Economy, Domestic Economy

China, Japan Racing for Iran’s “Economic Cake”

China, Japan Racing for  Iran’s “Economic Cake”China, Japan Racing for  Iran’s “Economic Cake”

While the lifting of sanctions against Iran on Jan. 16 marks a turning point in the normalization of its relations with the international community, it also points to the dawn of a new era in which the race for getting a larger share of the economic cake in post-sanctions Iran will significantly gain steam.

Here, the “economic cake” does not refer to only oil and gas deals, but also covers the country’s large and untapped consumer market, lucrative infrastructure projects and multibillion-dollar public procurement tenders as well, wrote the US-based Think Tank Eurasia Review.

China starts this race ahead of the other major players of the global economy. Its economic relations with Iran expanded despite the sanctions, becoming the number one customer of this country’s oil and gas and also undertaking large-scale infrastructure projects, such as seaports, airports and highways in a market that was hitherto inaccessible to other major economies due to sanctions.

Following the confirmation of the International Atomic Energy Agency that Iran has fulfilled the requirements of the nuclear deal, China will enjoy a more favorable environment to further improve its relations with Iran, but, at the same time, it will also face increasing competition.

Strategic Partnership

Last month's visit to Iran by Chinese President Xi Jinping had the objective of getting prepared for the coming competition and maintaining the advantage that China already has.

During this visit, not only was the relationship between the two countries promoted to the level of strategic partnership, but it was also announced assertively that bilateral trade, which stood at $51.8 billion in 2014, will be increased to $600 billion over the next 10 years.

The joint declaration released at the conclusion of Xi’s visit placed a special emphasis on areas like energy supply, petrochemicals and renewable energy. At the same time, certain sectors were singled out for carrying great potential for cooperation between the two countries, including transportation, railroads, ports and service trade.

Iran is important for China, not only as a source of oil and gas, but also because of its key location on China’s “One Belt, One Road” initiative.

One year ago, China announced that it was going to increase its infrastructure investment in Iran from $25 billion to $52 billion, and now, with the removal of sanctions, this figure can be expected to increase further.

On January 27, two tankers full of oil departed from Iran’s main oil terminal on Kharg Island in the Persian Gulf. One of these tankers, which happened to be the first shipment of oil from Iran after the sanctions, headed to China, whereas the other sailed toward Japan.

China has an economic advantage in post-sanctions Iran. However it is going to face increasing competition, which will come not only from the countries of the West but also from Japan.

By resuming its oil imports, and also through certain initiatives over the past few weeks, Japan has shown that it will take its part in the race for Iran. In this sense, the bilateral investment agreement signed between Iran and Japan on February 5 is likely to significantly open the way for Japanese companies keen on entering the Iranian market.

Trade Turnover

In contrast with China, Japan had been loyal to the sanctions against Iran to a large extent, due to its alliance with the United States. This situation is clearly evident in trade figures.

According to 2014 data, annual trade volume between China and Iran was $51.8 billion, while the volume of Japanese-Iranian trade was only $6.4 billion.

China exported $24.3 billion worth of products to Iran, including machinery, nuclear reactors, electrical and electronic equipment, and vehicles. In return, China’s import from Iran totaled $27.5 billion, of which $21.2 billion corresponded to oil and other energy resources.

Having adhered to sanctions, Japan’s export to Iran was only worth $251 million in the same year. On the other side of the equation, Japan’s import from Iran amounted to $6177 billion, almost all of which, $6125 billion to be precise, was oil and other energy resources.

China commences the race for Iran ahead of both the West and Japan. This is while both China and Japan have the advantage of not carrying the burden of historical baggage and the responsibility of sanctions.

Nevertheless, Japan also has an edge over China. Having significant experience and knowhow related to the peaceful use of nuclear technology, Japan offers Iran help in fulfilling the requirements of its nuclear deal.

In fact, Japan appears to be the most suitable partner for Iran in this respect, especially in areas like nuclear security and earthquake preparedness and protection.

Japan also appears to be preparing to rival China with its powerful corporations in areas like the automotive industry and high-speed railroads.

In this new era, there will be greater competition in Iran. While China will make efforts to maintain its advantage derived from not complying with the sanctions, western countries and Japan will do their best to get the most of the cake.

The more the competition increases, the more options Iran will have and the greater Tehran’s bargaining power.

It will be well worth analyzing how Iran’s economy will develop after the lifting of sanctions, how different actors will position themselves and what they will do to maintain and improve their positions in the Iranian market.