Last week in a strongly worded policy paper, the European Union called on its member countries to take a united stand against China. However, later this week, Italy will prove why China isn’t likely to take the EU’s words too seriously.
The EU and China share deep economic ties. China is now the EU’s second biggest trading partner, behind the United States, and the EU is China’s biggest trading partner. China has pivoted even more economically, politically, and strategically toward the EU in recent years, hoping to offset the toll of the prolonged trade war with the United States.
The EU has grown apprehensive about how to effectively address China’s growing economic and political influence in continental Europe, unfair trade practices, aggressive tactics on getting its hands on sensitive technologies by any means necessary, assertive stand on the South China Sea, and worsening human rights record.
China’s Change in Status
In this latest policy paper, the European Commission finally acknowledges that China is no longer a developing country but a global power, an economic and strategic rival. Thus, China’s new status should “be accompanied by greater responsibilities for upholding the rules-based international order, as well as greater reciprocity, non-discrimination, and openness of its system.” After reviewing the EU and China relationship, opportunities, and challenges, the commission lays out a 10-point action plan, including:
To achieve a more balanced and reciprocal economic relationship, the EU calls on China to deliver on existing joint EU-China commitments.
To promote reciprocity and open up procurement opportunities in China, the European Parliament and the Council should adopt the International Procurement Instrument before the end of 2019.
To detect and raise awareness of security risks posed by foreign investment in critical assets, technologies and infrastructure, Member States should ensure the swift, full and effective implementation of the Regulation on screening of foreign direct investment.
The commission is also keenly aware that “neither the EU nor any of its Member States can effectively achieve their aims with China without full unity” (emphasis added). The commission released its paper on March 12 and presented it to European Council on March 21 and 22, right around the time China’s President Xi Jinping began his state visit to Italy. The commission’s call for unity is especially timely and poignant because Italy is ready to jump on China’s “Belt and Road” initiative, despite mounting security concerns from the EU.
The Belt and Road Initiative Grows
It’s reported that when Italian Prime Minister Giuseppe Conte meets President Xi this weekend, Conte is ready to let Chinese state-owned companies hold a stake in or manage up to four major Italian ports: Italy’s biggest seaport Genoa, the Sicilian port of Palermo, and two ports in the northern Adriatic Sea, Trieste and Ravenna.
The South China Morning Post explains that Beijing is specially interested in acquiring the port in Trieste because “it would connect the Mediterranean to landlocked countries such as Austria, Hungary, the Czech Republic, Slovakia and Serbia, all of which are markets that China hopes to reach.” By opening up these ports, Italy will be the first G7 member to sign on to China’s “Belt and Road” initiative and let China establish a beachhead in one of the largest economies in Europe.
China promotes the “Belt and Road” initiative as an innocent and altruistic infrastructure program that will make the world a better place at China’s expense (with China’s investment). In truth, Chinese state-owned companies such as China Merchants Port Holdings have been aggressively investing in infrastructure projects that will give China access to strategically important locations, practically “redrawing the map of global trade and political influence.”
For example, as part of the “Belt and Road” initiative, China built an oil and natural gas pipeline from Myanmar’s Arakan coast in the Bay of Bengal all the way to Kunming, a major city in China’s southwest Yunnan province. This 1,100-mile pipeline helps China accomplish several goals at once.
First, it reduces China’s dependence on the Malacca Straits. China has long believed that in case of possible future conflicts with the United States, the United States and its allies could block the Malacca Straits and thus cut China’s economic lifeline to the outside world. The pipeline enables China to obtain energy security by bypassing the straits. Second, the starting point of the pipeline is at the Kyaukpyu deepwater port in the Bay of Bengal, where now both China’s commercial ships as well as Chinese navy ships can establish a legitimate presence, much to India’s annoyance.
