Eyeing Business Opportunities in Iran: Germany Caught between China and the U.S.
New Research Initiative Fellow
Yixiang Xu is the Fellow for the New Research Initiative at AICGS, working on the Institute’s China-Germany-U.S. triangular relationship initiative. He also researches international economic and trade issues. Previously, he worked at AICGS as a research assistant.
Mr. Xu received his MA in International Political Economy from The Josef Korbel School of International Studies at The University of Denver and his BA in Linguistics and Classics from The University of Pittsburgh.
Days after the announcement of the historic nuclear deal with Iran, German Vice Chancellor and Minister of Economic Affairs and Energy Sigmar Gabriel found himself in Tehran, with a delegation of German business leaders. Like many other European countries, Germany sees tremendous growth potential in Iran in the post-sanction era. That means more business for German companies. The Federation of German Industries (Bundesverband der Deutsche Industrie, BDI) already estimated that German exports to Iran could quadruple from €2.4 billion in 2014 to €10 billion in the next few years. A rapidly expanding Iranian market would provide German industry with a fresh source of growth in an era troubled by the euro crisis and slowing demand in China.
Years of Exodus for German Businesses
Once among Iran’s most important trading partners, Germany’s business interests in the country were slashed by U.S.-led sanctions. Fearing U.S. retaliation, many German businesses terminated their engagement in Iran. As they withdrew, Chinese companies moved in to fill the vacancy. During the tough years under the sanctions, Iran saw its trade and investment ties with China grow. Today, China is Iran’s top trade partner, with 35 percent of Iranian exports going to China and 21 percent of its imports coming from China. The vacuum left behind by Western companies also allowed Chinese firms to step into infrastructure development projects. The five subway lines in Tehran were built with the help of Chinese-provided funding, construction, and cars. China’s strong support for lifting the sanctions reflects its interests in deepening its already extensive trade and investment ties with Iran under more favorable international conditions.
German companies, constrained by international sanctions on Iran and especially by tight U.S. banking restrictions, lacked the ability to penetrate the Iranian market. At the time of Gabriel’s visit, only 80 German companies were operating in Iran. That number could rise significantly after the nuclear deal clears the path for reentering the Iranian market. Although Chinese companies have established a strong trade and investment position in Iran in the sanction years, the Iranians have not always been pleased with the quality and sophistication of Chinese products. In Iran, there’s a sense of nostalgia for pre-revolution Western industrial imports, especially German machinery. Largely left out of the international market in recent years, Iran’s industries and infrastructures are in desperate need of modernization.
Extensive Opportunities in Iran
The revival of German-Iranian trade and investment relations will allow German companies to play an active role in Iran’s economic development in the post-sanction era. German technological know-how in mechanical engineering and auto manufacturing would not only upgrade Iran’s industrial capacity in these sectors, but also expand domestic consumption in the country. Per capita motor vehicle ownership in Iran stood at 200 vehicles per 1,000 inhabitants in 2012, a third of that in Germany and a quarter of that in the United States. With the sanctions cast aside, Iran’s population of over 77 billion will create an important market for German auto manufacturers in the coming years.
Germany’s chemical and energy industrial could also see extensive engagement in Iran. Under the sanctions, Iranian exports were confined to raw materials. Over 70 percent of the country’s export revenue is derived from crude oil alone. Facing lingering low oil prices, the Iranian government is eager to upgrade and diversify its economy. Efforts such as expanding exploration and modernizing refineries would benefit tremendously from German partnerships.
Germany between Two Giants
As Gabriel sat to admire the craftsmanship of beautiful Iranian carpets in Tehran, he saw the bright future of the German-Iranian economic partnership in the many dazzling colors. But like the carpets, the future of that relationship is inter-woven with other players.
China, which established itself as Iran’s top trade and investment partner during the sanction years, seeks to strengthen and expand its business ties with Iran. In recent years, Chinese consumption of Iranian oil kept the sanction-besieged country from sliding further into financial hardship through infrastructure investment and an oil-for-service barter system between the two countries. Although German companies could bring more sophisticated technologies, the government in Tehran could find the easier access to and the lack of conditionalities of Chinese finance more attractive. China’s pursuit of deeper economic ties in Iran is complemented by its “One-Belt-One-Road” strategy, which would create an extensive economic network in Central Asia. Compared to their German counterparts, Chinese companies enjoy a higher degree of freedom to engage in Iran with full support from Beijing.
The close economic ties between Tehran and Beijing in recent years also incubated close political relations between the two countries. Angered by Western sanctions and accusations, Iran found validation and security in China’s “non-interventionist” approach. Alternative international organizations led by China, like the Shanghai Cooperation Organization (SCO), offered Iran a stage to vent its anger and frustration toward the United States and its Western allies.
Iran’s closer political partnership with China, as well as with Russia, could severely reduce U.S. interests and influence in Middle East and Central Asia, which the United States has fought hard to assert in recent year. As European leaders rush to mend ties in Iran, President Barack Obama labors to pass the nuclear deal through the U.S. Congress. Despite having no viable alternative proposal, opposition to the deal is strong from Republican lawmakers. Whether it is concerns regarding the security of Israel or U.S. strategic positions in the Middle East, opponents of the deal show no desire to pull Iran back into the international market. The international sanctions regime is crumbling, but some in the United States are not ready to let go. Mistrust between Iran and the United States runs deep and threatens to undermine any progress. So far, European delegations to Tehran continue, with the blessing of the EU, and operate under the assumption that there will be no return to sanctions. Even in the event that the U.S. Congress blocks the deal, rapid rapprochement with Europe makes it harder to isolate Iran again.
As valid as the assessment is, the euphoria generated by the deal should not mask the potential of U.S.-led altercations with Iran in the future. There are plenty of issues to quarrel over. Iran’s denial of Israel’s right to exist and its support for terrorist groups such as Hezbollah are grounds for future strife, in which Germany will undoubtedly take part. As Iran’s economy takes off, the United States and its allies will closely monitor how Iran directs its energy in the region. Confrontations with Iran, if they would indeed take place, will again cast German businesses to the realm of acute risk and uncertainty.
Gabriel’s visit to Tehran could usher in a new era of revitalized German business engagement in Iran, boosting German exports and generating new sources of growth for German companies. The desire for Germany to do business in Iran is reflected in Tehran. In its pursuit of new business opportunities in the country, Germany finds itself caught between the growing influence from China and elements of a strong opposition in the United States. For Germany and German businesses, the road to opportunity in Iran is nudged between the two great powers.