Iran-China Oil Trade. Impact of the sanctions on the oil cooperation between Iran and China


Master's Thesis, 2018
39 Pages, Grade: 10

Excerpt

Table of contents

1 INTRODUCTION
1.1 Background to Iran-China Relations
1.1.1 Ancient Relationships between Iran and China
1.1.2 Iran-China Relationship in the Post-World-War II Period
1.2 PROBLEM STATEMENT
1.3 RESEARCH OBJECTIVE
1.3.1 General objective
1.3.2 Specific Objectives

2 LITERATURE REVIEW
2.1 Factors Likely to Undermine Iran-China Oil Cooperation
2.1.1 Mutual Suspicion between the two countries
2.1.2 Political Factors
2.1.3 Economic Benefits

3 METHODOLOGY
3.1 Research Design
3.2 Instrumentation
3.3 Data Collection
3.3.1 Iran’s Oil Trade Data Collection
3.4 Data Analysis
3.4.1 Analysis of Oil Exports to China
3.4.2 Analysis of Oil Exports to the World
3.4.3 Combined Analysis
3.5 Hypotheses
3.6 Concluding Remarks

4 DISCUSSIONS
4.1 Hypotheses Testing
4.2 Conclusion and Recommendations

5 References

Abstract

China and Iran have had a long history of economic, social, and military cooperation which spans over hundreds of years ago. This kind of cooperation has been preserved up to the present moment in which the relationship between the two countries is more directed to mutual economic benefits. While Iran benefits from military and technological support from China, China obtains oil to fuel its rapidly growing economy since the amount it produces on its own is not sufficient to run the economy. Ultimately, the relationship between the two countries has culminated into an oil cooperation in which China has been entrusted with a majority of oil exploration tenders in Iran especially during the period in which economic sanctions had been issued against Iran. China remained an ally to Iran despite calls from the Western economic giants for the abandonment of bilateral relations with Iran as a punishment for its refusal to abide by the nuclear deal initiated by the United States. As a result, the oil cooperation has deepened mainly because China has been the main partner to Iran in a period during which economic sanctions were hitting hard on the country’s economy. However, the sanctions were recently lifted, allowing Iran to go back to the global oil market. The main aim of this study was to assess the impact the lifting of the sanctions could have on the oil cooperation between Iran and China. The researcher implemented a quantitative approach in which three measures were performed; the value of Iran’s oil-related exports to China prior to and after the lifting of sanctions, the value of Iran’s exports to the entire world prior to and after the lifting of sanctions, and the value of Iran’s exports to China expressed as a percentage of the total value of Iran’s oil-related exports to the world. Findings illustrated that the value of Iran’s oil exports to China indicated a rising trend prior to the lifting of economic sanctions and a falling trend after lifting of the sanctions. On the other hand, Iran’s exports to the entire world illustrated a falling trend prior to the lifting of sanctions and a rising trend after lifting of sanctions. China’s falling trend indicates that bilateral relations between China and Iran are reducing since Iran is focusing more on the global oil market (rising trend for the oil exports to the world).

Keywords: Sanctions, oil cooperation, bilateral relations, global oil market.

1 INTRODUCTION

1.1 Background to Iran-China Relations

The main aim of this paper is to assess the sustainability of the Sino-Iranian oil cooperation in light of existing factors that tend to inhibit this relationship. This study will also address the essence of this relationship and the need to maintain it at all costs, hence develop recommendations for the sustainability of this cooperation. Basically, China and Iran are engaged in an oil cooperation which is mutually beneficial to both parties. However, the oil cooperation has been recently undermined by a number of factors such as mutual suspicion between the two parties (showing lack of trust in each other), competition in the global oil market, and political factors. The most notable political factor that almost left a dent in the oil cooperation was the sanctioning of Iran’s oil and gas sector by the western countries (The United States and The European Union). However, this sanctioning did not undermine the cooperation to a greater extent as expected but instead introduced a new pattern in the cooperation where China seemed to benefit maximally due to Iran’s low bargaining power in the global oil market. However, the lifting of the sanctions is a significant political factor that could also alter the oil cooperation pattern between the two countries. This thesis is dedicated to a clear analysis of the oil cooperation between the two countries, assessing the various possibilities likely to arise following the lifting of the sanctions by the Western governments.

