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Alessia A. Amighini

Co-Head of Asia Centre, ISPI

1. My overall view about the Belt and Road Initiative

I believe the BRI will have a great regional and international development impact and will shape the future wave of globalisation. By facilitating landlocked countries’ access to the sea, the BR has the potential to improve connectivity and therefore promote socio-economic development over vast areas of land extending from the least-developed inner and western provinces of China to the so-called STAN countries in Central Asia and the rest of Developing Asia, but also to the Middle East and Eastern Africa. All Central Asian countries except Pakistan are landlocked, which is a major disadvantage insofar as access to the sea and the existence of a direct maritime connection play an important role in determining trade costs (Arvis et al., 2013). The absence of a direct maritime connection has been estimated to have the same impact on freight rates as an increase in distance between two countries of 2,612 km (Wilmsmeier and Hoffman, 2008). Maritime connectivity is particularly important because maritime transport is at the core of international trade in merchandise (Fugazza, 2015). According to UNCTAD, around 80% of the volume of goods traded in the world travels by sea. With the exception of China, developing countries are still far below their potential in terms of connectivity, particularly maritime connectivity, with only half of the average number of direct maritime connections (i.e. without transhipments) of developed countries. According to UNCTAD, this situation persists, despite their growing share in seaborne trade, which rose from 18% to 56% of the world total between 1970 and 2010. Research by Fugazza (2015) has recently found that the existence of a direct maritime connection (and not simply of maritime connectivity per se) plays an important role in determining trade costs. The absence of a direct connection is associated with a drop in exports value of 55% and any additional transhipment is associated with a drop in exports value of 25%. The most unexploited potential trade seems to be between Central Asian countries and their largest neighbouring economies, i.e. China and Europe, exactly the focus of BRI.

Improving infrastructure along the land-based Silk Road Economic Belt has the potential to contribute also to regional stability in Eurasia from which both China and the EU could benefit in terms of new markets and energy security. OBOR thus opens opportunities for the EU to pursue its geostrategic ambitions in Central Asia by deepening the EU-China strategic partnership through cooperation in non-traditional security fields, possibly paving the way to EU-Russia reconciliation. The maritime trajectory of OBOR will also benefit regional and global international affairs to the extent that it will effectively succeed in reducing tensions along sea lanes in South Asia.

Moreover, the BRI is a potential game changer in international trade to the extent that it will rebalance the current dominance of Asia-Pacific on world trade flows in terms of both trading countries and trade routes. Insofar as missing infrastructure acts as a major barrier to trade flows, the BR most evident and direct impact will be on the volume of trade among the countries covered by the initiative. Trade creation along the Belt and Road will occur through two major channels: on the one hand, through the expansion of trade ties between pairs of countries that are already important trade partners, facilitated by the decrease of transport costs and trade barriers; on the other hand, through new trade routes that will unlock potential trade ties among hitherto mutually isolated trading partners. An additional impact of BRI will be on the routes and transport modes of China’s foreign trade. Currently, 60% of China’s trade (in value, and a much higher share in volume) travels by sea, due to the lower transport costs associated with international shipments compared to railway transport and to the lack of infrastructure for land transport across Central Asia. Infrastructure improvement will change the relative cost of seaborne trade compared to shipment by railroad (i.e. it will make it cheaper to ply overland routes than use the current sea-lanes through the Malacca Straits).

2. The initiative’s influence on Italy

The maritime silk road will strongly influence Italy, the largest ‘Mediterranean’ country, to the extent that the Initiative will contribute to increase the centrality of the Mediterranean as a major centre of global trade, as it was in the past, due to the enlargement of the Suez Canal together with the increase in trade flows from China to Europe and to the rest of the Atlantic, to the detriment of Pacific routes. The Mediterranean ports today attract 56 percent of the goods that pass through the Suez Canal to reach continental and Northern Europe, compared to just 34 percent in 2001. The remaining share was absorbed by Northern European ports such as Rotterdam and Hamburg. The increased centrality of the Mediterranean is a huge opportunity for Italy, a country naturally shaped as an ideal platform to serve as a hub in Sino-European trade. This is why the Italian government participated to the Belt and Road Forum in Beijing in May 2017, with the aim to express the Italian willingness to participate to the Initiative.

