Geopolitical and Geoeconomic Challenges to China’s Silk Road Strategy in the Middle East

This essay is part of the series “All About China”—a journey into the history and diverse culture of China through essays that shed light on the lasting imprint of China’s past encounters with the Islamic world as well as an exploration of the increasingly vibrant and complex dynamics of contemporary Sino-Middle Eastern relations. Read more ...

Despite Beijing’s increasing engagement in the Middle East, it lacks a clear, consistent, and comprehensive strategy for the successful implementation of the new Silk Road. Although China’s Belt and Road Initiative (BRI) framework for cooperation with the Middle Eastern states is marked by strategic flexibility and maximizing opportunities, that may prove insufficient. As China and the countries of the region become more integrated, they will also share risks and face near-term geopolitical and geoeconomic challenges.

Geopolitical Challenges

Since the turn of the century, the Middle East has been experiencing a profound transformation that has exposed the region to geopolitical threats and instability. As regional order and international relations are yet to reach a new equilibrium in the process of disintegration, such restructuring could easily trigger geo-political conflicts, even wars, and lead to increased uncertainty and risk in the new Silk Road construction. The BRI reveals China to be an ambitious power, seeking regional dominance in the short term and global dominance in the long term. Like the US Marshall Plan for Europe, the BRI is China’s attempt to make itself appear as a benevolent country with leadership potential. Thus, it created hostility among other regional and global powers, with some seeking to counter Beijing’s inroads.

First, “great power” competition between the United States and Russia is likely to have adverse implications for the successful implementation of the BRI. The Middle East serves as an arena for proxy conflicts between the US and Russia. Taking advantage of the US eastward strategic rebalancing, Russia has reemerged as a key powerbroker and military actor in the Middle East, notably in Syria. In most instances, Beijing seems to have supported Moscow’s position. However, China’s plans for a long-term presence in the region will most likely require it to be more active on the political stage and adopt an independent policy orientation. Indeed, without playing an active role in addressing the central issues facing the Middle East, there is very little chance of China influencing regional dynamics.

Second, the regionwide strategic rivalry between Saudi Arabia and Iran is roiling the Middle East. The proxy battles waged by the two countries in Iraq, Syria, Yemen, Lebanon, and elsewhere have exacerbated regional tensions and fueled Sunni-Shia sectarian animosity across the Muslim world.[1] The ongoing struggle between Iran and Saudi Arabia, coupled with the US withdrawal from the JCPOA and reimposition of sanctions against Iran have complicated Beijing’s efforts to advance the BRI. Uniquely situated at the intersection of the Silk Road Economic Belt (SREB) and the Maritime Silk Road (MSRI), Iran is one of the major countries along the China-Central Asia-West Asia (CCAWA) Economic Corridor — a potential strategic hub linking the Middle East, Central, and South Asia and situated at the intersection of the SREB and the MSR.[2] Given Iran’s strategic location and abundant oil and gas resources,[3] it is not surprising that Beijing considers the integration of the country into the BRI to be so important.

Paradoxically, Iran’s regional hegemonic potential and aspirations could themeslves potentially do more to harm than to advance the prospects for the BRI. A more capable Shia Iran with a revisionist orientation intent on expanding its power is sure to certain to meet strong resistance from the Sunni-led Gulf States, which are also indispensable to the BRI.[4]

Third, China’s efforts to advance the BRI also face potential terrorist threats from violent extremist groups that are active in the Middle East. Such groups could damage or destroy BRI infrastructure projects. There is also a possibility that extremist groups or criminal networks might kidnap Chinese workers for their own political or economic goals.[5] [6] In the counterterrorism sphere, Beijing will rely on its partnerships with the Middle East states to enhance security along the BRI’s routes.[7]

Fourth, the region is beset by numerous hotspots and flashpoints of conflict. A sudden crisis may erupt over unresolved territorial or maritime disputes. The impasse between Qatar and its GCC neighbors could continue or the sharp divisions between them grow even wider. The hostility between the United States and Iran, or between Sausi Arabia and Iran could burst into open conflict. The civil war and humanitarian catastrophe in Yemen might drag on, producing a failed state and incubator for violent extremist networks. These uncertain and problematic conditions place China’s BRI plans at risk. 

Geoeconomic Challenges

The prospects for the Silk Road strategy’s successful implementation in the Middle East must also be viewed in the context of a multitude of geoeconomic challenges with which the countries of the region are continuing to wrestle. These challenges range from the high barrier to market access, bureaucratic corruption, complex business environment, weak governance and the rule of law, low regional economic and trade integration, lack of economic diversification, and low productivity growth, to inequality in earnings, the bottleneck in project funding, obstacles to doing business, the stability of regimes, concerns about the terms of loans and investment, and lack of central coordination.

First, most Middle Eastern countries are at the primary stage of industrialization, and they are susceptible to US and Western influence. Therefore, the BRI faces both internal and external constraints. For the most part, Middle Eastern countries have welcomed Chinese investment. However, six years into the BRI, there are some signs that this warm welcome might be waning. Echoing concerns heard in Asia, critics are pointing out that the Belt and Road projects often seem to bring more significant benefits to China than to the host countries. In addition to calling on China to hire local workers instead of Chinese workers, Beijing’s partners and outside observers also raise questions about debt sustainability, environmental impact, corruption, and the China’s overall motives.[8]

Second, the depletion of foreign currency reserves and uncertainty about future oil prices have forced the Gulf states to adopt restraint in economic policy, including streamlining and cost-cutting measures. Government agencies across the region have been instructed to cut their spending on new projects and return unused budget allocations to the Ministry of Finance. The Gulf states seek increasingly to escape their profound dependence on oil revenues through streamlining, diversification of revenue sources, and adoption of the principles of a modern economy. However, the main difficulty in converting the oil-based Gulf economies to diversify is that political and social stability in these countries is directly related to the high standard of living of their citizens, which is supported by oil money.[9] Economic or social instability in the Gulf states could influence or threaten the implementation of the BRI.

