US embargo on Iranian oil a blow to US-China relations

Author: Kai Ito, ANU

Beijing has chosen to defy Washington’s embargo on Iranian oil.

While this does not bode well for putting an end to Iran’s uranium-enrichment program, the embargo also represents another worrying failure for US-China relations.

Sanctions on Iran have proven one of the few areas of recent progress in the otherwise troublesome US-China diplomatic relationship, with the two powers having clashed over climate change, global economic reform, South China Sea territorial claims and North Korea. In contrast, both countries agreed on sanctions against Iran, thanks in part to successful diplomatic efforts, first, with United Nations Security Council Resolution (UNSCR) 1929 and, second, after Beijing’s partial compliance with the US Comprehensive Iran Sanctions, Accountability, and Divestment Act, both introduced in 2010.

But with the US announcing its latest round of sanctions in December 2011, threatening to bar any financial institution that engages in crude-oil trading with Iran from accessing the US market, vestiges of collaboration over Iran appear to be crumbling.

China, India, Turkey and Pakistan have all adopted clear policies in opposition to the US, indicative that Washington’s latest steps have dichotomised the situation. Now, the White House is heading down a path where it will be forced to choose between sanctions or waivers. Economically and diplomatically, the ramifications are concerning. This is because US-China cooperation extends beyond the issue at hand; a whole range of global and regional challenges depend on both countries getting their bilateral relationship right. But instead of deepening these ties to find a way around Tehran’s recalcitrance, both powers are now in direct confrontation over policy toward the Persian state — and with the first sanctions or waivers yet to fall due, the situation could get worse before it gets better.

But if China — the world’s second-biggest oil consumer, sourcing 11 per cent of its oil from Iran — is to reduce its reliance on Iranian exports, it will not be done overnight. It will require concerted efforts and hard-fought compromises to find other sources of supply — and not just for China, but for countries like India and Turkey too. This kind of shift, which can still put economic pressure on Iran, is unlikely to be compelled by the threat of US sanctions.

In any case, Iran has already started to experience a narrowing demand for its oil: Japan, South Korea, the EU, and even China and India have all been rolling back their reliance on Iranian oil — especially in the wake of UNSCR 1929. It is here that momentum ought to be leveraged so as to generate more-stringent cooperative action against Tehran.

Certainly, Beijing’s willingness to trade with Iran is no small part of the problem. But Tehran’s ambitions for nuclear weapons are Beijing’s problem as well. After all, China should be highly concerned about Iran because the Arab states are highly concerned — and they are a far more important source of oil for China. This is especially the case for Saudi Arabia, China’s largest supplier of crude oil (20 per cent), which sees Iran’s nuclear program as a security risk. China also remains conscious of its global image, and prioritising interests in Iran over its most important bilateral relationship and potential threats to global security is not helping the cause.

With China in need of alternative energy suppliers, and America in need of economic stimulus, diplomatic channels should be encouraging and facilitating Chinese national oil companies to enter the US market — luring them away from Iran and bringing relief in the form of operating capital to America’s oil industry. Instead, the White House is threatening to bar just that, despite Chinese national oil companies, including CNOOC Ltd, PetroChina and Sinopec, looking to expand or invest in the US.

Placing faith in cooperative diplomatic efforts helps to avoid other risks too. First, the imposition of sanctions elevates the risk of instigating a supply-side oil shock and further wounding global economic recovery, especially if Washington’s plan goes wrong and armed conflict is ignited. There is also the unwelcome economic strain on third parties, including US allies, that will be caused by the White House’s attempts to squeeze Iran. In particular, the embargo could definitely have come at a better time for Japan. With most of the country’s 54 nuclear reactors offline after the earthquake and tsunami last March, Japan has a 33 per cent increased reliance on oil, especially to power its thermal plants. It’s little wonder then that Japanese diplomats were asking their American counterparts last month to grant Japan an exception from the embargo.

With all this at stake, and at a time when Tehran’s nuclear ambitions are becoming more worrying than ever, abandoning cooperative efforts in favour of blunt and divisive sanctions is a risky strategy that may prove costly indeed.

Kai Ito is a postgraduate student at the Australian National University and an editor at the East Asia Forum

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