The Iran-China trade deal: regional implications

The trade agreement between Iran and China that was announced on 24 March apparently marks a significant new enhancement of relations between the two countries.[1] Most importantly, the deal is seen in some quarters as an indication of a geopolitical realignment aimed at countering US influence in the Middle East and, in particular, a means of loosening the stranglehold that US-led international sanctions have placed on an Iranian economy that is facing unprecedented challenges.

However, this paper will argue that the importance of the agreement is exaggerated and that China, though ready to lend some support to Iran’s attempts to broaden its diplomatic options, will not deepen its political and economic relationship with Tehran to the extent that it jeopardizes China’s relations with other major powers in the Arabian Gulf and elsewhere. Most importantly, and despite the deterioration of US-China relations over recent years, Beijing is looking to establish a pragmatic relationship with the Biden administration on a range of global issues. What follows will explain the context of the Iran-China deal before considering the agreement’s details and implications.

 The context

Over the last two decades, China has emerged as Iran’s leading trade partner, with the total volume of trade between both countries mounting to roughly $20 billion annually in recent years.[2] During the last Iranian year, Iran’s exports to China reached $8.9bn and imports from China stood at $9.7bn. China is also a major industrial supplier to Iran and was one of the top buyers of Iranian oil before US sanctions triggered a steep drop in Iranian oil exports, in particular to Asia, in 2018.

China has enjoyed growing trade with Iran since the early 1990, with China’s growing energy needs and Iran’s “Look East Strategy” forming the basis of a partnership that has since broadened and deepened. In 2016, following Chinese President Xi Jinping’s official visit to Iran, during which he met with the Iranian Supreme Leader Ali Khamenei, both countries agreed to intensify cooperation with a view to increasing the level of bilateral trade to $600 billion within a decade.

More recently, in June 2020, a draft of a proposed China-Iran “Comprehensive Strategic Partnership” leaked to the media signalled both countries’ intent to pursue a more formalized partnership involving cooperation in economic, political, cultural, and military spheres for the next 25 years along with a reported Chinese pledge to invest up to $400 billion in Iran’s oil, gas, and transportation infrastructure.

Figure 1: the recent development of the Iran-China trading relationship

China has developed a keen interest in the Iranian energy sector. Iran is believed to possess the world’s second largest natural gas reserves and the fourth largest oil reserves, which positions it as a significant weight in the strategic calculations that China makes in its efforts to secure sustainable sources of energy deemed vital to its economic growth. More broadly, many experts also believe that the various projects and initiatives associated with China’s Belt and Road Initiative (BRI) have in recent years boosted Iran’s potential value as a critical nodal point in an evolving regional network that would also connect the Arabian Sea and the Indian Ocean to the project.[3]

With the BRI, China’s relationships in the Middle East have greatly expanded in recent years, to include not only energy supplies, but also other sectors including infrastructure investments, financial cooperation, and now vaccine diplomacy. It should also be noted, however, that bilateral trade has significantly declined since 2014 due largely to declines in oil prices and the US sanctions imposed in 2014 after the Trump administration withdrew the US from the Joint Comprehensive Plan of Action (JCPOA), the mechanism signed in 2015 by the “P5+1” powers to monitor the Iranian nuclear program.

In addition, Iran’s struggle to maintain previous trade volumes with China must also be considered in the context of economic stagnation due to sanctions, the impact of which has been exacerbated by the global coronavirus pandemic. Due to the severe impact of the COVID-19 virus in Iran, the government has been forced to allocate 20 percent of its annual budget to emergency support for the economy and the health sector. The financial impact of the crisis has also forced Tehran to draw down US$ 1 billion from its sovereign wealth fund and also approach the International Monetary Fund (IMF) for help.[4]

The March 2021 agreement

The accord, which builds on intensified bilateral exchanges initiated in 2016, covers a wide range of sectors including oil, mining, industry, transportation and agriculture, tourism and cultural exchanges. Both parties also stressed their commitment to the principles enshrined in the United Nations Charter including mutual respect for national sovereignty and territorial integrity as well as non-interference in the internal affairs of countries. The agreement between Beijing and Tehran also rejects the use of force, “unjust sanctions” against other countries and all kinds of terrorism while emphasizing the need for international disputes to be “resolved through negotiations and political dialog”.[5]

The Iranian Foreign Ministry heralded the accord as a “deep, multilayered and fully fledged” agreement that would be "very effective in deepening relations with China”. In exchange for discounted Iranian oil, the deal will facilitate the BRI by giving China access to Iranian ports and scope to develop railway links between Pakistan and Lebanon.[6] The deal demonstrates Iran’s determination to break out of the relative isolation stemming from US-led sanctions diplomacy.

