Iran-China trade based more on geopolitics than economics

Much is made of links between Beijing and Tehran, but the true extent of their relations is more limited. Where there are alternatives, China takes them, with one eye on the US.

In the Middle East, Iran is a major power, and firmly against the US imposing its will in the area. This is music to Chinese ears.
Eduardo Ramon
In the Middle East, Iran is a major power, and firmly against the US imposing its will in the area. This is music to Chinese ears.

Iran-China trade based more on geopolitics than economics

The US has put high-level pressure on China to use its influence over Iran to end Houthi attacks on Western commercial shipping in the Red Sea.

However, the calls from Secretary of State Anthony Blinken and Jake Sullivan, the national security advisor, may overestimate the extent of Beijing’s power over Tehran and, therefore, over the Yemeni militia that Iran supports.

Influence aside, any expectation that China would prioritise its own commercial interests over moral support for Gaza also looks ill-founded, even though Chinese exports rely on the Suez Canal for the most direct route to Europe.

China is undoubtedly an important economic partner of Iran, but geostrategic considerations mainly make this partnership endure. Commercial relations rank second.

There is an imbalance, too. Iran is much more dependent on China than China is on Iran.

Here, Al Majalla looks at the ties between these two allies, outlining how they work and the global context in which they operate.

Avoiding US sanctions is foremost in Chinese minds, with a knock-on effect on infrastructure investments.

Geostrategic considerations dominate the Iran-China relationship. Commercial relations rank second.

Choices and priorities

Whereas China has been Iran's largest trade partner for a decade, there are 49 other states with whom China trades more.

This huge disparity is because the vast majority of Iranian oil (90%) is exported to China, yet this only accounts for 10% of China's total oil imports.

The major international sanctions slapped on Iran in 2012 have had an impact. In 2020, China's trade with Tehran fell to $14bn, the lowest in 15 years.

At the same time, trade between Saudi Arabia and China grew to $106bn, seven times more than Iran's. In January, Iran stopped shipping crude to China in a bid to end the substantial discounts that had been offered.

China called its bluff and showed the limit of Iran's economic leverage, even over oil, by sourcing alternatives to replace the Iranian supply.

China's President Xi visited Tehran in 2020 and pledged to invest $400bn in Iran by 2045 as the two countries signed an extensive deal.

However, little has come to fruition in the first three years of the 25-year pact. Last year, China's fresh investment in Iran was a meagre $50mn, taking its interests' total value to $3.5bn.

Eduardo Ramon
China believes that the US-led liberal global order is fading and that a new multipolar alternative is emerging. China and Russia are partners in this.

The Russian attraction

In 2022, Russia was the largest investor in Iran, with a $2.7bn investment. Afghanistan was the second largest, followed by Iraq and the United Arab Emirates. For its part, China was not in the top five.

US sanctions have had an impact but are not the main reason why trade and investment ties between Iran and China have not deepened.

Russia has also been sanctioned, but its economy has still grown, showing that this economic weapon can be ineffective in some circumstances.

Russia's GDP spiked in 2022, helped by higher oil prices. Despite a retrenchment in 2023, its GDP was still larger than in 2021, when the Ukraine war started.

China has been an important source of support for Russia during sanctions, in contrast to how Beijing has dealt with Tehran.

In 2018, China and Russia jointly targeted bilateral trade to reach $200bn by 2025. That has already been surpassed, reaching $240bn in 2023, accelerated by US sanctions.

The different levels of support show Beijing's alternatives to pursuing its geostrategic policies through economic choices.

Both China's Belt and Road Initiative (BRI) and the India-Middle East-Europe Economic Corridor (IMEC) bypass Iran as a connecting hub.

Prioritising the Gulf

China seems to have prioritised the Gulf over Iran. Beijing is not only the Gulf's largest trading partner but also an 'all-weather investor' in its ports, industrial parks, renewable energy systems, and digital infrastructure.

This translates into finance. Gulf states' sovereign wealth funds are diversifying their holdings and ploughing money into China.

There are multilateral efforts through groups such as the BRICS+ Club of Nations toward de-dollarisation, or at least towards developing an alternative international currency.

