The COVID-19 pandemic, however, has been a major complication for the BRI. Since January 2020, China has closed its borders to the world, cutting off most in-person exchanges and crippling businesses’ ability to evaluate, negotiate and conclude new deals (Figures 1 and 2).

Figure 1: China’s international air passengers, inbound and outbound (millions persons)

Source: Civil Aviation Administration of China, CEIC

Figure 2: Outbound tourists from China, 2014-2021, millions

Source: Chinese Outbound Tourism Research Institute.

At the same time, negative sentiment about China has grown in many countries, particularly developed economies in Europe and Southeast Asia (see here, for example). Sentiment analysis based on big data from news feeds also showed a clear deterioration globally in 2020 of positive perceptions of China’s and the BRI, though there has been some recovery since (Figure 3).

Figure 3: Big data media sentiment toward China and BRI

Source: GDELT

The pandemic’s negative economic effects on many developing countries have also reduced interest in the BRI. Many prominent BRI partner countries, such as Sri Lanka, now face debt distress arising from unrelated pressures including a strong dollar, high oil and food prices, and a collapse in the tax base during the pandemic. This has made Chinese banks and firms relatively less interested in projects in many of these countries, while undermining the ability of host countries to contemplate ambitious capital expenditures in the BRI’s traditional sectors, such as transport and logistics.

Many BRI projects underway before the pandemic appear to have been abandoned. The Overseas Development Institute (ODI) detailed 15 projects worth over $2.4 billion that faced financial difficulties in 2020, including the Kunzvi Dam electricity project in Zimbabwe, contracted to Sinohydro. Fifteen projects with problems is surely an underestimate. Given the opacity of China’s reporting on BRI projects, it will likely be at least another year until the extent of this downsizing can be quantified.

Predictably, Chinese overseas FDI during the pandemic declined everywhere (see data from theAmerican Enterprise Institute and Mergermarket, a provider of information on merger and acquisiton deals globally). China’s investment overseas sometimes includes control (foreign direct investment or FDI) through acquisitions of companies or greenfield investment, and sometimes is poor lending, especially project finance. As Figure 4 shows, all of these measures of China’s outward FDI globally plummeted 72% in 2020 from the average of the previous five years. In BRI countries, Chinese FDI was down 62%.

The decline in FDI hit the Middle East and emerging Asia harderthan Latin America and Africa (Figure 5). This is perhaps surprising, as Latin America was the region hardest-hit by the pandemic. Chinese investors have sustained their interest in Latin America partly because many governments in the region have moved to privatise state assets, such as utilities, to repair their finances after the pandemic. Most of the Chinese M&A deals in Latin America announced during the last two years are privatisations of state-owned power or resource extraction companies.

Figure 4: Chinese outbound investment ($ billions)

Sources: Mergermarket Note: Averages over period.

Figure 5: Chinese investment in BRI countries, regional breakdown ($ billions)

Sources: Mergermarket , American Enterprise Institute 

Chinese development finance (lending rather than equity purchases) into BRI geographies has also plummeted (Figure 6). This is particularly problematic for countries that are highly dependent on Chinese lending to finance their infrastructure. Some of these countries have growing current account deficits which they will need to finance.

Figure 6: Chinese development finance (lending, $ billions)

Source: Boston University Global Development Policy Center

Macroeconomic constraints

The BRI faces two main macroeconomic constraints this year. The first is that China is far from exiting the COVID-19 pandemic. Its dynamic zero-COVID policy is impeding cross-border business exchange. China’s economy has rapidly decelerated in the first half of 2022, because of the central government’s draconian restrictions and the attempts of local officials to over-comply with instructions. The slowdown is putting additional pressure on banks to lend domestically rather than overseas. Such lending is essential in the financing of major infrastructure projects overseas. Furthermore, the tighter grip of overseas regulators (especially the US) has been limiting Chinese corporations’ ability to raise funds in hard currency, whether through listings in foreign stock exchanges or offshore bond issuance.

However, the BRI has helped China expand its trade, even faster than for the rest of the world. In other words, the BRI has acted as an important source of external demand since 2015, when compared with the rest of the world.

Figure 7: Chinese trade, value (% of GDP) and growth by partner

Source: United Nations Conference on Trade and Development 

What comes next?

