Iran, a bigger headache for China than Venezuela, but with Taiwan as potential silver lining

The U.S.-Israeli military campaign against Iran, dubbed Operation Epic Fury, dwarfs the implications of the U.S. intervention in Venezuela for global geopolitics. While Venezuela's fall under U.S. influence disrupted China's access to Latin American oil and marked a symbolic setback for Beijing's alliances in the Americas, the strikes on Iran are much more important. Firstly, the risk to China's energy security is much larger as Chinese oil imports from Iran are much larger than from Venezuela (13% of total versus 4%). In fact, Iran has been supplying discounted crude that bypasses U.S. sanctions through relabeling as "Malaysian blended oil" among others. In addition, Iranian oil is virtually all settled in renminbi through China’s International Payment System (CIPS) which makes Iran completely dependent on China also for imports, this arrangement has kept Iran's economy afloat amid Western isolation, while providing Beijing with cheap fuel.Iran is also more important than Venezuela when it comes to trade routes, as it lies the center of China’s buildup of alternative routes for oil.  In particular, one of the key projects within the China-Pakistan Economic Corridor, namely the port of Gwadar, should help China bypass the Strait of Malacca, if needed, and potentially, even the Strait of Hormuz for Iranian oil via the extension of the Iran-Pakistan pipeline and/or Iran’s Jask oil terminal only 200 km away from Gwadar. All of these potential diversification options are now being upheld by the attacks on Iran and the future of the Iranian regime.Secondly, and well beyond energy security, Iran is crucial for China’s diplomatic prestige and leverage in the great-power rivalry with the United States. This is particularly true for the Middle East but also for the Global South, more generally. China has poured far more diplomatic capital into Iran than into Venezuela. In 2021, China signed a 25-year Comprehensive Strategic Partnership, which, in principle, included $400 billion in Chinese investments across Iran's energy, infrastructure, and tech sectors. And yet, actual investment remains tiny, with only 2-3 billion having been confirmed since 2021. This amount of investment pales when compared with China’s investment in the United Arab Emirates (UAE) or Saudi Arabia. Beyond investment, China did orchestrate Iran’s full membership to important clubs, such as the Shanghai Cooperation Organization (SCO) since July 4, 2023 and BRICS since January 1, 2024.  While the two memberships certainly helped Iran come back to international diplomacy after having been outcast by the West, China -and Russia- also benefited from showcasing their ability to put together anti-Western regimes. The reality is that both SCO and BRICS members – which have been expanding during the past couple of days – may wonder whether China can protect them from Trump’s ire. These doubts are probably larger for the Middle East than the Global South since the expectations were probably higher. In fact, China brokered the March 2023 reconciliation between Saudi Arabia and Iran, which many interpreted as China becoming the diplomatic power of a region long dominated by the U.S. This agreement has been lying in tatters since Hamas’ attack on Israel in October 2023.An important question is how leaving Iran at its own fate may influence Putin’s calculations when it comes to its long-term pivot to China, especially given Trump’s helping hand to end the war in Ukraine. The recent negotiations in Geneva and Putin’s position at Trump’s Board of Peace should make Beijing somewhat nervous about the future of China-Russia relations.While China’s diplomatic power is clearly being put to a test, China has never been more important economically for the Middle East, and the Global South as a whole, due to increasing dependences for imports and even to attract greenfield investment to create jobs but also for tech transfer.Beyond China’s economic leverage which will definitively be used if needed, there may still be a silver lining for China out of the US attack on Iran. Firstly, the cost – and length- of “Epic Fury” is yet to be determined. Trump's campaign risks entanglement in a quagmire, from Iranian counterstrikes on U.S. bases to proxy escalations in the Red Sea. If Trump falters, Xi’s gains are clear, portraying U.S. adventurism as reckless. Secondly, Xi might already be requesting compensation for restraint, which is becoming apparent when observing Trump’s behavior on Taiwan and more could come during Trump’s official visit to Beijing on March 31.  So far, the White House has already announced the postponement of a $13 billion arms sale—informally approved by Congress. Trump’ potential agreement to be softer on China’s threats to Taiwan may also stem from Trump’s perception of lack of support by his European allies in a potential conflict in the Indo Pacific, as he stated clearly during his speech at Davos World Economic Forum back in January. Since Iran’s attack started, Trump’s acolyte, Senator Lindsey Graham's branded Europe "pathetically soft" on the basis of their response to US-Israeli attacks on Iran. It is quite clear that Beijing can only benefit from an even more fractured Transatlantic Alliance as a consequence of the situation in the Middle East.In sum, Iran's crisis is China's Venezuela on steroids and with even bigger uncertainties on how it may affect US-China strategic competition. While it may hurt Beijing in the short term when it comes to energy security and its diplomatic sway on the Middle East and the Global South more generally, it could also bring windfalls. This is not only because Trump’s risky operation may fail but also because of the potential high price he might need to pay for China’s acquiescence. Throwing Taiwan under the bus in order for a quick gain in Iran, limiting China’s access to cheap energy would clearly be too high a price to pay than Trump may have realized or cared about.