International Policy Digest

Xinhua
World News /25 Jul 2020
07.25.20

China-Iran Deal Showcases Challenges for the U.S.

China and Iran are finalizing an economic and security pact that would pave the way for billions of dollars in investment in the sanctions-hit Persian Gulf country, according to the New York Times. The deal exchanges massive Chinese investments in Iran’s banking, infrastructure, and telecommunications sectors for discounted oil supplies over a 25-year period.

The agreement will face some pushback in the Iranian parliament. And should it be ratified, it may not realize its full promise, as is common with pacts of such size.

Nonetheless, the potential agreement showcases the capabilities of “China, Inc.” not just as a vertically integrated provider of regime survival solutions, but also as a vital partner meeting legitimate needs in “non-rogue” countries.

Through China’s unique state capitalism and massive population, China, Inc. has the capability to import a partner country’s energy or food commodities; construct and finance its infrastructure, potentially linking to Chinese logistics and supply chain networks; and provide the technology and weaponry necessary to monitor, deter, and punish adversaries, both foreign and domestic. Through its permanent member status on the UN Security Council, China can also use its veto power to provide cover for friends and allies.

These capabilities mirror those of the Soviet Union, but today’s China challenge is far greater, in large part due to its economic reach.

China is the world’s largest trading country. It’s the top trade partner of over 100 countries, most of which run a trade deficit with it. While China is the “factory of the world,” it is also the world’s largest importer of select commodities, such as oil, gas, cotton, and soybeans.

But as the Chinese economy matures, its trade profile may change, shifting from exports of apparel and household appliances to artificial intelligence and other next-generation technologies, and driven by rising consumerism. The rise of the Chinese tourist and luxury good consumer provides a glimpse of the world ahead. According to a McKinsey study, Chinese consumers accounted for roughly a third of global spending on luxury goods in 2018 and will drive the vast majority of growth in luxury spending through 2025.

China’s infrastructure and manufacturing boom has led to the creation of engineering, finance, and logistics giants. The world’s top five construction services companies are Chinese state-owned enterprises. Seven of the world’s top 10 container ports are Chinese. And it’s these state-owned companies that are the main vehicles for Beijing’s effort to drive the generation of globalization through the Belt and Road Initiative.

So far, the BRI has been a mixed bag—far from the game-changer China has portrayed it to be. But Iran may have all the factors necessary to be a BRI success story. It could emerge as the crown jewel of the Belt and Road—which, at its heart, is an initiative centering on the Eurasian and Indian Ocean regions.

Not only does Iran have a highly educated population, including world-class engineers, but it also has massive reserves of cheap energy and a highly strategic location. Indeed, Iran is positioned to be a Eurasian bridge state, connecting Europe, western China, and the Indian Ocean region through its touchpoints with Anatolia, the Caucuses, Central and South Asia, and, of course, the Middle East.

China and Iran have been driven together not just by their respective strengths, but also by our excessive use of coercive tools, such as economic sanctions. Even American allies who fear U.S. imposed conditionality or sanctions are turning to Beijing, especially for military hardware. Saudi Arabia’s ballistic missile program has been aided by China. And both Abu Dhabi and Riyadh have purchased Chinese-made attack drones.

But it’s not just countries fearful of U.S. coercion that are drawing closer to China. Ports in Greece, Israel, and Italy are now part of the BRI. And Huawei-powered “safe city” surveillance networks are proliferating across Africa and Asia, including in states that are illiberal but not adversarial to the United States.

A U.S.-China Cold War is taking form amid a more competitive geopolitical and geo-economic landscape. The China-Iran draft agreement puts on display Beijing’s position as the world’s “Plan B.” And it shows the cost of a foreign policy weighed too heavily toward sticks.

Countries we have punished or neglected are turning to Beijing for arms and technology. They are linking their infrastructure, and perhaps fates, with China. More broadly, we could be facilitating the internationalization of the yuan and the creation of a parallel China-led global governance system. The potential Beijing-Tehran pact should serve as a wakeup call. Countries today have options. Our capacity to punish is reduced. And we must relearn how to compete.