What is the longer-term prognosis? Will the current abrupt slowdown reverse, or will the BRI fade into irrelevance? This depends partly on Chinese domestic politics. The longer China remains locked within its borders, and the deeper the Chinese economy slides in the second half of 2022, the harder it will be to maintain the same level of ambition. As long as borders are closed, China’s overseas investment is bound to remain muted, limiting the number of new projects Chinese firms will want to take on. Cross-border mobility restrictions will also hamper China’s ability to send workers overseas for construction and logistics purposes.

Nevertheless, there is a wealth of reasons to believe that the BRI remains central to the global ambitions of China’s leadership. A more plausible scenario is that the BRI is evolving to serve better the interests of Chinese leaders under the current, rapidly changing, circumstances. China’s leadership remains deeply committed to the BRI as emphasised in February 2022 by Politburo Standing Committee member Han Zheng, chairman of the Leading Small Group responsible for the Belt and Road. However, he also advised Chinese banks and companies to focus on projects that “improve people’s sense of gain in participating countries,” and for the leadership to seek “greater alignment” of the BRI and China’s domestic macroeconomic strategies such as dual circulation, while strengthening “risk monitoring and prediction”. These comments were implicit criticisms of how the BRI has been rolled out to date, for two main reasons. The first is the international pushback, both from recipient countries after having increased their debt to finance unviable projects, and from developed economies, especially the US, the EU and Japan, who see their global influence curtailed by China’s expansion overseas. The second reason is domestic, stemming from the rather low return on investment for China as a good part of BRI related projects have failed or been delayed, or have ended up with cost overruns.

Notwithstanding these challenges, the Chinese government does not seem ready to abandon the BRI, but rather to transform into a sort of BRI 2.0. China seems to be losing interest in funding infrastructure and would prefer to increase its soft, and possibly even hard, power through other means of influence. The BRI is also linked increasingly to China’s geopolitical objective of proposing an alternative global order to the liberal order led by the United States.

Power instrument

One example of how the BRI may be an instrument for China to expand its hard power is the signature of a security pact with the Solomon Islands, which could have as objective reshaping the strategic balance in the South Pacific, where security is currently dominated by Australia and the US. While the pact was not formally connected to the BRI, the Solomons joined the BRI in 2019, and China and the Solomons continually referred to the BRI as they negotiated the security deal, suggesting that the two are linked. When Chinese Foreign Minister Wang Yi went on a follow-up tour in May, hoping to secure a broader regional security deal, he visited Kiribati where he signed 10 outcome documents, including an expanded BRI cooperation plan. Along the same lines, there are some indications that China wants to establish a naval facility in Equatorial Guinea, as a door to the Atlantic Ocean. Equatorial Guinea is also a recent BRI member. Finally, Chinese media are increasingly explicit about treating the BRI as a soft power tool, instructing party cadres to ‘tell the BRI’s story well’ as part of a broader effort to ‘tell China’s story well’.

These incremental steps allow the BRI to touch on issues far more closely related to security than was the case before the pandemic. A strong signal of the latter was given by President Xi at the Boao Forum for Asia in April 2022, where he proposed a new Global Security Initiative (GSI). Elaborating on Xi’s comments, Foreign Minister Wang Yi wrote in the People’s Daily that the initiative “contributes Chinese wisdom to make up for the human peace deficit and provides a Chinese solution to cope with the international security challenge”. This is very similar language to the ‘Chinese wisdom’ that propagandists claim is motivating the BRI. In talks with Jordanian counterparts late last month, the Chairman of the Standing Committee of the National People’s Congress Li Zhanshu made a single integrated pitch for the BRI and GSI. These are all hints that the BRI is evolving from an infra-centric strategy to a security one.

In conclusion, since the COVID-19 pandemic started, the BRI has faced short-term macroeconomic headwinds because of China’s much worsened economic situation, and because of recipient countries’ negative sentiments about China as some projects fail to deliver their expected benefits and debt continues to pile up. This, however, should not be read as the end of the BRI. The strategy is just too important for the Chinese leadership. If anything, it is more important than ever as China needs to build alliances in its strategic competition with the US. The BRI is transforming from an infrastructure-led project to a more political one where soft, and even hard, power are central. In other words, Xi Jinping’s grand vision of the BRI is evolving into a more versatile and hard-edged instrument of statecraft. This is much more in line with China’s broader domestic goals, as financial resources are increasingly needed within its own borders. It is potentially also more effective at furthering China’s interests abroad.

