Iraq – China Trade and Developments

China’s Belt & Road Initiative has made substantial progress in Iraq after the United States invasion removed Saddam Hussein but sparked a civil war

By Farzad Ramezani Bonesh

The trade relations between Iraq and China began over 2,000 years ago along the ancient silk road routes. Although in contemporary times they have experienced periods of ups and downs, current relations between Iraq and China are now 65 years old since the establishment of diplomatic relations between the two countries in 1958.

With the re-opening of the Chinese embassy in Baghdad in 2004, the intended expansion of relations with Iraq began. However, China-Iraq trade was disrupted from the very beginning of the relationship given the US invasion, resulting in an immediate withdrawal of Chinese companies against the background of what subsequently developed into a civil war lasting nearly a decade.

After China’s support to the Iraqi government, the expansion of visits, and the signing of agreements such as the cancellation of Iraq’s debt to China (80% of Iraq’s US$8.5 billion owed to Beijing), China has gradually moved to pick up the pieces and became the largest foreign investor and the main trading partner of Iraq in 2013.

In December 2015, the level of Iraq-China diplomatic relations was upgraded to a strategic partnership.

Iraqi Prime Minister Adel Abdul Mahdi’s visit to Beijing in 2019 was accompanied by the signing of eight memorandums of understanding and Iraq’s joining China’s Belt & Road Initiative (BRI). In recent years, geopolitical variables such as the reduction of the United States influence in the Middle East, the developing geostrategic position and huge oil reserves of Iraq, together with developing Chinese interest elsewhere in the region have caused Beijing to pay more attention to Baghdad.

Strengthening political and security relations and mutual opposition to separatist movements and Islamic fundamentalism, Iraq’s attention to China’s interests in Xinjiang, anti-terrorist cooperation, dealing with international threats, and the development of military and security relations have also strengthened trade.

Mohammad Shia al-Sudani, the Iraqi Prime Minister, has adopted a pro-Eastern approach to Iraq’s foreign policy, which is balancing relations with powers, adopting convergent policies towards China, strengthening comprehensive strategic partnerships, benefiting from China’s experiences in eradicating poverty and rebuilding infrastructure, celebrating the anniversary of the establishment of diplomatic relations, and is seen as a strategic factor for the expansion of relations with China.

Iraq – China Energy and Oil Relations

Iraq’s oil reserves (about 150 billion barrels) are the fifth largest in the world and are a primary opportunity for Chinese investment. Iraq’s reconstruction program significantly depends on its oil sector (95% of export income). Oil revenues are 85% of the Iraqi government budget, catering for more than 98% of total exports and 40% of Iraq’s GDP. Energy cooperation is the basis of bilateral relations, with Iraq being among the top oil exporters to China.

Iraq’s oil exports to China increased by nearly 50% in 2022, with revenues of more than US$115 billion. Beijing imports more than 40% of China’s crude oil.

Baghdad relies on the power of China to rebuild Iraq after the United States ill-advised intervention and the subsequent rise of the ISIS militant group, to help expand the Iraqi oil and gas industry, achieve oil production of a targeted ten million barrels, solve Iraq’s internal problems, increase its GDP, improve its foreign exchange reserves, and related issues.

With a new government in place since October 2022, Iraq has encouraged plans to increase oil production capacity, gas self-sufficiency and develop domestic gas resources, and repair and expand refineries. Therefore, a very extensive cooperation has appeared in most regions and Chinese companies have gradually become the most prominent foreign players in the Iraqi economy.

In 2008, China’s state-owned CNPC won Iraq’s first significant international oil exploration contract worth US$3 billion. In 2009, CNPC won two more contracts. In 2010, CNOOC signed a contract to develop three oil fields and then China Petrochemical Corporation (Sinopec) bought Switzerland’s Addax oil company (operating in Iraq). What had been intended as a US military and energy play in Iraq – trashing the country in the process and giving rise to radical groups such as ISIS – eventually became a fertile ground for Beijing rather than Washington.