1.1.1 Ancient Relationships between Iran and China

Iran-China relations have existed for an indefinitely long period of time. These relations extend to the ancient times of the Sassanids and Parthians, both of whom were originally from Iran (Dorraj and Currier, 2008; Abidi, 1981), had had earlier contacts with China. The two lands – which we recognize as China and Iran – were earlier connected to each other via the Silk Road (probably named from the ancient Silk Industry in China) (Abidi, 1981; Currier and Dorraj, 2010; Gill, 2007). It is these early relational links that have given rise to the modern ties observed between Tehran (Iran’s Capital city) and Beijing (China’s Capital city) (Mackenzie, 2010).

While existing literature on the history of China – and particularly its relationship with Parthia and other Asian lands – is unclear, a majority of historical records of China’s history illustrate that the beginning of the relationship between China and Iran was pioneered by one Zhang Qian, an ancient Chinese explorer. Zhang Qian made his initial visit to countries neighboring China, and this probably occurred during the Han Dynasty (126 B.C) (Dorraj and Currier, 2008). Following his visit, Zhang Qian made a detailed report regarding his visit with a special interest in Parthia (Mackenzie, 2010). This made Chinese merchants develop more trust in Parthia hence leading to the onset of China-Iran ties that would span for centuries. Commercial relations between China and other surrounding countries soon began to flourish as numerous Chinese missions were facilitated by the Silk Road throughout the first century BC (Currier and Dorraj, 2010). Since Parthians had also developed a positive attitude towards China, they were quite keen on maintaining the good relationship, hence they also sent their own missions to China via the same Silk road (Garver, 2011).

The relationship between Parthians and Chinese was deepened by the transmission of Buddhism from central Asia to China by the Parthians. Shih Kao, one of the noble Buddhist missionaries, was instrumental in the transmission of Buddhism to China where he established Buddhism temples and also became the very first missionary to successfully translate Buddhism scriptures to the Chinese language for the local Chinese population (Dorraj and Currier, 2008). The Sassanids, who are widely recognized as the predecessors of the Parthians, continued to maintain the good relationship between Parthia and China that had been established by the Parthians, and the frequency of trips by Sassanid ambassadors to China increased significantly (Mackenzie, 2010).

From the commercial perspective, both maritime and land trade was highly significant to both the Chinese and the Iranian Sassanid empires. As evidence to the successful maritime trade between China and Sassanid Empire, very many coins (Hong, 2014; Abidi, 1981) – used as a medium of exchange – have been excavated from the area in Southern China (Currier and Dorraj, 2010). Not only were the two empires connected by trade but also social ties which emerged as a result of continued interaction between the two diverse cultures. For instance, Garver (2011) and Chen (2011) point out that on many occasions, leaders of the Sassanid empire could send out the best of their talents - e.g. dancers and musicians – to China as a way of strengthening commercial and social ties (Dorraj and Currier, 2008; Gentry, 2005).

Trade among ancient empires was not as smooth as the modern international trade as it was marred by difficulties and risks. For instance, trade between the Chinese and Sassanid empires was initially successful but later came to be infiltrated with challenges particularly relating to frequent attacks from neighboring empires (Mackenzie, 2010). The famous Silk Road, which was the main trade facilitator between Sassanids and Chinese traders, passed through the Turkic empire (Dorraj and Currier, 2008). Chinese and Sassanid traders faced frequent attacks from Turkic advances hence they had to collaborate in protecting their trade route (Garver, 2011). There was an in-depth collaboration between the Chinese and Sassanid empires to repel the encroachment of the Turks. Other strategies that the two empires used to protect their trade caravans from possible attacks were through the construction of outposts in the areas defining borders to different empires (Currier and Dorraj, 2010).

The relationship between Sassanids and Chinese empires continued to deepen such that the Sassanids took refuge in China following a Muslim Arab invasion of Iran. In this invasion, many Iranians were displaced and they had to seek refuge in neighboring countries. Since the Sassanids had established deep connections with China, they saw China as the only safest place to escape to. The Sassanids were even entrusted with high titles in the Chinese courts, a sign of the deep trust that had developed between the two communities (Dorraj and Currier, 2008). Even though Persia had been invaded by Muslims who can be considered to have been strangers in a foreign land, the relationship between Persia and China continued to flourish. The Muslims who had invaded the region had to dance to the tune so as to remain economically sustainable (Mackenzie, 2010).

