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The Belt and Road Initiative in Italy: a distorted reality

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2000 years ago, two great civilizations dominated each ends of the ancient Silk Road.

At its most Eastern point was China’s Han dynasty, which knew very little of the other mysterious empire that controlled the Silk Road’s Western tip. Chinese people referred to this empire as “Da Qin,” and they thought of it as a sort of “counter-China” which sat at the other end of the world. Today we know that what the Chinese people called “Da Qin” was in fact nothing but the mighty Roman Empire. The story goes that in the year 97 A.D., Chinese ambassador Kan Ying embarked on a journey through the arid steppes of Central Asia to pay a visit to Rome, carrying lavish gifts for its Roman rulers.

Today, that ancient Silk Road has been revived under the name of Belt and Road Initiative (BRI). In 2013, Chinese President Xi Jinping announced his intention to build a modern-day adaptation of these trade routes, giving life to a network of railways, ports, pipelines, power grids and highways that will once again carry goods and ideas between East and West. In this vision, China and Italy could once again become the two powers sitting at the opposite ends of the Silk Road.

In March 2019, President Xi embarked on a three-day state visit to Italy, which today is less a Mediterranean spanning empire and more of a fatigued country saddled with massive debt. In addition, unlike Chinese ambassador Kan Ying, this time President Xi Jinping did not carry lavish gifts for the Roman rulers, but a Memorandum of Understanding (MoU) for Italy to join the Belt and Road Initiative. This was officially signed on March 23.

Chinese President Xi Jinping. Photo Credit: Flickr, licensed under Creative Commons

That Italy, a member of the G7 and a founding member of both the EU and NATO, embraced China’s Belt and Road Initiative was perceived as a major blow to its traditional Western allies. At a time when the US and China were locked in a bitter trade war which saw Washington and Beijing imposing tit-for-tat tariffs and EU leaders emphasizing the need for a common strategy towards China, Rome’s formal endorsement for the BRI raised concerns that Italy could become the entry point for Chinese influence in Europe.

Various media outlets claimed that Italy “was playing with fire”, and the US depicted the country as “the European weak link in the power struggle with China”. Former Secretary of State Mike Pompeo also warned that Beijing would take advantage of Rome, recalling the common assumption that the BRI only plays in China’s favor, and that countries that will be unable to repay generous Chinese loans will eventually fall into the so-called “debt trap”. And, because the MoU would grant a Chinese state-owned company access to various Italian ports, including Genova and Trieste, in 2019 many claimed that Italy would eventually cede its national assets to Beijing.

An article from The New York Times quickly inflated this narrative and painted a stark picture of Trieste being “invaded” by an army of deep-pocketed Chinese people: “To walk through Trieste is to witness how the city has already opened to China” - the article reads in a prophetic tone - “Chinese tourists shop for the city’s trademark Illy coffee and take pictures with their Huawei phones of the elegant Caffé Degli Specchi”. As the article continues, “most significant, construction workers in scuba gear have been laying foundations near the site where a new pier is expected to become China’s home in the industrial port.” In the imaginary of the Times, the idea that China could soon control major Italian national assets loomed large. Yet, two years since the controversial signing of the MoU, the obvious question is: have these prophecies come about? The answer is no.

First, it should be noted that most of the agreements signed by Italy and China were largely expressions of intention, which never really came to reality.

After March 2019 Beijing had to learn a hard lesson: dealing with Italy’s schizophrenic, unpredictable, and unreliable political system is no easy task. When the MoU for the BRI was first signed, Italy was governed by the Five-Star Movement (5SM) and the far-right League, a dysfunctional and populist coalition that favored a new partnership with Beijing. This coalition also rejected Italy’s traditional Western alliances and was largely anti-EU and anti-establishment. However, this government was quickly replaced by a new coalition that re-positioned Italy back into its traditional alliance system. This approach was then reinforced by yet another change of government in 2021, when Prime Minister Mario Draghi emphasized that his new administration was “strongly pro-European and Atlanticist.” This political roller coaster essentially proved that Rome’s position towards the BRI can virtually change at any time.