Leading Chinese contractors and energy companies are now present in Iraq and have deepened their participation in all upstream, middle, and downstream areas in Iraq.

CNPC has significant stakes in the Halfaya, al-Ahdab, West Qurna, and Rumaila oil fields. More than half of Iraq’s oil production comes from fields where China is present. The construction of the new Nasiriyah crude oil storage project has begun, with CNPC poised to deliver by 2025. In late 2022, Iraq signed a contract with CNOOC to advance an exploration project for an offshore oil block near Basra.

In recent years, smaller Chinese oil and gas companies such as Geo-Jade Petroleum and United Energy Group (UEG) Geo-Jade have signed contracts to develop the Huwaiza, Naft Khana, and Sindbad fields.

Apart from signing important contracts with China in 2022, the natural gas processing facility in the Block 9 oil field in Basra, and the refining project in Maysan province, the negotiations for the development of the Huwaiza block are also progressing.

Gas processing from the Halfaya oil field, the presence of China’s CAMC Engineering Company with two contracts for the supply of natural gas and oil processing facilities in Basra is another dimension of bilateral cooperation.

Chinese companies also have an extensive presence in the refining sector by developing a refinery in DhiQar province and building a refinery and petrochemical complex in Alfaw.

Meanwhile, China’s participation in electricity production in Iraq has greatly contributed to the reduction of electricity outages in the country.

Apart from an US$5.5 billion contract for the construction of the Karbala heavy oil power plant with CITIC Construction, and the 840-megawatt gas power generation at Maysan, Beijing has signed two contracts with Baghdad for the development of the power plant and desalination in Basra and the expansion of the production of the Mansourieh power plant in 2022.

The Iraqi government plans to produce up to 12 gigawatts of solar energy by 2030. Iraq and China are also developing renewables – the construction of a Chinese-powered solar power plant in the south of Iraq promises a capacity of 2000 megawatts and is also planned for further expansion.

Iraq – China Infrastructure Developments

In 2019, Iraq and China signed a 20-year oil versus construction agreement. Iraq has hydrocarbons and needs construction. China needs hydrocarbons and can build.

Iraq has put under consideration the construction projects of power plants, medical centers, tourist projects, etc. in the country. Iraq officially joined China’s BRI in October 2019. Iraq’s participation in the BRI was coordinated with an oil exchange program in return for reconstruction, investment, and development – essentially a development for energy trade swap.

Iraq is also strategically located at the intersection of the BRI between the Middle East and Europe along the Middle Corridor, and this has also played an important role in boosting trade.

In 2018, China’s investment in Iraq reached US$20 billion. In 2021, Iraq was the biggest beneficiary of China’s Belt & Road Initiative outbound investment, receiving an additional US$10.5 billion, with projects such as four aviation-related construction projects, the construction of a “science city” in Iraq, and the development of refineries.

Iraq applied to join the China-based Asian Infrastructure Investment Bank (AIIB) in August 2021 and was accepted in 2021. This also provided improved financial support for projects in Iraq as the cost of borrowing from the AIIB was less expensive than alternatives such as the IMF which were also dependent upon US political conditions to be imposed on Baghdad.

In 2022, numerous non-energy infrastructure investments, including the construction of 1,000 schools by PowerChina and Sinotec, the reconstruction of Iraq’s Nasiriah International Airport, the construction of 90,000 houses in Baghdad’s Sadr District (at a cost of between US$7-8 billion), 1,000 health facilities and power plants, were all provided by China. It is noticeable that large Chinese companies such as Huawei and CMEC have targeted non-oil industries, while cooperation has been developed in areas such as industry and infrastructure, construction projects, services and industries, agriculture, road and bridge construction, retail outlets and so on. It is understandable: Iraq has a population of 43.5 million and a now growing GDP per capita income of US$6,180 expected for 2023, up from US$4,220 in 2020.

Chinese companies are also active in various economic operations in the Iraqi Kurdistan region. China’s Gezhouba Group has proposed a US10 billion investment in Kurdistan for roads, railways, the electricity sector, and dams.

