Brief — The China-Lithuania Rift: what lies ahead for the EU?

Credit: Reuters.

Tensions between China and Lithuania have been growing ever since Taiwan established a representative office in Lithuania last year as “Taiwan” instead of the usual “Taipei.” The EU has been left in a bind trying to maintain relations with both sides.

Why did the unconventional name choice rattle China so much? Beijing claimed that by allowing Taiwan to use “Taiwanese” for its de facto diplomatic mission, Lithuania had breached the “One-China Policy”, which affirms China’s claims over Taiwan as a part of its territory. For its part, Lithuania claimed that it had not abrogated the policy or acted in any way that undermined China’s territorial sovereignty. Rather, it had only expanded cooperation with Taiwan without de jure diplomatic relations. After all, Taiwan was set to invest around $1 billion in Lithuania.

Things took a turn for the worse, however, when both sides recalled their respective ambassadors. Diplomatic relations between the two countries have reached an unprecedented low, eventually resulting in China imposing a trade embargo on Lithuanian products. This has had broader repercussions for supply chains in Europe as China has vowed to restrict goods, services, and any inputs that were sourced from Lithuania. Observing the regional implications of the fallout, the European Union cautiously joined the dispute on Lithuania’s side.

From an EU standpoint, the current dispute between Lithuania and China has two angles — an economic one and a political one. Concerning the former, the EU stands to lose over $800bn in trade due to China’s barriers.

As for the political angle, the EU fears that the dispute over Taiwan may have wider repercussions for its political relations with Beijing. Already, Slovenia has stated that it will be pursuing closer relations with Taiwan by setting up a representative office in Taipei. If this trend continues, the EU as a whole may face the same kind of economic pressure that the Chinese applied against Lithuania.

So what can the EU do to maintain its economic ties with Beijing while safeguarding an independent foreign policy? As it currently stands, Brussels has few options, if any. The EU possesses no readily-available tools, such as anti-dumping measures, with which to counter China’s pressure campaign. In addition, without a trade agreement with China, the EU’s room for manoeuvre is further constrained.

To make matters worse, the EU does not have the option of approaching the World Trade Organisation as its Dispute Settlement mechanism has come to a halt ever since the US pulled out in 2019. One alternative would be for the EU to apply the latest Trade Enforcement Regulations, but such a solution could only come too late as it requires a favourable decision from an exclusive WTO panel, which is a time-consuming process. And while the EU’s proposed Anti-Coercion Agreement initiative certainly has potential, bureaucratic hurdles and procedures might delay much-needed action in the short term.

For the time being, then, most of the EU’s options are either overly ambitious or unfeasible. A balanced approach therefore remains the only practicable solution: counter China as a united bloc, but do not allow Lithuania or other Member States to pursue their foreign policy vis-à-vis China independently when it comes to sensitive issues like Taiwan. Still, the EU must tread carefully: trying to impose a unified stance on Member States could easily fan the flames of anti-institutional sentiment across an EU that needs all the unity it can get.

Written by K.A. Dhananjay, Policy Brief Writer. Read more about this issue in the Financial Times, Bloomberg, and Reuters.

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