Relationship Between Iran and China in Light of Economic Sanctions Imposed on Iran - Essay Example

first Project Report on Iran and economic sanctions Introduction: International business has flourished aftercountries realized the comparative advantages of resource endowments. One such advantage is that of China that specializes in labour endowments. The most influential business that flourished through exchanges of factor endowments is that of oil trading. Oil reserves are concentrated in few parts of the world, mostly the Middle Eastern regions. Other countries have been trading oil from these regions over past many years to suffice their demand for energy required for domestic and commercial purposes. The United Nations has confirmed sanctions to be imposed on Iran, one of the riches oil reserves, which would affect the rest of the world; the cause of these sanctions are purported to world’s security as the US believes that Iran is developing nuclear weapons using the money and technology earned from oil trading. While most of the other nations that earlier traded with Iran have stopped or minimized their trade, China still seems to be inclined towards Iranian oil reserves, owing to its huge investments in Iran. In fact, Iran dismissed its deal with India’s oil company and confirmed the same with China’s oil company few years before the sanctions were announced. China did not heed to the warnings of sanctions from the US and succeeded in this and many other business deals in order to secure its oil reserves. As a consultant mediating Iran-China’s relationship, various factors will be evaluated that would result in the successful deal between Iran and China despite the tensions in international oil business and relations with Iran. Further, implications for China and Iran of the US sanctions and probable repercussions for China would be assessed. The report proposes few recommendations to Iran and China to deal with the present situation. 2. History: Free trade, facilitated through treatises such as NAFTA, has been adopted by almost every country in the world and in many business spheres based on the kind of resources the country can offer and take back from its trading partner. The Middle Eastern countries have been a rich source of crude oil and energy for rest of the world for many years. India, like many other countries, has invested billions of dollars in Iranian oil fields towards business oil trading purposes as well as research and development of oil refineries in Iran. The Economics Times reported that the Indian government-owned ONGC along with the private sector Ashok Leyland Project Services Ltd of the Hinduja group won $10 billion bid for investing in Iranian oil company, Naftiran Intertrade Co and Petropars Ltd in 2008. However, India eventually lost this deal to China after the China National Petroleum Corp (CNPC) offered to contribute towards NICO's share of the $ 2.5 billion cost for developing the field that holds an estimated 42 billion barrels of oil reserves, one of the world's largest finds in the last 30 years according to The Economics Times news report. Iran’s conduit towards India’s proposition and favoring China is a result of international business relations between the countries, which are further shaped by their cultures, business negotiations and political positions. It is important to note that both India and China have high demand for oil in both domestic and commercial sectors (Oil Prices, 2). Moreover, China is a larger and greater potential for business compared to India. Reports from investigation agencies revealed that inward FDI into China is at least two to three times higher than what is reported; and FDI is majorly from the United States, the United Kingdom, France and other European nations. Yet, China’s high corruption and regulations still discourage FDI by significant amount (Wei, 200). Sources also report that corruption has been tackled to a great extent in China compared to India, where corruption still continues to haunt its economic progress (Ragunathan, para 1). Reduction in Chinese corruption is a more recent undertaking by its government bodies, and thus might not apply to the practices it followed at the time of negotiating the deal with Iranian NICO. Prevalence of corruption and bribery in the Iranian political and regulatory system is not ruled out, and hence the CNPC-NICO deal. 3. Iran and China’s situation at present: With China already investing in oil business at international level with Iranian companies, the proposed sanctions on Iran will result in serious consequences for China; other countries that have already invested in Iranian oil companies too will not be spared of the losses and negative consequences. China was once considered as a country that provided rich resources