Challenges and Opportunities in China’s Economic Diplomacy with the Arab World

Source of the photo: China MFA

Over the past thirty years, China has experienced an average Gross Domestic Product (GDP) growth rate of over 10%, solidifying its position as one of the world’s fastest-growing economies. As the second-largest economy globally, China has emerged as a significant player in the world economy, holding several titles such as the world’s largest commodity exporter, manufacturer, holder of foreign exchange reserves, creditor nation, second-largest importer, and second-largest receiver of foreign direct investment (FDI).

This rapid development of China’s economy has resulted in a shift in the country’s foreign policy approach, with a focus on protecting its economic interests in Arab countries while avoiding political entanglements. China’s Middle East and North Africa (MENA) policy priorities reflect this approach.

One of China’s diplomatic policies is to promote economic cooperation while avoiding political participation. The Arab uprisings in recent years have presented a significant challenge to China’s leaders, who have responded cautiously to the uncertainty and political upheaval. The main goal has been to safeguard China’s foreign investment projects and residents in Arab nations undergoing transition.

China’s economic diplomacy has a significant reliance on the Arab world. In 2013, the Arab world was China’s seventh-largest commercial partner as a whole, with China being the second-largest trading partner for nine Arab states. In Algeria, China surpassed France as the largest commercial supplier in 2013, with exports worth US$6.6 billion compared to France’s US$5 billion. Unlike Western countries, China has maintained a safe distance from Arab politics.

Economic diplomacy encompasses several aspects such as exports, imports, investments, loans, and development aid. It involves not only sovereign governments but also global economic organizations like the International Monetary Fund (IMF), World Trade Organization (WTO), Organization of the Petroleum Exporting Countries (OPEC), as well as regional economic blocs and multinational enterprises (MNCs). Thus, economic diplomacy is both a means and an objective.

Economic diplomacy utilizes economic means to achieve political objectives. Diplomacy may use economic incentives (carrots) or disincentives (sticks) such as economic sanctions, blockades, or import reductions, to influence the target country’s policies and officials. Economic diplomacy merges economic and political statecraft to maximize national interests while minimizing diplomatic resources.

China’s economic diplomacy has three main characteristics. First, it engages in commercial and trade operations without intervening in foreign countries’ internal issues. Second, it uses political and diplomatic tactics to support overseas economic expansion, leveraging business contacts to obtain diplomatic support on issues like human rights, Taiwan, and Tibet in some regions, while frequently using political measures to achieve economic goals in the Arab world. In the 21st century, China’s foreign policy in MENA has focused on expanding export markets and investment opportunities. Third, its emphasis on building infrastructure through the Belt and Road Initiative. China has invested billions of dollars in Belt projects and has signed agreements with more than 100 countries, including many in the MENA region. Through this initiative, China seeks to expand its economic and strategic reach, while also addressing domestic overcapacity issues and providing an outlet for Chinese firms to expand overseas.

Chinese economic diplomacy is not uniform and is rooted in its business-first strategic philosophy that prioritizes economic growth. Its diplomatic dealings with Arab states prioritize commercial, rather than security, concerns. With the ongoing Arab revolts, China has adopted a pragmatic approach to seek maximum economic gains with minimal political risks. China utilizes the China Development Bank and Export-Import Bank to provide low-interest loans to MENA nations, repaid through resources or Chinese enterprises utilizing Chinese sources and materials.

Since the early 2000s, China’s economic diplomacy has shifted from industrialized to developing countries, particularly energy-rich Arab states. Compared to established economies, the resource-rich Arab countries of the Gulf and North Africa offer potential new markets for China’s surplus capital and manufactured goods. In 2013, China purchased 133 million tons of oil from the Arab world, accounting for 47.2% of its total imports. The Arab world is critical to China’s globalization and market diversification strategies, according to the official Xinhua News Agency. Since 2011, China’s economic diplomacy with Arab countries has focused on domestic demand.

China has come to recognize that the Arab world comprises countries with distinct national situations and policy orientations that have little in common with each other. China believes that bilateral economic cooperation with MENA countries is the most obvious connection between them, offering a win-win situation for both parties. China’s view is that the deep-rooted and complex MENA political disputes cannot be addressed anytime soon. Governments of countries in transition, such as Egypt, Libya, Tunisia, and Yemen, and those already in power, such as Algeria, Sudan, and the GCC nations, prioritize feeding their people and creating job opportunities. Many Arab countries are adopting an economic “looking eastward” approach, prioritizing strategic business partnerships with emerging Asian economies such as India and China.

Chinese senior officials, including President Xi, have frequently stated their ambition to achieve the “Chinese Dream of National Rejuvenation” since the twenty-first century offers significant strategic potential for China. Although the meaning and conditions of their strategic possibilities have changed, they still believe they have valuable prospects and good conditions for growth. With great power rivalry likely to be based on economics rather than a world conflict, stronger political relations with the Arab world will enhance Beijing’s economic diplomacy, translating into increased economic influence and soft-power presence in the volatile Arab world. Ultimately, this will give China a political edge over Western powers.

