Focus topics

‘There is a lot to learn from the actions of the Lithuanian government’

Viking Bohman was a diplomat and is now a foreign policy expert at the Swedish National China Centre

Lithuania is the latest example of economic coercion from Beijing, but it is not the first. Can you give us a brief overview?

So the first thing to say is that Beijing’s economic coercion is not a new phenomenon. Other countries have been subject to similar measures in recent years. We have Australia, following its request for an inquiry into the origins of the COVID-19 virus. We have Canada, following the arrest of Huawei Chief Financial Officer Meng Wanzhou, and we have South Korea following its decision to install a US missile defense system. There have also been many cases in the European Union, including in Sweden, where economic coercion has taken the form of travel warnings to restrict tourism, canceled business delegations and talks, as well as the pressure on specific companies. Most recently, it was in response to a decision that excluded Huawei and ZTE from parts of Sweden’s telecommunication networks. What is happening in Lithuania, however, is at a whole new level compared to what we have seen before.

Has economic coercion from China increased in recent years?

It does indeed appear as if the frequency of this type of overt economic coercion has increased in recent years. And this seems to be particularly true for European countries. You can also see that the magnitude of China’s overt economic coercion appears to have increased in recent years if you look at the extensive measures implemented against countries like Australia, Canada, South Korea, Sweden, and Lithuania. This suggests that the amount of pressure Beijing is willing to apply has increased. A further indication of China’s growing willingness to employ economic measures is its use of sanctions in the form of restrictions on travel and “doing business with” China against European entities and individuals in March 2021.

Is Beijing successful with this strategy? And if not, what is the greater intention behind it?

It depends on what we assume the goal is. If we assume that the goal is to reverse the supposedly China-critical policy of the targeted countries, then China has rarely been successful in recent years. In Sweden, for example, China’s actions have been met with heavy criticism and failed to reverse any policies like the exclusion of Huawei. There have been similar reactions in other countries. Failed coercion attempts on the 5G issue have been seen in Germany, France, the United Kingdom, even though these countries are quite reliant on trade with China. The coercion also often seems to be counterproductive. The measures frequently cause anger and damage China’s image as a reliable trading partner, which is a key source of its power in Europe.   

You have already mentioned the examples in your home country Sweden with the exclusion of Huawei and ZTE. Do you see any long-term effects of Chinese coercion in Sweden?

Ericsson has reported a significant loss of market share in China, and Ericsson is, of course, an important Swedish company. But I don’t think it had any significant effect on the Swedish economy as a whole, and definitely not anywhere close to what is currently happening in Lithuania. And if you look at trade flows between Sweden and China, they have been going up in recent years. So even though we have experienced an all-time low in political relations, this does not seem to have had a particularly big effect on economic relations.

Would you say the Lithuanian case is special, or could this happen to any country?

What’s happening in Lithuania is, to my knowledge, unprecedented. It appears that there is an on-and-off blanket trade suspension on goods from Lithuania. China has imposed trade restrictions against countries before, but these have always targeted specific sectors, industries, or companies, like in the cases of Australia, South Korea, or Canada, for example. Until recently, Lithuania seemed to be able to deal with this, as very little of its trade goes to China. But now we have seen China putting pressure on multinational firms to cut their ties with Lithuania or risk being shut out of the Chinese market. Investors could pull out of Lithuania and start to look for other suppliers, et cetera. This could really impact the economic flows within the EU. And I think that it is not an exaggeration to say that it is a challenge to the integrity of the EU Single Market.

Do you think the case of Lithuania will deter other EU countries from heading down the same path? Is China successful here with its coercive approach?

It really depends on how this will play out. One question is if Lithuania is going to maintain its current policy and the name of the Taiwanese representative office. Also, how significant will the economic impact from the coercion be and how much support will Lithuania get from the EU and other partners? If the impact becomes too great, other countries might be discouraged from taking similar steps.

But Lithuania has also reacted quickly to the threats from China.

I think there is a lot to learn from the actions of the Lithuanian government that it has taken in response to China’s coercion. It has established a hotline for companies targeted by Chinese coercion, and they have looked at how they can support these companies. They have tried to coordinate with allies, and they have explored opportunities to develop alternative supply chains. It will be interesting to see, later on, how well this has worked.