Third, there is a high barrier to market access in the Gulf region. Business and foreign investments in the Gulf states have been struggling due to bureaucratic corruption and royal monopoly. On the one hand, red tape in the government’s approval process jeopardizes the progress and profitability of projects. On the other hand, governments have sought to curb imports. Chinese enterprises have no distinct price advantage in the ratings and evaluation of foreign enterprises and contracted projects. There is also fierce competition with other countries. The Gulf states, having dealt with the US and European countries for a long time, tend to recognize Western standards in planning and design, production and operation, and quality supervision. In the traditional civil engineering field, Beijing is facing competition from other developing countries such as India and Turkey. The comparative advantage of Chinese enterprises is relatively weak.[10]

Fourth, according to the Corruption Perceptions Index 2019, about 70% of Middle Eastern countries scored below 50, which is a failing grade. Only five countries — the UAE, Israel, Saudi Arabia, Oman, and Qatar — have managed to remain above this average.[11] Most of the Middle Eastern states are experiencing political instability, internal conflicts, war, terrorism, and economic collapse. These phenomena feed corruption, which in turn, further fuels them. In these respects, the BRI may become a risky gamble for government investments and Chinese investors.[12]

Fifth, the Middle East is a highly complex business environment, marked by weak governance and the rule of law, low regional economic and trade integration, lack of economic diversification, and low productivity growth — all of which have curtailed the region’s ability to tap its significant potential for economic growth.[13] With the dramatic fall in oil prices and coronavirus disease outbreak fostering economic diversification and industrial restructuring has become paramount for many countries, including even oil-rich ones.[14] The region is also in dire need of high-quality infrastructure to accelerate investment, provide new jobs for its booming youth population, and create sustained and inclusive growth. According to the World Bank, the Middle East needs to invest over $100 billion annually to maintain existing infrastructure and to create new infrastructure to serve its burgeoning population.[15] Many regional economies lack adequate financing, a problem likely to be compounded by the fall in oil prices, escalating social and economic costs and slowdowns in global growth and trade induced by the covid-19 pandemic.[16]

Bottlenecks in project funding in the Middle East region are additional concern. Infrastructure projects generally feature low profitability, an extended period for return on investment, and strict government monitoring; accordingly, private investment and available financing channels are limited. As most Middle East states are under enormous fiscal pressure, meeting their investment financing targets may leave them little choice except to rely on the Asian Infrastructure Investment Bank and the Silk Road Fund.[17]

Fifth, Middle East states, despite welcoming the BRI, have thus far failed to remove obstacles to doing business with China and translate their intentions into bankable projects.[18] For some Middle Eastern countries that have signed on, there is also a gap emerging between expectations and actual benefits from the BRI. Additionally, as China’s economic role in the Middle East increases, there are concerns about the terms of loans and investment, which other states have found challenging to navigate.[19] This will be a concern for the Middle East states that taking participate in the BRI (e.g., Jordan, Yemen, Syria, and Lebanon) and are all “significantly” at risk of falling into a debt trap.[20]

Moreover, China is the most important trade partner of Middle Eastern states, but commerce between the two sides is still at a low level and has not realized its full potential. Energy accounts for a high proportion of trade while the export of Beijing’s high value-added and technology-intensive products is small and landmark cooperation projects are few. Although Sino-Middle Eastern cooperation has extended beyond traditional industries and infrastructure construction to retail, finance, telecommunications, and tourism, there is still significant room for development in policy and the cultivation of key industries. China and its Middle Eastern partners could expand areas of industrial capacity cooperation and focus on major projects (e.g., ports, logistics, and industrial parks). Chinese companies could invest in industrial development projects across the region, rather than focus almost exclusively on the Gulf countries. Furthermore, China could reduce the burden of the mammoth undertaking of implementing the BRI by cooperating with international public and private sector partners to bid on and execute major projects.[21]

Conclusion

As long as there is no complete network of roads, railways, cargo hubs, and new harbors, the BRI will remain an aspiration and not a concrete reality. The new Silk Road strategy lacks central coordination, as many routes and local construction projects are to be carried out by local or regional governments, which may create delays and hurdles if the states do not cooperate. Currently, Beijing tends to rely on bilateral relations with each country to help secure its investments, but transnational infrastructure investment in the BRI might suggest a transition to more of a regional and multilateral engagement strategy.[22] After all, some of the planned routes, especially the Southern Corridor running through Iran, may never leave the drawing board. In fact. all of the proposed main routes are slated to course through potential conflict areas in Central Asia and the Middle East. The ultimate success of the new Silk Road strategy will depend to no small extent on Middle East countries’ participation and support, as well as on China’s ability to overcome or find ways to maneuver around at least some of the many geopolitical and geoeconomic challenges that are impeding its progress.