The Proxy Battle between China and the United States in the Middle East – Part 1

Proxy Battle Between China and the US in the Middle East – Part 1

The proxy battle between China and the US in the Middle East has significant implications for the actors in the region, according to Iran Gate’s report.

Relations between Washington and Beijing remain tense, and the competition between these two superpowers has far-reaching consequences worldwide, including the Middle East. Although both Washington and Beijing insist on downplaying the extent of their strategic competition, it is now clear that both governments are seeking to develop independent supply chains.

The US risk reduction policy includes halting the export of the most advanced semiconductors and their production equipment to China, banning trade with 600 Chinese companies due to their ties to the Chinese military or human rights violations, and exerting political pressure on allies and trading partners to reduce economic ties with China.

This policy leads to a process of separation, which means reducing mutual economic dependence between the United States and China, especially in sectors that utilize advanced technology such as telecommunications, defense, aerospace, and artificial intelligence. One of the key dimensions of this process is the relocation of American manufacturing companies outside of China and their return to the United States, known as reshoring, or their relocation to allied countries, known as friend reshoring.

These trends contribute to increasing international tensions, not only in Taiwan or the South China Sea but also on a global scale. In addition to highlighting some structural weaknesses in China’s economy, these tensions have led to a significant decrease of 145% in China’s exports last year. It can be said that the US risk reduction policy has not been ineffective in this decrease.

In addition, the real estate market in China has remained unstable since the bursting of the bubble in August 2021, and consumer spending is still low. The youth unemployment rate has reached 213 percent, according to June data, and Chinese authorities have decided to suspend the publication of employment-related data based on age groups, according to Bloomberg. China is on the verge of reducing inflation, which could mark the beginning of a prolonged period of economic stagnation. There are still those who talk about the end of China’s economic miracle.

Multiple consequences of tension between the United States and China in the Middle East

The slowdown in China’s economic growth has led to a reduction in global economic growth, as China’s demand for raw materials and other goods has decreased, from construction materials to electronics. Japan, South Korea, Thailand, along with several African countries, are among the economies that have been most affected. However, the consequences are also felt on a global scale. In the Middle East, oil prices are under pressure. China has been the main buyer of crude oil in the region for years. Saudi Arabia, Iraq, the United Arab Emirates, Oman, Kuwait, and Iran are the most important suppliers of crude oil in this region.

Even some Asian economies that have been affected the most by China’s economic slowdown, such as Japan or South Korea, are dependent on the oil-producing countries in the Persian Gulf. The price of crude oil remains relatively high in international markets, but it has significantly decreased compared to 2022, mainly due to China’s economic slowdown. If the production reduction policy of OPEC+ is not adopted to increase the price of crude oil by reducing supply in international markets, the price of crude oil would certainly fall further.

In the Middle East, these developments are compounded by the repercussions of Russia’s invasion of Ukraine, which caused a sharp increase in hydrocarbon prices in 2022 and benefited exporting countries such as Saudi Arabia, the United Arab Emirates, and Qatar. However, it also led to financial and economic problems in several importing countries, including Jordan, Egypt, and Tunisia.

Saudi Arabia had recorded an 86% growth rate in 2022 due to the war in Ukraine and the West’s separation from Russia, which had caused an increase in oil prices. However, in 2023, China’s economic problems lowered the price of crude oil to below $80 per barrel for several months. In response to this event, Saudi Arabia reduced oil production in order to increase prices.

Riyadh’s voluntary reduction in oil production exceeds one million barrels per day, which is beyond the agreements set by OPEC+ member countries to limit supply until 2024. According to the International Monetary Fund, the Kingdom of Saudi Arabia needs to maintain the price of crude oil above $81 per barrel in order to have sufficient resources to pursue its 2030 vision and massive projects such as the NEOM linear smart city in Tabuk.

The project involves having a carbon-free street or carbon-neutral vehicle design. It consists of two parallel skyscrapers, 500 meters high and 170 kilometers long, in the middle of the desert in the northeast of the country. It feels like a combination of reduced production and reduced prices. The International Monetary Fund predicts that Saudi Arabia’s growth in 2023 will be around 19 percent. In the short or medium term, this will not pose a serious problem for Riyadh.

The same applies to other member countries of the Gulf Cooperation Council, who despite reduced growth, still have a strong economic and financial position. They also have enough room to maneuver in order to adjust their development policies and energy management. Other Arab countries, as well as Iran, are in a very vulnerable position. In many cases, the economic pressure resulting from the global recession exacerbates a set of parallel problems, including poverty, unemployment, inflation, economic crisis, and public dissatisfaction.