Alicia García Herrero is a Senior Fellow at European think-tank BRUEGEL. She is also the Chief Economist for Asia Pacific at Natixis, and a non-resident Senior Follow at the East Asian Institute (EAI) of the National University Singapore (NUS). Alicia is also Adjunct Professor at the Hong Kong University of Science and Technology. Finally, she is a Member of the Council of Advisors on Economic Affairs to the Spanish Government and an advisor to the Hong Kong Monetary Authority’s research arm (HKIMR) among other advisory and academic positions.

Eyck Freymann is a doctoral candidate in Area Studies (China) at Balliol College, University of Oxford. His research examines why democratic countries engage with China’s One Belt One Road initiative, and how Chinese mega-projects influence their domestic politics. Eyck holds an MPhil from the University of Cambridge, where he was a Henry Scholar; an AM in Asian Studies from Harvard University where he won the Joseph Fletcher prize for top thesis in Asian studies; and an AB in East Asian History with highest honors, also from Harvard.

To read the full commentary by the Bruegel, please click here.

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Therefore, it is no surprise that China applies the same approach when dealing with other developing economies, including in Africa. Focusing on economic relations, China proposes a developmental approach that differs from the West’s and challenges the Washington Consensus, based on free markets and economic liberalisation. This is reflected in China’s 2021 White Paper on International Development Cooperation, which notes that Beijing’s approach to cooperation is about “focusing on development and improving people’s lives” and “providing the means for independent development” of each country.

Following these principles, China’s engagement with African countries does not revolve exclusively around aid, but rather around the economic relationship between the two blocsaround trade, investment, development finance, and other forms of cooperation that aim to promote Africa’s growth. As such, China-Africa relations  have a strong economic focus, based on mutual economic interests which have contributed to promoting the continent’s economic transformation.

 The Belt and Road Initiative: Not a Game-Changer for the African continent

So, what is happening now? In terms of foreign engagement, China’s main tool is the Belt and Road Initiative (BRI), officially launched in 2013. African countries only committed to participating in the Initiative between 2018 and 2019, making it too early to assess its costs and benefits for Africa.

However, much can be said looking at pre-BRI trends in terms of economic and political cooperation. As regards policies and principles, many of the ideas and concepts governing Africa-China relations before the BRI — such as China’s second Africa policy and the ‘three networks and industrialisation’ principle (san wang yi hua 三网一化, based on the construction of roads, railways, aviation networks, and on the development of the industrial sector across the continent) —  already encapsulated many BRI ideas. Therefore, the BRI does not represent a break from  the past, but rather a continuation of China-Africa relations along the lines already established since 2013.

More practically, one could ask whether the BRI has infused new enthusiasm in China-Africa economic relations: however, this does not seem to be the case. Trade, investment, and lending commitments between China and Africa have undergone a considerable acceleration since 2000, but they have ultimately plateaued and stabilised since 2014. Comparing pre-BRI China-Africa engagement and early BRI trends reveals that the BRI has not disrupted China-Africa relations, but rather has strengthened previous political engagement and economic trends. Therefore, while infrastructure construction remains critical in Africa, the BRI has brought any dramatic changes in the pre-existing trends.

The African Continental Free Trade Agreement: a Potential Game-Changer for Africa’s Industrialisation

For Africa, the African Continental Free Trade Agreement (AfCFTA) is more exciting than the BRI. It is a pan-African initiative led by the African Unionaimed at creating a free-trade area among all African nations with the higher aim of supporting the continent’s economic transformation by promoting industrialisation. Why? Because while African countries mainly export raw materials and primary commodities to the rest of the world, they exchange a lot of manufactured products among themselves. Therefore, by creating a large free trade area, the AfCFTA can potentially contribute to Africa’s industrialisation and ultimately to the continent’s economic transformation, representing a tangible opportunity for Africa to change its position in the global economy.

The African Union and its members are working hard to advance the initiative, developing policies and agreements (the soft infrastructure) necessary to make the AfCFTA work. But what is still missing is the hard infrastructure, the roads, bridges and ports necessary for trade. These are crucial to making sure  the AfCFTA does not remain on paper alone and that the benefits actually accrue to African citizens.

