We argue that the U.S.-led imposition of economic sanctions on Iran, since 1979, has resulted in closer trade and investment relations between Iran and China. These relations started accelerating and strengthening from around 1999. They were further boosted by the March 2021, 25-year, $400 billion pact. The purpose of this paper is to characterize the nature of this relationship, to pinpoint the reasons behind it, and to study its dynamics.
China is one of the fastest growing economies in the world. It is now ranked as the largest economy by the PPP measure of its GDP. China’s political power and stature is also increasing. Iran is rich in natural resources including petroleum, natural gas (second in the world), copper, and aluminum. Iran is a major supplier of petroleum to China. With a population of 85 million, it is the most populous country in Western Asia.
The above-mentioned factors (sanctions, China’ economic growth needs, and Iran’s resources, market size and predicament), to varying degrees, have contributed to an increasingly close and, some argue, strategically important relationship between China and Iran. A multifaceted relationship between China and Iran has existed for about 2,000 years. However, in the modern era, formal diplomatic relations between the People’s Republic of China and Iran were established in 1971. These relations continued after the establishment of the Islamic Republic in 1979. The focus of this study will be the 1979-present period. Specifically, we will study: (1) the pattern of trade (volume, types of goods, etc.) between China and Iran—we will employ a formal modified Gravity Model of trade for this segment, (2) the pattern of Foreign Direct Investment (this has been mostly from China into Iran), and (3) the impact of the above two factors on the Iranian economy. We will then study whether, in fact, the relationship can be characterized as “strategic,” or whether a different paradigm is more appropriate. The problem of characterizing the relationship as “strategic” is partly due to the significant asymmetry between the economic and political positions of these two countries.
Existing academic/scholarly work in this area include those by Belal, Chen & Ren, Currier, Dorraj & Wu, Davis, Downs & Maloney, Garver, Hameed, Harold & Nader, Hufbauer et al, Liu &Wu, Shariatnia & Azizi, Talebi, van Kemenade, Wu, Wuthnow, and Zahirinejad & Ghoble.
