China’s political tact yielding mindboggling economic gains

China's main exports to Saudi Arabia and Iran include broadcasting equipment, motor vehicles and air pumps. Its main imports are crude petroleum, ethylene polymers and acrylic alcohols.

In the context of the Saudi Arabia and Iran reconciliation, trade with China is likely to continue to follow such increasing trends

Billions of dollars that China has put in global investments and infrastructure projects seem to be paying off, both politically and economically. Just recently, Honduras signalled that it would sever diplomatic ties with Taiwan, having been one of the few remaining countries to recognise the island as a state. This switch of allegiances would be a coup for China, which sees Taiwan as part of its jurisdiction, as it will be a sign of diminishing US power in Latin America considering that the US has been a long-time supporter of Taiwan.

China's influence seems to be everywhere. Days before Chinese president Xi Jinping flew into Moscow to discuss the Ukraine war with Vladimir Putin, China had brokered a deal between Iran and Saudi Arabia. The high-profile deal sought to re-establish diplomatic, trade and security relations between the two in an effort to de-escalate tensions and bring stability to the Middle East. The agreement transforms the nature of China's involvement in the region from one purely driven by commercial interests into a security-related cooperation that can protect its growing assets and expatriate population in the region.

Commentators see the agreement as a positive step but wonder about the influence that Iran and Saudi Arabia can have in lessening the internal conflicts in the nearby countries. This is particularly in countries where they support rival parties like Lebanon, Syria and Yemen. What the deal does highlight is the rising influence that China can exert and the waning of the US power over the Middle East regional order.

Studies have shown that political instability in neighbouring countries negatively affects the economic performance of a nation by disrupting trade flows and increasing defence expenditures while lessening investment, for example, in education. Under such conditions, economic incentives can drive a peace-building process. Peacefully resolving conflicts benefits countries not directly entangled in such disputes.

Since the 1990s, China has gradually become the largest trade partner of the Arab region overall and the top trade partner of Saudi Arabia. Its exports to Saudi Arabia have increased at 15.3 per cent year on year on average, amounting to $ 905 million in 1995 and $ 31.8 billion in 2020. Meanwhile, over the same period, China's imports from Saudi Arabia rose from $ 393 million to $ 33.4 billion, an average annual increase of 19.4 per cent. In 2019, China and Saudi Arabia signed 35 trade and investments deals.

Similarly, China's exports to Iran have increased at an average 14.7 per cent annual rate from $ 276 million in 1995 to $ 8.51 billion in 2020. And its imports from Iran have also risen by 14.5 per cent annually between 1995 ($ 197 million) and 2020 ($5.85 billion). By 2022, exports totalled $ 9.44 billion and continued to grow exponentially in early 2023.

Russia has recently overtaken China as the largest foreign investor in Iran but China remains its largest oil customer.

China's main exports to Saudi Arabia and Iran include broadcasting equipment, motor vehicles and air pumps. Its main imports are crude petroleum, ethylene polymers and acrylic alcohols. In the context of the Saudi Arabia and Iran reconciliation, trade with China is likely to continue to follow such increasing trends. If benefits from the agreement spread to other countries in the region, China could also gain from economic relations with those countries as regional stability increases. There is already some evidence of such a positive spill over. After the agreement with the Saudis, Iran is ready to expand cooperation, hopes rapprochement with Bahrain will be possible, and is willing to improve relations with Jordan and the UAE.

However, some commentators point out that previous efforts at reconciliation between Iran and Saudi Arabia were unsuccessful, while others question whether they will adhere to the terms of the agreement. (The writer is a senior Economist, IMD World Competitiveness Center, International Institute for Management Development)