The African Development Bank suggests  the continent’s hard infrastructure needs about USD130–170 billion a year, with an annual financing gap in the range of $68–$108 billion. Where can such money be found? While China’s financing pipeline may be getting colder, the country remains among the leading parties willing to provide support to close Africa’s infrastructure finance gap. The Chinese government has, in fact, shown a willingness to take part  in the future of the AfCFTA, with foreign minister Wang Yi explicitly supporting the initiative, not only in terms of infrastructure development but also through financial assistance and capacity building.

The AfCFTA, China, and the Rest of the World

In sum, while the BRI itself may not be a game-changer for Africa, China’s support to African infrastructure remains vital for the realisation of the African-led AfCFTA. China is signalling to African countries that it is willing to support their economic growth through infrastructure development, which could very much strengthen the China-Africa partnership at the continental level.

Recently, the G7 has made similar promises, launching the Build Back Better World (B3W) Partnership to tackle the infrastructure needs of the developing world. While details are still scarce, it seems to reveal Western countries’ renewed interests in Africa’s infrastructure after years of uncontested Chinese leadership in this area.  Should the G7 initiative represent a similar — or even better — offer for Africa than what China is currently providing, it would be very much welcome.

The Italian Institute for International Political Studies (ISPI) is an independent, non-partisan, non-profit think tank providing leading research and viable policy options to government officials, business executives and the public at large wishing to better understand international issues. 

To read the full commentary from The Italian Institute for International Political Studies, please click here.

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The new focus on competitiveness has been prompted by a confluence of factors: a global pandemic that highlighted supply chains and the importance of domestic manufacturing; a digital revolution that has emphasized the importance of digital inclusion, training and infrastructure; and the technological competitiveness of a risen China.

One of the few issues on which Congress and the administration appear to agree is the importance of maintaining American leadership in critical technologies as part of an expanded vision of national security. Bipartisan support has evolved in favor of an industrial policy for a limited number of key technologies, such as semiconductors, 5G, the ORAN alliance (open radio access network) and others essential to maintaining American innovation and technological leadership. 

The Senate has adopted the United States Innovation and Competition Act of 2021 (USICA). Passed with strong bipartisan support — 68 to 32 — USICA provides $250 billion to support research and development work, the development of key technologies, K-12 and graduate education, and more than $50 billion to support the semiconductor industry. Also with bipartisan support, the House has passed two bills adding significant funding for research at the National Science Foundation and Department of Energy.  

Yet, while the administration and Congress have taken some important steps in the right direction, more are needed.   

The pandemic drove home that America’s future is digital. But with more people on the web than any other country, China has aspirations to be the global internet leader, remaking cyberspace in its own image. China’s Digital Silk Road ($200 billion and growing) has become an increasingly important part of its larger Belt and Road Initiative (BRI). When China sells its equipment to middle-income and developing countries, their governments receive the tools to censor and control the internet while leaving their networks vulnerable to Chinese government cyber theft and interference. The Digital Silk Road also gives China a sufficiently dominant market share in many markets to set the technical standards to favor Chinese products over all others.

During the G7 summit in Cornwall, President Biden and other allied leaders announced a global infrastructure plan to counter the Chinese initiative. The program, which the White House calls the “Build Back Better World (B3W),” has the right ambitions but is not sufficient to the task.  

Under the Trump administration, a number of agencies were merged to form the International Development Finance Corporation (DFC). However, with lending power capped at $60 billion, the DFC’s funding is small compared with China’s BRI. The Senate-passed USICA would raise the lending limit to $100 billion, still far short of BRI funding and global infrastructure needs, estimated by the World Bank at $18 trillion.

To present a realistic alternative to China, the United States should launch a “Digital Marshall Plan” to do for the development of telecommunications, the internet and cutting-edge technology what the original Marshall Plan did to rebuild a war-torn world. The G7 leaders should work together, and alongside the World Bank, to create a robust, well-funded challenge to China’s Digital Silk Road. Congress must play its part, too.  

