China punishes Lithuania by disrupting supply chains

Container terminal in 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 timidly described as Taipei Economic and Cultural Offices. Beijing should not be offended, you see.

This is a message which does not seem to have reached the Lithuanian government coalition. Under the terms of his coalition agreement, he pledged to “defend those who fight for freedom in the world, from Belarus to Taiwan”. Having been occupied by Tsars, Soviets and Nazis, Lithuania has good historical reasons for supporting both self-determination and democracy.

And words were followed by deeds. In May 2021, Lithuania withdrew from the 17 + 1 deal, a Chinese initiative aimed at deepening trade ties between China and 17 countries in central and eastern Europe. Then came the creation 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), at blocked Lithuanian imports. But this time around, the embargo came with an additional twist.

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

China is pressuring German auto 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 Taiwan’s status …

Continental, one of the largest auto parts manufacturers in the world, has production facilities in Lithuania, manufacturing electronic parts such as controllers for vehicle doors and seats, and exports to customers all over the world including China. .

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

And these companies are not only German.

Elisabeth Braw in the The Wall Street Journal:

In 2020, Lithuania exported goods worth $ 350 million to China, an increase from previous years, but peanuts in overall trade. Lithuania has long imported much more from China than the other way around; last year, about four times more. So, the Lithuanian government may have calculated that the country’s economy could bear any retaliation that China inflicts for the gesture on Taiwan.

But the Lithuanians probably did not foresee 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 their number is increasing every day,” Valdis Dombrovskis, EU trade commissioner, told German newspaper Die Welt little before Christmas. “Apparently, the Chinese customs authority does not 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 powerful weapon. It is one that China, a powerful player in the global economy, can deploy in a way the Soviet Union was never able to deploy.

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 trade relationship with the West) is, as Braw points out, one that can also be pursued on the economic front. This, in turn, has to do with the massive Chinese tech momentum that’s also underway (something I’ve discussed here).

France, which currently holds the rotating EU presidency (it’s complicated), signals that the EU will be alongside Lithuania.

Politics:

The EU intends to deploy a new commercial weapon called “Anti-coercion instrument” to retaliate in precisely such cases, but that new legislation could take years to come into full force, and Paris is signaling that action on Lithuania would be needed long before that.

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

We will have to see what these measures will be.

However, this particular spat ends (there were signs of wobbling President of Lithuania, although this may be partly explained by Lithuanian domestic policies), this is just the latest sign that the companies (and countries) suing Chinese companies have taken a far greater risk than they didn’t seem to have understood it, a risk that will become clearer as the links attached to this trade become more visible, as they will elsewhere.

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