McLARTY UPDATE: China Update: Another Front in US-China Contention

China Update: Another Front in US-China Contention

May 9, 2018

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      1. The US withdrawal from the JCPOA is another issue where Washington and Beijing stand in opposition.
      2. China is the world’s largest oil importer and will likely seek to exploit US withdrawal in both political and economic terms.

The Trump Administration’s May 8 announcement of withdrawal from the Joint Comprehensive Plan of Action (JCPOA) has focused the world’s attention on the Middle East and Europe.  China is a strong supporter of the JCPOA and is now the world’s largest oil importer.

China’s domestic oil fields face declining production and the centrally-mandated focus of the domestic industry is on gas production.  The prospect, therefore, is for the Chinese economy to sustain demand on the global market as it leans heavily on oil imports.

Renewed US sanctions against Iran have implications for China’s clearing of dollar-denominated transactions in US institutions.  One way that China might get around that obstacle is yuan-denominated crude contracts, recently started in Shanghai.  China has reportedly been diversifying its sources of supply of crude oil away from the Persian Gulf in recent years, but industry analysts suggest that a Trump Administration-inspired drop in demand for Iranian oil would create both political and economic incentives for China to turn its gaze back to Teheran.

If in its series of next steps the US were to embark on secondary sanctions against countries investing in and/or trading with Iran, China would be high among the Administration’s targets.

China is already the subject of secondary sanctions related to North Korea; one hopes that recent positive signals in the run-up to a prospective Trump-Kim summit on the future of the Korean peninsula will preclude further friction between China and the US over North Korea, but that remains a possibility.  Tied with ongoing bilateral trade friction centered on the Trump team’s aim to lower the US trade deficit with China, the prospect is for continuing difficult relations between Washington and Beijing.