Crown Center for Middle East Studies

The Iranian-Chinese Strategic Partnership: Why Now and What it Means

A Conversation with Nader Habibi and Hadi Kahalzadeh

Organized and edited by David Siddhartha Patel, Associate Director for Research

April 28, 2021

On March 27, Iran and China signed a 25-year strategic accord that calls for China to invest a reported US$400 billion in Iran’s energy, banking, telecommunications, transportation, and other sectors in exchange for a regular, and presumably discounted, supply of Iranian oil. The partnership also envisions increased bilateral trade and deepening military cooperation between the two countries. In this Crown Conversation, we spoke with two Crown Center experts on Iran—Nader Habibi, Henry J. Leir Professor of the Economics of the Middle East at the Crown Center, and Hadi Kahalzadeh, doctoral fellow at the Crown Center and PhD candidate in social policy at the Heller School for Social Policy and Management at Brandeis—about factors that led to the agreement, opposition to it inside Iran, and what it means for the region.

Chinese President Xi Jinping raised the idea of an agreement five years ago during a visit to Iran in June 2016, soon after the lifting of international sanctions as a result of the Iran nuclear deal. Did the U.S. withdrawal from that deal (officially known as the Joint Comprehensive Plan of Action, or JCPOA) and the imposition of unilateral sanctions on Iran in 2018 by the Trump administration slow down negotiations, or have U.S. sanctions pushed Iran and China closer together?

Hadi Kahalzadeh:
After the signing of the JCPOA in 2015, Iran preferred to work with the West. Iranian car manufacturers and its oil industry sought to cooperate with European companies, such as Peugeot, Citroën, Renault, and Total, despite many offers of cooperation from Chinese firms. Even Iran’s minister of petroleum mentioned that Iran was already working enough with the Chinese. Over the last three decades—since the end of the Iran-Iraq War—a majority of Iranian bureaucrats and economists have concluded that Iran’s long-running economic problems are rooted in the country’s deep technological gap and lack of foreign investment. To overcome underdevelopment, they believe Iran must engage in constructive interaction with the West, which they see as the main source of technology, capital, and innovation in the world. At the same time, China was seen as a passive actor in the international community: one that followed the West’s lead; copied, instead of innovated; and imported technology and capital, instead of exporting those things. In other words, turning to China was viewed only as a substitute when engagement with the West was not possible and as a way to ease economic pressure caused by sanctions.

However, Trump’s maximum pressure policy was a turning point that changed the landscape for Iran in several ways. First, it undermined the position of proponents of reconciliation with the West inside the government because looking westward had reached a dead end. Second, Trump’s policies led Iran to redefine and acknowledge China as an emerging global superpower in competition with the U.S. Finally, China came to be seen as the only available source of technology and capital that has no ideological conflict with the Islamic Republic and is not interfering in its internal affairs. Thus, the maximum pressure policy pushed Iran to look eastward, even when many in Iran preferred to look west.

What is the current state of economic and political ties between Iran and China, and are there asymmetries in that relationship? What do each of them hope to get from this “comprehensive agreement?”

Nader Habibi:
China has been Iran’s largest trade partner for more than a decade. China is also Iran’s largest oil customer and its largest foreign investor. In the past, China cut back its investment and trade relations with Iran in response to both international sanctions and U.S. unilateral sanctions. These ties rapidly increased after international sanctions were lifted. But the latest unilateral U.S. sanctions on Iran, imposed in 2018, led to a sizable decline in bilateral Iran-China trade: The volume of trade (exports plus imports) fell from more than US$30 billion in 2018 to under $12 billion in 2020. This decline, however, might be overstated because of Iran’s clandestine and indirect trade with China. Iran’s official crude oil exports to China fell sharply from about 630,000 barrels per day (b/d) in 2017 to under 80,000 barrels per day in 2020. But, at the same time, a much larger volume of oil than this official 80,000 b/d—by some estimates, close to 900,000 b/d by March 2021—has been traded indirectly by ship-to-ship transfer, which allows China to report other countries, such as Malaysia, as the country of origin instead of Iran.