In the current juncture, the Italian economy is being faced with a number of severely pressing challenges from the BRI. One such challenge is that posed by the Port of Piraeus. In the past few years, the Italian ports, due to increasing competition from Piraeus and other ports, lost Mediterranean trade, as in the case of Gioia Tauro Port, the largest Italian port, whose trade fell from 3 467 772 TEU in 2008 to 2 546 805 TEU in 2015 (according to data from Gioia Tauro Port Authority and Contship Group). Piraeus also threatens the North Adriatic ports, which could be displaced by the Greek hub as a southern gateway to Europe. However, from Piraeus to the heart of Europe, there is still some way to go, and this is where internal competition is currently stiffer, between Italy and a number of European countries and within Italy itself. From Piraeus to the heart of Europe, in principle goods could be transported either via sea or via land. The sea lanes could travel either through Italian ports or Northern European ports. The four ports on the high Adriatic Sea (Venice, Trieste, Koper and Rijeka) jointly formed in 2010 the North Adriatic Ports Association (NAPA), a cooperation agreement to coordinate port activities and develop services that could compete with Northern European ports. NAPA does not seem to face much competition from Piraeus today, and in fact are working to become the end-point of sea lanes from Greece to continental Europe. However, NAPA, moves only 2.1 million TEU, much less than the total volume processed by Piraeus, and therefore cannot aim at becoming the only hub in the Mediterranean. Moreover, if Piraeus were to fully develop and complete its railway network with Budapest, the situation might change drastically and Italy could be left altogether out of the major BR routes in Southern Europe.

Compared to the maritime silk road, the development of the silk road economic belt is not likely to benefit Italy as much as other continental countries, mainly because of its geographical position that does not allow Italy to fully exploit the growing continental connectivity with China. Currently, according to the European Commission, Italian trade volumes by railway (in ton-kilometers) are one-third compared to Germany and two-thirds compared to France. This is clearly due to the difference between Italy and continental Europe as regards the most efficient modes of transport to and from China. According to a recent research by van Hassel, the silk road economic belt will be most preferred route in Sino-European trade only for trade between the western provinces of China and the more central European regions. The rest of Sino-European trade will continue to travel via sea. This is likely to have a divergent impact on trade with China by different European countries, with continental Europe more likely to shift partly to railway compared to Southern Europe, including Italy.

3. Local reaction about the Belt and Road projects in Italy

Although there has been a strong interest by the business community in Italy and Europe alike about the infrastructure projects under the BRI, there is not yet widespread perception that it will largely affect Italy’s position within the Mediterranean and within global trade routes as well. The BRI Forum held in Beijing in May 2017 has been widely reported on in the Italian media and marked the start of a more intense discussion on the BRI in Italy. Italian institutions, including the Prime Minister’s Office, the Ministry of Foreign Affairs, the Ministry of Infrastructure and Transport and the Italian Embassy in China, have gone on record as considering the BRI a priority. Since the BRF, the national debate on the BRI has spread from the closed circles in the academia and think tanks to the general press. Expectations and initial reactions have been mixed, as more efficient infrastructure could help increase Italian exports to China and Asia in general, but at the same time, could increase the ability of Chinese producers to further expand their market shares in Europe, and therefore to exacerbate the stiff competition that Italian companies have had to face from Chinese products.

One of most evident reactions among institutions and the business community alike has been an increasing competition among different port authorities in their effort to gain the largest benefits from future trade routes. The ports of Venice and Trieste are developing new strategies to compete effectively in the long run, sometimes disregarding their limited size compared to Piraeus and Northern European ports. Venice has long had an ambitious project to build a new offshore port able to handle mega vessels of 18 000 TEU and, most recently, a Sino–Italian consortium won the tender (€4m) for its final design. The new facility should be able to feed all the other ports in the North Adriatic Sea, reaching a total capacity of 1 million TEU, and will include an oil terminal. However, the offshore port in Venice has yet to be financed. Given its total cost of €2.1bn, it is highly unlikely that private investors could provide all the money needed for this project and it is not clear yet whether the Italian Government is ready to invest in the project, because of environmental and economic concerns. In the meantime, the port of Trieste is investing in new piers and in a new railway facility to serve the north of Italy and the rest of Europe. The railway connection will be able to handle 2 million TEU, which will be the total capacity of the ports when the new pier is completed. Therefore, at least theoretically, all the containers arriving in Trieste by ship could be moved through Europe by railway, which explains why Duisburger Hafen (Duisport) in Germany recently signed an agreement with the port of Trieste to increase traffic between the two.

