Why China Isn’t Standing By Iran

(Bloomberg Opinion) -- Last week, Iran’s economic minister was in Beijing for talks on bilateral trade and investment. An official readout of the discussions from China’s commerce ministry describes China and Iran as “comprehensive strategic partners.” This echoes the language used by President Xi Jinping a few weeks earlier, when he welcomed a delegation that included Iran’s foreign minister, oil minister and parliament speaker. Xi declared that “No matter how the international and regional situation changes, China’s resolve to develop a comprehensive strategic partnership with Iran will remain unchanged.”

Unfortunately for Iran, the data tells a different story from the official rhetoric.

The reimposition of U.S. secondary sanctions on Iran in November has significantly slowed Chinese-Iranian bilateral trade. Chinese exports to Iran — mainly crucial machinery and parts for Iran’s manufacturing sector — fell from $1.2 billion in October to just $428 million in February. Exports had averaged $1.6 billion a month in the period from 2014 until the beginning of 2018.

Imports from Iran, mainly crude oil, which had fallen to $1 billion in October, rose after November, when the Trump administration granted China a waiver to permit continued oil purchases. Imports hit $1.3 billion in February, of which $866 million is attributed to oil imports. These figures are consistent with the monthly averages in the period from 2014 until the beginning of 2018.

In short, while China is continuing to benefit from Iran’s energy resources, Iran is struggling to use its earnings to purchase Chinese exports. 

This challenges the long-standing assumption in Tehran that China would stand by Iran despite sanctions pressures. In the previous sanctions period from 2008 to 2016, Chinese businesses significantly expanded their commercial presence in Iran, stepping in as Western companies exited the market. Iranians welcomed commercial partnerships with a country they believed to be economically minded, and unconcerned by Iran’s regional activities or its domestic governance.  

These hopes received an early jolt in October, when the Iranian business community was left scrambling after Bank of Kunlun, the state-owned bank at the heart of China-Iran trade, suspended most financial transactions with Iran. Although the bank resumed trade in January, it announced a new policy: It would only service trade exempt from U.S. secondary sanctions. This means trade in food, medicine and consumer goods, for which China is not Iran’s leading source of imports. Bank of Kunlun’s move is consistent with the terms of the oil waiver, which requires Iran’s earnings be paid into an escrow account and used exclusively for non-sanctioned bilateral trade.

Seen through the prism of short-term considerations, China’s policy adjustments at the expense of its trade with Iran are easy to understand. As Pedram Soltani, vice president of the Iran Chamber of Commerce, has observed, the roiling trade war with the U.S. remains a much higher priority for China. Additionally, the arrest of Huawei executive Meng Wanzhou has made Chinese enterprises, particularly those with the most global reach, reticent to engage opportunities in Iran for fear of being similarly targeted by American authorities.

But China’s acquiescence to secondary sanctions is inconsistent with Beijing’s stated opposition to extraterritorial sanctions. In October, foreign ministry spokesperson Hua Chunying told reporters: “China always opposes the unilateral sanctions and long-arm jurisdiction. China’s normal cooperation with Iran under the framework of the international law is reasonable, legitimate and legal, and it should be respected and upheld.”

While Europe has made extraordinary efforts to both assert its economic sovereignty and preserve the nuclear deal, even going so far as to establish a new state-owned trade financial intermediary, China has taken no commensurate effort to shield its own trade from the long arm of American law.

Also, by downgrading the trading relationship with Iran, Beijing is in effect signaling to Washington that secondary sanctions can be used to stymie China’s economic ambitions abroad. As the U.S. struggles to respond to China’s Belt-and-Road strategy and its new role as a Eurasian superpower, there will be a temptation to use sanctions to raise barriers to China’s expansion. By failing to resist secondary sanctions on Iran now, China is inviting more pressure on key trade and investment relationships in the future, while also shirking its obligation to help preserve the nuclear deal.

It is possible that Chinese-Iranian trade could recover to a new steady state later this year, and that Beijing could designate a new bank to facilitate non-oil exports. But when the waivers come up for renewal in early May, the Trump administration could make such a waiver contingent on China continuing to downsize its non-oil trade with Iran. Since Iran is more important for China as an energy supplier than as an export market, China will likely sacrifice its exports to sustain oil imports — especially since it is unclear that Iran has sufficient leverage to insist that China avoid making such a trade-off.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Esfandyar Batmanghelidj is the founder of Bourse & Bazaar, a media company that supports business diplomacy between Europe and Iran through publishing, events and research.

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