In addition, the continuing US-China trade war and the growing tension around Italy’s endorsement for the BRI in 2019 might have eventually influenced Italy’s decision-makers, prompting them to choose different partners. In Trieste, where, according to the New York Times, to walk through the city is “to witness how the city has already opened to China,” the port infrastructure project was eventually contracted not by China Communication Construction Company (CCCC), but by Germany’s Hafen and Logistik.

It is also important to highlight that many concerns on Italy falling into a “debt trap” had little supporting evidence. Both Italian and European legal frameworks limit the ability of foreign companies to acquire assets in country’s vital sectors. In particular, the Italian government can also appeal to the so-called “Golden Power” regulation, a special rule introduced in 2012 and reviewed in 2020 by which the Italian government can decide to stop foreign direct investment when it goes against the national interest. This means that there was virtually no possibility to cede control of Italian ports to a Chinese organisation.

Finally, what is often ignored is that Chinese investment would have been limited to very specific projects: China’s collaboration would not be focused directly on the entire ports of Genova and Trieste - rather, in Genova, CCCC would have invested in the construction of a new breakwater dam, while in Trieste the company would have been involved in the construction of railway stations and rail connections. These considerations seem to suggest that fears over Chinese investments in Italian infrastructure have often been exaggerated by media outlets and political figures. Also, they stemmed from a general mistrust towards China’s BRI, rather than from any thorough analysis. Stating that “to walk through Trieste is to witness how the city has already opened to China” is a form of sensationalism that actively distorts reality.

The Rise of China Inc.: Can it Prevail in the US-China Trade War?

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by Guanie Lim & Yat Ming Ooi

Founder and chairman of Geely Automobile Li Shufu (second from the left) pictured during a visit to Volvo Car Gent. Geely bought the Volvo brand in 2010 (Image credit: Belga)

‘The Fortune Global 500 is now more Chinese than American’. The headline piece of Fortune Magazine’s edition of August 2020 revealed much about the nature of global business. With more companies based in Mainland China and Hong Kong (124) than in the US (121), the list sparked intense debate China’s perceived ascendancy in the international economy. Following four decades of rapid growth, this is a clear image of what is conventionally known as China Inc. Searching for market share domestically as well as abroad, these Chinese firms (occasionally termed ‘national champions’) are known for their acquisition of large and well-established firms such as IBM, Club Med, and Volvo. Against the backdrop of an increasingly strained relationship between the US and China and instances of some countries pushing back against Chinese infrastructure deals in the Global South, a dual question can be asked: where is this rivalry headed to? And, what are the implications for the rest of the world?

Chinese Corporate Power

The Global 500 is a prestigious list and offers arguably the best snapshot of the state of global business. In its methodology, firms are ranked based on revenue. This approach is somewhat biased as it tends to favour companies operating highly regulated monopolies/oligopolies in large economies. Many Chinese companies fall into this category. Indeed, an analysis of those 124 Chinese companies in the Global 500 reveals that many are operating de facto monopolies/oligopolies in the domestic market, where non-tariff barriers remain high. Examples include Sinopec Group, State Grid, and China National Petroleum (all located within the top 4). Operating in chemicals, power, and petroleum respectively, these three firms are not only state-owned but also generate much of their revenue in highly-regulated, capital-intensive industries. Further down the pecking order, a similar trend emerges: of the twenty-four Chinese companies in the top 100, almost all operate in industries such as banking, insurance, construction, and mining.

At the same time, there is also a paucity of Chinese manufacturing firms on the list. This odd development has occurred despite Beijing’s push for ‘national champions’ in industries such as automobile production, steelmaking, shipbuilding, and aerospace. However, only two manufacturing firms – Huawei (private; 49th) and SAIC (state-owned; 52nd) – made it into the top 100.

