China and Italy to ‘Relaunch’ Bilateral Ties: Trade and Investment Outlook

Italy and China have maintained a robust investment and trade partnership, as well as high-level interactions, despite Italy’s adjusted strategy towards China after the exit from the BRI. Prime Minister Giorgia Meloni’s visit to Beijing demonstrated Italy’s position on China, with discussions focusing on high-value sectors and enhancing trade amid evolving global dynamics.

China and Italy have long enjoyed a dynamic and mutually beneficial economic relationship, with each country playing a significant role as a trading partner for the other. For years, Italy has been a key player in China’s European trade network, while China has increasingly become an important market for Italian goods and investments.

Despite evolving dynamics and a noticeable shift towards greater competition in certain sectors, such as fashion and machinery, where Italian industries have historically been strong, the two countries continue to maintain a strong relationship. This evolution in their economic interactions could influence broader European perspectives on China, especially given Italy’s strategic position within the EU-China framework.

In this article, we explore the latest statistics on bilateral trade and investment between China and Italy. We also examine the various agreements and treaties that have shaped their economic interactions, providing a comprehensive view of the legal and economic foundations of their partnership.

China-Italy diplomatic relations

China and Italy, both distinguished by their ancient civilizations and rich cultural heritage, have maintained a long history of interaction. As early as the late second century BC, Chinese silk began reaching Italy, signifying the start of a deep connection between the two regions. From ancient Rome to the Renaissance, Italy led in cultural exchanges with China, with notable milestones including Marco Polo’s travels in China (1271-1295) and the Jesuit Matteo Ricci’s (1552-1610) introduction of Western science, mathematics, astronomy and cartography to China.

The Republic of Italy and the People’s Republic of China officially established diplomatic relations on November 6, 1970. Since then, their relationship has grown into a multifaceted partnership, marked by significant cooperation in trade, culture, and political dialogue while navigating the complexities of global and regional dynamics.

In 2004, China and Italy elevated their ties to a comprehensive strategic partnership. The 15th anniversary of this partnership was celebrated in 2019 during a state visit by Chinese President Xi Jinping to Italy. During this visit, both nations signed several key agreements, including a memorandum of understanding (MoU) for collaboration under the Belt and Road Initiative (BRI).

The year 2020 marked the 50th anniversary of their diplomatic relations, which was observed amid the COVID-19 pandemic. Despite the pandemic causing interruptions to mutual visits, high-level exchanges continued to progress the goals set forth in previous agreements.

Recent developments

Between late 2023 and early 2024, Italy-China relations experienced a significant transition with Italy’s withdrawal from the BRI. Led by Prime Minister Giorgia Meloni, this decision followed a year of political preparation, reflecting Italy’s reassessment of the economic and political benefits of participating in China’s global infrastructure initiative, particularly as the only G7 member involved. Italy formally informed China of its intention to withdraw from the BRI in early December 2023, just before the automatic renewal deadline in March 2024.

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Despite Italy’s exit from the BRI, bilateral relations have remained stable and predictable. China’s response to Italy’s withdrawal from the BRI has been measured, reflecting an understanding of the broader geopolitical context without escalating tensions. To sustain cooperative ties, both nations have continued to engage through high-level visits. The Italian government reiterated its commitment to the 2004 Global Strategic Partnership to guide future bilateral relations. This was reinforced during Foreign Minister Antonio Tajani’s visit to Beijing in September 2023.

Notably, University and Research Minister Anna Maria Bernini traveled to China in November 2023 for the 12th China-Italy Week of Science, Technology, and Innovation. Her visit focused on collaboration in smart manufacturing and Winter Olympics technologies. During this visit, a renewed Executive Program of Scientific and Technological Cooperation between Italy and China (2024-2025) was signed between Italy’s Ministry of Foreign Affairs and China’s Ministry of Science and Technology. This protocol supports joint research in agriculture, artificial intelligence, green energy, and biomedicine, reinforcing their commitment to scientific and technological collaboration.

These visits set the stage for further high-level engagements, including PM Meloni’s visit in July 2024 and the anticipated visit by Italian President Sergio Mattarella to China in October 2024, both of which are expected to strengthen and expand the bilateral relationship. As of 2024, the two countries have recorded over 620 scientific cooperation agreements spanning from physics to smart manufacturing, from advanced materials to agriculture.

Meloni’s visit to Beijing: A new beginning

PM Meloni’s visit to Beijing from July 28 to July 31, 2024, marked her first official trip to China since taking office in 2022. The visit aimed to revitalize bilateral relations, culminating in the signing of a Three-Year Action Plan to strengthen cooperation in trade, investment, education, environmental protection, and food security.

Additionally, during her meetings with Chinese Premier Li Qiang and President Xi Jinping, six new agreements were finalized, focusing on key areas such as electric mobility and renewable energy. These agreements reflect Italy’s commitment to addressing trade and investment imbalances, with PM Meloni highlighting the need to increase Chinese investment in Italy, which currently lags behind Italian investment in China.

