The two nations said the Chinese-Iceland free trade pact would result in the lowering of tariffs on a wide range of goods and was expected to increase seafood and other exports from the remote Nordic state to the world's second-largest economy.
The deal was inked during a five day visit to China by Icelandic Prime Minister Johanna Sigurdardottir, highlighting Reykjavik's endeavors to diversify an economy that was hard hit by the financial crisis in 2008.
"It also signals the deepening of our relationship, which has been lifted to a new height," Chinese Premier Li Keqiang said in a statement.
Analysts pointed to Iceland's unique importance to China as Beijing has been attempting to gain a foothold in the Arctic, where melting ice is opening passages for shipping and could create a boom in the extraction of natural resources such as oil, gas, diamonds, gold and iron.
Chinais seeking permanent observer status in the Arctic Council, an eight-nation body deciding on policies in the region. Beijing recently completed what was by far the largest embassy complex in the Icelandic capital, reportedly capable of accommodating a staff of 500.
Trade between China and Iceland jumped 21.1 percent last year to $180 million (137.6 million euros). Iceland exports mostly fish and imports Chinese products from ships to shoes.
hg/slk (AP, AFP)