The current general opinion in Italy points to the need to invest heavily not only in its ports but also in the domestic railway networks, so as to be able to realize the potential efficiency of the ports themselves in order to fully exploit the opportunities from the BRI. Due to the high level of public debt in Italy, the financing capacity of the country is limited. Thus, there is a concern that Italy could not exploit the possible advantages generated by enhanced connectivity and will run a risk of becoming logistically ever more marginal than today, compared to the bigger and more efficient ports in Northern Europe.

4. My expectations for further cooperation under the Belt and Road framework

The lack of a high-level policy dialogue between the EU and China has left the scope for cooperation under the BRI largely insufficient. The EU has not communicated a comprehensive strategic approach in responding to the impact of OBOR on regional dynamics, but some high-level initiatives to achieve more transparency were made. In September 2015, the European Commission and the Chinese government signed a Memorandum on the EU-China Connectivity Platform to enhance synergies between China’s OBOR initiative and the EU’s connectivity initiatives such as the Trans-European Transport Network. The Platform has been promoting cooperation in areas such as infrastructure, equipment, technologies and governance standards. It will help coordinate infrastructure plans in Europe through information exchange and ensure a level playing field for all investors. It also helps identifying investment opportunities through European Fund for Strategic Investments (EFSI), open to the Chinese Silk Road Fund. It promotes high standards in terms of government procurement and environmental protection not only inside the EU but also for countries along the OBOR. In this occasion, China also pronounced its intention to contribute to the European Commission’s €315 billion Investment Plan for Europe. Since then, the EU and China have had further discussions on policies, access for investments, and a shortlist of pilot projects under the Connectivity Platform. However, the 18th EU-China Summit in July 2016 did not result in a joint communiqué settling relevant elements, probably due to China’s difficulty to accept open public procurement rules for the projects. My expectations is that little further cooperation on the overall design of the BRI will be possible at the EU level under the current institutional framework, if China continues handling separate and competing negotiations or dialogues with different European countries.

5. My suggestions on further promoting the Belt and Road Initiative in Italy and Europe

Following the initial workings of the EU-China Connectivity Platform, the need for improved institutional infrastructure has been increasingly apparent. Although discussions have not been confined to the coordination of infrastructure development plans in the EU and China, related issues such as market rules for public procurement and reciprocal access for investments in the respective markets have not yielded any substantive progress, which is hardly surprising given the political nature of those issues, which are supposed to be discussed at a policy, rather than a technical level. Possibly the most evident case witnessing the urgent need for an effective policy dialogue on the broad range of issues raised by the BRI, extending far beyond the practical aspects of infrastructure coordination, is the Belgrade-Budapest rail project. Regarded as a flagship project within the BRI, it is currently being reviewed by Brussels for potential infringements of the EU’s requirement that public tenders are offered for such large-scale infrastructure projects. The latter case shows that the differing degrees of adherence to market rules in countries involved in the BRI is source of inevitable frictions that can act as bottlenecks in the progress towards an effective transport network, and at the same time divert public opinion and policy dialogue away from substantive issues.

A further related issue that should deserve an effective dialogue is the financial viability of infrastructure projects along the BRI. Currently, the need to make the new transport routes (railways linking different cities in China to diverse European cities) attractive compared to the much cheaper seaborne trade has led Chinese authorities to subsidies firms with the aim to divert trade from sea to land. This approach acknowledges the need to reach a sufficient trade volume in order for the rail company to be profitable, while today the new transport routes are mainly working on the westbound direction, compared to the eastbound. However, it runs against the market rule principles prevailing in the EU, and therefore prevents mutual benefits for Chinese firms exporting to Europe, compared to European firms exporting to China as well as, in both cases, possibly also to other countries along the route. Enduring the lack of progress on a broad range of policy issues related to the BRI – mainly investment framework, market rules, market access and public procurement – allows avoiding serious dialogue but paves the way to confrontational matters that may be even harder to handle.

