Unrest in the Middle East Is Bad for Both CPEC and IMEC

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Flashpoints | Economy

Unrest in the Middle East Is Bad for Both CPEC and IMEC

As uncertainties deepen, what lies ahead for these dueling connectivity projects?

Unrest in the Middle East Is Bad for Both CPEC and IMEC
Credit: Wikimedia Commons/ Chris Yunker

The flare-up of the Israel-Palestine conflict following the attacks on October 7 has triggered geopolitical tremors in the Middle East. While Israel and Hamas have agreed to a four-day “pause” in fighting and the partial release of hostages, the Israeli government has vowed that fighting will resume. Amid the current fog of war, where the prospects of a lasting ceasefire remain distant, the fate of mega-connectivity projects linking Asia to Europe via the Middle East is up in the air.

In this context, projects like the China-Pakistan Economic Corridor (CPEC), hailed as the flagship of China’s Belt and Road Initiative (BRI), and the India-Middle East-Europe Corridor (IMEC), launched in haste by New Delhi during this year’s G-20 Summit as a counterweight to CPEC, warrant closer scrutiny. 

The trajectories of these two corridors, viewed as manifestations of the wider Sino-American rivalry, are part of a complex equation with many unknowns. The current war in Gaza adds another layer of complexity that could well impact this equation.

CPEC versus IMEC and the Israel-Palestine conflict

CPEC envisions linking China to the Arabian Sea via Pakistan’s coast. While the project is geographically confined to China’s far west and Pakistan, it has greater ambitions: the end goal is to provide an alternate route for trade with the Gulf states, especially oil shipments headed to China.

Launched more than a decade ago, CPEC has a head start on the fledgling IMEC. Notable progress has been made in CPEC road and railway projects. The existing transportation infrastructure and completed initiatives around Pakistan’s Gwadar port and various economic zones are tangible accomplishments

Conversely, IMEC is still at the conceptual stage, lacking binding financial commitments. IMEC is ambitious; its route exceeds CPEC’s, incorporating Gulf nations and Israel. This inclusion has multiple pros and cons. Placing the Jewish state at the epicenter of the transit corridor brings several advantages, including the buy-in of Western nations. However, the enduring tensions in the region and the intensification of the Israel-Palestine conflict are serious disadvantages. 

Already, the renewed conflict in Gaza is having an impact in IMEC. The action plan stipulated a two-month timeframe to proceed with the Memorandum of Understanding, a deadline that has already been missed.

A comparison between CPEC and IMEC is tricky. Despite CPEC’s ongoing implementation, challenges such as Pakistan’s substantial debt, of which a considerable portion is owed to China (roughly one-third of a $100 billion total debt), security concerns from Baloch insurgents and the Pakistani Taliban, combined with China’s increasing apprehension over the safety of its nationals, cast uncertainty on the original optimistic forecasts. Such a pessimistic prognosis suggests that IMEC (even in its embryonic form) is a serious upcoming competitor to CPEC.

Approaching the situation from a security standpoint, the present escalation in Gaza and the occupied territories is a risk factor affecting the prospects of IMEC. The risk of the conflict spilling over throughout the region is a realistic concern. However, the scenario of an Iran-led multi-frontal engagement is now unlikely to happen, as Supreme Leader Khamenei recently affirmed Iran’s non-participation in the escalation triggered on October 7. Likewise, Hezbollah is likely to maintain a low-escalation strategy in a confined area and remain on the sidelines of the war unless Iran is directly threatened. 

Consequently, the prospect of the conflict transcending its current boundaries seems remote, making the landscape for IMEC less chaotic than predicted.

According to the World Bank’s recent preliminary assessment report, which examined three escalation scenarios (small, middle, and large), a consistent theme that emerged is the potential risk for disruptions in energy markets and a spillover effect on commodity markets. However, the report emphasizes that the contemporary global energy market exhibits a greater resilience to regional crises than historical instances like the Arab oil embargo of 1973, the Iran-Iraq war of 1980-88, and the Kuwait invasion of 1991. 

