The EU has no good cards to play as China rapidly ups the ante in its economic hit job against Lithuania.
As Lithuania sought to deepen diplomatic ties with Taiwan over recent months, Beijing has moved to make an example of Vilnius by flexing its massive trade muscle and stopping imports of Lithuanian goods. Business organizations told POLITICO that China's embargo is now hitting manufactured goods from other EU countries — such as France, Germany and Sweden — that are dependent on Lithuanian supply chains.
A day after Vilnius decided to pull all its diplomats out of Beijing, the 27 EU leaders meeting in Brussels on Thursday devoted little time to the unprecedented spat that is threatening to lay bare how little room for maneuver Europe has to take trade action to help defend political principles.
Lithuania's showdown with China kicked off in May when Vilnius pulled out of the 17 + 1 diplomatic format in which Beijing engages with Central and Eastern European countries. Tensions escalated when Taipei and Vilnius set up diplomatic offices in each other's country. While this fell short of full diplomatic recognition, China has still unleashed a welter of retaliation that shows it is out to stop any deeper warming of EU-Taiwan ties. State media described Lithuania as "a mouse or even just a flea under the feet of fighting elephants."
A China-based business executive told POLITICO that Beijing is putting pressure on EU businesses to stop importing Lithuanian products. The executive explained that two German companies in the auto industry had parts stopped at Chinese ports in recent days because they were manufactured in Lithuania. Some of these components could take years to be replaced with trusted alternative suppliers, he added.
French and Swedish firms are also reportedly facing similar problems because Lithuanian products form part of their supply chain, according to a European industry insider who requested anonymity due to the sensitivity of the matter.
A third person, from a European government, confirmed the state of affairs, adding that Beijing was still officially denying knowledge of the situation. Despite efforts by EU Ambassador to China Nicolas Chapuis to intervene on Lithuania’s behalf, China has not publicly acknowledged any ban on Lithuanian products. That is left to state media that warn Chinese businesses will stop trading with countries that do not respect Chinese sovereignty — a barely veiled reference to Lithuania’s deepening ties with Taiwan.
Jörg Wuttke, president of the EU Chamber of Commerce in China, called it an "unprecedented" move by China to put pressure on the wider European business community.
"It's complicating the supply chain situation, which has already been made difficult by the COVID-19 pandemic," Wuttke said.
No firepower
For now, the EU's solution is to turn to its usual mindset: Let the trade department handle it, and see what the World Trade Organization can do about it.
In neither case is there much ammunition available.
"What China is taking is a political step, and their goal is very clear, which is to threaten other member states in the EU not to follow the Lithuanian example by developing relations with Taiwan," Andrius Kubilius, former Lithuanian prime minister and currently a member of the European Parliament, told POLITICO. Noting the political support that Lithuania has received from the EU, he added that "trade issues take time."
EU Trade Commissioner Valdis Dombrovskis, from fellow Baltic country Latvia, has vocally supported Lithuania and has vowed to launch an investigation into whether Chinese measures are in line with WTO rules that the world's second-biggest economy has signed up to.
However much he might wish to help, though, his options are limited.
For the world's biggest trade bloc, its usual trade defense instruments such as safeguards or anti-dumping measures do not cover the gray economic zone in which China is targeting Lithuania. The EU also doesn’t have a bilateral trade agreement with China through which it could remedy the tensions.
The next-best option is to wait for the anti-coercion instrument that Dombrovskis proposed only this month. The instrument, designed to tackle exactly this type of geopolitically motivated trade tensions, allows the EU to strike back against trade challengers via goods, services and intellectual property rights.
This anti-coercion instrument will, however, probably face years of discussions before it is agreed by the EU institutions.
Off to the WTO
Brussels can (and will) start gathering evidence to start a dispute against China at the World Trade Organization, but that process also takes years.
As the WTO’s highest court is still paralyzed, the dispute is also likely to be appealed into the void. To circumvent the blocked court, the EU can use its recently updated trade enforcement regulation. But to use that, it has to wait for a WTO panel ruling on the case, which again takes time.
Lithuanian officials say they are working with the European Commission to bring the case to the WTO level. WTO boss Ngozi Okonjo-Iweala brought the Lithuania spat up with Chinese Premier Li Keqiang at the so-called “1+6 roundtable” video call last week, another European diplomat said, adding the issue was also raised at the WTO Market Access Committee.
“At this point, it is difficult to see what the EU can do to hit back,” said Jonathan Hackenbroich from the European Council on Foreign Relations, an expert on anti-coercion policies. “This is a very illustrative case to demonstrate the gap in the EU’s toolbox and the need for the upcoming anti-coercion instrument.”
The Lithuanian case also demonstrates the balance the EU will have to strike under the new instrument, Hackenbroich said.
“There has to be solidarity, but the instrument shouldn’t incentivize an individual EU country in the future to pursue any kind of individual foreign policy and then solidarize the costs with the other countries. Third countries can cross a line that the EU as a whole simply cannot accept and interfering even with internal EU trade with Lithuania probably would be one, but this balance is something the EU has to be mindful of in the future.”
A senior Lithuanian official acknowledged the lack of options for the EU, beyond the paralyzed WTO and soft diplomacy.
"In the long run, the EU needs to find a sustainable solution to restore trade flows and let third countries that do not respect the international rules-based trading system know that there will be a firm reaction on the EU level in the event of economic coercion action against one member state," the official said.
For now, Lithuanian exporters are turning their attention elsewhere.
"China's pressure is inspiring a domino effect, and some smaller member states with less economic interest with China are also already developing relations with Taiwan," said Kubilius, the ex-Lithuanian premier. He added that Lithuanian exporters are also trying to do more deals with the U.S.
"I don't know if China wants to be called a risky country for investment," he said, "but there're a lot of new opportunities which are opening up, with normal stable democracies."
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