World leaders were surprised when Saudi Arabia and Iran often bitter rivals — agreed to reopen diplomatic relations and revive a mutual security pact. The surprise was that the agreement was brokered by China and announced in Beijing.

China's successful diplomacy may represent a fundamental shift away from US dominance in the Middle East.

The Saudis and Iranians broke off their diplomatic relationship in 2016 after the Saudis executed a Shia cleric and the Saudi embassy in Teheran was attacked. The two states clashed directly in Yemen, where the Saudi-backed government was overthrown by Iran-backed Houthi rebels, leading to years of costly war. By 2019, the bilateral relationship hit rock bottom when the Saudis accused Iran of attacking facilities of petroleum and natural gas company Aramco inside Saudi Arabia.

The Beijing agreement has created new conditions under which the two countries can return to a more stable and productive relationship. Why did the two Middle Eastern powers turn to Beijing to help restore their diplomatic, economic and security ties?

The answer is a combination of hard economic realities and deliberate policy choices by the United States and China. Practical economic considerations have brought Saudi Arabia and Iran closer to China than either country is to the US.

The Iranians suffer from tight US sanctions, and no economic relationship has existed with the US since the 1979 hostage crisis. In contrast, China has emerged as Iran's largest trading partner, with annual total bilateral trade value of nearly $16 billion. This key relationship is based on Iranian oil, unavailable to most of the world because of US sanctions. China and Iran concluded a strategic cooperation agreement in 2021 covering a broad range of industrial development and joint investment initiatives, further increasing the value of the bilateral economic relationship.

China has also emerged as Saudi Arabia's most important economic partner. China's trade with Saudi Arabia exceeded $87 billion in 2021 — an amount greater than total Saudi trade with the US and the European Union combined ($78 billion).

In December, President Xi Jinping and Saudi Arabia's King Salman bin Abdulaziz Al Saud launched a comprehensive partnership agreement, including a wide range of investment initiatives extending the economic relationship into infrastructure development and other dimensions.

Oil and other mutual economic interests have made China the most important trading partner of both Iran and Saudi Arabia, while US economic participation in the region has steadily receded. At the same time, both China and the US have made deliberate policy choices that have further reshaped the dynamics of the Middle East, reducing US influence. The first of these was the choice between economic sanctions or economic development to influence the behavior of trading partners. The US relies heavily on economic sanctions to punish governments and individuals declared to be misaligned with US interests.

Today, the US government administers some 38 active sanctions programs barring or regulating trade. Some are broad-based and oriented geographically, such as those against Iran. Others are "targeted", such as those countering terrorism or narcotics, and focus on specific individuals and entities.

While China has also applied limited sanctions in a few cases, the overarching framework of Chinese policy is development-oriented and based on investment and mutual interests. In Saudi Arabia, the Saudi-China Joint Committee explores joint investment opportunities in oil and non-oil projects ranging from hydrogen energy to artificial intelligence and climate change. Chinese companies such as Huawei, Changan and Hongqi are well known in Saudi Arabia, and Chinese products are widely used, further cementing the economic relationship.

China has taken a similar approach in Iran, signing a long-term strategic cooperation agreement valued at more than $400 billion and including oil, mining, transportation and agricultural development projects. Positive influence from development assistance and investment, rather than negative influence from sanctions, has elevated China's soft power in the Middle East, while US sanctions have limited American access and its ability to influence political and diplomatic developments.

The second policy choice — use of arms sales and security assistance — has further boosted Chinese influence at the US' expense.

The US relies heavily on arms sales to gain political influence, but this approach seems to be losing effectiveness in the Middle East. Between 2013 and 2022, US arms transfers totaled over $104 billion to 124 countries. Saudi Arabia was by far the biggest market for US arms transfers. At $19 billion over 10 years, US arms transfers to Saudi Arabia totaled more than the value of all Chinese military assistance worldwide. In fact, Saudi Arabia received more US arms transfers than the next three largest US arms customers (Australia, Japan and the United Arab Emirates) combined. Despite the vast scale of arms transfers to Saudi Arabia, US influence has clearly eroded, as the kingdom turned to China for the Iran deal.

For its part, China's use of arms transfers is more modest, totaling about $16 billion to 70 countries over 10 years, or about 15 percent of US arms transfers. Saudi Arabia received only about $350 million in Chinese arms transfers, or about 2 percent of the value of US arms transfers to the kingdom. Iran received only about $30 million in arms transfers over the past decade. Despite — or perhaps because of — the modest scale of Chinese defense assistance, Saudi Arabia and Iran chose to work with Beijing to settle their dispute.

Economic realities have pushed Saudi Arabia, Iran and China into closer and more comprehensive relations. Policy choices around the use of development assistance, sanctions and arms transfers have further increased Chinese influence and prestige, even as the US role in the Middle East has declined.

The global competition between major powers seems increasingly to be based on economic development, investment, and pragmatic, positive measures to enhance cooperation. China's important accomplishment in bringing Iran and Saudi Arabia into a new era of mutually beneficial relationships may point the way toward a future of global economic collaboration.

The author is principal of Midgley& Co, a global strategy consultancy based in Washington, DC.