Italy, the Belt and Road program, and China – My weekly column

Italy’s moves to sign a deal with China and get involved in its Belt and Road Initiative (BRI) are highly significant as Italy is the first of the European Union’s founding countries to join this program. By way of reminder, the Belt and Road Initiative aims to develop stronger trade between China and various other regions of the world. Italy is the 12th European Union country to get involved in this program. Meanwhile Greece, Hungary and Poland are not opposed to it, and rail transport between Chengdu and Lodz has increased considerably over the past five years due to trade between the two countries. However, Sweden is fairly opposed to the Chinese program, while France and Germany are reacting cautiously – probably as they see potential business and trade opportunities, but also the restrictions involved in the program as it is primarily dictated by China.

The value of the Italy-China agreement is not yet huge and does not reflect a firm commitment between the two countries, but it has already caused some strife in the Italian government between Di Maio who went all out to promote the agreement, and Salvini who wanted none of it.

China sets great store by this international drive and the country’s role in the global balance, and when Xi Jinping set up the BRI in 2012 just after he took over as President, he put this world view center-stage again. His aim then as now is to root China’s fresh phase of growth within a broader context and link it back to the country’s development more than 2,000 years ago when the growth of the Silk Road network shaped Asia, sprawling out as far as Europe. During his recent visit to Europe, Xi Jinping was keen to remind listeners of the very long-standing relationship between Rome and the Han dynasty, which ruled from 206 BC to 220 AD, and he also referred back to the rich 13th century Venetian merchant Marco Polo’s trip to China. He took great pains to mark the country’s historical ties with Italy, but also China’s long-standing influence and role across the globe.

China’s incursion into Europe via the BRI obviously raises questions on the relationship between the two regions: targeting one of the EU founder countries marks a new milestone, especially as Italy has already been on the receiving end of quite a bit of China’s investment in the region. The UK has traditionally been China’s favorite focus for investment since 2000, with a total of €59.9bn up to 2018 according to Merics, but Italy ranks third with €15.3bn, just behind Germany’s €22.1bn, while France is fourth with €14.3bn.

However, Italy’s political choice raises a number of questions.

Is this decision a way to divide Europe amidst a global backdrop where doubt already prevails over European harmony? Several countries no longer want to comply with EU rules as strictly as they did before: Italy is a case in point, but we could also mention Poland, Romania and a few others. Considering European wariness of China, could this be a way for it to drive a wedge between the countries of Europe? This is a valid question as by promoting an easing of European-led restrictions, perhaps China could gain some more leeway to implement its worldwide growth strategy while also shoring up its international position…

Well may we wonder then whether Italy’s move is also a way for Southern Europe to put pressure on Northern Europe and the European Commission, as the region could use the relationship with China to gain leverage – particularly Italy, as tension with Brussels has soared since the coalition government took over.

China has already invested in the port of Athens (Piraeus), the port of Sines in Portugal, the port of Valencia in Spain, and has taken a foothold in the industrial port of Venice (Mestre-Marghera). The country – alone or sometimes via Hong Kong – now owns or manages 10% of European ports, while there are also bids to manage even more. This is a hefty figure and these moves could fuel imbalances and pressure between European states in a less harmonious Europe.

So all this begs the question whether China’s behavior as it seeks to extend its influence is a reflection that Europe is relegated to second place. The old continent harbors strong purchasing power, but it is divided despite the European institutions and does not seem to have a role to play in the tech battle between China and the US. So is this a way for China to disrupt Europe’s supposed unity with the US and move forward in the technological war, which will ultimately lead to China’s technological domination in Europe as it asserts its worldwide position? We recently saw threats from the White House – particularly to Germany – as it sought to stop the use of Huawei equipment when renewing mobile phone infrastructure.

Lastly, the key point in the Italy-China agreement is the port of Trieste, an industrial free zone that is set to be China’s bridge into Italy. Trieste boasts major advantages that Piraeus does not have, and these explain much of why Chinese investments in the port of Athens ended in failure. Firstly, the port of Trieste is already part of a broader industrial framework: secondly, there is a much more extensive rail network than in Greece, which makes Munich closer via this route than if getting there from Hamburg, in terms of both time and distance. In other words, Trieste is close to southern Germany, northern Italy and south-east France, and the route from Shanghai to Trieste is almost 10 days shorter than the route to ports in the north of Europe. This is very important and could put Trieste in a position to rival with Rotterdam or Hamburg, and this factor could play a crucial role in shaping the new European landscape.

This post is available in pdf format My Weekly Column – 1 April

Huawei vs America

Look at this map. Who then can expect a trade deal between China and the USl The real question is about techno leadership? Huawei has a step ahead of the US.

