In recent years, China has used its market power to punish Australia for questioning the origin of Covid-19, Norway for honouring a Chinese dissident with the Nobel Prize, Japan for staking its claim to a few barren islands and South Korea for deploying a defensive US missile system. Now Lithuania has earned Beijing’s ire for letting Taiwan open a representative office in its own name.

Shippers entering Chinese ports discovered in early December that Lithuania had mysteriously disappeared from China’s customs registry. Taiwan tried to offset Lithuania’s seemingly modest loss — the Baltic nation has only $350m in direct exports to China at risk each year — by setting aside a $1bn credit fund and a $200m investment fund for Lithuanian projects, while buying scores of containers that were barred from entry to Chinese ports.

What Vilnius did not reckon on is Beijing’s willingness to disrupt the importation of EU goods with Lithuanian suppliers in the value chain — and to potentially isolate all Lithuanian exporters from the common market. China’s campaign against Lithuania — a country so insignificant to China that its national media likened the EU state to “a flea under the feet of fighting elephants” — is clearly taking trade coercion to the next level.

Targeting any goods with Lithuanian parts “is a clever and effective strategy”, says Emily Kilcrease of the think tank the Center for a New American Security, because it brings to bear pressure from businesses across Europe. At the same time, it dramatises “why a unified EU response is so important”. 

If China’s offence is Europe-wide, then the defence had better be Europe-wide too.

The EU, pushed by France, is in the early stages of developing an “anti-coercion instrument” that would authorise EU-wide retaliatory sanctions if any single member of the EU is targeted — a rough economic analogue to the Nato security guarantee. At the level of the transatlantic economy, the US has generally promised to work with its allies through the new US–EU Trade and Technology Council, to diversify supply chains and counter “all forms of economic blackmail”.

In late January the EU initiated a World Trade Organization (WTO) trade action against China over its Lithuanian trade gambit. Ms Kilcrease says that while the EU’s complaint is clearly meritorious and would establish a worthy precedent under international trade law, it would hold little chance of deterring China — especially while the WTO Appellate Body is in abeyance. To deny market access in order to pressure a state politically, she says, openly violates WTO law. 

What then of the extensive system of US economic sanctions against the likes of Iran and Venezuela?

“All states use economic leverage to pursue geopolitical ends,” Ms Kilcrease notes. “What China is doing is different because it is so clearly political and coercive in nature, and because China is not operating through formal rule of law mechanisms.”

Venezuela has filed a WTO action against the US to test that distinction, but the US has thus far blocked the formation of a dispute panel, arguing that Nicolás Maduro’s government is illegitimate. 

Michael D Goldhaber has been tracking the world’s largest disputes since the turn of the millennium. Email: michael.goldhaber@gmail.com

This article first appeared in the February/March 2022 print edition of fDi Intelligence.