In the field of investment, it is imperative to underscore the pivotal role of trust in risk assessment. Earlier this year, India’s Adani Group secured the operational tender for Haifa port in Israel, and some have cast doubt about the future of this endeavor amid the escalating Israel-Palestine conflict. However, Karan Adani, head of Adani’s port unit, recently stated that they have judiciously factored the region’s precarious geopolitics into their strategic investment decisions. Adani’s successful bid for the Haifa port stands not only as a testament to his business acumen but also as an achievement of the I2U2 (India, Israel, the UAE, and the U.S.) bloc, forged in the context of enhanced economic synergy resulting from Arab-Israeli normalization and the United States strategically aligning with India to counterbalance China. 

Contrary to common perceptions, the foundations of IMEC were not laid during the G-20 summit in September 2023. They resulted from the G-7’s Partnership for Global Infrastructure and Investment (PGI). This framework emerged due to the normalization momentum and the intensifying great power competition. It is also intended to serve as a strategic counterweight to the BRI. Therefore, IMEC is a calculated approach that assumes its role despite the inherent risks in a geopolitically sensitive region.

While the normalization between Israel and key constituents of IMEC, such as Saudi Arabia, is currently paused to avoid inflaming local public sentiments, its continuation is not in doubt. Saudi Crown Prince Mohammed bin Salman (MBS) and Israeli Prime Minister Benjamin Netanyahu have produced statements in this direction, affirming that the normalization process remains alive. Consequently, one of the uncertainties surrounding the future of IMEC has been alleviated, as the normalization between Saudi Arabia and Israel remains on track.

The Wider Context: The Sino-American Rivalry

In comparing CPEC and IMEC, the overarching theme centers on the U.S. pivot to Asia and its interplay with the unfolding Israel-Palestine conflict. The United States did not expect the recent round of escalation, and the White House had to pause its focus on Ukraine in the meantime. Thus, this new reality is a litmus test for the United States, examining its ability to navigate multiple strategic trajectories simultaneously. 

It is essential to note that, for China, the BRI transcends mere financial investments through state-owned entities, with CPEC standing as a key component of this mega infrastructure initiative. Despite the complexities posed by security risks around Gwadar and the fiscal challenges within Pakistan’s troubled economic outlook, China remains resolute in its commitment to finalizing this project. While the investment landscape may go through periodic fluctuations, as evident in China’s recent rejection of Pakistan’s plea for new projects within CPEC, the core objective remains to complete the foundational infrastructure. This strategic imperative will avert potential setbacks. This is why, in a joint statement during Prime Minister Anwaar-ul-Haq Kakar’s visit to China, both sides conveyed positive messages regarding CPEC despite dozens of security risks and economic limitations hampering its progress.

Still, uncertainties shroud the future of both economic corridors. Any exacerbation of the Israel-Palestine conflict and potential spillover would not only be a roadblock for IMEC, as commonly suggested, but also a significant impediment for CPEC. The latter aspires to connect China and the Gulf energy market. Therefore, it confronts the risk of being confined to a mere highway and railway network between China and Pakistan or, if it surpasses those confines, operating with trading volume below initial expectations via existing maritime routes.

In summary, the prospective escalation of the Israeli-Palestinian conflict poses potential risks to IMEC and CPEC but is unlikely to hamper the determination of either party. CPEC holds paramount significance for the prestige of the BRI, representing a longstanding endeavor by China to cultivate a favorable investor image. It also serves as a demonstrable means to enhance China’s access to  partners in the Gulf.

In contrast, IMEC aspires not only to be a westward-oriented route but also seeks to realign India’s alliance position toward the Western hemisphere to squeeze China in its vicinity and make it focus on regional dealings. Moreover, for the United States, IMEC is a tool to consolidate economic cooperation and facilitate the pace of normalization in the Gulf. 

Both corridors, therefore, present strategic opportunities to achieve multiple objectives. In the final analysis, any protracted conflict in the Middle East will damage the prospects of both CPEC and IMEC and, by extension, the interests of their participants. De-escalation of the conflict – and soon – is crucial to the viability of any of these corridors.