Regarding Iran’s motivations for the agreement, the recent unilateral U.S. sanctions have had a severe negative impact on Iran’s economy and oil revenues. Iran’s government is trying hard to end its economic isolation, and China remains its most important trade partner. Hence, any bilateral agreement that increases China’s incentives to bypass the sanctions or oppose them in international organizations will be welcomed by Iranian leaders. Furthermore, Ayatollah Khamenei and his core supporters have an ideological and strategic orientation toward closer ties with China and Russia because they view the Islamic Republic’s tensions with the United States as existential and permanent. In this context, they are eager to develop long-term ties with both countries; Iran continues to desire permanent membership in the Shanghai Cooperation Organization (also known as the Shanghai Pact), which is co-managed by Russia and China. Iran is also aware that China is strengthening its economic relations with other Middle Eastern countries, including its regional rivals Saudi Arabia and the UAE. So Tehran does not want to fall behind in this region-wide shift to “look to the east.”

For China, Iran is an important source of oil and natural gas imports. Iran is also located in a strategic area where it can serve as a transaction route in China’s Belt and Road transportation network. The signing of this long-term strategic agreement helps China strengthen this relationship and further integrate Iran into its Belt and Road-focused economic orbit. At the same time, it is important to keep in mind that Iran is not an exceptional partner for China: It is simply one of many oil-exporting, large economies with whom Beijing has signed economic partnerships. And, as China has demonstrated on many occasions in the past, it will not compromise its economic interests with the U.S. and its other major economic partners for the sake of Iran.

Hadi Kahalzadeh: From a political standpoint, although both Iran and China identify themselves as anti-imperial and as offering an alternative to the West, until recently their relationship with one another has been heavily influenced by their relationships with the United States. China, as a permanent member of the UN Security Council, voted with the U.S. on a series of six resolutions from 2006 to 2010 that sanctioned Iran. And since 2008, China has ignored Iran’s request to upgrade its status in the Shanghai Pact from an observer to a permanent member. However, some Iranian leaders claim that China has changed its approach under Xi Jinping and is showing a greater willingness to defy the U.S. and support Iran. They note China’s vote in Iran’s favor at the International Atomic Energy Agency in 2020; its stance against invoking snapback UN sanctions; and its criticism of the U.S. role in Syria and Yemen during Trump era.

From an economic perspective, Iran’s non-oil exports to China increased almost six-fold as Iran’s trade isolation increased from 2000 to 2019. Approximately 80% of Iran’s non-oil exports went to 23 countries in 2000; 18 countries in 2010; and only 8 in 2019. China’s share was 4.2% in 2000; 14% in 2009; and 23% in 2019. Similarly, China has been the leading exporter to Iran since overtaking the UAE in 2014; China’s exports to Iran reached $11 billion in 2019. Before the UN Security Council increased sanctions on Iran in 2010, the European Union was Iran’s top trading partner, with two-way trade totaling $35 billion in 2008.

China can provide Iran with the technology and capital to overcome many of its economic problems, shore up its economy against seemingly endless waves of sanctions, and reduce the leverage the U.S. holds over Iran. Based on some estimates, Iran needs at least $300 billion of investment in its oil sector. Given electricity shortages throughout the region, Chinese investment in Iran’s solar energy sector could be a new source of income for Tehran. Iran needs infrastructure development, including highways and dams. The Iranian government wants to strengthen its internet infrastructure against both internal and external threats and is working on cybersecurity with China. A shared interest in internet control and censorship has led to greater confidence in Chinese companies, like Huawei, rather than in Western or Russian companies as sources of advanced 5G technology. Additionally, Iran hopes to attract more than 2 million Chinese tourists—38 times more than the current number of Chinese tourists entering Iran—over the next five years. It is worth mentioning that Iran’s tourist revenue reached $10 billion in 2019, before the outbreak of the coronavirus pandemic. This source of income met almost 20% of Iran’s hard currency needs at the time (i.e., under sanctions and before the pandemic). In addition, China invests in Iraq, Syria, and Lebanon without objecting to Iran’s presence and influence in those countries. From Beijing’s perspective, Iran can be an attractive partner because of its energy resources, large domestic market, and location as a transit route to Turkey and the Levant. Iran owns one of the world’s largest oil and natural gas reserves and, as a producer, is neither influenced by the U.S. (as Saudi Arabia and other GCC members are) nor a strategic competitor to China (like Russia).

There has been criticism of the deal within Iran, including from businessmen, political activists, and even some inside the government. What concerns have been raised?

