Final agreement with Iran would boost trade but hurt China

Final agreement with Iran would boost trade but hurt China

With the introduction of a comprehensive agreement and the thawing of U.S-Iranian relations, a new era of regional dynamics will be ushered in. Some of these dynamics could adversely impact Chinese national interests in the Persian Gulf and beyond.

Changing regional dynamics

China has much to gain should P5+1 negotiations succeed. Sourcing upwards of 50% of its oil and natural gas from the Middle-East, an end to the Iranian nuclear crisis would significantly bolster Beijing’s energy security. Furthermore, as punitive economic sanctions against the regime are repealed, Chinese firms would be ideally positioned to exploit new opportunities within the Iranian market.

Sino-Iranian relations have allowed Beijing to achieve two broad goals; firstly, despite the high-level of risk, China has successfully secured a relatively secure source of oil and natural gas. Secondly, Beijing’s support for Tehran’s civil nuclear ambitions has effectively projected a clear challenge to U.S. global hegemony. The status quo has thus far played into Beijing’s favour.

However, with the prospect of a deal on Iran’s nuclear program on the horizon, China will likely have to reevaluate how best to maintain her interests in the region.

Competition from the West

Under sanctions, Iran had little choice but to grant Chinese oil companies relatively unfettered access to its vast reserves of oil and natural gas. However, China’s privileged status is likely to be compromised should sanctions ease. U.S. and European oil companies have already demonstrated great interest in re-establishing a presence in Iran. Furthermore, the Iranian government has expressed dissatisfaction with China over cost, development delays and quality issues.

Conversely, U.S. and European oil companies can offer Iran’s oil industry a level of professionalism and accumulated expertise thus far unmatched by Chinese counterparts. Iran’s oil ministry may therefore be inclined to sideline Chinese proposals in favour of those tendered by U.S. and European firms.

In fact, such a scenario may have already come to fruition. Since the initiation of the interim agreement in November 2013, Tehran has become increasingly firm vis-à-vis its dealings with Beijing. This new dynamic was shown by Iran’s revocation of a $2.5 billion contract with the China National Petroleum Corporation.

As U.S. and European firms enter the Iranian market, Chinese oil companies will be forced to adhere more strictly to contractual obligations, and improve quality controls. Furthermore, China will have to address issues of graft and chronic corruption within the oil industry. Failure to adapt may result in the attrition of China’s ability to secure its economic prominence in Iran.

China’s strategic loss

The easing of U.S-Iranian tension may weaken China’s strategic position in the Persian Gulf. Currently, the oil rich states of Iraq and the GCC (Cooperation Council for the Arab States of the Gulf) are firmly within the western sphere of influence. In China’s purview, Iran represented the final bastion against America’s absolute regional hegemony.

Over the past decade China’s relationship with Iran has been effective in counterbalancing U.S. presence in the region. A détente in U.S-Iranian relations would very likely erode Beijing’s clout over Tehran. Some within the Chinese government believe that should the United States cultivate relations with Iran, Beijing would lose its Middle East stronghold. Washington would therefore ostensibly win control of the Middle-East and Eurasia, with China relegated to the periphery.

The Iranian government would thus have the ability leverage its relationship with the United States over China. China would no longer be in the position to dictate terms to the regime in Tehran.

U.S. Asia-Pacific rebalance

Furthermore, should the Iran nuclear crisis be resolved, China could expect to see a significant eastward shift in Washington’s strategic focus. A stable Middle-East would allow the United States to allocate resources and attention towards the Asia Pacific. China would likely have to contend with a more robust U.S. presence in the region at a faster pace than what is already happening. This comes at a time when Beijing is at loggerheads with Tokyo, Vietnam and Manila over sensitive territorial disputes.

The regional stability derived from a comprehensive agreement on Iran’s nuclear program will on a whole benefit China and Chinese national interests. Based upon a new paradigm however, Beijing must be careful to formulate a policies designed to mitigate the side effects of improved US-Iranian relations.

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