The blooming China-Iran bilateral relationship serve as a warning to U.S. policymakers.
Chinese investment in Iran is not a new phenomenon. The Persian Gulf nation is a critical corridor for Chinese President Xi Jinping’s $1 trillion Belt and Road infrastructure initiative. Iran has increasingly benefited from tens of billions of dollars in credit from China’s state-backed financial institutions. Beijing has a hand in wide swaths of the Iranian market, including the transportation, nuclear, and energy sectors.
A draft strategic partnership agreement, however, takes Beijing’s investment in Iran to a new level. Reports that Beijing and Tehran have settled on a $400 billion accord covering 100 separate projects across the Iranian banking, telecommunications, port, and oil industry—not to mention increased cooperation between the two nations in weapons development and intelligence—is a reflection of the importance the Chinese Communist Party attaches to the untapped Iranian market.
But the stronger China-Iran bilateral relationship is also an indictment of Washington’s Iran policy: an all-stick, no-carrot blunt instrument that has brought Beijing and Tehran, two U.S. adversaries, closer together.
The Trump administration’s May 2018 decision to withdraw from the Joint Comprehensive Plan of Action severely blunted the Iranian economy. Banking restrictions and secondary sanctions targeting foreign entities doing business with Iran in any way, shape, or form have forced President Hassan Rouhani’s administration to make do with a lot less. European companies prepared to jump into Iran after the nuclear deal was signed have instead stayed clear of Iranian commerce. In April 2018, before the most serious sanctions were issued, Iran’s crude oil exports averaged 2.5 million barrels per day. Today, daily exports have plunged to 100,000 to 200,000 barrels—a 96% decline.
By its own admission, the Iranian government is in extreme need of cash. Mohammad Bagher Mobakht, the official in charge of the Iranian state budget, told parliament that Iran received a paltry $8.9 billion in crude export revenue last year—a fraction of the $119 billion Tehran earned a decade earlier. In President Rouhani’s own words, the Iranian people are going through “the most difficult year” in the Islamic Republic’s 41-year history.
The sanctions are so indiscriminate that even Chinese companies have occasionally backed out of joint projects with the Iranians. China National Petroleum Corporation pulled out of a $5 billion natural gas project last October, a demonstration of just how concerned some Chinese financial firms can be of getting on the wrong side of the U.S. Treasury Department.
While the White House can brag of successfully strangling Iran’s economy, the policy objectives the administration is striving to accomplish through its maximum pressure campaign are nowhere in sight.
The Trump administration assumed that, faced with the prospects of bankruptcy and poverty, the leadership in Tehran would return to the negotiating table, fulfill U.S. demands and radically transform its foreign policy to Washington’s liking. However, Iran, like many mid-tier powers, puts a high price on capitulating to a larger power—particularly if those powers are historic adversaries. Iranian officials see no legitimate reason why they should introduce even a sprinkle of reform when the U.S. is offering little to nothing in return. Surrendering to U.S. diktats would only put the current leadership in Tehran at high risk, all the while confirming in Washington’s mind that uncompromising financial pressure is a strategy worth pursuing far into the future.
Washington’s maximum pressure campaign is not only sadly lacking in positive results—it is also inherently prefaced on escalation. Newton’s third law of motion—every action has an equal and opposite reaction—is as relevant in geopolitics as it is in physics. In Tehran’s case, maximum pressure has resulted in maximum resistance. Far from offering concessions, Tehran is using its mastery of asymmetrical tactics to unleash pressure of its own while reaching out to China in an attempt to balance out pressure from Washington. China, increasingly battling the U.S. across multiple strategic domains, is the one big power both willing and able to serve as Iran’s balancer of last resort—and Beijing intends to profit off Washington’s mistakes in the process.
The overarching lesson of this story is clear for those in the Beltway open-minded enough to heed it: not only can sanctions force targets to adapt and harden their position, but their punitive effects very often have negative, second-order consequences detrimental to U.S. national security interests. The Trump administration is learning in real time how launching economic pressure tactics against multiple adversaries at the same time can push those very same adversaries into greater alignment at U.S. expense.
Relying on America’s enviable financial power and overusing the sanctions tool, however, weakens their impact over time and gives other countries added incentive to find alternatives to U.S. banking systems. Let the blooming China-Iran bilateral relationship serve as a reminder to U.S. policymakers—if not tied to reasonable policy objectives and a willingness by the U.S. to actually negotiate in good-faith, financial warfare can create geopolitical openings that will dampen U.S. influence in the long-term.
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