Proxy Battle Between China and the USA in the Middle East Part One

Proxy Battle Between China and the U.S. in the Middle East Part One

Proxy Battle Between China and the U.S. in the Middle East: According to Iran Gate, what consequences does the open confrontation between China and the United States have for Middle Eastern players?

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

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

This policy leads to a decoupling process, meaning a reduction in economic interdependence between the United States and China, especially in sectors that use advanced technology such as telecommunications, defense, aerospace security, and artificial intelligence. A key aspect of this process is the relocation of American manufacturing companies out of China and back to the United States, reshoring, or transferring to allied countries, friendshoring.

These dynamics contribute to increasing international tensions, not only in Taiwan or the South China Sea but on a global scale. Additionally, tensions between these two countries help highlight some of the structural weaknesses of China’s economy. China’s exports decreased by 14.5% last year, and it can be said that the U.S. risk reduction policy has not been without impact on this decline.

Moreover, China’s real estate market has remained unstable since the bubble burst in August 2021, and consumer spending remains low. Youth unemployment has reached 21.3% based on June data, and Chinese officials have decided to stop releasing employment-related data by age group. According to Bloomberg, China is on the brink of deflation, which could mark the beginning of a prolonged period of advanced anemia. There are still those who talk about the end of China’s economic miracle.

Multiple Consequences of Tensions Between the United States and China in the Middle East

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

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

In the Middle East, these developments add to the consequences of Russia’s invasion of Ukraine, which in 2022 led to a sharp increase in hydrocarbon prices and spurred economic growth in exporting countries like Saudi Arabia, the United Arab Emirates, and Qatar. At the same time, it caused financial and economic problems in several importing countries, including Jordan, Egypt, and Tunisia.

The war in Ukraine has also caused food insecurity and inflation in Yemen, Syria, Egypt, Lebanon, and parts of Iraq, which depend on wheat imports. In 2022, the average economic growth in the Middle East and North Africa (MENA) was 5.9%, but inflationary pressures forced many central banks to raise interest rates. These dynamics, along with China’s economic slowdown and its negative effects on the global economy, have led to a sharp decline in economic growth in the region. According to World Bank estimates, the average growth in the MENA region in 2023 will be around 2.2%.

It should be noted that the negative effects of economic growth slowdown on the Middle East and North Africa region are not uniform, as these areas include countries with completely different economic and social conditions. Saudi Arabia and other Gulf Cooperation Council countries—Kuwait, Bahrain, Qatar, the United Arab Emirates, and Oman—have sufficient income and financial reserves to ensure their security. Except for Bahrain, these countries are not facing an imminent political instability problem, but at the same time, the decrease in crude oil prices and production negatively impacts the economies of the Gulf monarchies.

Saudi Arabia recorded an 8.6% growth rate in 2022 because the war in Ukraine and the West’s break from Russia increased oil prices. However, in 2023, China’s economic problems brought crude oil prices below $80 per barrel for several months. Saudi Arabia responded to this event by reducing oil production to increase prices.

Riyadh’s voluntary oil production cut 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 Saudi Kingdom must keep crude oil prices above $81 per barrel to have sufficient resources to pursue its Vision 2030 and massive projects like The Line, a linear smart city in Neom, Tabuk.

Designed in such a way that it has no cars, streets, or carbon emissions, this project includes two parallel skyscrapers 500 meters tall and 170 kilometers long in the middle of the desert in the northeast of the country. However, the combination of reduced production and lower prices is somehow felt. The International Monetary Fund predicts that Saudi Arabia’s growth in 2023 will be around 1.9%. In the short or medium term, this will not pose a serious problem for Riyadh.

The same applies to other Gulf Cooperation Council member countries, which, despite reduced growth, still enjoy a strong economic and financial position and also have enough room to maneuver to reset development policies and manage energy transition. Other Arab countries, as well as Iran, are in a much more vulnerable position. In many cases, the economic pressure from the global recession exacerbates a set of parallel problems, including poverty, unemployment, inflation, economic crisis, and public discontent.

Lebanon, Egypt, and Tunisia face excessive public debts, and the economic problems caused by COVID-19 have worsened their financial situation. Lebanon’s economy and currency have already collapsed. Now Egypt and Tunisia also find themselves on the brink of collapse. In recent years, Egypt has faced its worst currency crisis. Also, due to the war in Ukraine, these countries are exposed to food insecurity and inflation, especially food inflation. Mismanagement of public debts is a sensitive issue. Without reforms, the economic and financial crisis in these countries will worsen, and austerity policies pose the risk of creating social crises and instability.