In this overview of the origin and development of the relationship between China and Iran, we find that the two communities have not begun their trade relations the other day. Instead, their relationships began a long time ago and have since been growing regardless of the challenges and difficulties that ancient communities faced in trading with each other (Gentry, 2005). The relationship grew so deep that there developed social and cultural connections between them. There was also an efficient military collaboration between the two communities aimed at stabilizing the security of Silk Road as the main facilitator of trade (Lin, Christina, 2010).

1.1.2 Iran-China Relationship in the Post-World-War II Period

As asserts, China and Iran have been shaping their relationships through cultural and social ties, a strategy which has led to efficient friendship and cooperation between them. From the contemporary perspective, the year 1971 saw the official establishment of diplomatic relationships between Iran and China. The relations have grown in various sectors such as energy, politics, and security.

The Iran-Iraq war which erupted in 1980 made the Chinese government balance between its energy interests in Iran and a call for peaceful resolution of the conflict between the two warring countries. China acted as a custodian for peace, though there are claims of the Chinese government taking advantage of the war between the two countries to supply weaponry and military equipment to both countries. China further refused to vote for the United Nations arms embargo against Iran. Critics of the Chinese government’s decision to support Iran despite its engagement in an internationally prohibited nuclear deal cite the country’s too much interest in economic value rather than social and environmental sustainability (Shen, 2006).

Iran was an important source of market for China’s arms and military equipment. The arms embargo against Iran implied that the country could have a limited access to firearms and military equipment beyond its borders, hence China would lose a substantial share of its market for arms and military equipment. Information from other proponents of China’s decision to remain a strong ally of Iran claims that country officially began selling firearms and other military equipment to Iran after the end of the 8-year war between Iran and Iraq. However, China cited the need for peaceful reconciliation between the United States and Iran and pledged to continue its cooperation with Iran regardless of the implications of doing so. Furthermore, China refused to vote on a US-sponsored motion of issuing economic sanctions against Iran’s oil and natural gas sector.

Again, critics of China’s decision not to support the economic sanctions against Iran have been attributed to China’s value for economic output rather than social sustainability (Downs, 2011). Careful observation of the punishments issued by the international community on Iran seemed to affect China indirectly, hence its negative reactions to any sanctions and embargos against Iran. Just like the arms embargo would affect China’s trade relationship with Iran, issuing of economic sanctions on the oil and natural gas sector would further destroy the relationship that has existed for centuries between the two countries. If China would have supported the economic sanctions against Iran, it would have implied that the country could no longer source oil and natural gas from Iran in similar amounts like it does. This would, in turn, have negative impacts on China’s economy. China is a rapidly growing economy hence it requires a significant amount of fuel to sustain the rapid growth (Jakobson & Daojiong, 2006).

At the onset of the second-last decade in the 20th century, Iran changed its foreign slogan by adopting the ‘No-East-Nor-West’ strategy, which was directed at defying both the United States and the Soviet Union. This slogan blended perfectly well with the Chinese’ governments foreign policy which embraces a unified global political agenda (Clarke, 2003). The two countries applied the themes of Third World Alliance and anti-imperialism to forge a deeper energy-security alliance. Due to the increased level of cooperation and friendly relations between the two countries, the total value of trade between China and Iran increased from approximately $630 million to approximately $1.63 billion. Additionally, there were increased cultural relations – in terms of student scholarships, student exchanges, research programs, artistic explorations, and tourism – between the two countries (Clarke, 2003).

