China-US trade war impact on the Middle East

Middle Eastern countries, a close trade partners of both sides in the spat have found themselves caught in the middle of a trade war that will certainly have an impact on their economies. 

Iran - the main battleground

Many predict that Iran will become the focal point of the trade war. Since President Donald Trump withdrew the United States from the Iran nuclear deal in May, Iran has been under immense pressure from the American administration. 

The US goal of completely blocking Iran's crude export has not only seriously jeopardised Iran's survival but also highly threatens Chinese supplies of crude. 

While Europeans have decreased the purchase of Iranian oil and their companies are slowly but surely pulling out from Iran, frightened of possible retaliation measures in the case of ignoring the US sanctions, China, already the biggest buyer of Iranian oil, is not expected to heed to US demands. 

China imported around 718,000 barrels a day on average from Iran between January and May of this year, what is equivalent to more than a quarter of Iran's oil exports.

According to Jonathan Fulton, an assistant professor of political science at Zayed University, in Abu Dhabi, and author of the book China's Relations with the Gulf Monarchies, this unilateral upending of the Joint Comprehensive Plan of Action (JCPOA) also known as the Iran nuclear deal, has major strategic ramifications for a lot of important US allies and competitors.

Read also: Arab states and nuclear energy: Necessity or geopolitical status symbol?

The seemingly haphazard roll-out of the decision leads to more questions than answers. 

"Until then, expect China to continue deepening its economic position in Iran, as we've seen with CNPCs likely majority stake in the South Pars gas field at the expense of France's Total," he told The New Arab.

Tristan Kenderdine, research director at Future Risk, leading a group of specialised analysts providing commissioned research in political risk and economic geography with a focus on China, said that the US cannot possibly halt Iranian crude oil exports to China.

China will also be the buy-side lifeblood of the Iranian petrochemical industry if the US decides to hit even harder.

But again, "I think the US has used up, or more like squandered most of its political capital here. China has no incentive to follow US sanctions in the Middle East while the US is determined to impose a belligerent trade policy on it in the Pacific," he told The New Arab.

Can the US punish China?

Whether and how US will try to punish China for deepening ties with Iran and not following the US suit remains to be seen.

Fulton noted that it will be hard for the US to punish China and China alone on Iranian oil imports – India is a major importer as well and as a member of the Quad Washington has to consider New Delhi's interests vis-à-vis Iran. 

A similar situation has happened before in the first round of sanctions before the JCPOA, recalls François Godement Director of the Asia Programme at European Council on Foreign Relations.

The US did not require countries other than allies to stop oil purchases. China, however, refrained from exploitation of Iran's fields, much to the chagrin of Tehran. 

He thinks that the US needs China above all on the issue of North Korea's de-nuclearisation. Therefore, he thinks that "sanctions against Chinese petro companies and banks are possible but more difficult than with allies. After all, China has already retaliated by lightening sanctions on North Korea."  

Besides oil, Iran holds a key position in China's Belt and Road Initiative or the Silk Road Economic Belt and the 21st-century Maritime Silk Road.

The initiative focuses on connectivity and cooperation between China and Eurasian countries. China is Iran's number one trading partner, and China has already demonstrated its commitment to strengthening its position in Iran.

Fulton recalled that last year, for example, China's CITIC extended a $10 billion line of credit to Iranian banks to finance infrastructure projects. 

Interestingly, the credit line was in Chinese RMB and Euro, which helped them get around US sanctions. So, Beijing has already indicated that it's willing and able to work around pressure from Washington.

As a matter of fact, some believe that Iranian oil sanctions could give China leverage in a trade war with the US.

Read also: Trump sanctions bite as Europe-Iran flights grounded

But Victoria (Xiaoli) Guo from the Centre for Arab and Islamic Studies at the Australian National University, believes that while the gap between China and the US is narrowing, it does not mean that China would like to contest with the US for the sphere of influence in the Middle East.

Instead, China prefers win-win relations with any other countries, including the US and Iran. So, according to her, it is hard to say that China would use one against the other, in other words, use the Iranian oil sanction leverage the negotiations with the US. 