The visit also featured participation in the 7th China-Italy Business Forum, where Prime Minister Meloni highlighted the new agreements and articulated her goals for achieving more balanced trade relations. Analysts widely perceive the visit as a clear signals a renewed commitment to improving ties amid a complex global landscape and underscores Italy’s intention to engage with China on strategic areas of mutual interest while navigating past criticisms and concerns.

Bilateral trade

Italy and China have cultivated a robust economic relationship characterized by dynamic trade exchanges. For Italy, China stands as the second-largest trading partner in Asia, and the biggest non-EU partner after the US.

As of early 2024, Italy is the 22nd largest market for Chinese exports, with a market share of 1.4 percent from January to May 2024, up from 1 percent in the same period in 2023. For Italian exports to China, Italy’s share has increased to 2.5 percent from January to April 2024, up from 8.1 percent the previous year, indicating modest growth.

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Italy is ranked as the 24th largest supplier to China, showing that while Italian exports are rising, they still trail behind other major European suppliers like Germany and France. China, in turn, is a key supplier to Italy, holding the third spot in terms of goods supplied. Between 2019 and 2023, Italy and China experienced a notable increase in their trade relations, with Chinese exports to Italy rising by 50 percent and Italian exports to China growing by 48 percent. This expansion outpaced China’s trade growth with the EU as a whole and with major European countries such as France and Germany.

A significant component of Italy’s exports to China has been industrial goods, which have driven this growth. Packaged medicaments, a vital part of Italy’s pharmaceutical sector, accounted for US$1.36 billion in exports in 2022. The automotive sector also contributed substantially, with car exports valued at US$1.01 billion in the same year. This demand reflects China’s expanding middle class and increasing interest in premium automotive brands. Furthermore, exports of machinery and equipment, including advanced manufacturing tools and technical apparatus, have seen notable growth.

Despite these gains, the trade imbalance between the two nations has widened, particularly in the last three years. The surge in 2023 was notably influenced by a spike in Italian pharmaceutical exports following China’s relaxation of its zero-Covid policy. However, when excluding pharmaceuticals, the overall growth in Italian exports to China was negative.

The rise in exports also includes Italian consumer goods and luxury items, which aligned with the rebound in Chinese consumer spending. Yet, the focus on self-reliance within China and a reduction in its manufacturing activities have further diminished the proportion of industrial products in Italy’s exports, reflecting a broader trend also seen in Germany’s trade with China.

In 2023, Italy’s primary exports to China, based on value-added categories, included pharmaceutical, chemical-medicinal, and botanical products (US$4.72 billion), textiles and clothing, leather, and accessories (US$4.35 billion), machinery and equipment n.e.c. (US$4.02 billion), substances and chemical products (US$1.35 billion), and vehicles (US$1.07 billion), according to data from the Economic Observatory MAECI elaborations.

Meanwhile, in the same year, the main goods exported from China to Italy included computers, electronic and optical devices (US$8.49 billion), electrical equipment (US$6.98 billion), textiles and clothing, leather, and accessories (US$6.71 billion), substances and chemical products (US$6.43 billion), and machinery and equipment n.e.c. (US$6.05 billion).

Bilateral investment

Italian investment in China

Italian foreign direct investment (FDI) in China amounting to EUR 15.5 billion (US$16.78 billion) in 2023, as per to data from the China-Italy Chamber of Commerce.

According to a survey conducted in the first half of 2024 the Italy China Council Foundation, Italian companies are drawn to China’s major economic and industrial hubs, such as Shanghai, Hong Kong, Guangdong, and Beijing, due to their strong international connectivity and proximity to political influence. These cities offer a favorable environment for Italian investments, aligning with their preference for established economic centers.

The performance of Italian investments in China has been relatively stable. Approximately 30 percent of Italian firms reported consistent turnover levels, although growth has been modest. As of today, there are over 850 wholly Italian owned entities in China.

Chinese investment in Italy

The BRI is often synonymous with large-scale Chinese infrastructure projects. Italy’s involvement in the BRI, particularly concerning the Port of Trieste and the Port of Genoa, has shown mixed results. The Port of Trieste, initially expected to see significant growth in Chinese-linked activity, experienced a downturn after an initial uptick. Similarly, the Port of Genoa, which saw record volumes in 2021 and 2022, reverted to 2018 levels in 2023. These outcomes suggest that while the 2019 MoU set ambitious goals, various administrative and political challenges have hindered substantial progress.

Moreover, data show a notable decline in Chinese direct foreign investment in Italy, which fell sharply from US$650 million in 2019 to just US$20 million in 2020, with a slight recovery to US$33 million in 2021.