Through the agreement, Iran is seeking to leverage its understanding with its powerful friend to break the stranglehold of international sanctions that has crippled the Iranian economy in recent years. Therefore, the deal with China could be interpreted as an attempt by Iran to build a counterweight to general US regional influence and anticipated pressure from Washington in any future negotiations.[7]

Overall, however, while the grand statements of intent in the agreement appear impressive, there is little to indicate how the proposed cooperation will take effect. The mooted Chinese investment of $400 billion reported in June 2020 appears nowhere in the joint statement of the announced agreement; there remains uncertainty over the amount and purpose of Chinese, investment, though major projects involving the Huawei technology company have been mooted. In addition, speculation that Chinese-Iranian military cooperation might lead to the establishment of a Chinese base on Iran’s Kish island appears unfounded. Such a project appears improbable given historic Iranian suspicions of foreign military interference and Chinese consistent vetoes since 2008 of Iranian membership of the Shanghai Cooperation Organization (SCO), a Eurasian led by Beijing that has a specific security dimension.[8]

Implications

The new deal should be considered in the context of intensifying US-China conflict over issues ranging from the Covid-19 pandemic, maritime disputes in the South China Sea, political repression in Hong Kong and human rights violations in Xinjiang. By boosting its ties with Iran, China is making it clear to the Biden administration that it is increasing its influence in the Middle East and is prepared to support a regime whose policies are antithetical to traditional US allies in the region.[9]

However, while the China-Iran deal may further increase ties between Tehran and Beijing, other countries in the region, including Arab Gulf states will remain integral to Beijing’s key aims in terms of its foreign economic strategies towards the Middle East. Indeed, the Chinese leadership has been keen to balance its relations so as to transcend the interlocking regional conflicts and geopolitical splits that have dictated previous great power engagement in the region.

While Chinese exports to Iran rose by an annual rate of 16.9 percent between 2004 and 2018, this growth reflects the average annual growth rate of Chinese exports observed in many countries in the region during this period, including in Pakistan (15.6 percent), Saudi Arabia (16.1 percent), and Turkey (16.8 percent). It is also worth noting that since 2014 the trade relationship between China and Iran has deteriorated, with exports decreasing by an annual average of 11.5 percent between 2014 and 2018, despite Iran benefiting from increased sanctions relief in this period. By comparison, China’s trade with other Middle East trade partners has remained relatively constant during this period.

Enhanced cooperation with Iran will not be pursued by Beijing to the extent that it jeopardizes relationships with China’s other regional partners, not least in terms of access to hydrocarbons. It is worth noting that in 2019, as much as 17 percent of China’s oil imports were purchased by Saudi Arabia, 10 percent from Iraq, and a mere 3 percent from Iran.[10] Although the overall agreement will concern the US and its Arabian Gulf allies, it is evident that Chinese self-interest rules out a strategic relationship with Iran that might undermine its vital interests in the wider region.

China will continue to place great importance on its links with Arab countries in the region. An indication of how important such partnerships are to Beijing is evident in the recent announcement that the UAE is set to manufacture and distribute the Sinopharm Covid-19 vaccine on a global basis. This agreement suggests that China places great value in the UAE as an ally that can be trusted as an effective diplomatic and technological partner. It also indicates that the 2018 China-UAE Comprehensive Strategic Partnership has evolved into an alliance that can deliver tangible and impactful results.[11]

Although the recent deal builds on a relationship that has evolved over decades, it does not suggest that China is now ready to prioritize Iran over other partners. It should be emphasized that “Comprehensive Strategic Partnership” is a standard term used in China’s bilateral agreements that also features in Beijing’s agreements with UAE and Saudi Arabia. The accord with Iran therefore does not signify a bespoke “alliance” between the two countries. Though a broad range of sectoral cooperation is indicated, there are no provisions for specific financial commitments or contracts. Iran has not been given geopolitical priority over its neighbors, and a range of factors, not least US sanctions, mean that relations between Beijing and Tehran will remain wary. It should be noted that Chinese businesses have struggled to make profitable investments in Iran, Indeed, Chinese oil and gas companies were excluded from the South Pars project by National Iranian Oil Company (NIOC). [12]

Although the agreement gives Iran some political capital to spend against US pressure, while potentially allowing the Iranians to benefit from increased cooperation with China in key sectors such as high-tech, cyberspace, and defense industry, the continuance of sanctions will stymie the deal’s economic provisions and probably leave Beijing in a position of advantage if and when US sanctions are lifted.[13]

It should also be noted that while the bilateral agreement sets out a superficially ambitious roadmap for the next 25 years, the July 2020 draft and final document lack the executive steps, the level of details, and the necessary financial provisions that are typical of binding agreements. In reality, Beijing is continuing to take a cautious approach to its relationship with Tehran, avoiding binding commitments and instead preferring case-by-case cooperation. As a consequence, the effective implementation of the trade deal and the subsequent expansion of Sino-Iranian relations are far from assured.

