Lithuania’s Confrontation with China Over Taiwan: Lessons from a Small Country

Lithuania’s Confrontation with China Over Taiwan: Lessons from a Small Country

Lithuania’s Confrontation with China Over Taiwan: Lessons from a Small Country

Tomas Janeliūnas is a professor at Vilnius University’s Institute of International Relations and Political Science, as well as chief research officer at the Eastern Europe Studies Center (EESC). Raigirdas Boruta is an associate expert with the EESC’s China Research Program and a PhD student at Vilnius University’s Institute of International Relations and Political Science.

Last year, Lithuania became one of the primary targets of Chinese propaganda and trade sanctions. The ongoing Sino-Lithuanian diplomatic standoff should not come as a major surprise, as Lithuania caused great outrage in China in November 2021, when it allowed Taiwan to open a new representative office in Vilnius. The office was notable for its bold choice of names: rather than the typical “Taipei Representative Office,” the office was officially dubbed the “Taiwanese Representative Office in Vilnius” (駐立陶宛台灣代表處). Such a move was significant, as it marked the first opening of a new Taiwan representative office in Europe in 18 years (the last office opened in 2003 in Slovakia); as well as the second such office to exist under the name “Taiwanese” in the world, after Somaliland. 

For a long time, China paid little attention to Lithuania, a small and distant country in Europe. Yet, after the opening of the Taiwanese Representative Office in Vilnius, Beijing decided to make Lithuania an example of how China could punish another country if it did not respect China’s interests.

The Example of China’s Revenge 

Lithuania has been clearly indicating its intention to distance itself from China for some time. In the spring of 2021, the Minister of Foreign Affairs of Lithuania announced Vilnius’ withdrawal from the 17 + 1 initiative (formally titled “Cooperation between China and Central and Eastern European Countries”). Additionally, the Parliament prohibited Chinese companies from developing a 5G network in Lithuania under national law, while Lithuanian diplomats openly supported granting observer status to Taiwan in the World Health Organization (WHO). Those were not accidental moves. As the US-China rivalry intensified, Lithuania joined the anti-People’s Republic of China (PRC) coalition formed by the United States, and became one of the most vocal critics of China in the European Union.

Yet, the opening of a Taiwanese Representative Office in Vilnius unleashed the full wrath of China. As a result, Beijing downgraded the status of its diplomatic representation in Lithuania to the level of the chargé d’affaires, renamed its embassy in Lithuania as the Office of the Chargé d’Affaires (中國駐立陶宛代辦處), and began urging the Lithuanian side to do the same. Shortly thereafter, Lithuanian diplomats in China were forced to leave Beijing urgently because their diplomatic status was simply revoked. Then, in December 2021, Lithuanian exports to China were almost completely blocked, with more than 90 percent of the usual flow of goods prevented from entering the Chinese market. These unofficial trade sanctions (China never issued a formal decision to sanction Lithuanian goods) had little impact on Lithuania’s economy, as exports to China accounted for less than one percent of Lithuania’s total exports.

However, concern rose significantly following unofficial reports that China had blocked exports from other EU companies when they contained components of Lithuanian origin. “Nobody expected that Beijing would go after Lithuania’s trading partners in Europe,” said Deputy Foreign Minister Mantas Adomėnas, the main advocate for Vilnius’ so-called values-based diplomacy toward China. Some Lithuanian companies, especially those working in the laser sector, publicly expressed criticism that the Lithuanian government was unprepared for the Chinese sanctions and did not warn Lithuanian businesses about possible economic retaliation. Several heavily impacted foreign investment companies asked Lithuania’s political leaders to deescalate the dispute with China, while the German-Baltic Chamber of Commerce stated that imports of Chinese machinery and parts—as well as the sale of Lithuanian products to China—had ground to a halt, and that some firms may have to leave Lithuania. 

At the end of January 2022, the EU requested World Trade Organization (WTO) dispute consultations with China concerning alleged Chinese restrictions on trade with Lithuania. Later, Taiwan, Australia, Canada, Japan, the United Kingdom, and the United States requested to join the WTO’s consultations on this case. This was seen in Lithuania as sorely needed political support from the democratic allies of Vilnius. 

More than half a year after China’s trade sanctions began, the situation has stalled. Lithuania refuses to change its decisions and is preparing to open a trade representative office in Taipei. Likewise, China continues to stop Lithuania’s goods at customs, only occasionally allowing a small part of the goods to pass (for example, small quantities of copper have still been accepted by China). The president of the Association of Lithuanian Chambers of Industry, Trade and Crafts has stated that while exports to China are almost nonexistent, imports from China have stabilized. Lithuanian importers still face increased risks and strict requirements, such as full, up-front payment for goods instead of the 15-20 percent prepayment that was the norm before relations soured. 