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Despite this, Italy has successfully drawn interest from prominent Chinese companies such as GAC and Geely, which have established European design centers in Milan. Additionally, COSCO’s acquisition of the Italian logistics company Trasgo in early 2024 emphasizes Italy’s strategic role in the Mediterranean, enhancing COSCO’s logistics network in Europe. This selective yet strategic engagement highlights Italy’s focused approach to Chinese investment, prioritizing specific sectors over a widespread influx of BRI funds.

Trade and investment treaties

China-Italy bilateral investment agreement

In 1985, China and Italy established a Bilateral Investment Treaty (BIT) to strengthen their economic ties and create a supportive environment for cross-border investments. This treaty, effective from 1987, is designed to foster a stable and secure investment climate by embedding several key principles.

The BIT ensures robust protection for investments from both countries, shielding them from expropriation, nationalization, or any form of discriminatory practices. It guarantees that investments will receive fair and equitable treatment, thereby safeguarding them against undue risks and ensuring a level playing field.

A crucial aspect of the BIT is its dispute resolution framework. The agreement provides mechanisms for resolving investment-related conflicts through negotiation, mediation, or arbitration. Article 11, in particular, outlines a process for addressing disputes via an international arbitral tribunal, offering a structured approach to handle disagreements and ensuring that disputes are resolved fairly and transparently.

The BIT also promotes a transparent investment environment by stipulating that all transfers related to investments—including profits, royalties, and capital repatriation—must be executed without undue delay and in convertible currency. Additionally, it extends protection to reinvested returns, ensuring they are afforded the same level of security as the original investments.

These provisions aim to create a favorable and predictable investment climate, thereby encouraging mutual economic growth while upholding principles of non-discrimination and adherence to the rule of law.

China-Italy double taxation avoidance agreement

On June 19, 2019, the Italian Council of Ministers approved the new Double Tax Agreement (DTA) between Italy and China, which had been signed in Rome on March 23, 2019. The new DTA replaced the previous agreement from October 31, 1986, aiming to prevent double taxation, curb tax evasion, encourage investments, and provide tax certainty.

The provisions of the new China-Italy DTA are aligned with the OECD/G20 BEPS (Base Erosion and Profit Shifting) Project and the OECD Multilateral Instrument (MLI), signed by China and Italy on June 7, 2017. The BEPS initiative addresses tax avoidance strategies that exploit gaps and mismatches in tax rules to shift profits to low or no-tax locations. The MLI incorporates BEPS measures into bilateral tax treaties, helping to close gaps in international tax rules, prevent treaty abuse, and enhance dispute resolution mechanisms.

The new DTA includes a Principal Purpose Test (PPT) clause to deny treaty benefits if the primary purpose of a transaction is to obtain those benefits, ensuring that tax treaties are not misused.

The new DTA includes several important provisions related to dividends, interests, and royalties. A comparison with the 1986 DTA is summarized in the table below:

Article 13 addresses capital gains taxation. The new DTA retains the tax on capital gains from the sale of at least 25 percent ownership but adds that this applies only if the threshold was held at any time during the 12 months before the sale. Additionally, capital gains not specifically regulated by Article 13 will be taxed only in the seller’s state of residence, a significant change from the concurrent taxation under the 1986 DTA.

Overall, the new DTA aims to foster and strengthen cross-border investments between Italy and China, making project financing more accessible and straightforward.

Multilateral treaties

China and Italy, both members of the WTO, are signatories to various multilateral treaties concerning trade and investment. These include:

• The Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), which mandates WTO members to extend intellectual property rights to owners in any member state. It incorporates a most-favored-nation (MFN) clause, ensuring equal treatment for IP rights protection across all member countries. Additionally, it provides mechanisms for dispute resolution and compensation.
• The Agreement on Trade-Related Investment Measures (TRIMs), which prohibits the implementation of investment measures that restrict trade between members. This includes measures like local content requirements, which mandate the use of locally-produced goods or services by companies operating in a market.
• The General Agreement on Trade in Services (GATS), which grants most-favored-nation status to service providers of any WTO member, excluding governmental services such as social security, public health, education, and certain services related to air transport.

2024 outlook: A new phase of China-Italy relations

As Italy transitions away from its involvement in the BRI, the shift has been relatively seamless, highlighting a commitment to sustain and strengthen its economic ties with China under a new framework. This evolution reflects the country’s aim to recalibrate its strategic engagement with China, focusing on sectors where mutual benefits can be maximized. Despite potential regulatory challenges, Italy’s strategic focus on high-value sectors and the burgeoning role of e-commerce platforms should enhance trade prospects within this refined partnership.

On the export side, while the extraordinary growth seen in 2023 may not recur very soon, Italy’s export sector remains robust, particularly in luxury goods and high-end consumer products. The resilience of the Chinese luxury market amid geopolitical tensions bodes well for Italian exports in fashion and gourmet products.

As Italy expands its strategic relationships in the Indo-Pacific region, notably with Japan and India, it will seek to balance regional partnerships with its ongoing economic engagement with China.

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