Oct 29, 2018

With U.S. sanctions looming, China loosens trade ties with Iran

China's Foreign Minister Wang Yi and Iran's Foreign Minister Mohammad Javad Zarif during the meeting of the UN General Assembly on Sept. 25. Photo: Alexander Shcherbak/TASS via Getty Images

On Nov. 4, the U.S. will re-impose sanctions on Iran that had been lifted under the Iran nuclear deal. In response, the Bank of Kunlun, which handles China’s financial transactions with Iran, informed customers that on Nov. 1 it will stop processing them. China’s largest oil refiners, Sinopec and China National Petroleum Corporation (CNPC), may also stop importing Iranian oil in November.

Why it matters: China is Iran’s largest oil importer and most important trading partner. Because China is better insulated from U.S. sanctions than other major importers, Iran could avoid the worst economic effects of U.S. sanctions if China continues buying its oil. But if China cuts back, Iran will likely pull out of the nuclear deal, leaving it free to resume an unrestricted nuclear program.

The background: Nevertheless, Chinese government officials have been deeply critical of President Trump’s nuclear deal withdrawal. At the UN Security Council's September meeting, Foreign Minister Wang stressed economic sovereignty and defended “the legitimate right of all countries to normal economic relations and trade with Iran.”

There are three ways to think about China’s latest moves:

  1. A bargaining strategy. China is seeking discounts and other favorable commercial terms for continued trade with Iran, so leaking that its oil refiners are rethinking their positions gives China leverage. Since Trump is sensitive to oil prices, China may also be trying to soften the U.S. position by surprising the market and pushing prices up.
  2. A way to restructure trade with Iran. China may simply be further insulating its biggest firms from Iran-related sanctions by removing them from this trading relationship, leaving smaller Chinese refiners and banks to step into the gaps left by Kunlun, Sinopac and CNPC. This would put some effective limits on Iranian oil sales and other trade without totally shutting it down.
  3. A diplomatic concession. If China is preparing to comply with re-imposed U.S. sanctions, it might be as a sweetener to secure a Trump–Xi meeting at the November G20 to make progress on the trade war, which is vastly more important to both countries than Iran sanctions.  

The bottom line: In any case, the Trump administration has succeeded in creating the impression that China bowed to U.S. pressure, something China was careful to avoid when it substantially reduced Iranian oil purchases under President Obama. By acting before Trump’s November deadline and leaking waiver requests, China has made, in principle, an important concession.

Jarrett Blanc is a senior fellow in the Geoeconomics and Strategy Program at the Carnegie Endowment for International Peace.

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