Treading the trade war tightrope

Trumpʹs latest campaign to put pressure on China, with the option of raising existing trade tariffs of 10% to 25% by year-end, is just part of an escalating trade war between two super economic powers that could have disastrous effects – with the fragile Middle East destined to feel the pinch. By Stasa Salacanin

By Stasa Salacanin

One of the key hotspots of the trade dispute is likely to be Iran – a country with very close ties to China and one of the main Chinese suppliers of crude. After the United States unilaterally walked away from the Iran nuclear deal, China remained the only certain meaningful customer of Iran capable of ignoring U.S. sanctions and retaliation measures. 

Of late Beijing has been Tehranʹs most important trading partner, accounting for 25.6 percent of imports and 19.7 percent of exports. In addition, China has also made clear that it will not stop buying Iranian oil and break commercial ties with Tehran, especially having cut imports of U.S. crude amid the ongoing trade war with America. On the other hand, however, China has also pledged not to increase its oil purchases from Iran.

Seizing the opportunity

Mohammadbagher Forough, a research associate at the Clingendael Institute and assistant professor of International Relations at Leiden University explained to that the U.S. sanctions against Iran are a perfect economic and energy opportunity for China for three reasons.

Firstly, China can use its relations with Iran as leverage against the United States.

Secondly, with European companies leaving Iran for fear of being sanctioned, Chinese companies that are more protected and cannot be sanctioned by the U.S., are now free to enter the Iranian energy market and stand to benefit greatly from deals originally designed for European companies.

Thirdly, due to the fear of sanctions, many countries will be hesitant to enter into energy deals with Iran. This will give China more bargaining power against Iran when it comes to pricing. 

View of the China National Petroleum Corporation stand, parent company of PetroChina, during an exhibition in Shanghai, China, 10 May 2018 (photo: picture-alliance/dpa/Z. Junxiang)
When French giant Total pulled out of Iran following the de-certification of the JCPOA, China National Petroleum Corp (CNPC) was quick to take over the shares of French Total in an Iranian project involving the South Pars gas field. Total held a 50.1 percent stake in the South Pars field, the largest natural gas field in the world, with estimated reserves worth .9 trillion. CNPC originally held 30 percent and Iran's PetroPars 19.9 percent

Nevertheless, it remains to be seen to what extent and how successfully China will continue its co-operation with Iran and whether Beijing can withstand the pressure from Washington. Just recently, Chinaʹs top refiner Sinopec halved its oil imports from Iran as of September, seen by some as bowing to pressure from the United States, which is currently seeking to reduce Iranian oil exports down to zero.

Although President Trump has already proven unpredictable and erratic, Andrea Ghiselli, a project manager with ChinaMed consultancy and researcher at the School of International Relations and Public Affairs of Fudan University in Shanghai does not think the U.S. will hit Chinese banks involved in the purchase of Iranian oil. According to him, this would be seen as a direct attack against China and it would be highly destabilising for Sino-U.S. relations.

Moreover, Ghiselli predicts that China may try moving away from trading Iranian oil using U.S. dollars. This would come as no surprise considering the degree of interest in the crude futures contract traded on the Shanghai International Energy Exchange. Although Iranian oil is not deliverable through the Shanghai exchange, it seems likely that there are workarounds.Domino effect of any Chinese economic slowdown

Since crude oil is a key strategic commodity for Beijing, the Gulf states are also top Chinese energy partners which could get caught in the crossfire of a global trade war. Any prolonged dispute between the U.S. and China could cool down Chinese industrial activity and consequently decrease oil demand, with the attendant impact on oil-dependent Gulf economies.

Seats remained unfilled as western stakeholders protesting the murder of Jamal Khashoggi boycotted the Future Investment Initiative conference in Riyadh on 23 October 2018 (photo: Reuters/F. Al Nasser)
Empty reserved seats are seen during the Future Investment Initiative conference in Riyadh, 23 October 2018 (photo: Reuters/F. Al Nasser)

According to Ghiselliʹs research paper "China and the Middle East: Growing influence and divergent perceptions," China imports anywhere between 11 and 90 percent (depending on the country in question) of crude oil and natural gas.

In addition, any inflation of Chinese products would have a serious impact on the Gulf, as Chinese imports to the GCC totalled $47.7 billion in 2017, representing 11.4% of imports in the region, according to EU data.

Some believe that the trade war could affect Chinaʹs plans for the Middle East, primarily their Belt and Road initiative which might need to be reconsidered. This would be a significant blow for all parties involved, as Middle Eastern countries would miss out on an excellent opportunity to intensify their diversification efforts.

The fate of the Chinese loan for economic development in the region worth $23 billion, which was announced during the China Arab States Cooperation Forum, is also up in the air, as the current U.S.-China tariff war could force China to reconsider its investment.

This also brings us to the question of whether the current U.S. administration will try to exert pressure on Gulf countries in an attempt to sabotage any future deals between the Middle East and China.

Internal GCC rifts are a stumbling block

It would come as no surprise, says Ghiselli, to learn that the U.S. is putting pressure on other countries to prevent them from becoming too close with China. Yet the main stumbling block to cementing relations between the Gulf States and Beijing can be found in the deep divisions among the GCC members themselves. It is no mystery that bickering among the GCC countries has brought discussions surrounding the China-GCC free trade agreement to a standstill.


Mohammadbagher Forough believes that the U.S. will try to force players to pick sides, conceding, however, that "China is currently unparalleled in terms of what it can offer the region economically."

Despite mounting pressure, Gulf nations are bound to do their best to balance relations with both the U.S. and China. According to Ghiselli, there is little chance that they will break ranks with the security alliances and partnerships they have with the U.S. merely because of China, yet the logic of economic diversification is likely to see them drifting eastwards in the long run.

Stasa Salacanin

© 2018