In contrast, the United States (US) emphasizes promoting democracy, ensuring Israeli survival, combating terrorism, preventing the proliferation of weapons of mass destruction, and maintaining US hegemony in Middle Eastern political and security affairs. China quietly penetrates the region, seeking a pragmatic, win-win development with Arab countries in the fields of energy and trade, avoiding confrontation with the US. Beijing’s senior officials believe China’s MENA economic growth policy mirrors the US security strategy. China seeks to protect its growing economic presence in the Arab world, rather than pursuing risky political or military objectives. Therefore, it has taken measures to protect China’s economic interests. In 2004, when former President Hu Jintao visited the Arab League headquarters in Cairo, the two sides announced the formation of the China-Arab States Cooperation Forum (CASCF), the most important instrument for promoting win-win bilateral ties at the ministerial level. Besides the China Investment Corporation (CIC), Beijing has established the State Administration of Foreign Exchange Investment Company (SAFEIC).

Since the Arab uprisings began, Chinese policymakers have shifted their focus towards the economy rather than political turmoil. To promote its economic diplomacy, China has established various international venues such as the Forum for China-Arab Civilization Dialogues, the China-Arab Friendship Conference, the China-Arab Press Cooperation Seminar, and the China-Arab Cultural Festival. High-level visits by Chinese leaders to Arab countries have played a crucial role in triggering economic diplomacy, with China’s primary focus being on resource-rich and politically stable Arab countries such as Saudi Arabia, Qatar, and the UAE. As a result, the Bank of China and the Industrial and Commercial Bank of China have established branches in these countries, while airlines like Air China, China Southern, and China Eastern have expanded their operations in Saudi Arabia, the UAE, and Qatar.

China also uses aid to promote economic diplomacy, offering economic aid, training programs, and student recruitment to Arab nations. In 2012, around 1,000 Arab professionals from various industries were trained in China, and over 8,000 Arab students were enrolled in Chinese universities. In 2012, China pledged to train an additional 5,000 Arab technicians and intellectuals during the fifth CASCF ministerial meeting in Tunisia, and in June 2014, President Xi announced that Beijing would educate 6,000 Arab workers and have 10,000 artists exchange visits over the following decade. China has also reaffirmed its commitment to sharing its state governance expertise with its Arab counterparts.

Despite their differences, China views the Arab countries as a “unified entity” and coordinates with other Ministries of Commerce, Science, and Technology, as well as the Communist Party of China (CPC) agencies. The Foreign Ministry’s Department of West Asian and North African Affairs and Department of African Affairs play a crucial role in supporting the CASCF and executing economic diplomacy, respectively. Negotiations for a free trade agreement (FTA) between China and the Gulf Cooperation Council (GCC) are ongoing, and China is hosting the China-Arab States Economic and Trade Forum. The Ministry of Commerce has announced additional standards for meaningful progress in bilateral discussions to speed up the China-GCC FTA process, and it maintains de facto control over foreign aid and influence over China’s domestic power structure in the State Council, making it a secondary actor in the CASCF system.

China’s Ministry of Science and Technology’s Asia and Africa Department has played a vital role in implementing China’s economic diplomacy in Arab nations. The International Department of the CPC is also a significant actor in China’s economic diplomacy in the MENA region. The first International Forum on Yangzhou-GCC Countries Cooperation on Petro-Chemical Industries was hosted by Yangzhou, Jiangsu Province, in late June 2010, with over 20 ambassadors, consuls-general, and other diplomats attending. The China-GCC States Forum on Sustainable Development was launched in Abu Dhabi in December 2012.

China’s economic diplomacy with the Arab world is not a centralized policy, and local entities sometimes compete for their provincial interests in the Arab world. For instance, the National Development and Reform Commission (NDRC) has the authority to approve foreign investment proposals worth more than $1 billion from Chinese companies. However, the Ministry of Commerce holds more influence than the Foreign Ministry in the CASCF as it can implement Beijing’s aid programs in the Arab world.

Since 2010, the China-Arab States Economic and Trade Forum (CAESTF) has been headquartered in Ningxia, where the third China-Arab States Economic and Trade Forum was held in 2012, attended by over 7,000 delegates from developing countries such as Libya, Jordan, Iraq, and Qatar. The third China-Arab States Energy Conference, the fourth China-Arab States Friendship Conference, the China-GCC States Investment Conference, the China-Arab States Joint Chamber of Commerce Meeting, and the 2012 Yinchuan International Muslim Entrepreneurs’ Summit were also hosted in Ningxia.