Lebanon, Egypt, and Tunisia have all faced excessive public debts and the economic problems resulting from COVID-19 have worsened their financial situations. Lebanon’s economy and currency have already collapsed, and now Egypt and Tunisia also see themselves on the brink of collapse. In recent years, Egypt has experienced the worst currency crisis. Additionally, due to the war in Ukraine, these countries are exposed to food insecurity and inflation, especially food inflation. Managing government debts is a sensitive issue. Without reforms, the economic and financial crises in these countries will intensify, and austerity policies pose the risk of social and political instability.

China, along with the World Bank, the International Monetary Fund, and Western countries, is one of the main investors and providers of financial resources for developing countries. Many debts in the Middle East and North Africa are held by international financial institutions and Western countries, but Egypt and Jordan have significant debts to China. The exact amount of these debts is uncertain because China has a controversial policy of secrecy regarding the amount of money loaned and the conditions under which it is given.

Recent investigations have shown that many of China’s loans to developing countries are not reflected in official public debt data, as these loans are not directly given to governments but rather to offshore subsidiary companies. These contracts also include clauses that restrict recipient countries from discussing these loans with any entity or government other than China.

Egypt’s debt to China, according to official statistics, is around $8 billion, but considering Beijing’s leading role in the construction of Egypt’s new capital mega-project, which is estimated to cost $59 billion, this figure can be much higher.

Regarding Jordan’s debt to China, it is related to the construction of the Attarat power plant, a large project worth over $2 billion that uses shale oil for electricity production. In fact, it has been proven that this power plant has no economic justification, as Jordan can now obtain electricity at a much more competitive and cost-effective price by using gas from Egypt or directly purchasing electricity from Israel.

Recently, the countries in the Persian Gulf region, which used to intervene to help other Gulf countries in times of economic difficulties, show less inclination to provide generous assistance and loans themselves. This is because their priority now is to reduce dependence on hydrocarbons by diversifying their economy, given the uncertainty of long-term demand for oil and gas.

The economic and financial stability policies of countries such as Egypt and Jordan require coordination among financial supplier countries. However, with increasing tensions between the United States and China, this coordination is currently almost non-existent. The annual meeting of the International Monetary Fund and the World Bank will be held in Morocco from October 9 to 15 this year, and one of the main topics is how to coordinate government debt management, which is one of the most important common interests of the international community beyond tensions between Washington and Beijing.

Today, more than 55 countries are facing serious public debt problems in the world. A recent report by the International Monetary Fund confirms that in the Middle East, countries at risk of debt crises are Egypt, Jordan, and Tunisia, while Lebanon is currently in a permanent crisis situation.

Climate change and competition between Washington and Beijing

One of the consequences of tension between the United States and China is that international cooperation in combating climate change has significantly weakened. Reduction agreements and policies to mitigate the impacts of climate change require extensive international cooperation, especially from Washington and Beijing, which are the two major carbon dioxide producers worldwide.

If this cooperation was insufficient in the past, it is now at risk of collapsing. Despite the positive tone of China and the United States in the latest climate change negotiations, representatives of the two superpowers mainly focused on managing diplomatic relations rather than climate actions. Later, the director of China’s National Energy Agency announced that China must maintain secrecy regarding the quality and quantity of its energy consumption.

He also spoke about the conflicting forces regarding America and its allies, Chinese President Xi Jinping had also stated in one of his statements that China will decide alone how and when to deal with the climate crisis without foreign intervention. Considering that China is the world’s largest emitter of carbon dioxide and its economy is still dependent on coal for about 60% of its national energy consumption, such statements are concerning.

Meanwhile, climate change has devastating effects on the Middle East and North Africa, especially in countries with insufficient consumption reduction policies and less adaptability. These regions are more vulnerable to climate shocks due to water scarcity and political instability that affects many countries. According to the United Nations, climate change actually acts as a multiplier of risk, impacting the economic and food security of vulnerable communities. It increases the risk of social and humanitarian crises and contributes to instability and conflicts.

Countries that have been most affected are likely those that have experienced internal conflicts and turmoil, such as Syria, Iraq, Yemen, and Sudan. Without institutions capable of mitigating the effects of climate change, these countries have already witnessed the collapse of many agricultural communities. The consequences include increased migration towards overcrowded and socially tense cities, food insecurity, and the risk of malnutrition.

Even in countries like Morocco, Algeria, Tunisia, and Iran, climate change has serious social, economic, and environmental consequences. Droughts, extreme weather events, desertification processes, and other undesirable environmental phenomena all contribute to the decline of sustainable agriculture and exacerbate dependence on food imports.

Climate change will also lead to internal and international migration flows, not only in the Middle East but also in vast regions of Africa and Asia. The number of climate refugees is expected to significantly increase in the coming years. Therefore, climate change has consequences not only for the environment but also for stability and security.

This is a global problem and without coordinated action from China, the United States, and other countries, it will not be solvable. On the other hand, tensions between Washington and Beijing undermine international cooperation in addressing this potential threat.

In the next section, it will explore other dimensions of the consequences of tensions between Washington and Beijing in the Middle East.