China and Iran after the U.S. Withdrawal from the JCPOA

China and Iran after the U.S. Withdrawal from the JCPOA
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With the US withdrawal from the JCPOA, it seems that all paths to the survival of this agreement lead to Brussels. Beijing, however, as Iran's first trading partner, a top importer of oil, a major foreign investor, and a key party for the continuation of peaceful nuclear cooperation still pursues a low-profile diplomacy when it comes to the Iran Nuclear Deal. How will the US withdrawal from the JCPOA influence Iran-China relations?

The first factor pointing to the attitude of China toward the JCPOA and relations with Iran, in technical and political terms, is the cooperation with Iran for the reconstruction of the Arak reactor. According to the JCPOA, the P5+1 is required to help Iran reconstruct and operate this reactor. China has undertaken a key role in redesigning and modernizing the Arak reactor within the framework of the agreement. Consequently, in April 2017, Iran and China signed a 200-page agreement in Vienna on the reconstruction of the Arak reactor. On the other hand, the United States is responsible for technical support in its redesigning and modernization. However, after the US withdrawal, China faces new political and technical challenges in working with Iran. China had once ended its nuclear cooperation with Iran in the 1990s following US pressure. Its decision to withdraw or continue to work with Iran under recent conditions is a determining factor regarding its attitude toward the JCPOA and relations with Iran.

Furthermore, in a broader perspective, the scope of changes in Iran-China relations under the new circumstances strongly depends on the outcome of talks between Iran and the EU. In case Iran and the European Union reach an agreement to continue with the deal, China will also help uphold it. As a result, Angela Merkel tried to align China with European efforts to save the Iran deal in her recent visit to Beijing. However, if the negotiations fail and the deal falls through, the relations between Iran and China will become even more complicated, and likely face severe constraints.

In economic terms, major Chinese corporations, similar to their European counterparts, operate in different sectors of the global value chain (GVC) in today's international political economy and are dependent on this chain. US sanctions may impose heavy costs on these companies. For instance, with Total Co. halting its activity in the 4.8 billion dollar project for the development of Phase 11 South Pars gas field (the most important investment agreement since the deal was put in place), CNPC, which owns 30% of the project, will face new challenges in working with Iran. Chinese companies operating in global markets are not likely to have an extensive presence in the Iranian market when the sanctions are re-imposed. Consequently, CNPC has not yet expressed interest to replace Total in this project, even though it could do so according to the agreement. With large Chinese companies limiting their activity, small and medium-sized enterprises, with limited activity and little interest in the US or the global financial system, will likely play a key role in shaping commercial and financial transactions between the two countries.

Iran's 37 billion dollar trade with China amounts to a mere 0.80% of China's total foreign trade, which, even though a small figure, is of crucial importance for Iran. Crude oil is the most important commodity in trade between the two countries. Thus, China continuing to buy Iran's oil can be seen as the critical factor determining China's attitude toward the JCPOA minus the US, and its reaction to US pressure. Nearly 80% of Iran's oil is exported to Asian markets, with China being the top importer. Since India, Japan, and South Korea (as other major importers of Iranian oil) are regarded as US allies, they will be aligned with greater US pressure sooner than China does. It is likely that China will be the last country to reduce its purchase of Iranian oil. Of course, Beijing's decision regarding Iranian oil will also depend on developments in the global energy market. The US withdrawal can have two different implications for the oil market. The first one is that Iran's oil sales will not face significant reduction since the US is not likely to simultaneously target the oil export of both Venezuela and Iran, which would upset the global oil market. On the other hand, Saudi Arabia and Russia may increase oil production and replace Iran in the global and Chinese oil markets. Another important development is the use of the Chinese yuan for purchasing oil in the Shanghai International Energy Exchange, known as petro-yuan. This may help China continue to purchase oil from Iran. Europe's decision, as another key importer of Iranian oil, will also influence China's decision. The likely solutions of Brussels for continuing to buy Iran's oil can directly influence Beijing’s oil policy regarding Iran.

However, finding innovative solutions for the continuation of banking transactions between these two countries will pose more challenges compared to other sectors. The dominance of the United States over the global financial system, and Europe and China's dependence on this system can limit their freedom of action for dealing with Iran. Again, European Union solutions will have strong effects on China's calculations and policy.

With the US's withdrawal from the Iran Deal, the expansion of Iranian relations with other parties of the JCPOA, including China, remains in a cloud of doubt. Therefore, it is hard to predict long-term developments in Iran relations with the E3, China, and Russia under the current circumstances. In these doubtful times, President Rouhani will visit China to attend the Shanghai Cooperation Organization (SCO) Summit in Qingdao on June 9 - 10. The outcomes of his negotiations with President Xi Jinping will have a significant influence on the prospect of Iran-China relations and continued cooperation within the framework of the JCPOA minus the US.

The views expressed in this article are the authors’ own and do not necessarily reflect IRAM’s editorial policy.