Despite China’s economic revenge, Lithuania has not experienced a resultant economic collapse. The EU’s quick reaction seems to have slowed down China’s aggressive actions, and there have been no recent reports of EU companies being openly discriminated against in China due to supply-chain connections with Lithuanian businesses. The Lithuanian government also allocated up to €130 million (USD $130 million) as loans for companies that suffered from China’s actions. This kind of financial strategy to help businesses that are facing challenges due to the coercive actions of third countries was the first of its type in the EU.

On the other hand, it is clear that the Chinese market is already closed for Lithuanian companies. However, some Lithuanian businesses have found new ways to transport goods from neighboring countries’ ports, thus avoiding labelling their products “made in Lithuania,” while others have hidden from China’s sanctions by moving company branches to other EU countries.

Gains and Losses for Lithuania

In January 2022, the Lithuanian National Bank issued estimations of the economic impact on Lithuania’s economy resulting from China’s restrictions on Lithuanian businesses. Preliminary calculations showed that Chinese sanctions could lead Lithuania’s GDP growth to decrease by between 0.1 to 0.5 percent in 2022, and between 0.3 to 1.3 percent in 2023. The lower numbers represent the impact of ceasing direct trade with China only, while the larger negative numbers include the indirect results on investments. 

The expanding economic ties between Lithuania and Taiwan could at least partly compensate for those projected losses. Lithuania and Taiwan have exchanged several business and diplomatic missions already. The Lithuanian government believes in the potential benefits of enhanced trade and investment flows with Taiwan. The biggest hope for Lithuania is to become a part of the semiconductors supply chain. In February 2022, the Taiwan and Lithuania Center for Semiconductors and Materials Science (TLCSM, 臺立半導體暨材料科學中心) was established in Vilnius. In addition to this, Taiwan set up a USD $200 million fund to invest in Lithuania and other Central and Eastern European countries, while also offering USD $1 billion in loans for joint projects between the countries. Taiwanese governmental representatives have also expressed intentions to help Lithuania expand its semiconductor industry in areas ranging from integrated circuit design, packaging, and testing to manufacturing. With competition for semiconductors increasing, Lithuania’s involvement in this technology field would be particularly important for the country’s economic potential, and even for its geopolitical significance.

On the other hand, the political lessons for other European countries are ambiguous. Lithuania has shown that it is possible to resist China’s economic coercion. Vilnius’ fight against Beijing encouraged the entire EU to seek solutions to protect itself from third-party economic sanctions against EU countries. To this end, on December 8, 2021, the European Commission published its proposal for an EU Anti-Coercion Instrument. Previously, in October 2021, the European Parliament for the first time formulated recommendations to the European Commission on strengthening relations with Taiwan. All these trends show that Europeans are increasingly aware of the risks of economic ties with China—while at the same time, they are willing to strengthen political support for Taiwan’s sovereignty. Lithuania has become another wakeup call for the EU and other democratic countries, which have long ignored the political risks due to the benefits of trade with China.

Yet, other EU countries do not seem to be in any hurry to follow the example of Lithuania and establish new representative offices in Taiwan or to rename existing offices. It could be that China’s economic sanctions were more effective in deterring other small European countries that do not want to repeat Lithuania’s path and face China’s economic aggression. Many European governments are trying to solve numerous economic problems simultaneously—including Western sanctions against Russia, broken supply chains, high prices of energy resources, extremely high inflation, as well as other pressing issues. During economically rough times, getting into a row with China is not a desirable choice, it seems. 

Nevertheless, Lithuania has provided one precious lesson: sooner or later, uncomfortable decisions regarding economic dependence on China will have to be made. Lithuania’s decision to stand against China and its growing ambitions in the region was possible due to its insignificant bilateral trade volumes: according to 2020 trade statistics, Lithuania had weaker economic links to China than almost every country in the region. Despite Eastern and Central Europe’s relatively low dependence on China, the situation with the rest of the EU is alarming. Germany, the EU’s economic powerhouse, is highly dependent on trade with China, Germany’s most important trade partner for the sixth consecutive year. This situation creates new challenges for the EU and significantly affects its ability to form a tougher, more united stance against China that would better reflect and safeguard the shared values of the EU. Given the increasing number of cases in which China has employed its economic leverage as a weapon, reducing dependence on China should be one of the most important long-term goals for the EU. Economic diversification would ensure that China will lose significant leverage against the EU. The war in Ukraine is already showing how reliance on an authoritarian regime can result in dire economic consequences for the whole bloc. 

Practically speaking, it would be better to cut off the most sensitive links with China now, so as not to suffer painful consequences later. And most importantly, the potential fight against China will require concentrated efforts by the entire EU, as well as the support of all democratic partners. China is a large country, but it is mostly alone. The consolidation and unity of many countries, even small ones, is the most effective way to withstand bullying by authoritarian regimes like the PRC.

The main point: The ongoing Sino-Lithuanian diplomatic standoff has already demonstrated how China might use its economic leverage to coerce countries into submission, and shows that a joint EU response is the best way to counter China’s bullying. In Lithuania, Taiwan is seen as an increasingly important partner that could help to offset the politically motivated costs, but both sides must work to ensure the sustainability of the relationship.