Elsewhere, with the presentation of the official “Iraq Development Road” infrastructure project proposed by several countries including Turkiye, there are expectations that China is set to be one of the main participants in the US$17 billion railway and road project.

The plan includes the construction of about 1,200 kilometers of railway lines and highway and is intended to be a complementary project as of China’s BRI to connect Iraq’s Persian Gulf AlFaw Port to Turkiye. This would provide connectivity through the Persian Gulf to Europe via Iraq and Türkiye via railways, roads, and ports, as a less costly and faster alternative to the Suez Canal. The issue over whether this happens or not is purely down to Chinese funding, in part if not the whole.

China’s participation in boosting future trade via infrastructure builds is very important to Iraq. Apart from Iraq’s various policies aimed at attracting foreign investment and improving infrastructure, Beijing and Baghdad’s regular bilateral meetings are aimed at expanding projects, including the strategic construction of airports and ports, cooperation in fields such as cement and steel, and increasing Iraq’s production capacity.

Iraq – China Bilateral Trade

According to Chinese customs data, China is Iraq’s largest trading partner and Iraq is China’s third trading partner amongst the Arab countries. In 2022, the volume of bilateral trade between the two countries reached US$53.37 billion dollars, with an annual increase of 42.9% over 2021.

Iraq’s share of this is nearly US$39 billion. Trade in oil and mineral fuels had the main and major value. Other exports such as sulphur, stone, lime, cement, and chemical products are worth about US$28.5 million. China’s trade value is worth US$13.99 billion, however is more diverse, including nuclear reactors, machine tools, electrical appliances, iron and steel products, plastics, autos, ceramics, clothing, toys, games, sports and so on.

More recently, Iraq – China bilateral trade volumes reached US$24.16 billion in H1 2023.

Elsewhere, Iraq has concluded Free Trade Agreements (FTAs) with Algeria, Egypt, Jordan, Oman, Qatar, Syria, Sudan, Tunisia, and the UAE, and is also a member of the Greater Arab Free Trade Area (GAFTA). These would make the country more attractive to foreign investors looking at Iraq as a regional export manufacturing hub. However, the government suspended these FTAs in 2021 pending a review of the extent to which these agreements have benefitted Iraq. Trade tariffs to and from the GAFTA region to Iraq currently need to be clarified with Iraqi customs.

The Iraq- China Vision

China’s role has already caused some political opposition in Iraq, with some new investment proposals from China were rejected.

Concerns have been raised about Iraqi overdependence on China, ceding too much control over critical industries to Beijing, and debt trap issues. Bilateral limitations also include security, customs regulations, irregular taxation, lack of visa convenience, lack of immediate dispute resolution mechanisms, lack of electricity, fluctuations in global energy prices, limited transportation networks, insufficient port facilities, and the risk of China’s economic slowdown. All remain challenges for bilateral business development.

Yet many in Iraq see China as a potential ally, a model of successful development, and a developing hero with no colonial legacy. The growing trade relations between Iraq and China provide numerous opportunities. Iraq continues to rebuild its economy and strengthen. The two sides have a stated aim to increase trade to US$100 billion by 2030.

However, if China’s trade volumes also expand to an increased usage of the RMB Yuan, new opportunities will also be created. Although it seems difficult to reach the US$100 billion trade target, the implementation of the previous economic agreement and emphasis on infrastructure projects can develop bilateral trade.

What is clear is that China needs Iraqi energy, and Iraq needs Chinese investment. However, crude oil constitutes more than 90% of Iraq’s exports, and at some point, this will need to diversify. The main issue is working out a road map as to how and where Iraq can satisfy China’s non-energy needs. Here, the involvement of Iraq in Middle Corridor infrastructure could hold the key – earning transit fees and developing added value manufacturing via special economic zones on products passing through the country could be an answer.

However, Iraq’s efforts, China’s global influence, the complementarity of economies, technological advances, continuous investments in the development of infrastructure related to the BRI, Iraq’s development road, bilateral plans, can also increase the mutual future bilateral trade growth if structural forward-thinking planning is implemented with a view to diversification.

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