European Union is concerned that Italy’s support for China’s BRI would create divisions within the bloc. Already, EU member states of Hungary, Croatia, Czech Republic, Greece, Malta, Poland, and Portugal have signed MOUs with China regarding the Belt and Road Initiative. In Greece, the Chinese state-owned giant COSCO Holdings Company has already acquired a 67% interest in the Port of Piraeus, Europe’s largest passenger port. The Port of Piraeus is now China’s gateway into Europe. In 2017, Greece blocked a European Union statement at the United Nations criticizing China’s human rights record.

The EU, especially France and Germany, want a stricter approach to China. They have led the charge that European companies should find the same degree of openness in the China market as China finds in Europe. To the EU, the BRI gives China unfettered access to the European markets and economies, but its economy is still mostly closed to foreign investment. For this act, the European Commission has branded China a “systemic rival” and plans to impose stricter rules on China’s investments in Europe.

EU-China engagement

The EU aims to pursue a bilateral relationship with Beijing, rather than have 28 nations have their own relationships. Nevertheless, by getting Italy’s signature, China is successfully proceeding in its strategy.

Already, another EU member state, Luxembourg, has signed an MOU with China to cooperate on the BRI. Sharing borders with Belgium to the west and the north, with Germany to the east and the north, and France to the south, Luxembourg is the gateway to the European market and its 500 million consumers. Also, 40% of the European Union’s wealth is concentrated in a 500 km area around Luxembourg. When extended to 700 km, this figure rises to around 70% of the EU wealth. It is the Eurozone’s leading financial center and the world’s second-largest fund market. Thus, a perfect gateway to Europe’s financial markets. Luxembourg may serve as a bridgehead for cooperation between the BRI and Europe. The country was the first EU states to join the Asian Infrastructure Investment Bank.

Consequently, this has made the bloc less effective at presenting itself in front of Beijing with a single voice.

What is the United States is concerned about?

China’s leading economic rival, the United States fears that BRI for trade projects is a strategy to bolster China’s political and military influence in Eurasia. The BRI serves as push back against the U.S. “pivot to Asia,” launched by the Obama administration in 2011.

Many in Beijing read this as an effort to contain China by expanding U.S. economic ties in the Indo-Pacific region. Therefore the BRI project will assist China to develop new investment opportunities, export markets, and boost Chinese revenue, and slash its excess industrial capacity.

The trade war tensions between China and the US does not help matters. Currently at China is telecom giant Huawei’s plan to install 5G networks around the world is the center of the tension. Earlier in 2019, the US Justice Department charged Huawei with fraud and IP theft and called the company a threat to US national security.

U.S. — China engagement

With Italy signing this deal, the US fears its traditional allies seem to have fallen to the wayside to establish their own trade ties with China, a major great power competitor and rival for Washington in the 21st century.

A previous case could be helpful. In 2015, Britain became a founding member of China’s Asian Infrastructure Investment Bank. Although, Britain joining drew criticism from Washington, several other U.S. allies, Germany, France, and Italy followed Britain’s lead and joined the bank. Therefore, Washington is worried that a unified front against China’s geopolitical and economic ambitions will fail.

Also, the United States and Europe have branded the BRI as a vehicle for debt trap diplomacy and accused the BRI of being nothing but a vanity project. China has also been accused of offering loans at a high interest rate to economies that will struggle to pay them back. A famous case is Sri Lanka. With almost all its revenues going toward debt repayment, at interest rates as high as 7%, in December 2017, Sri Lanka gave China 70% stake and a 99-year lease to the Chinese-built Hambantota port because it couldn’t afford to pay back loans. Sri Lanka owed $13 billion to China.

Unable to pay back its debts, Pakistan, in April 2017, handed over operations of its Gwadar port to a China Overseas Port Holding Company for 40 years.

As precaution not to enter the same problem as Pakistan and Sri Lanka, Malaysia axed $22 billion worth of infrastructure projects with China in 2018, citing an inability to pay back its loans from China in the face mounting national debt.

Both Washington and Brussels are going to voiced concern about China using the initiative to gain influence or control over strategically vital assets across the world. China is not exactly a comfortable partner for both the EU and the United States. Both are frustrated by Beijing unwillingness to open its economy fully. Secondly, China’s unfair trade practices like Yuan devaluation, Cyber espionage, intellectual property rights, subsidized state-owned enterprises, unequal market access and discrimination against Western companies in Chinese finance, logistics and telecom sectors, but these sectors are fully opened to Chinese investors in the EU and America.

The role of third countries — India, Japan, and Russia

India is firmly opposed to China’s Belt and Road initiative especially the China-Pakistan Economic Corridor (CPEC). The CPEC project is viewed by India as part of Beijing’s strategy to infringe on the Indian subcontinent and could potentially undermine New Delhi’s claims of the Pakistan Occupied Kashmir area. Part of CPEC route runs through the contested Kashmir region. Thus it will make China the third party in India-Pakistan POK dispute.

Moscow has become one of the BRI’s most enthusiastic partners. However, unofficially, the Kremlin is very nervous. The reason is due to the massive pouring of financial resources by China on Russia’s near abroad in Central Asia, ultimately making Central Asia a Chinese backyard in the future instead of Russia. However, as Russia’s relationship with the West has deteriorated, Russia has pledged to link up its Eurasia Economic Union with China’s BRI.

With Italy participation on the BRI, China has scored a significant victory in its ambition to bolster its economic and diplomatic influence throughout Eurasia. The United States and EU have been significantly weakened to engage Beijing on many issues jointly from unfair trade practice to the South China Sea, and Taiwan.