Hadi Kahalzadeh:
China’s image within Iran, among both ordinary people and political elites, is overwhelmingly negative. Anxiety over the partnership with China is caused by several factors. In recent years, Chinese fishing vessels in the Persian Gulf have damaged local economies and ecosystems in southern Iran. Another source of grievance is China’s perceived irresponsibility in failing to control the spread of the novel coronavirus and the behavior of China’s ambassador in Tehran. After the outbreak of the pandemic, China’s ambassador in Tehran forced the privately-owned Iranian airline Mahan Air to continue its flights to China, reversing a decision to stop them. A majority of ordinary Iranians see China as an exporter of low-quality goods. In the eyes of many, the Islamic Republic sold the country to China in this deal in exchange for the security and survival of the regime. Interestingly, they believe it was the economic sanctions that forced the government to do so. Persian-language media outlets abroad have played an important role in tarnishing the image of China and the Iran-China partnership.

From the perspective of political elites and activists, many of them view China as a violent, repressive, corrupt, and opportunistic state that cannot be trusted. They are pessimistic about China’s intentions and goodwill and fear that sanctions have weakened Iran’s ability to defend its national interests in any potential cooperation with Beijing. Some political activists believe that the new approach toward China undermines Iran’s political independence and violates the foreign policy mantra that dates to the 1979 Revolution: “Neither East nor West.” However, others support Iran’s new approach and the partnership. They believe that the complementary needs of the two countries mean this relationship will be sustainable and mutually beneficial. These enthusiasts of the deal tend to see Trump’s return to unilateral U.S. sanctions and pressure as the rule, rather than an exception, and believe that engagement with the U.S. will not end Iran’s isolation. They also say, given the emerging new world order, Iran needs to think more strategically and long-term regarding its relationship with China, regardless of its relationship with the U.S.

Nader Habibi: There are several reasons for the widespread opposition inside Iran to the deal. The most vocal opponents and dissidents express a nationalist narrative that says the agreement compromises Iran’s sovereignty and will lead to Iran’s economic dependency on China. This is the dominant narrative, shared by many Iranians on social media and by many political activists in op-ed articles and interviews.

However, each group that has joined this nationalistic, anti-China bandwagon against the agreement has its own motivation for doing so. The hardcore opponents of the Iranian regime—most of whom reside outside Iran—are concerned that this agreement will help the Islamic Republic become more resilient and, hence, reduce the likelihood of a regime collapse. A large number of Iranians inside the country, such as workers and business owners, oppose the deal because they think it might encourage the regime to continue its hardline, anti-American and anti-Israel foreign policy, which they blame for the economic sanctions. From their point of view, the government is trying to develop long-term relations with China and Russia to survive pressure from the U.S. without any change in its behavior. They fear this will prolong the sanctions and resulting economic hardship. Another large group of ordinary Iranians dislikes China simply because it is a friend and supporter of the Iranian regime. Their anti-China sentiment is mostly an extension of their negative view of and frustration with their own government. Some members and supporters of the Islamic Republic—such as former President Mahmoud Ahmadinejad, Faezeh Rafsanjani (daughter of the late former President Hashemi Rafsanjani), and even some members of the Islamic Consultative Assembly—have also voiced their opposition to this agreement.

Since neither Iran nor China so far have released the details of their purportedly comprehensive strategic partnership agreement, its terms and details remain unknown. Some are relying on an earlier draft of the agreement that was leaked as a foreign ministry document. Yet even this document does not include any mention of some of the more controversial claims made by opponents, such as the positioning of Chinese troops in Iran or the long-term lease to China of Iranian islands in the Persian Gulf. Some critics focus on the risk of a debt trap and compare Iran’s future under the deal to Sri Lanka’s experience of being forced to rent the Hambantota port to China for 99 years because it was unable to pay the debts it incurred after strategic partnership agreements with Beijing. While several spokespersons for the regime, including Foreign Affairs Minister Mohammad Javad Zarif, have denied these assumptions of what is in the deal, the government’s reluctance to release the signed document has led to widespread speculation that Iran’s interests have been compromised.

Iran’s foremost regional rival, Saudi Arabia, remains China’s largest oil supplier, and Chinese companies have a number of investment projects in the Kingdom. Will this strategic partnership with Iran affect China’s relations with Saudi Arabia and other Persian Gulf monarchies or draw China into regional disputes?

