As the EU frets over how to manage ties with China, Beijing’s economic retaliation against one of its smallest members has set alarm bells ringing for some in the region, Sam Sachdeva reports from Vilnius

After almost half a century under Soviet rule, the small Baltic nation of Lithuania is no stranger to dealing with domineering behaviour from an authoritarian state.

Yet while Lithuanians have kept a wary eye on Moscow in the decades since regaining independence, it is a country a continent away that several years ago sparked an unexpected economic crisis – and accelerated a European reexamination of their relationship with a different superpower.

When the Lithuanian government decided to allow the opening of a Taiwanese representative office in 2021, it was with the history of its occupation by Soviet forces in the background, the country’s foreign minister Gabrielus Landsbergis tells Newsroom.

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“We were very happy that we de-risked way before it was common knowledge in Europe,” Landsbergis says wryly, framing greater cooperation with Taiwan as another step towards economic diversification.

While it’s not unusual for Taiwan to have offices in countries that follow a ‘One China’ policy, New Zealand included, the Lithuanian government’s decision to “as a matter of principle” let Taiwanese officials choose the name under which they would operate – Taiwan, rather than Taipei – proved far more contentious in the eyes of the Chinese government.

Beijing recalled its ambassador to Lithuania, arguing the country had breached its ‘One China’ policy – an allegation denied by Vilnius – while Lithuanian exporters began to face new restrictions in the Chinese market.

Landsbergis says he and his colleagues expected some form of retaliation, but worse was to come. In December 2021, Lithuania was removed as a country of origin in China’s customs system – essentially wiping the country off the map in the eyes of Chinese officials and businesses.

For companies like Volfas Engelman, Lithuania’s second-largest brewery which has been operating for 170 years, the impact was immediate.

China wasn’t a huge market for the brewery, chief executive Marius Horbačauskas tells Newsroom, but it was a growing one: 10 percent of Volfas Engelman’s exports had gone there in 2021, a figure that had been roughly doubling each year until it stopped in its tracks.

“At some point, it stopped – they cancelled all the orders and said, ‘Sorry, we cannot do anything about that’,” Horbačauskas says.

While China’s economic retaliation against Australia looms larger in the minds of most Kiwis, with exorbitant tariffs on Australian beef, barley and wine, Beijing’s treatment of Lithuania is a much more severe example of economic coercion in action.

The country’s exports to China plummeted by more than 90 percent in December 2021 compared to a year earlier, with shipping containers stuck at sea as government officials worked frantically to find an alternative destination.

Volfas Engelman chief executive Marius Horbačauskas says his brewery’s exports to China were cut off almost overnight as a result of the Chinese government’s actions. Photo: Sam Sachdeva

Lithuanian businesses who had built up strong business ties with the Asian superpower were hardly impressed, with some blaming their government for failing to handle the Taiwan decision more diplomatically.

“Before, China was included as a priority market for expansion: [we were] spending [a lot of money] on exhibitions, on business trips, on meeting at politicians’ level. All these 10 years [of work were] closed … during one decision, which was hardly understandable for business,” says Arūnas Laurinaitis, vice president of the Lithuanian Confederation of Industrialists.

While the government talks up the benefits of diversifying trade, Laurinaitis says establishing new markets comes at a high cost, both in terms of money and time.

The wider public hardly seemed on board either: an early 2022 poll commissioned by the country’s own foreign ministry showed just 13 percent of people were in favour of its China policy, with 60 percent opposed.

The February 2022 invasion of Ukraine by Russia – one of Lithuania’s top trade partners despite their fraught history – had acted as a double whammy for businesses given the European Union’s subsequent trade sanctions.

“We were building China as an alternative to Russia, then we lost both,” Horbačauskas notes with a laugh.

Landsbergis concedes there was real pain from what he calls China’s “handbrake scenario”, but argues companies have already been able to find new trade partners elsewhere, with Lithuanian trade in the wider Indo-Pacific up 40 percent last year.