at lower wages, which became one of the important reasons for Western and Asian countries to trade with China. After China embraced FDI, exports from China increased leaps and bounds to Western nations, including the US. These trading investments created thousands of job opportunities in China. The comparative advantage of China rested in their labour efficiency. While the US produced fully manufactured products, all component parts of these products, mostly automobiles and electronics, were exported from China. These trading businesses resulted in huge net profits for the US companies. A similar pattern of trading through FDI was subsequently adopted by the European and Middle Eastern nations that had rich natural resources but lacked labour efficiency. Wright’s (p.A21) report highlights that about 9.5% of total Iranian imports are from China. China has invested in many infrastructure projects in Iran. Iran has been importing numerous domestic and commercial products such as computer systems, household appliances, cars etc from China. The Iran-China relationship has only intensified during last decade, despite warnings from the US to China to stay away from Iran because of Iran’s advent into nuclear program and refusal to support peace projects in neighboring countries. The US had delayed sanctions on Iran for many years because of China’s involvement with Iran, which was an obstacle to putting international pressure on Iran. 4. Analyzing factors responsible for Iran-China inclination: 4.1 Cultural standpoints affecting business: The successful deal between CNPC and NICO may be attributed to Chinese-Iranian connections of the past. Culture has probably played a major role in this deal. The Chinese business negotiations are mainly influenced by three factors namely, the PRC condition, Confucianism and the Strategem (see Figure 1). The PRC includes group of social and institutional forces that would include political groups, financiers, personnel from legislative framework, technology etc. Secondly, all business negotiations in China are influenced by Confucianism which is a set of beliefs that emphasize power and authority, relationships, loyalty and commitment, morality, peace, and safeguarding self-esteem or face-saving. The third paradigm is the Chinese strategems, as coined by Fang (1997), which are set of rules to deal with various situations to gain material and psychological gain over the opponent. Fang’s (1995) analysis of these strategems translate to Chinese negotiating tactics, some of which include attacking the opponent’s vulnerabilities, playing home court, manipulating friendship, hospitablity, pitting the competing foreign bidders against each other etc (see Figure 2). Ghauri further emphasizes, “The Chinese negotiator seldom wages a physical war but rather is keen on a psychological wrestling of wit to manipulate his opponent into doing business his way” (p.9). Bar’s extensive study highlights the Iranian side of story pointing out certain negative traits, especially among Tehranis, such as manipulative, calculative, opportunistic, hypocritical or double-faced, dishonest, and corrupt. Iranian negotiations are never concluded without the Iranian officials personal gain, referred to as personal renta or pour cent (p.38). Trickery, exercised as cleverness is acceptable and appreciated in Iranian culture, which is also used in most business negotiations and political dealings; Iranians are highly appreciative and supportive of cleverness depicted even by opponents (p.30). Iranians are highly individualistic and hence self-proclaim as being clever, resourceful and capable of tackling any sort of challenge. The Iranians do not trust anyone outside their community or group and believe that humans are evil by nature, power-seeking and irrational; relationships are not to be trusted; and that manipulation is essential to survive. Iranians lay extreme emphasis on pragmatism and power, be it economic, political or military. Iran, like China is a high-context culture and thus places high importance on relationships than formality. Hierarchical positions are given importance, with highest role having the first priority over any dealings. Loyalty to superiors resembles the Chinese culture. Bar points out at the ambiguity factor that is common in Iranian culture, which confirms that no promises would be made or kept, especially by interlocutors in business (p.35). It is natural for Iranians to refrain from their promises or verbal guarantees, and commitments are subject to assessment of gains from any deal. Bar highlights that Iranian negotiations, especially with its enemies, such as the Western nations, is only a disguise; Iranian negotiators are more interested in collecting information rather than participating in genuine negotiations. Most high-level business negotiations are conducted in teams, a feature very different to Iranian culture; most of the times, these negotiations are subject to internal politicization and push-pull patterns. 