The Chinese company already has deep discussions with many countries throughout the world. From Asia to Europe, Africa and Latin America the Chinese web is already impressive. On the other side, the US has forbidden purchases of infrastructures coming from Huawei. Australia, New Zélande, Japan and Taiwan follow the same rule. But it is a minority.

Recently, the US has generate pressure on Germany to forbid the German to buy Huawei products in the renewal of their mobile network. Germany has not changed its mind and has allowed Huawei to compete.
The balance of strength at the global level may change rapidly at the expense of the US.

How to expect an agreement that would validate the dominance of one over the other? From China to the US?

American pressure: the issue is the possible use of Chinese 5G by the Germans

Tensions between China and the US are about technological leadership. The Chinese, whose technological catch-up has been rapid in recent decades, is now rather ahead of 5G and Artificial Intelligence. The US does not accept, rightly, this change of equilibrium.
The standoff will continue and I can not imagine a quick trade agreement because it would assume that one of the two countries accepts the leadership of the other. This seems totally illusory and that is why the global environment will remain volatile.
The US is pressuring its allies to limit Chinese influence.
To be convinced, read this article of the Wall Street Journal published this afternoon (March 11). It indicates the pressure of the Americans on the Germans in the adoption of a Chinese 5G technology for the renewal of their mobile network.

The article “Drop Huawei or See Intelligence Sharing Pared Back, U.S. Tells Germany” is available here 
Here is the first paragraph 
“BERLIN—The Trump administration has told the German government it would limit the intelligence it shares with German security agencies if Berlin allows Huawei Technologies Co. to build Germany’s next-generation mobile-internet infrastructure.”….

The inevitable Chinese slowdown – My weekly column

This post is available in pdf format My Weekly Column – January 28th

Growth in China slowed again in 2018, with an average of 6.6% across the year vs. 6.9% in 2017.
This remains a respectable figure, but it is the lowest since 1989 and 1990 as shown in the chart opposite. The 10-year average is also at a low, at around 8%. The 10% that had previously been typical of the Chinese economy is now a thing of the past, and expectations of a shift back to this trend are unrealistic. The Chinese economy is changing, setting the stage for a slower pace of growth. 

A weighty challenge for the world as a whole
Slowing Chinese growth often sets off the warning bells on world growth as a whole. Having hinged on developed countries during the period after the Second World War, growth is now dependent on the situation in China, which has displayed exceptional expansion since the start of the 1990s, creating strong and long-lasting impetus for the world overall.

The world growth driver is now China, rather than developed markets, and this shift is particularly vital as potential growth in developed countries has been on the wane since 2008. Right across the globe, from the US to France, growth that can be sustained in the long term while not generating permanent imbalances is weaker than before the 2007 crisis, and none of these countries can drive strong and self-sustaining growth from within their borders. Meanwhile, China managed to fuel momentum, taking over the role of developed economies – particularly the US – and benefiting the entire world economy.

So China managed to set the stage for stronger growth the world over on a long-term basis, either by sparking fresh competition on the Western markets, developing relationships with other emerging countries (Asia, Africa, Latam) or attracting capital to take advantage of Chinese growth, even if the price to pay for this was the transfer of technology.

According to IMF data (in current dollars terms), Chinese GDP has gone from less than 2% of world GDP in 1991 to 6% ahead of the 2007 crisis and then 16% in 2018, reflecting an astounding acceleration and putting it on a par with the euro area.

Chinese GDP as measured in purchasing power parity – a more coherent price and exchange rate system than the dollar-denominated assessment – has been higher than the US figure since 2014 and above the euro area figure since 2011.

More generally speaking, an increase in the weighting of China was achieved primarily at the expense of Europe and Japan, while the US maintained its strong representation. This also explains why the tension surrounding technological leadership is a Chinese-US matter and excludes Europe, which was not sufficiently involved in supporting China’s swift development.

A final point worth keeping in mind is that Chinese imports equated to close to 80% of US imports in 2017. A domestic Chinese shock affecting its imports would have a similar effect to a shock on US domestic demand and hence on its imports, and the worldwide impact of a shock on Chinese growth would be closer than many would expect to the effects of a shock on US growth.

Trade War Erupts On No. 1 U.S. Farm Export to China

The Chinese’s retaliation measures have a strong impact on soybean.
The US price of soybean has dropped dramatically while at the same time its price in Brazil is surging.
Brazil which is already the main soybeans’ exporter will take advantage of the current mayhem between the US and China How a crop used in hog rations and cooking oil got caught up in a huge trade war — Read here www.bloomberg.com/graphics/2018-soybean-tariff/