China, along with the World Bank, the International Monetary Fund, and Western countries, is one of the main investors and financial resource providers 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 figure of these debts is unclear because China has a controversial policy of keeping the amount of loaned money and the conditions under which it was given confidential.

Recent investigations have shown that many of China’s loans to developing countries do not appear in official public debt data because these loans were not granted directly to governments but to offshore shell companies. These contracts also include clauses stipulating that recipient countries cannot discuss these loans with any entity or government other than China.

Egypt’s debt to China, according to officially announced statistics, is around $8 billion, but this figure could be much higher considering Beijing’s leading role in constructing the new capital, a mega project envisioned by Egypt’s president, with an estimated cost of $59 billion.

In the case of Jordan, its debt to China is related to the construction of the Attarat power plant, a major project worth over two billion dollars that uses oil shale to produce electricity. It has been proven that this power plant is economically unjustifiable because Jordan can now obtain electricity at a much more competitive and affordable price using Egyptian gas or by purchasing electricity directly from Israel.

Gulf countries, which in the past often intervened to help other Gulf countries during economic difficulties, have recently shown less willingness to provide generous aid and loans because their current priority, given the uncertainty of long-term demand for oil and gas, is economic diversification to reduce dependence on hydrocarbons.

The economic and financial stability policies of countries like Egypt and Jordan require coordination among financial provider countries, but with increasing tensions between the United States and China, this coordination is currently almost nonexistent. 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 key topics will be how to coordinate the management of public debts, which, beyond tensions between Washington and Beijing, is one of the main common interests of the international community.

In today’s world, more than 55 countries face serious public debt problems. A recent International Monetary Fund report confirms that in the Middle East, the countries at risk of a debt crisis are Egypt, Jordan, and Tunisia, while Lebanon is currently in a state of perpetual crisis.

Climate Change and the Competition Between Washington and Beijing

Another consequence of the tension between the United States and China is that international cooperation in combating climate change has been significantly weakened. Agreements to reduce emissions and policies to mitigate the damages caused by climate change require extensive international cooperation, especially from Washington and Beijing, which are the two main producers of carbon dioxide worldwide.

If this cooperation was insufficient in the past, it is now at risk of collapse. Despite the positive tone of China and the U.S. in the latest climate change negotiations, representatives of the two superpowers mainly discussed managing diplomatic relations rather than climate actions. The director of China’s National Energy Administration later announced that China must maintain confidentiality about the quality and quantity of its energy consumption.

He also used the term ‘hostile forces’ regarding the U.S. and its allies. Chinese President Xi Jinping also stated in one of his remarks that China alone will decide how and when to deal with the climate crisis without foreign interference. Given that China is the world’s largest emitter of carbon dioxide and its economy still relies on coal for about 60% of its national energy consumption, such remarks are concerning.

Meanwhile, climate change has devastating effects in the Middle East and North Africa, especially in countries with insufficient consumption reduction policies and less adaptation. These areas, due to water scarcity and political instability affecting many countries, are more vulnerable to climate shocks. According to the United Nations, climate change actually acts as a ‘risk multiplier,’ affecting the economic and food stability of more fragile communities, increasing the risk of social and humanitarian crises, and consequently contributing to instability and conflicts.

Countries that have been most affected are likely those in conditions of internal conflict 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 of their agricultural communities, leading to migratory flows towards overcrowded cities filled with social tensions, exacerbating 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. In all these countries, droughts, extreme weather events, desertification processes, and other adverse environmental phenomena reduce the sustainability of the agricultural sector, consequently increasing dependency on food imports.

Climate change will also lead to domestic and international migration flows, not only in the Middle East but across vast areas of Africa and Asia, and the number of climate refugees is expected to increase dramatically in the coming years. Therefore, climate change has implications not only for the environment but also for stability and security.

This is a global problem and cannot be solved without coordinated action from China, the United States, and other countries. On the other hand, tensions between Washington and Beijing contribute to weakening international cooperation to address this potential threat.

In the next part, other dimensions of the consequences of tensions between Washington and Beijing in the Middle East will be addressed.