Huawei can be described as a non-traditional firm in the manufacturing industry since a relatively large portion of its revenue is derived from what are essentially service activities (telecommunication installation, consulting, and repair). Even in the manufacturing of its renowned smartphones, core components are still sourced primarily from Western and Japanese business groups. For example, the Huawei P and Mate Series – which come with high-definition cameras – rely on German company Leica for the supply of camera-related components. Despite Huawei’s attempts at expanding into global markets, the firm continues to face difficulties in some markets, due to allegations of undue state support, and cybersecurity concerns. Most recently, its Chief Financial Officer has been under house arrest in Canada. In addition, the US has stepped up pressure on its allies to remove Huawei equipment from their telecoms infrastructures over concerns that the Chinese government could possibly lean on the company to allow it to conduct espionage, closely followed by the UK. Although it is premature to write off Huawei at this stage, it seems to be one of the highest-profile targets ensnared in the trade war between the USA and China.

For SAIC, an automobile player based in Shanghai, the outlook is somewhat better. Since its joint-venture with Volkswagen after the 1978 economic reforms, SAIC has been able to continuously strengthen its position in the domestic economy, emerging as a de facto lead firm. In the Global 500 list for 2020, it is ranked as the seventh-largest automobile company, surpassing brand name rivals such as BMW Group and Nissan Motor. However, like Huawei, there does not seem to be enough incorporation of critical manufacturing technologies, which forces SAIC to rely on more mature foreign companies. SAIC still sells vehicles from a variety of brands licensed from mainly Western automobile companies, in exchange for entry to the Chinese market. As of 2020, only two of its brands, MG and Roewe, have had (limited) success outside China. These two brands were acquired during the mid-2000s from now-defunct British carmaker MG Rover.

For the MG brand, in particular, SAIC’s internationalisation efforts have been bumpy. In 2012, SAIC entered into a joint venture with Thailand’s largest conglomerate, Charoen Pokphand (CP) Group, to produce MG cars in Thailand. With an annual production capacity of fifty thousand vehicles at the outset (which could increase to two-hundred thousand units), the company aspired to capture the Thai as well as the adjacent Southeast Asian markets. However, here again, progress has been slow. SAIC only managed to sell 23,740 MG vehicles in 2018, well below its total production capacity of 200,000 units. By capturing only a 2.3% market share in the Thai market, SAIC has failed to make a dent in the Japanese-dominated automobile market of Thailand (and by extension Southeast Asia).

Chinese Catching-Up in Retrospect

The experiences of Huawei and SAIC are sobering. Although undoubtedly ‘national champions’ in their own right within the large domestic market of China, there is not enough evidence to suggest they have become the sort of ‘global champions’ that successive Chinese politicians and bureaucrats frequently exhort them to be, nor are they necessarily setting the example for other national firms. Perhaps this suggests some underlying problems with China’s technological catching-up that goes unmentioned in both the euphoria surrounding the ‘rise of China Inc.’ and the pessimism engulfing the increasingly tense international economic environment? What we are advocating here is to step back and scrutinise both sets of development. While not denying China’s economic strengths, there is an equal need to unpack the nature of the Chinese economy.

As illustrated in the previous paragraphs, Chinese growth is mainly driven by a large domestic market, which obviates the need to create competitive firms with world-beating indigenous technologies. Chinese technological shortfall can instead be plugged by purchasing production and process expertise from foreign firms (through royalty payments for copyrighted products and mergers and acquisitions, for example), resulting in a dearth of genuine manufacturing ‘national champions’, for which long-term investment in R&D is required. If the fate of Huawei and SAIC is of any relevance, then we must more seriously take manufacturing as a key cog of development. More broadly, while one may like to envision a post-industrial society, no economy – barring small, wealthy offshore financial centres (e.g. Macau and the Cayman Islands) – transitioned straight into the high-income category without a competitive manufacturing sector. Without a strong manufacturing sector (and by extension command of technology), talks about a US-China trade war is overblown as China Inc. might not have the strategic depth to mount a sustained challenge.

