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Preventing U.S. – China Escalation Over Iranian Oil

The U.S.-China trade war is escalating. With Tuesday’s threat by President Donald J. Trump to impose additional sanctions on Beijing and recent aggressive exercises by the People’s Liberation Army Navy (PLAN) in the Taiwan Strait (following U.S. arms sales to Taiwan), it is easy to see how the economic quarrel between the U.S. and China could turn into a military one. But that’s not all.

The State Department is considering how to punish China after it purchased more than one million barrels of Iranian crude last month in direct violation of U.S. oil sanctions.

American policymakers should not plunge headlong into an escalation, however. If the U.S. plays its cards right China’s energy relationship with Iran could actually be used as a vehicle to defuse U.S.–China tensions – rather than stoke them further.

Trade War’s Ups and Down

Though bilateral relations have improved slightly following Trump’s meeting with Xi Jin Ping at the G20 Summit in Osaka where the U.S. president intimated lifting the trade ban on Huawei, the ongoing trade conflict has created a serious rift between the United States and China. Analysts estimate that sweeping tariffs – which affect everything from soybeans to iPhones – have cost the US and China as much as 0.2% and 0.6% of their GDPs respectively.

Weighed down by the trade row, China’s GDP growth slowed to 6.3% this past quarter, its lowest in 27 years. On the U.S. side, analyses show that Trump’s tariffs could more than wipe out the benefits of his $1.5 trillion tax cut. In addition, China’s $110bn in retaliatory tariffs are putting the screws on U.S. exporters.

Iranian Oil, U.S. Sanctions, and China

Beijing’s refusal to cease purchasing oil from the Islamic Republic after the U.S.-imposed May 2 waiver deadline could add yet more fuel to this roaring fire. This holds especially true if both sides proceed in the ham-fisted fashion that has come to define their bilateral relations thus far.

In 2017 and 2018, China imported between 500,000 and 600,000 bpd of Iranian oil during the months of January and February. Throughout 2018, Chinese imports of Iranian Oil averaged 585,000 bpd, according to Chinese Customs Data. S&P states that those numbers have since dropped to 150,000-220,000 bpd in June and July, but these reduced figures still do not satisfy the State Department’s demand for a total cessation of Iranian oil purchases.

China is the largest importer of crude oil in the world, a title it won from the U.S. some five years ago (though we still claim the position as the world’s most prolific oil consumer). According to OPEC statistics, China’s May crude oil imports numbered at around 9.5 million bpd, of which Russia held the largest share at 16%, followed by Saudi Arabia at 12%, Iraq at 11% and Angola at 9%. Customs Data shows that Iranian oil supplies to China were 255,000 bpd in May, which is equivalent to 2.7% of imports- not an insignificant amount. Subsequently, Iran and China-hawks in the Trump administration are pushing for sanctions against Chinese entities as punishment.

Getting China on Board with Iran Sanctions

One way the U.S. can resolve these tensions would be to adopt a pragmatic ‘carrot and stick approach,’ in which they proceed to threaten harsher penalties against China’s purchases of Iranian oil while proposing an alternative in the form of U.S. or allied supplied crude. There is certainly no shortage of the commodity in the world today, with forecasters predicting a major oil glut in 2020. That’s thanks in part to booming U.S. shale production, which launched America into the number one producer spot in 2018. And, U.S. oil exports hit record levels earlier this year at 3.6 million bpd. In that case, it would certainly be possible for China to make up Iran’s 150,000-250,000 bpd shortfall from Corpus Christi, Ras-Tanura, or anywhere in between.

An agreement by Beijing to purchase its oil elsewhere could be met by sanction relief, and perhaps act as the catalyst for bilateral de-escalation.

The resolution of these problems will by no means be a simple task. But given the size of the hole the U.S. and China have dug themselves into, policymakers should be looking for a ladder, not a shovel. American oil sales to China can be the foreign policy tool that both sides use to lift themselves out.
Source: Forbes

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