Nevertheless, Kenderdine noticed that the US as a developed economy is now regressing to trade protection measures, and China is attempting to seize the ascendency by proclaiming itself open to trade with Belt and Road partners, bringing us to the conclusion that the US loses a lot of ground.

Belt and Road is China's trade policy, it is a trading bloc to counter the TPP which was supposed to be the US Pacific trade bloc which excluded and contained China.

"It remains to be seen whether BRI economies can really replace China's potential Pacific trade, but even as a bluff, they are going for it. It will become increasingly difficult for the US to say that any country should not be allowed to trade with any other country after their schizophrenic trade policy in East Asia over the past 10 years," he added.

Whether and how US will try to punish China for deepening ties with Iran and not following the US suit remains to be seen

Sino-Arab interdependence 

China's growing energy needs have largely contributed to the Chinese push to the region, creating the strong interdependence between the Middle East and China.

Beside Tehran, Beijing has forged ever closer ties with the GCC block of states, as well. At the same time, China has become an important trade partner for many of the countries in the region, mainly as a supplier of goods.

China's three largest trade partners in the Middle East are the three largest countries by population: Egypt, Saudi Arabia, and Iran.

In Egypt - a country with a long history through the Cold War of allegiance switching, Kenderdine, added, China has a real opportunity to secure a stable trade partner and a foothold in the Mediterranean, and a support base for its Red Sea trade strategy.

For him, "Oman looks a much more strategic investment opportunity for China than Saudi Arabia. And yet China has pledged industrial capacity transfers to Saudi Arabia in civil nuclear energy equipment, docking with Saudi's Vision 2030 strategy."  

Indeed, China overtook the United States as Saudi Arabia's largest trading partner in 2017, making it the key trade leader with both Iran and Saudi Arabia. In 2017, Saudi Arabia's King Salman signed $65 billion worth of memorandums of understanding in Beijing, and the two countries began implementing agreements in petrochemical, technology, and other sectors.

Trade war impact on the GCC states

Many wonder whether this fruitful cooperation between China and the Arab Gulf states will be affected due to an ongoing trade war.

There is no doubt that in the long term, China's oil imports from the region, may decrease as the consequence of falling industrial activity and lower demand for oil in China as the result of the trade war. This could have very negative effects on shaky Gulf economies which are still highly dependent on oil exports.

Moreover, any volatility in oil could dampen confidence among investors and affect the regional markets. 

In the worst-case scenario, the unpredictable Washington administration may even try to push Gulf nations to pick a side in their spat with Beijing.  

However, François Godement, expresses serious doubts about this possibility, stating that distancing China from Iran is a key US objective.

According to Fulton, the US may try to play on this card, but the Chinese energy market is too important for GCC states. 

"I'd expect the GCC will continue to intensify their relations with China, as seen in the recent China-UAE comprehensive strategic partnership, and the China-Arab States Cooperation Forum held in Beijing this summer. The Gulf states are diversifying their relationships with external powers, and I don't think US pressure can change that," he continued. 

Let us not forget that China has pledged a dedicated International Production Capacity Cooperation fund for the Middle East which should facilitate investment in industrial capacity, especially after the institutional space is opened under the GCC-China free trade agreement. This would provide an additional boost to GCC countries which have been steadily diversifying their oil-dependent economies.  

Kenderdine thus believes that it will be difficult for the United States to argue against an open trade regime as their institutional legitimacy is being eroded by their abandonment of the global trading regime. After all, Gulf states have their own interests and considerable agency in pursuing them. But, the current international dynamic isn't what we saw in the Cold War - the Gulf states don't have to choose one side or the other, Fulton added.  

He suspects that officials around the Gulf would be looking at ways to maximise their leverage in an environment where the world's two biggest powers are competing with each other.

Stasa Salacanin is a freelance journalist who has written extensively on Middle Eastern affairs, trade and political relations, Syria and Yemen, terrorism and defence.