The USA: Still No. 1?

Moreover, in the US, the situation is nowhere near as dire as what the popular media seems to suggest. Despite numerical superiority, Chinese companies account for only twenty-five per cent of the total Global 500 revenue against the US’ thirty per cent. Furthermore, two US companies made it into the top 10 – Walmart (first) and Amazon.com (ninth). Walmart, in particular, claimed the top spot for the seventh consecutive year.

In addition, thirty-four US companies made it into the top 100, outweighing the twenty-four hailing from China. Although US companies in the Global 500 participate heavily in service activities, it must be noted that some of the manufacturing behemoths have maintained or even enhanced their positions. In the top 100 roster, USA Inc. is represented by Ford Motor (31st), General Motors (40th), Microsoft (47th), and Dell (81st). Ford Motor and General Motors represent the mature automotive industry, while the latter two represent the more forward-looking information technology industries.

Amid the seemingly meteoric rise of Chinese companies, the US retains three salient points that will determine the outcome of the much-hyped trade wars. The first point that often goes unnoticed is the early mover status of US companies, which allow them to go abroad far more easily than companies originating from latecomer economies such as China and India. The US (and by extension, its cohort of companies) remains popular in many parts of the globe, in turn giving US companies quite simply the benefit of the doubt, a privilege that Chinese firms do not enjoy (at least for now). Take, for example, the ban that prohibited Huawei and ZTE from participating in Australia’s 5G network development. A cue the Australians took from the US.

The second point concerns the innovative capabilities of US companies. Historically, the US and other Western countries are famed for their ability to innovate. By innovating, we mean to create something new, and implementing it in the production process or bringing it to market as a new product. While US companies are moving some production out of China, this is unlikely to affect their ability to innovate as communication technologies have improved companies’ ability to innovate throughout their value chain. It is through the ability of US companies, often with support from the state, to continually renew and reinvent themselves that we see US companies extending their early mover advantage in the long run.

The final point brings our analysis into the behavioural realm. US companies have market-shaping capabilities. In other words, these companies can dictate what customers and consumers need and want in the US and global markets. No one knew we needed an MP3 player until the late Steve Jobs told us it is ‘cool’ to own an iPod. We had no idea we needed boutique takeaway coffee too. That is until Howard Schultz told us we should all be sipping on a barista-made, grande, vanilla latte with low-fat milk from Starbucks. Of course, there was more to the iPod story. Apple was excellent in crafting an ecosystem strategy, which created network and lock-in effects. The ability of US companies to create new demand, tap previously untapped markets, and influence consumer choices, reinforces US Inc.’s position in the global market.

Is China Inc. taking over from US Inc. any time soon? The short answer is no. Chinese companies are performing well in the globalised and connected world we live in today. But (most) open and transparent economies are ‘suspicious’ of Chinese companies’ intentions. Will China Inc. prevail if we have a full-blown trade war between the two largest economies? Maybe. Chinese companies are still learning and expanding. Moreover, they have the Chinese and surrounding Asian markets to fall back on if indeed a full-scale trade war materializes. Regardless, we can conclude that the US can prevail if it continues to do what it does best – extend its early mover advantage through innovation, market-shaping capabilities, and lock-in effects.

Guanie Lim is Research Fellow at the Nanyang Centre for Public Administration, Nanyang Technological University, Singapore. His main research interests are comparative political economy, value chain analysis, and the Belt and Road Initiative in Southeast Asia. Guanie is also interested in broader development issues within Asia, especially those of China, Vietnam, and Malaysia. In the coming years, he will be conducting comparative research on how and why China’s capital exports are reshaping development in key developing regions – Southeast Asia, the Middle East, and North Africa. He can be reached at guanie.lim [at] gmail.com

Yat Ming Ooi is Research Fellow in the Department of Management and International Business, The University of Auckland, New Zealand. He is also Adjunct Lecturer at Swinburne University of Technology, Australia. His main research interests are innovation management, technology and science commercialisation, and business models. Yat Ming is also interested in the role of new research funding policy plays in addressing grand challenges. He can be reached at y.ooi [at] auckland.ac.nz