Yiwu city in Zhejiang Province actively promotes China’s economic diplomacy with Arab nations. The city is the world’s largest commodities distribution centre and the Middle East’s most extensive commercial transaction hub in China. Yiwu now has over 580,000 foreign businesspeople and 1,500 enterprises from more than 20 Islamic nations. Although it is impossible to quantify the number of Arab employees and businesses in China, the registered permanent Arabs alone number over 12,000, making up the largest Arab population in modern China. In 2011, 189 Egyptian companies had registered in Yiwu, with 400 more planning to do so soon. Yiwu has allocated RMB8 million (approximately $130 million) to restore mosques and has worked hard to strengthen its investment and cultural environment.

China’s national oil firms such as China National Petroleum Corporation (CNPC) and SINOPEC play a significant role in China’s economic diplomacy in the Arab world, as evidenced by their investments in Sudan, South Sudan, Iraq, Saudi Arabia, and Libya. These state-owned oil companies incorporate their foreign investment plans with China’s globalization policy, controlling large shares in Iraq’s al-Ahdad, Halfaya, and Rumaila oil fields. In an effort to improve relations with Baghdad, Beijing cancelled around 80% of Iraq’s $8.5 billion debt.

Despite the Arab uprisings, Arab nations still appreciate China’s economic development model, particularly when led by competent leaders such as China’s current government. China’s economic diplomacy with Arab countries has been successful, as evidenced by the increase in commerce between China and the Arab States from US$107.4 billion in 2010 to US$238.86 billion in 2013. President Xi Jinping has stated that China intends to double its trade with Arab states by 2024.

The Arab world was viewed as a monolithic power by China before the Arab revolts; however, the Arab world has become increasingly divided, facing numerous challenges. The CASCF is a symbol with limited substance and institutionalization, with disparities in national interests and difficulties in coordinating among the 22 Arab nations hampering the creation of a unified Arab strategy toward China. Unlike those procedures, the CASCF is still a ministerial level event. Additionally, the Arab uprisings exposed China’s economic diplomacy. Beijing used to import 11% of Libyan crude oil and had around 50 projects in the country’s infrastructure, telecom, and energy sectors worth an estimated $18.8 billion, employing over 35,000 Chinese citizens who had to be evacuated in late 2011.

China’s foreign policy has not yet prioritized Arab nations, as it is divided into four rings: ties with big powers, contacts with neighbors, connections with developing nations, and interactions with multilateral institutions. President Xi’s first international visit in 2013 was to Russia and several African countries, with subsequent visits to Latin America and the US, not Arab countries. Most Arab investments are directed toward Western countries, not China. In 2013, China’s FDI to Arab countries was only $2.2 billion, or 2% of its total FDI abroad. China’s economic diplomacy has yet to elevate Sino-Arab relations to a political and military strategic level.

In response to the Arab upheavals, China’s economic diplomacy has tried to avoid political entanglements, which has hindered its implementation. The alliance of China and Arab countries was predicted by Huntington in his Clash of Civilizations theory in the early 21^st century. Western officials would not let China gradually penetrate the MENA; a region critical to their geopolitical interests.

China’s economic diplomacy with the Arab world has been hampered by a lack of cultural connections. The foreign ministry, as well as Chinese embassies and consulates abroad, have traditionally focused on commercial and business relations. Additionally, China’s state-run Xinhua News Agency has been unable to compete with Western media since 2013. Contacts between China and the Arab world in areas such as academia, media, youth, and think tanks are limited. Although bilateral trade is growing, it does not necessarily enhance China’s image in the Arab world. Thus, Beijing still has a long way to go to win the hearts and minds of the Arab people, which has hindered China’s economic diplomacy.

Despite the challenges, China’s economic diplomacy towards the Arab world is becoming more active. As the largest lender to developing countries, many of which are in the Middle East, China is surpassing the World Bank. Unlike the US, China’s policy towards Arab countries is pragmatic, tactical, and transitory, driven by a pragmatic geo-economic vision.

While Sino-foreign economic relations are based on mutually beneficial trade agreements, China has not effectively used economic instruments to coerce the Arab countries, unlike what it did to Japan and the Philippines in East Asia through economic sanctions and embargoes. This is because China heavily relies on the Arab countries for emerging markets, investments, and energy supplies.

China’s economic diplomacy with the Arab world is driven by domestic demand for foreign oil and markets, and is coordinated between the State Council and the ruling CPC. However, a centralized economic diplomacy towards the Arab world is difficult, if not impossible, due to the disparate interests of various agencies. To create a strategic economic alliance with Sudan, Algeria, and Egypt, China focuses on the GCC countries through the CASCF, state visits, and development financing. However, following the Arab uprisings, China’s economic diplomacy of pursuing just economic gains while avoiding political entanglements may become unworkable. The Chinese government has been concerned about the possible threat to its overseas projects and expatriates, so it has so far avoided the political fallout from the MENA turmoil.

 

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