Despite the broader policy implications of the BRI on the future geo-economic role of the EU, the only bilateral dialogue on the Initiative today is still the EU-China Connectivity Platform, with the aim to promote cooperation on infrastructure, including financing, interoperability and logistics. Nevertheless, there is a growing sense of urgency to move forward to more substantive policy dialogues to create synergies between EU policies and projects and China’s BRI. At the “Belt and Road Forum” held in Beijing on May 14-15 2017

Vice-President Katainen

of the European Commission set out the

EU’s vision for improving Europe-Asia connectivity

, which is a step forward in EU-China cooperation on a common policy objective. However, and not surprisingly, given the technical nature of the Connectivity Forum, at the 19th EU-China Summit held in Brussels. on June 2 2017, the progress acknowledged on “policy exchange and alignment on the principles and the priorities in fostering transport connections between the EU and China, based on the TEN-Ts framework and the Belt and Road initiative, and involving relevant third countries”, in fact has boiled down to having agreed upon a list of infrastructural projects of common interest.

Within the current governance structure of EU-China relations, there is a need for matching the technical dialogue within the Connectivity Platform with a high-level policy dialogue on a broader range of issues. As the BRI goes far beyond physical connectivity to encompass a variety of policy areas, it has raised awareness of a need to give a boost to parallel dialogues on a large number of issues on which the EU and China have been handling meetings under the umbrella of the EU-China Summit since 1998, within over sixty substantive and sectorial dialogues (including cooperation on climate, competition, customs, energy, investment).

The single most evident case of potential divergence between the BRI and national development priorities is the progress taken by the “16+1” cooperation framework since the launch of the Initiative. The “16+1” mechanism is a platform created in April 2012 by the Chinese leadership that seeks a stronger connection between China and the 16 CEE (Central and Eastern European) countries, namely Albania, Bosnia and Herzegovina, Bulgaria, Croatia, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Macedonia, Montenegro, Poland, Romania, Serbia, Slovak Republic and Slovenia. Nowadays, many previously agreed-upon joint 16+1 projects were given the BRI label, which may pave the way for diverging perceptions towards EU internal integration policies. CEE countries have shown that they are able to adopt an active policy of cooperation with China and an issue has been raised about the status of Central Europe within the region and in the EU. There are evident discrepancies between EU and non-EU members, especially in terms of rules and procedures related to investments and infrastructural projects. This poses serious challenges to the extent that EU and non-EU member countries develop common interests under the China-led 16+1 mechanism but perceive the divergent rules and regulations in EU vs. non-EU members as a source of bottlenecks in their development process.

This cooperation framework is not just paving the way to divergent perceptions and positions on the power of the EU to set rules and standards within its own borders and in neighbouring countries, but as well as on its ability to convey a unified position in international decisions. The increasing Chinese economic and commercial influence in some member states, together with a timely diplomatic push from Beijing, “has boosted its capacity to influence the choices of European states and has complicated EU diplomacy …. Following the pronouncement of the Permanent Court of Arbitration in The Hague on the status of land masses in the South China Sea in July 2016, for instance, the stances of Hungary and Greece – key countries for China’s OBOR initiative – resulted in a more convoluted European position on the ruling (van der Putten et al., 2016, p. 10). The BRI has further exacerbated the inconsistencies in the “16+1” framework and confirmed the need for three party cooperation between the EU, China and CEE, a region that is central in the overall Initiative and from which will depend the smooth and efficient functioning of the entire international land transport network in Eurasia.

Moreover, the EU should seriously consider the consequences of the lack of a common framework for bilateral investment with China. In fact, the BRI will further accelerate Chinese investment activity in various infrastructure projects in European countries. Before the BRI was announced, China’s infrastructure investment in Europe targeted individual EU countries and many non-EU members in Central and Eastern Europe, mainly in the manufacturing and services sectors. Recently, Chinese firms have started to invest in large infrastructure projects backed by their inclusion in the BRI project list. Coalition building around individual projects now tends to prevail over the legal rules and procedures that are at the heart of the EU competition policy, as the core principles around which the internal market has been developed.

Amighini, A. (Ed.) (2017), China’s Belt and Road: a Game Changer?, ISPI, available at

http://www.ispionline.it/it/EBook/Rapporto_Cina_2017/China_Belt_Road_Game_Changer

Arvis J.F., Duval Y. and Utoktham C. (2013), Trade costs in the developing world: 1995-2010. Policy Research Working Paper Series No. 6309, The World Bank.

Fugazza, M. (2015), Maritime connectivity and trade, Policy issues in international trade and commodities Research Study Series No. 70, United Nations: New York and Geneva.

Wilmsmeier G. and Hoffman J. (2008), Liner Shipping Connectivity and Port Infrastructure as Determinants of Freight Rates in the Caribbean. Maritime Economics and Logistics, 130-151.