It helped that Lithuania was hardly reliant on trade with China before the political spat, with just over 1 percent of its exports going there in 2020. That limited relationship allowed Beijing to take its draconian approach without hurting Chinese businesses – but it also meant Vilnius could weather the storm.

“My job was to actually try and explain what it means if you give in … it creates precedent that actually economic coercion works, that you can pressure a country enough for it to change its practically-driven sovereign decisions, which do not infringe on any international obligations or international treaties or agreements,” Landsbergis says.

EU ‘de-risks’ on China

Lithuania wasn’t alone in its stand: when China threatened the status of exports from other European countries that used Lithuanian components, the EU lodged a complaint against China at the World Trade Organisation.

While that process could take years to play out, the European Parliament and EU Council reached agreement on a separate “anti-coercion instrument” last month in an effort to deter attempted coercion, while creating an arsenal of countermeasures to deploy against hostile nations that forge ahead regardless.

Economic “de-risking”, as European Commission president Ursula von der Leyen has put it, has become a key part of the EU’s approach to China.

At last week’s European Council meeting, leaders reconfirmed their view of China as “simultaneously a partner, a competitor and a systemic rival”, while pledging to “continue to reduce critical dependencies and vulnerabilities, including in its supply chains, and … de-risk and diversify where necessary and appropriate”.

The use of “de-risk”, rather than the more pointed American term “decouple”, reflects the more complex view of China within Europe, with some countries reluctant to take an overly hawkish approach to Beijing as they deal with the consequences of war in Ukraine.

As Bruegel Institute researcher Niclas Poitiers notes, EU work on the anti-coercion tool sprouted not as a result of China’s spat with Lithuania, but from the imposition of tariffs on European steel under US President Donald Trump.

“What is remarkable about this instrument, on the one hand, is a signifier of this complete shift in stance of the EU where we used to worry about US overreach, but now, we’re really worried about Chinese coercion,” Poitiers says.

“But it is also remarkable in the sense this is a really wide-ranging instrument, and the member states were willing to give this much leeway to the European Commission … in allowing such an instrument which basically at the end of the day could strike every kind of economic area.”

“Now our government will always tell [businesses], ‘Look, if you have a very good profit margin with one country, imagine that there is a risk margin calculated into it’.”
– Gabrielus Landsbergis, Lithuania foreign affairs minister

Those powers remain theoretical, with the anti-coercion tool not entering into force until later this year, but the shift in focus to Chinese actions is part of a wider EU tilt towards the Indo-Pacific region.

“We’ve all been watching the increasing geopolitical tensions in the Indo-Pacific part of the world, and clearly if those tensions were to spiral out of control, they would have a massive impact on not just Europe’s security, but Europe’s prosperity as well and indeed global prosperity,” the EU’s Indo-Pacific envoy Richard Tibbels tells Newsroom.

Part of the EU’s focus, says Tibbels, is signing new trade deals “to ensure that all countries of the Indo-Pacific are resilient in the choppy waters of the 21st Century, and that they’re not coerced by anyone, and that they have the tools … to provide them a greater capacity to maintain their own national interests and sovereignty”.

New Zealand is having its own discussions about the need for economic diversification and greater resilience, albeit from a markedly different position to Lithuania, with a far greater share of its exports going to China and a deeper relationship with Beijing.

But Landsbergis believes there are lessons that Kiwi businesses can learn from Lithuania nonetheless, both in its recent dispute with China and its longer history with Russia. 

While businesses can benefit from high profit margins with any one country, there are “risk margins” that should not be discounted – particularly when it is national sovereignty at stake.

“We put a higher price on our independence … because we still very well remember what we had to pay for it. Freedom is very much not for free … and whenever we are under pressure, the first reaction is to push back.”

* Sam Sachdeva’s trip to Brussels and Vilnius was funded through a media grant from the European Union

Sam Sachdeva is Newsroom's national affairs editor, covering foreign affairs and trade, housing, and other issues of national significance.

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