Tehran has been sidelined in these efforts and others because it cannot showcase its openness, financial strength, or conducive political environment with a global outlook.

As a result, the investment that flows to cutting-edge areas like digital and renewable infrastructure or financial architecture is lacking in Iran.

New trade routes

The Belt and Road Initiative (BRI), China's signature investment programme in international trade, has Pakistan as the central node connecting the Middle East, Africa, and Southern Europe.

A rival US-backed trade route infrastructure scheme called the India-Middle East-Europe Economic Corridor (IMEC) has India as the crucial connection hub.  

Without its political alliance with Iran, China would be more easily contained by the US.

These transcontinental trade routes bypass Iran, which once prospered as the ancient corridor between Asia, the Middle East, and Europe. 

At the same time, China is expanding its continental Eurasian trade through the corridors of Central Asia and the Caucuses.

China recently passed Russia as this region's biggest trade partner, and the trade of goods and services between China and Azerbaijan is steadily rising.

Once again, these trends show another area in which Eurasian trade is bypassing Iran. 

Energy economy

China relies heavily on Russia for its energy supplies, and geographical proximity is a factor in its avoidance of shipping through the US-controlled Strait of Malacca.

The two countries also have joint operations in offshore energy exploration in the Arctic Ocean. Yet China is weaning itself off carbon and investing heavily in domestic renewable energy, using the energy transition as a critical new economic growth driver.

Renewable energy sources accounted for just over 50% of China's total energy capacity in 2023, surpassing fossil fuels.

With China's reliance on oil imports soon likely to decline over time, secondary suppliers such as Iran will become even less important to it.

Geopolitical ties

The main reason China and Iran feel bound together is political. They stand together against US hegemony.

Eduardo Ramon
Without its political alliance with Iran, China would be more easily contained by the US and the West, amid their wider strategic rivalry.

In the Middle East, the Islamic Republic is a major power and is firmly against the US imposing its will in the area. This is music to Chinese ears.

China believes that the US-led liberal global order is fading and that a new multipolar alternative is emerging.

Gone are the days when the West could impose its liberal democratic values on the rest of the world according to a set of ageing international institutions.

China says this no longer reflects developing nations' moral aspirations and economic realities in a changing world.

Without its political alliance with Iran, China would be more easily contained by the US and the West amid their wider strategic rivalry.

Iranian actions have a global impact, as the Houthis' actions in the Red Sea show. More trouble spots mean more of a spread of resources for Washington.

For instance, does it send its aircraft carrier to the Black Sea or the Red Sea? Either way, this keeps US military assets away from areas like the Taiwan Strait.

China knows the limits of its strength, but it also wants a balance of power in the Middle East and helped broker the Saudi-Iran diplomatic breakthrough in May, which has withstood the Houthi attacks in the Red Sea.

Had it not been struck before the war in Gaza in October, this latest Middle East conflict would likely have entangled more regional powers. This shows China's contribution to regional peace.

China knows the limits of its strength but also wants a balance of power in the Middle East.

US foreign policy in the Middle East in recent decades sought a balance between major regional powers, but the toppling of Saddam Hussein's regime in Iraq broke it. Since then, China has joined the table as a player.

Red Sea solutions

As the world's largest trading nation, China's exports rely on the safe passage of ships through the world's major maritime arteries, but it is not part of the US-led Operation Prosperity Guardian protecting Red Sea shipping.

China thinks a two-state solution would help mitigate the Red Sea crisis and criticises the US-led strikes on the Houthis contrary to that larger purpose.

Yet China knows that it still cannot project sufficient strength so far from home, so it continues its policy of non-intervention, instead positioning itself as a mediator.

It has not publicly blamed the Houthis for the Red Sea crisis, in part because China's support for the Palestinian cause stretches back to the 1940s, predating the People's Republic of China.

China also shares decades of solidarity with the people of the Global South, who seek a louder global voice.

We still live in the era of Pax Americana. Global trade and security are still ultimately guaranteed and underwritten by the US. This owes much to its military being so much bigger than anyone else's and to the dollar still being the world's principal reserve currency.

China continues to benefit from those guarantees and security, but for Beijing, any relative weakening of US power is no bad thing.

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