1.2 PROBLEM STATEMENT

China and Iran have a long history of economic, social and political relations spanning over hundreds of years ago. This relationship has survived to this modern day due to the strategic value each of the two countries acquires from the relationship. This cooperation has intensified in the post-world war II period particularly due to the China’s high energy demands which can be solved by Iran, and Iran’s military demands which can be sorted out by China. As a result, the two countries have engaged in an oil cooperation in which Iran entrusts China with its oil reserves and China, in turn, assists Iran with military weaponry and expertise. However, one key area of confusion that is portrayed in this cooperation concerns the issuance of economic sanctions against Iran and China insistence in Iran’s oil and gas sector regardless of the International Community’s harsh stance and warning against other countries cooperating with Iran. While the period between 1979 and 2016 has been a period of constant economic sanctions against Iran, the sanctions were toughened in the wake of the year 2011. China began its official oil cooperation with Iran in early 2000. This implies that the oil cooperation has been implemented in a period during which Iran had limited bargaining power in the global market as well as a limited share of the same as China was the only country with which Iran was doing oil and gas business with. Since the economic sanctions against Iran have been lifted, it is not quite clear as to how the Sino-Iranian oil cooperation could be affected. On the one hand, Iran could go global and cut short its over-dependence on China, hence breaking or reducing the intensity of its ties with China. On the other hand, Iran could hold on to China due to its ability to its decision of standing with Iran despite all other G20 nations refusing to do business with Iran. Furthermore, Iran might be afraid of trusting other countries such that in case of other economic sanctions, China would still be a reliable partner. However, all these are just mere speculations due to the lack of clarity concerning the fate of Sino-Iranian oil cooperation. Hence, investors wishing to invest their millions into Iranian gas and oil sector do not have a clear road-map of what the future holds regarding the Sino-Iranian cooperation. It is, therefore, necessary to conduct a research in this direction and find out the possible impact of the lifting of economic sanctions against Iran on the Sino-Iranian relationship.

1.3 RESEARCH OBJECTIVE

1.3.1 General objective

To find out the effect of the lifting of sanctions against Iran on the oil cooperation between Iran and China.

1.3.2 Specific Objectives

a. To compare the value/amount of China’s crude oil imports from Iran prior to and after lifting of sanctions.
b. To compare the value of crude oil exports to the global market from Iran prior to and after lifting of sanctions.
c. To compare the value of Iran’s crude oil exports to China and to other countries prior to and after the lifting of the economic sanctions against Iran.

2 LITERATURE REVIEW

2.1 Factors Likely to Undermine Iran-China Oil Cooperation

2.1.1 Mutual Suspicion between the two countries

Even though China and Iran seem to have a good trade relationship, there are also cases of mutual suspicion in both countries. Both countries recognize that their relationship is of convenience. Iran has become suspicious of China’s trade model. China completely takes over a country – as there have been cases from African developing nations like Kenya – and makes the country completely dependent on it. China also strives to separate the country completely from the West so that it remains the only economic power reaping the benefits of trading with the country. Iran does not wish to become fully dependent on China on matters regarding its economic operations. Iran wishes for an autonomous relationship with China so that it does not rich a time when Iran will have to comply with China’s every wish (Morris, 2012). This form of suspicion is likely to undermine future trade with China as Iran will need to resist some of China’s wishes to portray its independence. For instance, Iran recently canceled an oil field development contract worth $2.5 billion with the China National Petroleum Corporation (Dorraj, 2013).

China, on the other hand, had previously remained suspicious of taking part in trade with Iran due to the economic sanctions targeting the oil and natural gas industry of Iran. Economic sanctions were placed on Iran principally due to its refusal to comply with the internationally acceptable nuclear regulations and the nuclear agreement signed with the United States (Morris, 2012). China was suspicious because it was not just engaging itself in business with Iran but rather, it was engaging in business entailing an industry sector which has received the placement of economic sanctions; the oil and natural gas industry of Iran (Shen, 2006). This was a high-risk business which could have had far-reaching consequences on China’s economy. First, China could face a snapback of economic sanctions simply because it would be portrayed in the international community as a country going against the international community by enhancing a regime that has refused to comply with terms in the nuclear agreement. This could even involve placement of sanctions on all energy products from China, a step that could easily cripple China’s economy in an instant (Xuetang, 2006).

The idea of China remaining the only economic power which not only failed to support the sanctioning of Iran but was also deeply involved in the sanctioned oil and gas industry in Iran can be regarded as a strategic move on the part of China in two perspectives (Xuetang, 2006). Firsts, China wanted to take advantage of the oil and gas exploration opportunity in Iran since most of the Western countries which had been pursuant competitors had lifted their subsidiaries from Iran and cut short any oil and gas deals they signed on a contractual basis with the government of Iran. China, however, remained in the country. Second, China wanted to win the trust of Iranians and separate the state completely from the West. In the long run, China remains the only economic power operating in Iran (Dorraj, 2013).