Will Congress rise to the challenge? Bipartisan action in the Senate and the House looks promising. But much more needs to be done. If these bills emerge as legislation, Congress will need to authorize the funding and resist the urge to water down everything. History points to times when the Congress has acted decisively. In the 1980s, for example, Japan posed a similar set of economic challenges to the United States and Congress responded. The Omnibus Trade and Competitiveness Act of 1988 set the nation on a competitive path with a national economic strategy. 

Today’s Congress has just begun. Now, the House must pass its own version of USICA, most feasibly by combining a number of Science Committee bills with a House companion to the Endless Frontier Act. It should add provisions to address critical competitiveness concerns such as China’s near monopoly of rare earth elements used in domestic and national security-related electronics.  

Once that work is complete, Congress must dedicate sufficient resources to the endeavor to ensure that the United States and its allies can offer developing countries a Digital Marshall Plan grounded in democratic values of openness, transparency and accountability. 

Orit Frenkel is co-founder and CEO of the American Leadership Initiative and former director for trade in high-technology products at the Office of the U.S. Trade Representative.   

Kent Hughes is former director of the Program on America and the Global Economy at the Woodrow Wilson Center and a former associate deputy secretary at the Commerce Department.

Jennifer A. Hillman is a senior fellow for trade and international political economy at the Council on Foreign Relations and a professor of practice at the Georgetown University Law Center.

To read the full commentary, please click here.

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While the B3W claims to be a highly cohesive initiative, the BRI has expanded beyond comprehension and would be extremely difficult to dethrone, even when some of the most lucrative economies of the world are joining heads to compete over the largely untapped potential of the region. Now let’s be fair and contest that neither the G7 nor China intends the welfare of the region over profiteering. However, China enjoys a headstart. The BRI was unveiled back in 2013 by president Xi Jinping. The initiative was projected as a transcontinental long-term policy and investment program aimed to consolidate infrastructural development and gear economic integration of the developing countries falling along the route of the historic Silk Road. 

The highly sophisticated project is a long-envisioned dream of China’s Communist Party; operating on the premise of dominating the networks between the continents to establish unarguable sovereignty over the regional economic and policy decision-making. Referring to the official outline of the BRI issued by China’s National Development and Reform Commission (NDRC), the BRI drives to: “Promote the connectivity of Asian, European, and African continents and their adjacent seas, establish and strengthen partnerships among the countries along the Belt and Road [Silk Road], set up all-dimensional, multi-tiered and composite connectivity networks and realize diversified, independent, balanced, and sustainable development in these countries”. The excerpt clearly amplifies the thought process and the main agenda of the BRI. On the other hand, the B3W simply stands as a superfluous rival to an already outgrowing program.

Initially known as One Belt One Road (OBOR), the BRI has since expanded in the infrastructural niche of the region, primarily including emerging markets like Pakistan, Bangladesh, and Sri Lanka. The standout feature of the BRI has been the mutually inclusive nature of the projects, that is, the BRI has been commandeering projects in many of the rival countries in the region yet the initiative manages to keep the projects running in parallel without any interference or impediment. With a loose hold on the governance whilst giving a free hand to the political and social realities of each specific country, the BRI program presents a perfect opportunity to jump the bandwagon and obtain funding for development projects without undergoing scrutiny and complications. With such attractive nature of the BRI, the program has significantly grown over the past decade, now hosting 71 countries as partners in the initiative. The BRI currently represents a third of the world’s GDP and approximately two-thirds of the world’s entire population.

Similar to BRI, the B3W aims to congregate cross-national and regional cooperation between the countries involved whilst facilitating the implementation of large-scale projects in the developing world. However, unlike China, the G7 has an array of problems that seem to override the overly optimistic assumption of B3W being the alternate stream to the BRI. 

One major contention in the B3W model is the facile assumption that all 7 democracies have an identical policy with respect to China and would therefore react similarly to China’s policies and actions. While the perspective matches the objective of BRI to promote intergovernmental cooperation, the G7 economies are much more polar than the democracies partnered with China. It is rather simplistic to assume that the US and Japan would have a similar stance towards China’s policies, especially when the US has been in a tense trade war with China recently while Japan enjoyed a healthy economic relation with Xi’s regime. It would be a bold statement to conclude that the US and the UK would be more cohesively adjoined towards the B3W relative to the China-Pakistan cooperation towards the BRI. Even when we disregard the years-long partnership between the Asian duo, the newfound initiative would demand more out of the US than the rest of the countries since each country is aware of the tense relations and the underlying desperation that resulted in the B3W program to shape its way in the Summit.