4.2 Political blend between China and Iran: Political ideologies between Iran and China started blending after the Iranian revolution in 1979. Iran and China share some common political beliefs about the rest of the world, particularly about the US. However, China has developed and maintained its diplomatic relations with the United States, unlike Iran. Chinese government has encouraged both US and Iran to invest and trade with Chinese businesses as long as the foreign countries do not enter or try to dominate the Chinese undertakings. China has been a supporter of peace and hence avoided conflicts with other nations during wars. As Iran supports China and is obliged by the Chinese government’s involvement and support in many Iranian projects, China is allowed to maintain military rule in some of Iranian oil fields, which are known to be the richest in the world. The Iran-China political relationship is also crucial for Iran’s position in international arena (Zahirinejad and Ghoble, p.7). China’s relation with the Western world is more recent compared to that of Iran and China values both. Political relations between Iran and China have suffered some degree of turbulence after China signed some resolutions against Iran’s Nuclear Programme along with other permanent members of the United Nations. This approach of China indicates its willingness towards diplomacy with other countries, unlike Iran which is adamant on developing its nuclear resources. This step from China has probably alarmed Iran about its relation with China and thus its position in the international market. Upon this realization, Iran might have enticed various Chinese companies to increase investment and stakes in Iranian oil companies. Iran also provided maximum research and development opportunities to Chinese oil companies. Downs and Maloney had quoted, “Driven by economic interests, as well as sympathy for Iran's grievances, China is the only major player still active in the Iranian oil patch” (para 3). 4.3 Nature of trade relations: According to a Forbes report, China is considered to be the main driver of oil demand in Asia, with about half of the demand from non-OECD (Organization for Economic Cooperation and Development) coming from China. The Chinese crude imports have grown by about 80 percent during last decade (Zahirinejad & Ghoble, p.8). Such an increase in demand for oil in China is attributed to various factors. Firstly, the Chinese industrial growth during last decade has been tremendous owing to FDI; secondly, life style changes that emerged from increased job opportunities in China have resulted in increased demand for petroleum and its products; thirdly, governmental measures to reduce pollution and to improve environment are necessitating minimum usage of conventional resources such as coal and increase in usage of energy from oil resources. All these factors along with equally rising demand for oil from other nations are pressurizing China to look for more and more oil reserves. China is also the exporter of numerous other products to various other countries; in fact, China houses the largest manufacturing outsourcing units in the world. This further increases demand for oil in China. In order to maintain its economic stability, China has to meet expectations of other countries. China’s enormous economic growth and influence over various other countries’ economies and politics have forced China to look for secure energy resources. Hence, China is forced to maintain trade relations with energy-rich countries irrespective of concerns from other nations. China’s diplomacy and centre position in the world economy are also forcing other nations not to take harsh decisions against China. China’s diplomacy and comparative advantage in terms of labour and production have helped in maintaining trading relations with outcaste nations like Iran. 5. Implications for other countries and the world Countries of the world that value peaceful existence and betterment of human race have much to learn from China’s present relationship with Iran. Demand for oil is high across the world, and not only in China. Vanderbuck’s report challenges claims made by the US with respect to presence of oil reserves in rest of the world to meet the demand. Countries that already invested in Iranian oil refineries now face further challenges in terms of recovering their losses incurred through trading with Iranian companies, plight of other businesses, and socio-political relationships. In fact, owing to its huge economic stake in world markets, huge business potential and economic progress, China is playing a balancing act for Iran; but this balancing act would not last long if Iran does not agree to amend its ways as per the United Nations regulations. Oil prices will continue to rise in other parts of the world; even Iran will not benefit much because of its rebellious disposition, which might affect its other trading opportunities. All nations of the world would require a win-win outlook in order to continue to benefit from factor endowments of different regions. 