The Road that divided the EU: Italy joins China’s Belt and Road Initiative

By Femke van der Eijk and Angela Pandita Gunavardana

China’s global influence has grown dramatically in recent years. Its Belt and Road Initiative (BRI) is an important manifestation of this rise. On 23 March 2019 Italy, the first G7 country, formally joined the BRI, which has caused significant tensions within the EU. This was the wake-up call for the EU, which prompted it to reconsider its policies towards the Asian superpower.

To BRI, or not to BRI?

The BRI is a transcontinental endeavour, launched in 2013, which is centred around infrastructure investment and aims at promoting projects that foster regional cooperation, development, and connectivity.

Italian Deputy Prime Minister Luigi Di Maio and Chinese President Xi Jinping signed the Memorandum of Understanding on Italy joining the BRI on 23 March 2019. The Memorandum is a non-binding statement of intent, through which Italy expresses its commitment to the initiative. It does not create rights and obligations under international law as a treaty would do. The Memorandum, however, represents an umbrella deal under which 29 other commercial and institutional agreements amounting to €2.5 billion were made. The deals concern energy, finance, and agricultural produce. It was also agreed that large Italian gas, energy, and engineering firms will obtain access to the Chinese market. At the same time, Chinese communications and construction companies will receive access to the port of Trieste and Genoa. This will open China’s passage into central and eastern Europe.

China portrays the BRI as a win-win relationship aimed at mutual growth and prosperity. Yet skeptics view the BRI as a means by which China strives to further embed its global influence. Moreover, there are concerns that China will use the BRI to export more of its goods to lucrative markets, while the other participants will not benefit to an equivalent degree from the arrangement and even incur debts. For instance, Pakistan and Malaysia have already started cancelling many of their BRI projects, because they are unable to make debt repayments for the Chinese loans for those projects. In this regard, some critics also expressed their concerns claiming that China could use, “debt-trap diplomacy” to obtain strategic concessions, for instance, over territorial disputes in the South China Sea or silence on human rights abuses. These concerns are particularly alarming considering the scale of the initiative. It is linked to two-thirds of the world’s population and already amounts to an investment of more than US $1 trillion.

The Road that divided the EU

Italy joining the BRI has caused discontent within the EU. There are widespread concerns that an influx of Chinese investment can have an adverse effect on the national security of EU Member States. A number of officials voiced concerns that through developing telecommunications networks China could spy and disrupt European communications. These concerns are especially pertinent in the light of the ongoing cybersecurity controversy surrounding Chinese tech giant Huawei. In order to avoid such adverse effects, “[s]ome EU officials advocate the bloc’s right to veto Chinese investments across the region”, pointing out, moreover, that China has a poor reputation regarding transparency and that unfair trade practices will only favour Chinese firms.

These concerns are also reflected in the European Commission Report titled “EU-China – A strategic outlook.” The European Commission criticizes China for preserving domestic markets from the competition by deploying      “selective market openings” as well as providing      “heavy subsidies to both state-owned and private sector companies etc.” Furthermore, the Commission clearly objects to the fact that the “EU operators have to submit to onerous requirements” to access the Chinese market. The Commission also emphasizes the lack of reciprocal market access. For instance, while Chinese financial services are rapidly expanding into the EU market, European companies are still denied access to the Chinese market. In this light, the Commission calls for developing “a more balanced and reciprocal economic relationship”. In his recent book The Silk Road Trap: How China’s Trade Ambitions Challenge Europe, Jonathan Holslag, a leading expert on Asian affairs, argues that in order to achieve such a relationship “the EU must reduce its reliance on China and work on building a stronger and more sustainable European economic model”.