China wishes that the oil-cooperation between itself and Iran grows to higher levels. China, therefore, could choose to invest in Iran’s oil and natural gas industry fully and permanently in anticipation that it will have a large share of Iran’s oil sales globally since the sanctions have been lifted. However, it is suspicious of the possibility that Iran’s economic sanctions could be re-issued due to Trump administration threats which point towards not recognizing the lifted economic sanctions against the country. Hence, fully investing in Iran’s oil and natural gas industry sometimes proves tricky for China (Clarke, 2003).

China is also aware of the political instability in Iran with the governments of Iran lacking absolute control of their citizens and neighboring countries like China itself. These are the political factors that present investment in Iran’s oil and natural gas industry as a highly risky business for China. Lack of control over Iran’s citizens was displayed in a recent attempt by well-organized revolutionary organizations to overthrow Iran’s government following the successful overthrow of governments in Egypt and Tunisia (Afrasiabi, 2004).

However, despite all these risks, China has gone ahead with the construction of the pipeline from Tehran to Gwadar in Pakistan. Gwadar is a strategic point of transportation from which oil will easily be transported by ship to China’s capital Beijing. This one among the many strategies that China has put in place to grow its oil and gas cooperation with Iran.

2.1.2 Political Factors

2.1.2.1 ECONOMIC SANCTIONS AGAINST IRANS OIL AND GAS SECTOR

The main reasons for issuing sanctions against Iran’s oil and natural gas sector was the country’s persistence in the international prohibited nuclear activities. Iran was initially issued with sanctions in 1979 for the same reason. After 1979 sanctions, the country has experienced a series of sanctions from the United States. The sanctions were aimed at gradually kill Iran’s engagement in prohibited nuclear activities (Shen, 2006). The oil and gas sector was strategically chosen for sanctioning because it forms the backbone of Iran’s economy. The implication of these sanctions, therefore, was to use economic means to either stop Iran from continuing with its nuclear deal or to address the international community over its continued engagement in the nuclear deal and the subsequent defiance of calls from the international community requiring the country to address nuclear concerns (Shen, 2006). While the United States has issued a series of sanctions against Iran for quite a long period of time, the toughest sanctions were issued in the year 2011. The European Union also issued extremely tough sanctions against Iran in the year 2012 hence significantly affecting Iran’s economy (Clarke, 2003).

US and EU sanctions against Iran had far-reaching consequences on the economy of Iran. A report released by the World Bank Group illustrates that prior to the tightening of the 2011 economic sanctions against Iran’s gas and oil industry, the country used to export more than three million barrels of crude oil per day. The main importers of Iran’s crude oil included Japan, Turkey, India, South Korea, and China. World Bank Statistics further illustrate that one year following the 2011 tightening of economic sanctions against Iran, the country’s oil production capacity significantly reduced from approximately 3 million barrels a day to less than one million barrels a day (between July 2011 and July 2012). Towards the end of the year 2012, Iran’s oil export capacity significantly reduced probably due to the effect of European Union boycott of Iran’s oil and gas sector. European companies which had invested in Iran’s oil and gas sector were adamantly warned not to continue their engagements with Iran lest they too face sanctions against their products (Morris, 2012). This led to many European countries lifting the contracts they had signed with the Iranian government. The United States also exerted a lot of pressure on Asian countries such as Japan and South Korea to significantly limit the volume of crude oil they imported from Iran (Dorraj, 2013).

illustration not visible in this excerpt

Figure 1: The Impact of US and EU sanctions on Iran's Oil and Gas Industry. (Source: World Bank, 2015)

The table below illustrates Iran’s oil production and exportation trend between 1995 and 2010, just before the United States and the European Union issued their toughest sanctions against Iran. Trends illustrate that the country has mainly been exporting its oil to Asian countries. In fact, the volume of oil export to Asian countries has increased from 38.7% in 1995 to 60.8% in 2010.

[...]

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Details

Title
Iran-China Oil Trade. Impact of the sanctions on the oil cooperation between Iran and China
Course
Thesis
Grade
10
Author
Year
2018
Pages
39
Catalog Number
V416190
ISBN (eBook)
9783668676053
ISBN (Book)
9783668676060
File size
1975 KB
Language
English
Tags
Thesis, dissertation, International Trade, International trade relations oil trade, Sanctions, oil cooperation, bilateral relations, global oil market
Quote paper
Bachelor James Muthanga (Author), 2018, Iran-China Oil Trade. Impact of the sanctions on the oil cooperation between Iran and China, Munich, GRIN Verlag, https://www.grin.com/document/416190

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