 

Sri Lanka between China and the West: Balancing on a Foreign Policy Tightrope

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by Shakthi De Silva

Hambantota port, victim of China’s debt-trap diplomacy? (Image credit: AFP)

After purportedly falling victim to China’s ‘debt-trap diplomacy’, the island of Sri Lanka took the international limelight in July 2017. Many observers referred to the Sri Lankan Government’s decision to hand over the strategically located Hambantota Port on a 99-year lease as indicative of a malicious plan to indebt countries to China. Scholarship discussed the case as depicting the seemingly nefarious nature of the Chinese Belt and Road Initiative and in many narratives, the island was portrayed as having no agency – a small power which ‘suffers what they must’ in Thucydides’ words.

The 2015 ousting of Pro-China President Mahinda Rajapakse by a former minister of his own party - Maithripala Sirisena - ostensibly signalled a shift in the country’s foreign policy. The optimism of such a ‘foreign policy reset’ was overshadowed by the outcome of the 2019 Presidential election which resulted in Gotabhaya Rajapakse’s victory. Western scholars ruefully reasoned that Sri Lanka would shift overtly towards China under Gotabaya Rajapakse, having witnessed a Pro-China foreign policy during the tenure of his elder brother – Mahinda Rajapakse (2005-2015).

This conjecture has not been borne out by facts. A few days after the election, Gotabaya welcomed Dr. S. Jaishankar, India’s External Affairs Minister – the first Foreign Minister to meet and personally congratulate him on his victory. Rajapakse also chose India as the first country to visit as head of state and after meeting Prime Minister Modi received a $400 million line of credit to fund several development projects on the island. Since then, he met with Wang Yi, the Chinese Foreign Minister, Sergey Lavrov, the Russian Minister of Foreign Affairs as well as welcomed the U.S Principal Deputy Assistant Secretary of State for South and Central Asia, Alice G. Wells in the same week.

Complying with the much-iterated policy of ‘Non-alignment and Mutual Friendship and Trust among Nations’ was a core tenet of Gotabaya’s election manifesto. In several public pronouncements after the election, President Gotabaya expressed his desire to adopt a balanced approach in his foreign policy; welcoming investments from and striving “to maintain friendly relations” with all parties. As China and the United States expand their presence in the Indian Ocean, what must they keep in mind when they engage with the new Sri Lankan administration?

Rationalising the Sino-Sri Lankan relationship

Western powers should take note of the fact that Sri Lanka has been in dire need of investments to kick start its economy since the end of its internal armed conflict in 2009. Foreign direct investments (including foreign loans received by companies registered with the country’s Board of Investment) during the first half of 2019 amounted to $501 million - significantly lower than most neighboring Asian countries.

A World Bank report detailing the projected GDP growth of South Asian countries ranked Sri Lanka just above the bottom, with a real GDP growth rate of less than 3% for 2019. Since the island reached upper-middle-income status, it has had to borrow on commercial terms; thereby intensifying its debt crisis. In such circumstances, policymakers are attuned to attract as much investment as possible to spur an economy that has consistently lagged behind other regional powers. In so doing, China emerges as an attractive partner and, thus, increased its investment in Sri Lanka from $ 178.5 million in 2012 to $ 579 million by 2017. Although the United States is the largest source of foreign direct investment in the Indo-Pacific, its cumulative foreign direct investment inflows to Sri Lanka between 2013 and 2018 amounted to only $134 million. The economic rationale behind the close Sino-Sri Lankan relationship is clear to see.