Nader Habibi:
China has developed strong bilateral economic relations with many Middle Eastern countries such as Egypt, Saudi Arabia, Israel, and the UAE.  It has demonstrated repeatedly that it is not interested in taking sides in any regional disputes among MENA countries. This neutrality is visible in China’s balanced policy toward Iran and Saudi Arabia. In fact, the Chinese foreign minister’s visit to Iran in mid-March, which included the signing ceremony for the 25-year partnership agreement, was part of a six-country tour that also included Turkey, Saudi Arabia, the UAE, Oman, and Bahrain. Furthermore, China has developed close economic ties with Israel despite the ongoing animosity between Iran and Israel.

So it is very unlikely that the signing of this partnership will bring China closer to Iran at the expense of its relations with other Middle Eastern countries. While China is eager to buy Iranian oil at discounted prices (partly because Iran has lost its other oil clients due to sanctions), Beijing also has established strong, long-term energy relations with many other oil-exporting countries, such as Saudi Arabia and the UAE. China’s relations with the UAE are more diverse than those other Middle Eastern countries and include cooperation in many non-oil areas, such as healthcare, finance, and high-tech telecommunication. China is likely to continue its policy of non-interference and neutrality in disputes between Iran and any of its rivals in the region.

How is the deal likely to affect the lives of ordinary Iranians in the coming years?

Hadi Kahalzadeh:
 As far as we know, the signed agreement is a roadmap that lists areas of common interest for the two countries. Thus, until this roadmap—or wish list—turns into substantive economic agreements, we cannot speculate on how it will affect the lives of ordinary people. However, there are two impediments to Iran being able to take full advantage of its strategic partnership with China. First, the Iranian economy will continue to face the risk of economic sanctions. Sanctions remain a prominent component of Washington’s Iran policy, and the U.S. could impose new sanctions in the future, even if the Biden administration returns the U.S. to the nuclear deal. The threat of sanctions increases risks associated with investments and long-term economic partnerships with Iran. Second, the Islamic Republic has reached a point where coordination failures routinely occur in its administrative system. This paralyzes the government to make decisions or take advantage of opportunities. There are numerous examples of such decision-making dysfunctionality. For example, no one in Iran knows whether the country will join the Financial Action Task Force on money laundering or why the Iranian parliament failed to approve annual budgets over the last two years. It is estimated that in the best-case scenario the Iran-China cooperation agreement would bring $400 billion of investment to Iran over the course of 25 years. But, owing to the sanctions and administrative dysfunctionality, approximately $300 billion of capital flowed out the country over the last 15 years. Therefore, as long as the country cannot manage the dysfunctionality in its economic and political systems and minimize risks associated with sanctions, Iran is unlikely to be able to grow its economy sufficiently enough to dramatically improve the lives of ordinary people. Iran’s experience with the JCPOA, which allowed it to sell more oil and increase its imports from 2016 to 2018, shows that bad governance and corruption lead to a sharply unequal distribution of benefits among the different segments of Iranian society.

Nader Habibi: The direct economic impact of the agreement is likely to be minimal in the short run because it is not expected to lift any restrictions that China has voluntarily imposed on its dealings with Iran in response to the unilateral U.S. sanctions. In the long run, the impact of the agreement depends on how the Iranian leadership manages its economic relations and negotiates large investment projects with China. Countries that have developed strong economic relations with China in the context of its Belt and Road Initiative have had different experiences. In general, countries with strong bargaining power that interact with China are able to benefit from these relations. A good example is Indonesia: Indonesian President Joko Widodo negotiated favorable financing and regulatory terms with China for large-scale infrastructure projects in the country, such as the Jakarta-Bandung high-speed rail link. Widodo’s bargaining power was rooted in competition: Indonesia’s diplomatic and economic relations with the U.S., Japan, South Korea, and other advanced economies presented viable alternatives to many of the infrastructure projects that he was negotiating with China. On the other hand, Philippine President Rodrigo Duterte has faced strong domestic criticism for the terms of the construction projects that he negotiated with China. Duterte made a strategic decision to weaken the Philippines’ geopolitical alliance with the U.S. in favor of closer ties with China, but this shift weakened his bargaining position in subsequent economic negotiations.

In this context, the Iran-China partnership will be more beneficial for the Iranian economy if the Islamic Republic can bring the U.S. sanctions to an end and thereby negotiate with China from a position of greater bargaining power. If the JCPOA is restored and sanctions are lifted, not only will China be able to expand its relations with Iran and complete the projects that are unfinished, but Iran will have more bargaining power because it would be less isolated and no longer solely dependent on partnering with Beijing.

The opinions and findings expressed in this Conversation belong to the authors exclusively and do not reflect those of the Crown Center or Brandeis University.