Moreover, the B3W is timed in an era when Europe has seen its history being botched over the past year. Post-Brexit, Europe is exactly the polar opposite of the unified policy-making glorified in the B3W initiate. The European Union (EU), despite US reservations, recently signed an investment deal with China. A symbolic gesture against the role played by former US President Donald J. Trump to bolster the UK’s exit from the Union. As London tumbles into peril, it would rather join hands with China as opposed to the democrat-regime of the US to prevent isolation in the region. Despite US opposition, Germany – Europe’s largest economy – continues to place China as a key market for its Automobile industry. Such a divided partnership holds no threat to the BRI, especially when the partners are highly dependent on China’s market and couldn’t afford an affront to China’s long envisaged initiative.

Even if we assume a unified plan of action shared between the G7 countries, the B3W would fall short in attracting the key developing countries of the region. The main targets of the initiative would naturally be the most promising economies of Asia, namely India, Pakistan, or Bangladesh. However, the BRI has already encapsulated these countries: China-Pakistan Economic Corridor (CPEC) and Bangladesh-China-India-Myanmar Economic Corridor (BCIMEC) being two of the core 6 developmental corridors of BRI. 

While both the participatory as well as the targeted democracies would be highly cautious in supporting the B3W over BRI, the newfound initiate lacks the basic tenets of a lasting project let alone standing rival to the likes of BRI. The B3W is aimed to be domestically funded through USAID, EXIM, and other similar programs. However, a project of such complex nature involves investments from diverse funding channels. The BRI, for example, tallies a total volume of roughly USD 4 to 8 trillion. However, the BRI is state-funded and therefore enjoys a variety of funding routes including BRI bond flotation. The B3W, however, simply falls short as up until recently, the large domestic firms and banks in the US have been pushed against by the Biden regime. An accurate example is the recent adjustment of the global corporate tax rate to a minimum of 15% to undercut the power of giants like Google and Amazon. Such strategies would make it impossible for the United States and its G7 counterparts to gain multiple channels of funding compared to the highly leveraged state-backed companies in China.

Furthermore, the B3W’s competitiveness dampens when conditionalities are brought into the picture. On paper, the B3W presents humane conditions including Human Rights preservation, Climate Change, Rule of Law, and Corruption prevention. In reality, however, the targeted countries are riddled with problems in all 4 categories. A straightforward question would be that why would the developing countries, already hard-pressed on funds, invest to improve on the 4 conditions posed by the B3W when they could easily continue to seek benefits from a no-strings-attached funding through BRI?

The B3W, despite being a highly lucrative and prosperous model, is idealistic if presented as a competition to the BRI. Simply because the G7, majorly the United States, elides the ground realities and averts its gaze from the labyrinth of complex relations shared with China. The only good that could be achieved is if the B3W manages to find its own unique identity in the region, separate from BRI in nature and not rivaling the scale of operation. While Biden has remained vocal to assuage the concerns regarding the B3W’s aim to target the trajectory of the BRI, the leaders have remained silent over the detailed operations of the model in the near future. For now, the B3W would await bipartisan approval in the United States as the remaining partners would develop their plan of action. Safe to say, for now, that the B3W won’t hold a candle to the BRI in the long-run but could create problems for the G7 members if it manages to irk China in the Short-run.

Syed Zain Abbas Rizv is an active current affairs writer primarily analyzing the global affairs and their political, economic and social consequences. He also holds a Bachelor’s degree from Institute of Business Administration (IBA) Karachi, Pakistan.

To read the full commentary from Modern Diplomacy, please click here.

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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”. 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.

Femke van der Eijk is majoring in International Justice at Leiden University College The Hague, Leiden University’s international honours college. She is part of Dr. Joris Larik’s research clinic on new frontiers in EU foreign relations law. 

Angela Pandita Gunavardana is majoring in International Justice at Leiden University College The Hague, Leiden University’s international honours college. She is part of Dr. Joris Larik’s research clinic on new frontiers in EU foreign relations law. 

To read the original commentary from the European Law Blog, please visit here

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