 Nevertheless, many European States continue to benefit from Chinese investments. For example, the Italian government argues that the concerns of France and Germany are hypocritical, considering that French and German trade and investment ties with China greatly overshadow its own. The Italian Government also claims that states with relatively smaller economies are unable to benefit from the EU-China trade policies, which prompted Italy to join the BRI. Moreover, Italy is not the only EU Member state participating in BRI. Already in 2012, the 16+1 framework was created, which brought together China and sixteen countries in Central and Eastern Europe. The framework was created by China in order to intensify and expand cooperation with eleven EU Member States      and five Balkan countries in the areas of investments, finance, science,      transport, culture, and education. Later the 16+1 became the key platform for promoting the BRI in Europe. Each of the 16+1 framework states was incorporated into the BRI. These states view the BRI and Chinese investment as a largely positive development.

This rift in perspectives causes further disunity within the EU. The Dutch government in its new strategy on China realizes the potential of tensions within the EU due to the differences in perspectives regarding the future of EU-China relations. Hence, the Dutch government emphasized that coherence, unity, and compromise should be the key concepts driving the formulation of the new policy regarding EU-China relations.

BRI and EU law obligations

Moreover, there are certain legal obligations under EU law that Italy must comply with, including the EU’s exclusive competence in trade matters (the “Common Commercial Policy”) and the duty of sincere cooperation (as stipulated in Article 4(3) of the TEU). Italy’s commitment to the BRI through the Memorandum can create tensions with these obligations down the road.  While Italy is not the only EU Member State to get involved with the BRI, it is the largest EU economy so far to do so. Therefore, this question of whether the MoU abides by EU law becomes even more pressing.

As established earlier, the Memorandum is a non-binding statement of intent. However, moving forward in implementing these intentions could not only exacerbate political tensions within the EU but also lead to a violation of Italy’s legal obligations as an EU Member State.

A particular aspect of the Memorandum stands out in this context. The second paragraph of the Memorandum concerns areas of cooperation and more specifically the third section herein discusses unimpeded trade and investment. Within this section, the Memorandum discusses the aim of working towards expanding investment and trade, and promoting market cooperation between the two countries. Although this section does not explicitly mention the creation of trade or investment agreements, if steps were made in the direction of creating binding intergovernmental agreements that solidify the commitments set out in the Memorandum without the approval of the EU, that would be at odds with EU law for the following two reasons.

Firstly, trade policy is an exclusive competence of the EU. This means that only the EU can act internationally and not the Member States themselves. The scope of this EU trade policy has been expanded by the Lisbon Treaty and subsequent judgments and opinions of the Court of Justice of the EU, with for example Daiichi Sankyo and Opinion  2/15. It includes today explicitly foreign direct investment.

Secondly, under the duty of sincere cooperation, Member States are to “refrain from any measure which could jeopardize the attainment of the Union’s objectives” (Article 4, paragraph 3 TEU). The case law of the CJEU has interpreted this duty widely and according to the Inland Waterways case, this duty includes situations where Member States negotiate agreements with third countries in parallel to the EU and on the same subject matter. Seeing that the EU launched negotiations for an investment agreement with China in 2013, a new bilateral Italy-China investment agreement under this BRI framework would thus amount to Italy violating the duty of sincere cooperation.

Furthermore, modernizing the pre-existing bilateral investment treaty between China and Italy from 1985 would also amount to a violation of EU law without proper coordination with the EU institutions. In addition, the fact that CJEU declared the arbitration clauses in bilateral investment treaties between the EU Member States illegal in the Achmea judgment, strengthens the case that any binding investment agreement with investor-state dispute settlement made between Italy and China in the future under the BRI umbrella could constitute a violation of EU law, if not specifically authorized by the EU.

Looking down the Road

Italy joining the BRI has heightened the tensions regarding a unified EU approach vis-à-vis China. Yet, the Memorandum of Understanding between China and Italy is merely a political commitment, not a legal one. Hence, it does not immediately create a conflict with Italy’s legal obligations under the EU law. Nevertheless, if Italy decides to take further steps in formalizing this Memorandum by launching negotiations of binding international agreements, it may soon find itself at odds with its obligations under EU law, which in turn would further amplify the disunity within the EU. Overall, the need for a coherent European foreign and trade policy towards China continues to become more pressing.

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