SPECIAL FEATURE ITALY. After a 5-year trial, Italy has decided to withdraw from the Chinese Belt and Road Initiative and is seeking to further develop the bilateral relationship outside of this framework.
As the only G7 country in the Belt and Road Initiative (BRI), both Italy's decision to join in 2019 and leave in 2023 communicated significant political messages. This article seeks to review the China-Italy economic exchanges during Italy’s participation in the BRI, which unfortunately also largely coincided with the global pandemic. Considering the substantial economic repercussions of the COVID-19 crisis, this article will discuss the situation within a broader China-EU trade relationship for a more balanced assessment. We then raise the subject of the new prospects for China-Italy trade in the post-BRI era under the current global geopolitical upheavals.
2019-2023: China-Italy relations during the BRI
- A Multifaceted Trade Expansion
When comparing 2019 to 2023, Chinese exports to Italy grew by 50%, and Italian exports to China rose by 48%[1](Figure 1). The growth rate in both directions significantly outperformed China’s trade with the EU as a whole, as well as with France and Germany individually (Figure 2). During this period, driven by the nature of the asymmetrical China-Italy trade relations, the strong growth rate has also widened the trade deficit at an accelerated pace, especially in the past three years.
Figure 1- Data Source: Eurostat
Figure 2- Data Source: Eurostat
However, Italian exports to China in 2023 were less driven by a gradual expansion of China-Italy economic relations per se, than as an outcome of the specific Chinese demand following the end of its zero-Covid policy by the end of 2022.
To start with, the sudden surge of infections in China in the first few months following the re-opening resulted in a drastic growth in Italian pharmaceutical exports to China in the first quarter of 2023. If we exclude this category, the annual growth of Italian exports to China was in fact negative (-1%)[2].
Secondly, the products Italy exports were well suited to Chinese demand after the reopening. Over the years, Italian consumer goods and food have grown their share in the exports to China (around 40%[3]), while Chinese industrial exports to Italy expanded along with a dwindled share of consumer products. As such, the rebound in the Chinese luxury consumer market contributed to the double-digit growth of Italian leather goods and apparel shipments to China. Likewise, the resumption of social gatherings in China also created moderate growth in demand for certain types of Italian food. That said, the Chinese market only accounted for around 2% of all Italian exports in this sector outside of the European single market. Similarly, France, which leads the European exports to China of high-end consumer products, gourmet foodstuffs, and beverages, also saw burgeoning outflow to China in these sectors.
Considering the already declining share of industrial products (including the automotive sector) in Italian exports to China, the Chinese policy choice of seeking greater self-reliance and the contraction of manufacturing activities have both only further accentuated the trend. This can also be easily observed in German exports to China, which is dominated by industrial products.
- Chinese Investment in Italy
The BRI has often been associated with gigantic Chinese investment projects, especially in infrastructure. The two ports highlighted in the 2019 Memorandum of Understanding (MoU) – Port of Trieste and Port of Genoa – have seen mixed results. In the case of Trieste, the throughput linked to China has been declining after the initial increase in 2019. For Genoa, after record highs in volumes for 2021 and 2022, volumes in 2023 were back to the level of those of 2018 (Figure 3). Of course, an MoU by nature is not binding. Besides, research also suggests complex administrative and political factors behind the limited tangible Chinese engagement in these two ports[4].
Figure 3- Data Source: Eurostat
Chinese investment in Italy lags behind its investments in Western and Northern European economies in terms of both the number of projects and the value of investments (Figure 4). There were only three large Chinese investment projects (transaction values higher than 100 million USD) in Italy between 2019 and 2023, according to the American Enterprise Institute’s Chinese investment tracker. While large Chinese greenfield investment has been in favour of BRI countries since 2019, most of the projects are in the energy sector or in more politically aligned countries, such as Hungary. Italy fits neither category.
In spite of not having generated as many large Chinese investment projects as some of its neighbours, Italy has nevertheless attracted two major Chinese automakers, GAC and Geely, who have located their European design centres in Italy (Milan) and project further localisations. Furthermore, Italy’s strategic location in the Mediterranean has motivated COSCO’s acquisition of the Italian logistics service provider Trasgo in January 2024, which serves Cosco’s digital supply chain strategy in Italy and Europe and aims to improve the group's overall logistics capacity in Europe.
Figure 4- Data Source: American Enterprise Institute. 100 million USD as the threshold.
2024 and beyond: In the Post-BRI era
It may be too early to be able to evaluate the impact of the Italian withdrawal from BRI, but the transition seems to have been rather uneventful. Italy hopes to carry on developing economic relations with China and it has been reported that Giorgia Meloni aims to visit Beijing later this year. Below we look at the potential evolution of trade between China and Italy, in the light of geopolitical upheavals.
- Italian Imports from China
While the share of industrial products in Chinese exports to Italy has increased over the years, traditional consumer products could perform better in 2024. The warming up of European demand for Asian products, possibly driven by re-stocking in retail, could contribute to a surge in Chinese exports of consumer goods to the Italian market. Chinese new export orders entered expansion again after 9 months of contraction.
