What Should Iran Ask from China?
Part 5 (Embassies and Trustees)
An Iranian minister visits China in January of 2022 to sign a 25-year economic plan between Iran and China. As he returns, there is an unsolved question in his mind: “What should we ask from China?”
Well, this article tries to answer that question.
In my previous article I tried to emphasize contributions that Iran could have on China Belt and Road Initiative. Here I expand how Iran could acquire experience from China’s international trade policy.
Embassies and Trustees
To expand its participation in international trade has always been one of the most prominent features of China’s economic development. China’s exports grew by an average of 5.7% in the 1980s, 12.4% in the 1990s and 20.3% between 2000 and 2010. By 2003 alone, China’s export growth rate was seven times higher than the world-wide average. An average 7.7% growth rate from 2011 to 2021 is a historical record, especially in the Covid-19 pandemic. Economic expansion is more evident in China’s coastal cities, where trade and industry appear to be booming at every turn.
Ambassadors, business associates, and other members of the diplomatic corps have been shown to play a key role in developing and maintaining export markets. To be more precise, consider the fact that in 2003, Brazil and Belgium both exported $17 billion worth of goods to the United States, despite the fact that the Belgian economy is twice that of Brazil. Brazil has seven consulates (and one embassy) in the United States, while Belgium has only four consulates (and one embassy).
Interestingly, a scientific study has been conducted in this field indicating that the multiplicity of commercial offices or consulates operating in a country with the aim of helping to increase exports, leads to a 6 to 10 percent increase in exports to the destination. Of course, factors such as population, political ties, demographic kinship, common language, trade agreements and the distance from the country of origin are contributing factors.
Suggestion
In recent years, though, with the emergence of the “door-sell” culture by Iranian factories, which is comparable to the DIY strategy of IKEA, brokers or exporters are the ones who obtain the main profit. This is unfortunately due to the fact that Iranian companies do not dare to ship their products to the destination country without LCs. Therefore, establishing a mechanism which gives all assurances to the exporter should be at the forefront of Iran’s requests to the Chinese government. LCs can of course be a solution, because they guarantee the payment at the time of delivery to end-users, especially in countries hit by US sanctions.
One of biggest stumbling blocks of Iranian exportable products is the high cost of export, not to mention the high risk of it. Risks related to the US sanctions which leave establishing trust companies as the only solution. Now, the core problem persists, despite the fact that in the past several years trust companies have acted as fund managers addressing parts of the problem.
The main problem needs be solved by private commercial offices, joint financial institutions or similar companies. This means directing trust companies, rather than eliminating them. This way, Iranian trust companies can act on behalf of Iranian producers by establishing credit institutions and commercial offices in China, providing the possibility of direct sale to the end consumer and ensuring the return of the payment amount.
It is evident that this model returns the sales profit directly to the producer, and given the experience in the past several years, this profit is almost equal to the production profit, essentially (almost) doubling the producer’s profit.
For 2019, Iran exported $12.1b to China which was mostly Crude Petroleum worth $6.29b, Ethylene Polymers $2.31b, and Iron Ore $1.05b. During the last 24 years, the exports of Iran to China have increased at an annual rate of 18.7%, from $199m in 1995 to $12.1b in 2019. However, Iran has lost its place as the first partner of China in oil supply to Saudi Arabia, Iraq and Oman and recently to Russia. Therefore it seems like the right time to make a move by introducing other Iranian derivatives (with more export value than crude oil) to the Chinese market through establishing trustees in China.
