The EU does not have good cards to play as China rapidly raises the stakes in its economic blow against Lithuania.
As Lithuania sought to deepen diplomatic relations with Taiwan in recent months, Beijing decided to make Vilnius an example by strengthening its enormous trading power and halting imports of Lithuanian products. Business organizations have told POLITICO that the Chinese embargo now hits manufactured goods from other EU countries – such as France, Germany and Sweden – which depend on Lithuanian supply chains.
A day after Vilnius decided to withdraw all its diplomats from Beijing, the 27 EU leaders meeting in Brussels on Thursday devoted little time to the unprecedented feud which threatens to show how little room for margin Europe has maneuver to take trade action to help defend political principles.
Lithuania’s clash with China began in May when Vilnius withdrew from the 17 + 1 diplomatic format in which Beijing engages with the countries of Central and Eastern Europe. Tensions escalated when Taipei and Vilnius established diplomatic offices in the other’s country. Although this has not been fully recognized diplomatically, China has nonetheless unleashed a wave of retaliation that shows it is ready to stop any deeper warming in EU-Taiwan relations. 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 pressuring European companies to stop importing Lithuanian products. The executive said two German auto industry companies had parts stopped at Chinese ports in recent days because they were made in Lithuania. Some of these components could take years to be replaced by trusted alternative suppliers, he added.
French and Swedish companies are also said to face similar problems as Lithuanian products are 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 play, adding that Beijing still officially denies being aware of the situation. Despite the efforts of EU Ambassador to China Nicolas Chapuis to intervene on behalf of Lithuania, China has not publicly recognized any bans on Lithuanian products. This is left to the media warning Chinese companies to stop trading with countries that do not respect Chinese sovereignty – a thinly veiled reference to Lithuania’s deepening ties with Taiwan.
Jörg Wuttke, president of the EU Chamber of Commerce in China, called the move “unprecedented” by China to put pressure on the wider European business community.
“This complicates the situation for the supply chain, which has already been made difficult by the COVID-19 pandemic,” Wuttke said.
For now, the EU’s solution is to go back to its usual state of mind: let the Trade Ministry take care of it and see what the World Trade Organization can do about it.
Either way, there isn’t a lot of ammo available.
“What China is doing is a political step, and its objective is very clear, is to threaten other EU member states not to follow the Lithuanian example in developing relations with Taiwan,” said Andrius Kubilius, former Lithuanian prime minister and currently member of the European Parliament, told POLITICO. Noting the political support Lithuania has received from the EU, he added that “trade issues take time”.
EU Trade Commissioner Valdis Dombrovskis of Baltic Latvia has supported Lithuania and pledged to launch an investigation to determine whether China’s measures comply with WTO rules to which the world’s second-largest economy has subscribed.
However, while he is very keen to help, his options are limited.
For the world’s largest trading bloc, its usual trade defense instruments such as safeguard measures or anti-dumping measures do not cover the gray economic zone in which China targets Lithuania. The EU also does not have a bilateral trade agreement with China through which it could alleviate the tensions.
The next best option is to wait for the anti-coercion instrument that Dombrovskis only offered this month. The instrument, designed to tackle precisely this kind of geopolitically motivated trade tensions, enables the EU to retaliate against trade challengers through goods, services and intellectual property rights.
However, this anti-coercion instrument will probably have to face years of discussions before being accepted by the European institutions.
Brussels can (and will) start to gather evidence to start a dispute against China at the World Trade Organization, but that process also takes years.
With the highest WTO court still paralyzed, the dispute should also be appealed in a vacuum. To bypass the stuck court, the EU can use its recently updated Trade Enforcement Regulation. But to use it, he has to wait for a WTO panel ruling on the case, which still takes time.
Lithuanian officials say they are working with the European Commission to take the matter to WTO level. WTO boss Ngozi Okonjo-Iweala raised the Lithuanian issue with Chinese Premier Li Keqiang at the so-called “1 + 6 round table” last week, another EU diplomat said, adding that the issue had also been raised in the WTO Market Access Committee.
“At this point, it’s hard to see what the EU can do to retaliate,” said Jonathan Hackenbroich of 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 toolbox and the need for the future anti-coercion instrument. “
The Lithuanian case also demonstrates the balance the EU will need to find under the new instrument, said Hackenbroich.
“There must be solidarity, but the instrument should not encourage an EU country to pursue any individual foreign policy in the future, then to combine the costs with the other countries. Third countries can cross a line that the EU as a whole simply cannot accept and even interfering with the EU’s internal trade with Lithuania would likely be one, but this balance is something the EU must be aware in the future. “
A senior Lithuanian official acknowledged the lack of options for the EU beyond the crippled WTO and soft diplomacy.
“In the long term, the EU must find a lasting solution to restore trade flows and let third countries that do not abide by the rules-based international trading system know that there will be a firm reaction at EU level in the event of an economic crisis. coercive action against a member state, ”said the official.
For now, Lithuanian exporters are turning their attention elsewhere.
“Pressure from China is having a domino effect, and some smaller member states with less economic interests with China are also already developing relations with Taiwan,” said Kubilius, the former Lithuanian prime minister. He added that Lithuanian exporters are also trying to make more deals with the United States.
“I don’t know if China wants to be called a risky country for investment,” he said, “but there are a lot of new opportunities opening up, with normal stable democracies.”
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