(Persia Digset) - Matt Lavietes writes in CNBC that since President Donald Trump withdrew the United States from the Iran nuclear deal in May, Iran has been pleading with other nations to keep its oil-dependent economy alive. The need for economic ties to the rest of the world increased when the Trump administration announced planned sanctions on Iranian oil exports starting in November. For Iran one nation matters more than any other to its oil economy, and it is also Trump's largest global trade rival: China.
European companies have been winding down their purchases of Iranian oil, and the threat of sanctions on Iranian business has pushed out banks, many of which had paid severe fines for sanction violations in the past. But China, already the biggest buyer of Iranian oil, is not expected to heed U.S. demands. In fact, the Iranian oil sanctions could give China leverage in stalled trade negotiations with the United States.
“Now that the trade relationship is in jeopardy, why would they do that?” Derek Scissors, resident scholar of the American Enterprise Institute, said of China's pulling back on purchases of Iranian oil. “If we tell the Chinese, ‘Oh, we’ll cancel our pending tariffs as long as you stick to the Iran sanctions,’ they’ll do it in a second.”
On Monday a war of words between the United States and Iran erupted, with Trump and his top national security advisor John Bolton threatening Iran. The harsh White House words apparently came in response to recent suggestions from Iran that it could close the Strait of Hormuz, a critical seaway for global oil shipments. The U.S. Energy Information Administration states that by volume of oil transit, the strait is the busiest global choke point for oil. In 2016, data from the EIA showed total flows through the channel reached a record high of 18.5 million barrels a day. China, Japan, India, South Korea and Singapore are the largest destinations for oil moving through the strait.
On Tuesday Iran’s foreign ministry reportedly said it would implement countermeasures against the United States if it tries to block its oil exports. "If America wants to take a serious step in this direction, it will definitely be met with a reaction and equal countermeasures from Iran," Foreign Ministry spokesman Bahram Qassemi was quoted as saying.
China, the world’s top crude-oil buyer, imported around 718,000 barrels a day on average from Iran between January and May of this year, according to official Chinese customs data — equivalent to more than a quarter of Iran’s oil exports. China’s increased its imports of Iranian oil by 9.3 percent during the same time period from the year prior and is not expected to slow down purchases anytime soon. The United States expects that China will buy even more oil once the U.S. sanctions take place in early November, as reported recently by The Wall Street Journal.
How China historically has responded to US sanctions
In refusing to comply with U.S. sanctions, the world’s second-largest economy will dull the sanctions’ fiscal impact, but China’s current position on Iranian oil sanctions is consistent with its historical approach.
“The Chinese position in general has been that they will honor U.N. sanctions and they are reluctant to recede to bilateral sanctions,” said senior fellow David Dollar of The John L. Thornton China Center at the Brookings Institution. Dollar said the Chinese have been averse to U.S. sanctions — bilateral and unilateral — in the past, usually choosing their own business interests over cooperation.
However, under the Obama administration, the United States successfully negotiated with China to reduce their investments in Iranian oil, following bilateral sanctions. Dollar suggests that during that time period, China valued mutual interests with the United States, including climate change, security concerns and the two nations' strong economic ties. Conversely, Trump withdrew the United States from the Paris Climate Agreement and has strained economic ties between the two countries with the imposition of $34 billion tariffs on Chinese exports to the United States. More recently, Trump has threatened to impose sanctions on all of China's exports to the United States. Experts say these moves have weakened the U.S. position when it comes to any Chinese collaboration on Iranian oil sanctions.
The evolving trade war has taken a toll on China’s stock market this year. Among the 32 exchange-traded funds that track broad China equities indexes and specific sectors of the emerging economy, only three have generated positive performance this year, including an energy ETF, a health-care ETF and an ETF that tracks Chinese stocks listed in the United States.
The nuclear deal had lifted economic restrictions on Iran, allowing its oil industry to rebound. Iran is the third-largest producer in the 15-member OPEC group. In June 2018 it produced 3.8 million barrels of oil a day, OPEC data shows.
Under any circumstances, it’s a bit of an uphill fight to get China to abide by U.S. sanctions, but not impossible. In this current situation, it’s hard to see the U.S. getting China to cooperate,” Dollar said. “If I were the Chinese, I would bring in these trade issues,” he added. “It’s not in China’s narrow economic interest to stop buying oil from Iran.”
Speaking to the House Financial Services Committee on July 12, U.S. Treasury Secretary Steven Mnuchin claimed that the Trump administration has the “intent to enforce sanctions on Iran-related oil against everybody, including China.”
At a press conference last Monday, Secretary of State Mike Pompeo announced that he has held personal discussions with top officials from many of those countries, including China, to ensure that the U.S. economic sanctions work. "They have a commitment; they understand where we're headed," Pompeo said of countries that the Trump administration has asked to cut off economic ties with Iran. "What they've asked us to do is review how we get there and the timeline for that."
Growing economic ties between China and Iran
But recent history shows that Beijing intends to intensify its trade relationship with Tehran, not lessen it.
Shortly after the Trump administration announced that it would reinstate sanctions, Iran’s Foreign Minister Javad Zarif met with foreign leaders for support. His first visit was to Beijing. Following the visit, the Chinese state-run news agency Xinhua announced the launch of a new rail connection between Bayannur, in China’s Inner Mongolian Autonomous Region, and Iran. The new train line will expedite travel times by 20 days in comparison to cargo shipments, as a part of Beijing’s $124 billion Belt and Road initiative, according to the Xinhua’s announcement. The broader initiative aims to build new infrastructure between China and Europe, financing billions of dollars' worth of Chinese-led projects in Iran to build railways, highways, ports and power plants, greatly expanding trade.
Last week, when asked if China would cooperate with U.S. sanctions, Foreign Ministry spokesman Lu Kang told reporters, “China is always opposed to unilateral sanctions and long-arm jurisdiction.”
Analysts predict that the oil market will become increasingly unpredictable over the next several months. In recent trading, oil prices have seesawed as the potential impact of a trade war on global demand, and Iranian sanctions on supply have created a short-term stalemate. “The market will struggle for the next two months until the drop in Iranian exports materializes,” analysts at Energy Aspects said in a research note published Monday.
Last Wednesday, White House National Economic Council Director Larry Kudlow said that while talks to strike a deal with Chinese officials have been positive, President Xi refuses to compromise over Beijing’s trade policies.
“I don’t think President Xi at the moment has any intention of following through on the discussion we made, and I think the president is so dissatisfied with China on these so-called talks that he is keeping the pressure on — and I support that,” Kudlow said in an interview at CNBC's Delivering Alpha conference in New York.
China’s foreign ministry spokesperson, Hua Chunying, hit back during a scheduled briefing in Beijing last Thursday, saying, "The relevant United States official unexpectedly distorted the facts and made bogus accusations [that are] shocking and beyond imagination.” She added, “The United States' flip-flopping and promise-breaking is recognized globally."
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