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Inside Out & Outside In

Trump’s betrayal of Iran deal brings US-China trade war to a much scarier level 

As China has no intention of going along with any new US sanctions on Iran, the stage could be set for a rise in tensions 

PUBLISHED : Sunday, 13 May, 2018, 4:42pm
UPDATED : Sunday, 13 May, 2018, 10:29pm

I only met John Bolton once, back in the President Bush days when “neo-cons” strode the world assuring us that our hearts should rest at ease with the United States as the world’s policeman. 

I remember three reactions: first, that he held some very unhinged views of what is going on in Asia in general, and China in particular. Second, someone with such strongly held fanaticisms is scary. And third, thank goodness he does not have practical power in Washington.

Now he sits at Donald Trump’s elbow, alongside the similarly scary Peter Navarro, author of Death by China, and I barely dare think in any detail about what is going to happen next.

Iran’s top diplomat hopeful of forging ‘clear future’ for nuclear deal

A week ago, my main gloomy worries were over the dangerous escalation in the US-China trade conflict. Today, that seems positively manageable by comparison with the abyss that has opened up under the Iran nuclear deal. Despite optimistic comments about Trump hosting North Korea’s Kim Jong-un for denuclearisation discussions in Singapore in a month’s time, I wonder what on earth can persuade Kim to trust Trump’s sanctions-lifting promises, once Trump’s betrayal of the Iranian deal sinks in.

Meanwhile, the rest of the world – in particular the five other signatories to the July 2015 Joint Cooperative Plan of Action that brought Iran sanctions to an end in exchange for its commitments to wind down its nuclear weapons programme – is tearing its hair out on whether or how to reintroduce sanctions.

All have received instructions from the White House that sanctions have to be reimposed. All companies with business links with Iran are being told they should desist immediately.

As Gideon Rachman of the Financial Times noted on Saturday: “In extremis, European executives who continue to do business in Iran could become subject to arrest if they travel to the US, and European banks that do business with Iran could find themselves shut out from the US financial system or subject to prosecution and massive fines in America.”

After so many years with sanctions in place – they were first imposed in 1979 in response to the 444-day Iran hostage crisis, it is fair to concede that most companies in most parts of the world have long-since given up trading with Iran. Since sanctions were effectively lifted less than 18 months ago, there has hardly been chance for trade to resurge. But that does not mean there are not large numbers of significant companies wringing their hands.

Perhaps foremost are Boeing and Airbus, who between them have received orders from Iran Air for around 180 new aircraft worth around US$38 billion to patch up its dangerously antique fleet. What an irony that new sanctions will hit one of the US’s leading exporters so hard. So much for reducing the trade deficit.

In the oil sector, casualties will abound – inevitably, since Iran is a true energy superpower, sitting on 10 per cent of the world’s proven reserves of oil, and about 15 per cent of proven gas reserves. France’s Total SA has a US$2 billion stake in Iran’s South Pars gas field, and unless some kind of exemption can be negotiated, it is likely to have to sell its stake to joint venture partner China National Petroleum Corp.

In the tourism sector, airlines like British Airways and Lufthansa have only recently resumed flights to Tehran, and hotel groups like France’s Accor, Melia from Spain and Rotana from the UAE are likely to see their new ventures in jeopardy.

While European companies are wringing their hands – and face irresistible pressure to bow to US demands to reimpose sanctions – the same is unlikely to be true in Russia, or looking east to Asia. Just as Trump was announcing his decision to repudiate the US commitment to the Iran deal, a Chinese high speed train was leaving Bayannur in Inner Mongolia destined for Tehran, laden with 1,150 tonnes of sunflower seeds.

China backs Iran nuclear deal as United States walks away, but could it be a costly decision?

China clearly has no intention of bowing to US demands to resume sanctions. Geng Shuang from the Chinese foreign ministry said that Beijing intended to “maintain normal economic ties and trade”, adding that the Chinese government was opposed to the imposition of unilateral sanctions “and so-called long-arm jurisdiction by any country.”

As the biggest buyer of oil and gas from Iran, and Iran’s largest source of imports, China clearly has much at stake. Its trade with Iran has more than doubled since 2006, and it has invested heavily in new railways and ports in the country.

China also has readier access to “workarounds” in response to a new US-imposed sanctions regime. First, many of the Chinese companies with business in Iran have no US exposure, and so face little direct danger of US retaliation. If they do, then it seems relatively easy to create special purpose vehicles, or to direct trade with Iran through third countries.

Most intriguingly, the threat of sanctions may lead to a sharp increase in yuan-denominated trade which avoids all contact with the US financial system – not just by Chinese companies, but by others in Asia too. Malaysia and Pakistan already settle most of their trade with China in yuan. In 2016, cross border settlements in yuan amounted to 5 trillion yuan (US$789 billion), according to the People’s Bank of China – tiny in terms of total global settlements, but a significant marker that this will now grow quickly.

The recent US attacks on Huawei and ZTE for their past trade with Iran are also likely to lead to urgent moves to self-reliance in China’s fast-growing hi-tech sector, which over time might hit US tech exports, and polarise digital trade worldwide.

In short, therefore, China’s trade war with the US just got a whole lot more serious. Potentially grave consequences abound. But in the White House, no one seems to care. Scary people are making the world a scary place.

David Dodwell researches and writes about global, regional and Hong Kong challenges from a Hong Kong point of view

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