6. Recommendations: China wishes to maintain good relationships with all its business partners, especially the oil-rich companies keeping in mind demand for crude oil. Moreover, China considers its economic benefits beyond oil; thus, China is forced to amend its contracts with sanctioned nations like Iran. China has shown efforts towards this direction in recent past while sacrificing its own economic and energy interests involving sanctioned countries. Many Chinese foreign policies have been made flexible in some regions and have also resulted in worsening of relations in other regions (Currier & Dorraj, p.9). The world does not trust Iran because of its deceitful nature and uncanny political practices. Iran should mend its ways in concrete manner before it faces the heat from United Nations, unlike its conventional double-faced trickery and focus on earning the world’s trust. After President Obama confirmed sanctions over Iran and subsequent consequences for financial institutions involved in the transactions with Iranian oil companies, China is yet to confirm its withdrawal from partnering with Iranian oil companies. China should continue to abide by its principles and norms of not seeking control, upholding principles of sovereignty, engaging in peaceful development and in being a responsible stakeholder in the international system. The rest of the countries have to realize their demand for oil and possible repercussions if demand is not controlled through effective governance and distribution systems. Even if trade is resumed with Iran, current patterns of oil usage will not render this resource renewable for longer time. Like the NAFTA, the world nations have to come to an agreement on oil usage patterns considering demand and supply ratio; however, such initiatives are always hindered by political and anti-social elements, cultural affiliations and financial systems. Works Cited Bar, Shmuel. “Iran: Cultural Values, Self images and Negotiation Behavior. Institute for Policy and Strategy.” IDC Herzliya, October 2004. Web 22 April 2012 http://www.herzliyaconference.org/_Uploads/2614Iranianself.pdf Currier, Carrie Lu and Manochehr Dorraj. “The Strategic Implications of China’s Energy Engagement with the Developing World.” China's Energy Relations with the Developing World. London: Continuum International Publishing Group, 2011. 3-16. Downs, Erica and Suzanne Maloney. “Getting China to Sanction Iran: The Chinese-Iranian Oil Connection.” Foreign Affairs. March/April 2011. Web 25 April, 2012 http://www.foreignaffairs.com/articles/67465/erica-downs-and-suzanne-maloney/getting-china-to-sanction-iran Ghauri, Pervez N. “The Chinese business negotiation process: a socio-cultural analysis.” Systems, Organisations and Management, 1999. Web 24 April, 2012. http://edissertations.nottingham.ac.uk/1118/1/07MAlixxt4.pdf Raghunathan, V. “Corruption in India and China: A study in contrast.” The Economic Times, 29 January 2011. Web 24 April, 2012, http://articles.economictimes.indiatimes.com/2011-01-29/news/28429816_1_discipline-inspection-transparency-international-corruption “ONGC-Hinduja JV looses rights to dev Iran's oilfield to China.” The Economics Times. 30 September, 2009. Web 24 April 2012, http://articles.economictimes.indiatimes.com/2009-09-30/news/28450277_1_phase-12-gas-field-cnpc Vanderbuck, Tobias. “Iran, Oil and Strait of Hormuz.” Oil Price.Net, 20 February, 2012. Web 24 April, 2012. http://oil-price.net/en/articles/iran-oil-strait-or-hormuz.php Wei, Shang-jin. “Sizing up foreign direct investment in China and India.” How Far Across the River?: Chinese Policy Reform at the Millennium. Eds. Hope, Nicholas, Dennis Tao Yang and Mu Yang Li. California: Stanford University Press, 2003. 178-203. Wright, Robin. “Iran's New Alliance with China Could Cost U.S. Leverage.” The Washington Post. 17 November, 2004. Web 22 April, 2012. http://www.washingtonpost.com/wp-dyn/articles/A55414-2004Nov16.html Zahirinejad, Mahnaz and Vrushal Ghoble. “Energy Factor in China-Iran Relations.” Journal of Peace Studies, 17 (2&3), April-September, 2010. http://www.icpsnet.org/adm/pdf/1291714062.pdf Appendices Figure 1 Figure 1. Source: Ghauri & Fang, p.27. Figure 2 Figure 2. Fang’s interpretation of The Thirty-Six Chinese Strategems Source adapted from Ghauri, p.28. Read More