The rapid expansion of Chinese B2C cross-border e-commerce platforms such as SHEIN and TEMU could boost Chinese consumer product exports. In 2023, Chinese cross-border e-commerce exports rose by 20% (in RMB), far higher than its total export growth rate (0.6% in RMB). Specifically, regarding the Italian market, the Cross-Border Shopper Survey published by International Post Corporation reveals that 43% of the respondents in Italy bought their most recent online e-commerce purchases from China in 2023. TEMU has partnered with Posta Italia to further facilitate its service. SHEIN has established distribution centres in Italy as part of its nearshoring strategy.
Furthermore, the current drivers of Chinese exports, EVs and solar panels, are expected to continue expanding in European markets, including Italy. In 2023, despite Chinese exports to Italy falling by 18% globally, the two sectors grew by 69% and 28% respectively. The lesser penetration of EVs in Italy, in comparison to other major European countries, also denotes great market potential. Particularly as the nearly 1 billion USD of new financial incentives under review for EVs could boost demand in the second half of 2024. However, the incentives are expected to favour made-in-Italy vehicles, so we will have to wait for details of the exact contours of the scheme before we can assess its potential impact on exports of Chinese EVs to Italy.
Indeed, both cleantech products and Chinese e-commerce platforms are facing increasing regulatory uncertainty. However, the policies being considered are unlikely to have an immediate impact on Chinese exports in those fields. Most of them are still at the drafting stage, and those that have already been adopted will only take effect in a few years' time. In the meantime, Chinese exports could seek to accelerate before any possible regulation could turn into a trade barrier.
Similarly, at the national level, although Italian incentives for the solar sector are aimed at supporting local production, analysts suggest that they would only have a limited impact on Chinese suppliers, due to the scarce number of qualified suppliers and the modest amount of tax incentives. From this perspective, the Italian government’s subsidy approach for the cleantech may suggest an attempt to keep a delicate balance between supporting domestic industry and not provoking China too much, especially after its withdrawal of BRI.
- Italian Exports to China
The surge in exports recorded in 2023 is unlikely to be repeated in 2024, since it took place in the particular context of the end of the Zero-Covid policy in China. However, Italian consumer products, and food and beverage industries may continue to benefit from a stable luxury market and strong service consumption in China.
According to a recent report by Bain & Company, the Chinese luxury market in 2024 is expected to grow by a mid-single digit. This could come as good news to Italian leather and textile producers. The gradually resumed growth of the Chinese international travel sector is set to contribute to the demand for Italian luxury product exports to other Asian markets, especially Japan. This is because overseas purchases comprise a significant proportion of Chinese luxury goods shopping, apart from the three years of the pandemic. LVHM has reported strong growth in Japan and Europe in the first quarter of 2024, citing the resumed Chinese tourist spending. Likewise, the continued strong Chinese service consumption – 10% growth in first quarter of 2024 – could lead to growth in food and beverage imports from Italy.
At the same time, there are questions about China's reactions to the EU’s regulations and its investigations into Chinese products, and the impact this will have on Italian exports. Often, the products targeted by China in retaliation are relatively easy to replace or of little significance for it but are rather of a more symbolic or economically important nature for the country concerned by the retaliation. A very recent example is the Chinese anti-dumping investigation against EU brandy. This is more targeted at France, as almost all the brandy China imports from the EU comes from France, which is also the main advocate of the anti-subsidy investigation on Chinese EVs. In recent years, the Chinese market has become increasingly important for French brandy, now accounting for a quarter of total exports of this product outside the EU[5]. As mentioned above, Italy has so far adopted a relatively balanced approach. However, Meloni's strong Atlanticist approach to foreign policy could create some uncertainty, particularly if Donald Trump is elected in the upcoming US presidential election.
It should be noted that luxury products, based on recent history, seem to be relatively resilient to geopolitical upheavals. For example, despite being caught in the crossfire of geopolitical tensions in 2019, the sale of luxury goods in China continued to grow that year.
Finally, while seeking to maintain a strategic partnership with China outside of the BRI framework, under the current Meloni government Italy has been actively expanding its presence in the Indo-Pacific region, as other major European countries have been doing. The country especially aims to foster closer state relations with Japan and India, both economically and politically. But the desire for cooperation at a state level is going to take time to be translated into concrete commercial exchanges.
[1] Unless specified, data come from Eurostat.
[2] Here we excluded the Italian exports under the HS code 30.
[3] The 40% here is based on 2022's data, not 2023, because in the BEC 4 categorization system, medicine is considered a consumer product, significantly increasing the share of consumer products in Italian exports to China.
[4] Ghiretti, Francesca. "The Belt and Road Initiative in Italy: The Ports of Genoa and Trieste." IAI Papers 21.17 (2021): 1-20.
[5] This is based on the data of HS code 220820 (Data source: Eurostat)