Buying Sprees to Protect Sea Access
In recent years, Chinese state-run companies have taken their buying sprees to Europe. For example, China’s Cosco Port Holding Co. took over the terminal in Zeebrugge, Belgium’s second largest port, in 2018. According to the Organisation for Economic Cooperation and Development’s latest number, Chinese state-run companies now control 10 percent of European container terminal capacity, including taking significant financial stakes in three of Europe’s largest ports: Euromax, Antwerp, and Hamburg. China’s control of these ports not only allows China to physically penetrate continental Europe, but also enables China to influence EU foreign policy, especially foreign policy towards China.
Keith Johnson, a writer at Foreign Policy, writes that “Since Cosco dropped $1 billion into buying and upgrading the once-sleepy Greek port of Piraeus, for example, Beijing has been able to count on Greek assistance to scupper European Union condemnations of China’s behavior on issues including human rights and the South China Sea.”
Like many things China does, China fulfills its ambition in Europe in a very systematic approach. First, it creates “national champion” state companies by forcefully consolidating several smaller state firms into a few large ones. Then it lets these national champion companies have easy access to almost unlimited low-cost loans from state-run banks for their oversea acquisitions. Cosco Port Holding became the world’s fourth largest shipping company as a result of such government-sanctioned mergers of several smaller state firms.
Second, China initially targets smaller and more economically vulnerable states in Central and Eastern Europe. Once Chinese state-owned enterprises (SOEs) establish footholds in these countries, they move on to other larger and more influential but still economically vulnerable countries. In this case, Italy is a perfect example.
The Italian Struggle
Italy is the third largest economy in the Eurozone and the eighth largest economy in the world. Yet its economy has been shrinking. It has seen three recessions in 10 years. Its gross domestic product growth in 2019 is expected to be 0.2 percent. Its unemployment rate stood at 10.3 percent and youth unemployment rate was at 33 percent as of 2018, only slightly better than Spain’s.
When my husband and I toured Italy in 2015, our tour guide was a young lady with a PhD in archaeology. She told us her dream was to become an archaeologist. But since there were no other jobs available, she became a freelance tour guide. Her brother, who also has a college degree but is unable to find work, is staying with their parents.
Italians not only have to endure a poor economy, but also suffer seemingly endless political turmoil. The most recent upheaval took place in May 2018. Weeks after an election, the anti-establishment groups and pro-EU lawmakers failed to produce a new coalition government. The final comprise resulted in a virtually unknown law professor whose academic credentials are in question, Giuseppe Conte, becoming the new prime minister.
Like his predecessors, Conte promised to revive Italy’s economy. So far, he has failed. Of course, he blames external factors such as the U.S.-China trade war and the EU’s strict budget rule for Italy’s economic woes. The port deal with China is his desperate attempt to reboot Italy’s economy and his own political future with Chinese investment, despite the EU, the United States, and even many inside the Italian government being deeply concerned about such a move.
There Is No Free Lunch from China
Someone should remind Conte that there is no such thing as a free lunch with the Chinese. At least eight countries who signed on the “Belt and Road” initiative are so indebted to the Chinese that they had to hand over their strategic assets to China in order to offset their debt. Exhibit A is Sri Lanka. Unable to pay off its billion-dollar loan, Sri Lanka handed over a strategic port to China on a 99-year lease in 2017.
The EU should take notice too. Its action plan will remain a paper tiger if its third largest economy chooses to defy the united front and offer a geopolitical opening to China. If Italy becomes indebted to China, it will have major implications in EU’s policies toward China. Therefore, the EU needs a better strategy than a policy paper.
One thing the EU has failed to do is to stimulate the Eurozone’s economy, which made member states like Italy vulnerable. Many economists point out that the EU needs economic reform, including easing regulatory burdens on businesses and getting rid of anti-growth policies.
The EU should also reconsider its tough stand on Brexit. It’s understandable that the EU wants to make exiting as hard as possible to discourage other member states from leaving the block. But Italy’s pivot to China shows a member state can still disregard the union’s policy without officially exiting the block.
Thus, it’s in the EU’s own interest to work with the United Kingdom and come up with a mutually beneficial plan so both parties can come out of this as winners. A messy Brexit will weaken both the UK and the EU. An economically and politically weakened EU can’t compete with China.