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China, Lithuania, and Supply Chains

Container terminal at the port of Klaipeda, Lithuania, May 13, 2021. (Ints Kalnins/Reuters)

Late last year, Lithuania, one of the three Baltic states and a member of the EU and NATO, agreed to let Taiwan open a “representative office” (a de facto embassy) in the Lithuanian capital, Vilnius. In itself, this is not particularly unusual. There are such outposts elsewhere, but normally they are coyly described as Taipei Economic and Cultural Offices. It doesn’t do to offend Beijing, you see.

That’s a message that doesn’t seem to have gotten through to Lithuania’s governing coalition. Under the terms of its coalition agreement, it is committed to “defend those fighting for freedom around the world, from Belarus to Taiwan.” Having been occupied by czars, Soviets, and Nazis, Lithuania has good historical reasons to support both self-determination and democracy.

And words have been followed by deeds. In May 2021, Lithuania pulled out of the 17+1 agreement, a Chinese initiative designed to deepen trade links between China and 17 central and east European nations. Then came the establishment of the Taiwanese “representative office.” Beijing was duly offended. China downgraded Sino-Lithuanian diplomatic relations shortly thereafter, and, following a script that has been used before (Australian wine, Norwegian salmon), has been blocking Lithuanian imports. But this time round, the embargo came with an extra twist.

Earlier this week, I noted this from a Reuters report from December:

China is pressuring German car parts giant Continental to stop using components made in Lithuania, two people familiar with the matter told Reuters, amid a dispute between Beijing and the Baltic state over the status of Taiwan…

Continental, one of the world’s largest car parts maker, has production facilities in Lithuania, making electronic parts such as controllers for vehicle doors and seats, and exports to clients globally including China.

German industry sources said the pressure was not only being felt by Continental but up to a dozen companies, mainly from the automotive and agricultural sectors, they said. . .

And those companies are not only German.

Elisabeth Braw in The Wall Street Journal:

In 2020 Lithuania exported goods worth $350 million to China—an increase over previous years but peanuts in overall trade. Lithuania has long imported far more from China than vice versa; last year, about four times as much. So Lithuania’s government perhaps calculated that the country’s economy could handle whatever retaliation China inflicted for the gesture to Taiwan.

But the Lithuanians probably didn’t anticipate a Chinese attack on global supply chains. “We now know of many cases where imports from Lithuania and the EU are blocked in Chinese ports, and the number is increasing every day,” Valdis Dombrovskis, the European Union’s trade commissioner, told Germany’s Die Welt newspaper shortly before Christmas. “Apparently the Chinese customs authority doesn’t process goods from other EU member states if they contain parts made in Lithuania.”

As Braw notes:

Targeting global supply chains to punish a country is an extremely potent weapon. It’s one that China—a power player in the global economy—can deploy in ways that the Soviet Union never could.

This story is yet another reminder that the Chinese challenge, unlike that attempted by the USSR (which was, relatively speaking, an economic pygmy with only a limited trading relationship with the West) is, as Braw highlights, one that can also be pursued on the economic front. This, in turn, connects to the massive Chinese technological drive that is also under way (something that I discussed here).

France, which currently holds the rotating presidency of the EU (it’s complicated), is signaling that the EU will stand with Lithuania.

Politico:

The EU has plans to roll out a new trade weapon called an “anti-coercion instrument” to retaliate in precisely these kinds of cases but that fresh legislation could take years to fully enter into force and Paris is signaling that action over Lithuania would be needed well before that.

When asked whether Paris would push for EU action to resist Beijing before the anti-coercion instrument is ready, a senior French government official on Thursday told POLITICO: “Yes. We will take measures very quickly.”

We’ll have to see what those measures will be.

However this particular spat ends (there have been signs of wobbling from Lithuania’s president, although those can be partly accounted for by Lithuanian domestic policies), this is just the latest sign that companies (and countries) that chase Chinese business have been taking a far greater risk than they appeared to have understood, a risk that will grow clearer as the strings attached to such trade become more visible, as indeed they will.

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