China Must Decide Whether to Sanction Iran

China has never been shy about forging alliances with unpopular regimes that have resources that it needs to fuel its breakneck pace of growth. Zimbabwe, Venezuela, and Cuba are just a few of the nations that China has formed resource alliances with. So you wouldn’t think China would show any concern for keeping up oil imports from Iran even as the U.S. and European Union impose sanctions and put pressure on China to do the same.

However, the case of Iran puts China in a difficult position. Continued support could bolster Iranian aggression, leading to disaster for the global economy — including China’s surging economy — but support of Iran could also bring China more oil at cheaper prices.

In the end, China’s demand for oil will likely overcome any concerns Beijing may have over the consequences of maintaining or increasing imports from Iran.

For the better part of the 20th century, China relied on its coal reserves — some of the largest in the world — and its northeastern oil fields to meet its growing energy needs. However, in 1993 China flipped from a net oil exporter to a net oil importer. A combination of a lag in domestic oil production paired with an explosion in the demand for energy led to the shift.

China’s new energy dependence forced the rapidly growing nation to look abroad for new sources of energy, mostly in the form of oil and natural gas. Chinese oil diplomacy has led Beijing to grow ties around the globe from Central Asia, to the Middle East, Africa, and South America.

In many cases, what has made China’s strategy for buying up resources so successful is a total lack of concern for the policies of the regimes of those partner nations. This posture has not only resulted in a long standing relationship with Iran — China is Iran's biggest oil customer and uses 20% of Iran’s crude exports — but has also resulted in China's cozying up to other unsavory bedfellows such as Zimbabwe’s Robert Mugabe, Venezuela’s Hugo Chavez, and Cuba’s Fidel Castro, just to name a few.

Enter the rising threat of a nuclear Iran and the potential closure of the Strait of Hormuz. Earlier this month, following news repots of Iran’s efforts to develop nuclear weapons, the U.S. imposed additional sanctions on Iran which will fully kick in on July 1. Last week the EU, which currently buys 20% of its oil from Iran, followed suit by banning all new oil contracts with Iran and establishing that existing contracts must be phased out by July 1.

During the intervening week while EU sanctions were being brokered, U.S. Treasury Secretary Timothy Geithner headed to Beijing to seek China’s help in limiting Iranian exports.

Although Geithner did not come home with the promise of sanctions from Beijing, a news conference by China’s Vice Foreign Minister Zhai Jun did frame China’s concern for what a crisis in the Strait of Hormuz would mean: "Iran is also an extremely big oil supplier to China, and we hope that China's oil imports won't be affected, because this is needed for our development."

This response seems to signal Beijing’s genuine concern that their support could embolden Iran to actually blockade the Strait, which would lead to a potentially disastrous surge in China’s oil prices as well as a potential supply shortage.

The flip side is that as U.S. and EU sanctions are fully phased in on July 1, Iran will continue to sell 2.6 million barrels per day (3% of world supply) and that excess supply would most likely flow to China. And as one of the only remaining customers, Beijing would be in a position to negotiate a significantly reduced price.

It is still unclear which position Beijing will take but with history as a guide, it seems quite safe to predict that Beijing will increase its imports from Iran and not support sanctions.