Secondly, Western narratives portraying Sri Lanka’s predicament as a manifestation of Chinese ‘predatory lending’, ‘checkbook diplomacy’, or ‘debt-trap diplomacy’ hardly resonates with the local public. Numerous studies by Sri Lankan economists have uncovered how Sri Lanka’s debt crisis is not ‘wholly’ or even ‘largely’ caused by China. In fact, a much larger percentage of Sri Lanka’s external debt are loans raised through external sovereign bonds and foreign currency financial facilities. Locals are also prone to blame Sri Lankan politicians, particularly members of the United National Party, for finalizing the 99-year lease agreement of the Hambantota port.

Moreover, the West must also understand that Sri Lankans do not generally perceive China’s presence in the Indian Ocean as pernicious to the island’s security. Despite establishing a base in Djibouti, China’s engagement in the Indian Ocean has been relatively limited and benign, owing to the fact that Beijing’s primary security interests reside in the South China Sea and Taiwan Strait. In consequence, the island welcomes China’s presence in the region and has sought ways in which the two economies can closely integrate so that the island can benefit from China’s rise. Furthermore, the substantial quantities of medical supplies delivered by China after the outbreak of the COVID-19 virus exhibit Beijing’s desire to cultivate an image as a friendly benefactor.

Beijing’s support during the final phases of the internal armed conflict in Sri Lanka is another major factor driving the local public’s relative lack of apprehension towards Chinese activities in the region. Political engagement between the two countries has been robust. As of 2018, Sri Lanka had nine ‘sister-city agreements’ with China and 2013 saw the inking of a comprehensive cooperative partnership between the two countries. One report also suggested that between 2000 and 2017 there were 130 political visits between Sri Lankan and Chinese governmental leaders. This year also marks the 63rd anniversary of the inauguration of diplomatic relations with China.

Intensified allegations from the West against the state armed forces have also pushed President Gotabhaya to declare his intention of withdrawing from international institutions if they continue to press for transitional justice or demand for impartial investigations into the last stages of the war. For example, in his speech at the 2020 National Ranaviru Day commemorations, he emphatically stated: ‘In a small country like ours where our war heroes have sacrificed so much, I will not allow anyone to exert undue pressure on them or harass them.’ Therefore, continued pressure from the West on the human rights front will only push Rajapakse towards China – an outcome which the West nor Rajapakse are necessarily inclined to welcome.

However, this does not imply that Rajapakse will be beholden to Beijing. A pro-China policy stance is not an indelible position for most countries. Beijing would be wise to understand that a pro-China foreign policy can change if the leader is replaced by an alternative candidate in a democratic election or when the local ‘pro-China’ elite has a change of heart. To continue its robust relationship with Sri Lanka, it would be advisable for Beijing to enhance investments while also promoting people-to-people ties, particularly in the sectors of professional training and higher education

A pawn on the chessboard of great power politics?

Sri Lanka’s location has often been lauded as its most important asset but policymakers cannot solely avail on ‘strategic location’ if they wish to position the island as the hub of the Indian Ocean. In this complex and fluid environment, strategic astuteness has become a necessity for policymakers. Sri Lanka’s favorable location needs to be matched by a stable and coherent foreign policy as well as structural reforms to promote the island’s investment and business climate.

As great power presence in the Indian Ocean is unlikely to dissipate in the near future, misreading the landscape can prove costly for Sri Lanka. The island will witness increased presence and engagement with regional and extra-regional powers, which may create a situation where the island’s leadership might have to choose between one party over another. Local policymakers need to have hard-headed assessments of contemporary geopolitics, conduct unsentimental audits of the benefits and negative implications of diverse forms of engagement with regional and extra-regional powers, and resist a situation where Sri Lanka’s policy choices are constrained by external powers.

As China’s economy has entered a phase of gradual slowing down, Rajapakse would do best to remember that there are limits to what China can offer economically in the long run and therefore, diversifying ties with other regional and extra-regional powers would be in the island’s best interest.

Mr. Shakthi De Silva currently serves as an Assistant Lecturer at the Department of International Relations, University of Colombo. His previous work has appeared on the South Asian Survey (SAGE), Journal of the Indian Ocean Region (Taylor & Francis), and the Diplomat Magazine.