Conclusion

Aside from the fact that Iran-China trade deal is framed in generalities, the broader context of the agreement suggests that it is primarily an Iranian initiative intended to achieve political capital out of a superficially enhanced relationship with one of the world’s great powers. The accord glosses over the severe economic difficulties that Iran is facing while also showing that the country can find a way around the constraints imposed by US-led sanctions. Through its deal with Beijing, Tehran is also signaling for public consumption that it will not back down from its “maximum resistance” to what it portrays as Washington’s ambitions to curtail Iran’s regional influence and even undermine the regime itself.

However, it is notable that China’s Foreign Ministry and media outlets have made little comment on the deal: it is likely that this official discretion reflects Beijing’s need to keep its options open and avoid provoking the US in the Middle East while the chance remains of agreement over at least some form of “live and let live” understanding on a broad range of global geopolitical and economic issues with the US and its allies. From a US perspective, enhanced Chinese influence in Iran could actually be a benefit in terms of constraining Iran’s nuclear activities and active support for its regional proxies if Beijing and Washington manage to establish a working relationship on other issues.

As a result, the Iran-China deal is a public relations exercise that largely conceals its lack of substance. While the agreement may facilitate Iranian energy sales in exchange for China’s assistance in specific projects, it will not commit Beijing to the extent that it jeopardizes Chinese interests elsewhere in the Middle East. Although Tehran is seeking to show it has alternatives to the West, Beijing’s policy will continue to be dictated by its broader regional and global interests, not least in relation to the urgent need to address the question of the Iranian nuclear program and international sanctions on Iran.

References

[1] Associated Press (2021), ‘Iran, China sign long-term cooperation agreement’, Politico (https://www.politico.com/news/2021/03/27/iran-china-agreement-478236).

[2] Harold, Scot and Nader, Alireza (2012), ‘China and Iran. Economic, Political, and Military Relations’, Occasional Paper, RAND Corporation (https://www.rand.org/pubs/occasional_papers/OP351.html).

[3] Neelakandan, Rakesh (2020), ‘Iran-China Mega Deal-Game Changing Bargaining Chip’, Moneycontrol (https://www.moneycontrol.com/news/opinion/iran-china-mega-deal-game-changing-bargaining-chip-for-iran-5608951.html).

[4] Motevalli, G. (2020), ‘What U.S. Sanctions Mean for Iran’s Corona Virus Fight’, Bloomberg News, April 6, (https://www.bloomberg.com/news/articles/2020-04-06/what-u-s-sanctions-mean-for-iran-s-coronavirus-fight-quicktake).

[5] Islamic Republic Iran (2016), ‘Full text of Joint Statement on Comprehensive Strategic Partnership between I.R, Iran and P.R., China’ (http://www.president.ir/EN/91435).

[6] DW (2021), ‘Iran, China sign “strategic” deal in Tehran’, Deutsche Welle (https://www.dw.com/en/iran-china-sign-strategic-deal-in-tehran/a-57025741).

[7] Yellinek, Roie (2020), ‘Opinion-The Sino-Iran 25 years Agreement: Why, and Why Now?’, E-International Relations (https://www.e-ir.info/2020/09/14/opinion-the-sino-iran-25-years-agreement-why-and-why-now/).

[8] Xiyue, Wang (2020), 'China Won’t Rescue Iran', Foreign Policy (https://foreignpolicy.com/2020/12/18/china-wont-rescue-iran/).

[9] Akbarzadeh, Shahram and Mahmoud Pargoo (2020), ‘Iran-China Deal raises more questions than answers’, Middle East Institute (https://mei.edu/publications/iran-china-deal-raises-more-questions-answers).

[10] Saikal, Amin (2021), 'Iran–China strategic agreement could be a game-changer', The Strategist, Australian Strategic Policy Institute (https://www.aspistrategist.org.au/iran-china-strategic-agreement-could-be-a-game-changer/).

[11] Email interview with Dr Jonathan Fulton, Assistant Professor at the College of Humanities and Social Sciences, Zayed University, Abu Dhabi, 30 March 2021.

[12] Greer, Lucille  & Batmanghelidj, Esfandyar (2020), ‘Last Among Equals: The China-Iran Partnership in a Regional Context’, Occasional Paper 38, Wilson Center (https://www.wilsoncenter.org/publication/last-among-equals-china-iran-partnership-regional-context).

[13] Email interview with Jacopo Scita, H.H. Nasser al-Mohammed al-Sabah Doctoral Fellow, SGIA, Durham University, 28 March 2021.