Recently, the Lithuanian president officially called it “a mistake” for the first time to allow a “Taiwan office” in Vilnius under that name. Are we now witnessing the first cracks forming in the Lithuanian position under China’s pressure?

I think it is hard to say from one statement. The fact that he considers the decision a mistake may not necessarily mean that he wants to reverse the overall policy. However, some may take this as an indication that Lithuania is really under great pressure and that it needs more substantial support from the EU and other allies to deal with it. It would be bad for the EU and its credibility if China was able to force Lithuania to backtrack.

The planned Anti-Coercion Instrument (ACI) is intended to prevent the very situations Lithuania is currently dealing with. The EU Commission plans to use this instrument primarily as a deterrent and hopes that it will never have to use it. Is this an effective approach against China?

One of the main problems with this instrument is that it is based on the assumption that it will be able to deter China. Proponents say that the mere existence of the ACI will have a deterrent effect, and ideally the instrument would never have to be used. I find this quite unlikely. China’s current foreign policy trajectory suggests that the EU’s ability to influence decision-making in Beijing is quite small. And there seem to be red lines that have been defined by China’s top leaders that they are not willing to budge on. In order to defend the credibility of these red lines, China appears to be willing to accept quite high reputational, political and economic costs.

What would be the consequences?

To me, it seems unlikely that China, under its current uncompromising “wolf warrior” approach to diplomacy, would refrain from this type of coercive action just to avoid the economic costs of a European trade and investment restriction. That doesn’t mean that the EU shouldn’t do something. But the strategy cannot be based on an assumption that China will change its behavior. China might continue this type of coercion, and we have to plan for that. 

You suggest that the ACI should be more focused on better absorbing China’s economic pressures, rather than potentially taking countermeasures. Can you elaborate on this?

The problem with an instrument that focuses on countermeasures is that it doesn’t do much for the country targeted by China’s economic coercion. And that could in effect mean that China successfully frightens and deters other countries from criticizing it or acting against its interests. One way to solve this would be to shift the focus from countermeasures to actions that aim to absorb the effects of coercion. Under this design, the ACI’s main function would be to provide tailored support to targeted EU member states to prevent or upset any economic fallout, for example, in cases where supply chains are disrupted

That would mean a realignment of the ACI.

It could help open new connections to alternative partners and suppliers, or provide financial aid for specific switching costs. It could also consist of a solidarity mechanism whereby the member states on a voluntary basis would agree to assist or share some of that economic burden with the target country. The goal here would not be to deter China but to make a coercion attempt ineffective while maintaining an independent policy direction.

What other flaws do you see in the EU Commission’s current proposal on the ACI?

Another problem with the mechanism is that China’s actions are usually hard to verify. They operate in this sort of gray zone, and it’s difficult to know if the state contributed to the coercion and how. For example, it is difficult to verify if a boycott or canceled business delegation is caused directly by the state. If China conceals the act, it is probably hard to prove, which means that the EU would not have a clear case at the WTO. 

What do the current drafts envisage here?

In the current proposal, decisions on the use of the ACI will be made by the commission after consulting a committee made up of representatives from the member states. I am not sure if this is an ideal option and if it will be accepted by the member states. As the issues at hand will be very political and foreign policy-oriented, I would expect the member states to play a bigger role. 

The ACI does not yet exist, and it will take some time before it comes into force. What options does the EU have at this stage in the case of Lithuania?

China’s more assertive approach requires action. But the reflex to respond to economic coercion by retaliating with similar countermeasures may not be the best option. I think it is more important now to give Lithuania the support it needs to maintain an independent policy. It would not look good if China successfully forced Lithuania to back down. A WTO case against China or retaliatory trade sanctions does not really provide any concrete help for Lithuania. Even if the EU could impose such measures today. 

What scenarios are possible now?

The pressure that China is putting on companies to cut ties with Lithuania really interferes with the internal flows of the single market. The EU’s response should focus on preventing or mitigating the effects of this. Otherwise, the Lithuanian economy could really become squeezed. After the US imposed sanctions against Iran in 2018, the EU took steps to prevent European companies from pulling out of the Iranian market through the so-called Blocking Statute. A similar move may not be possible in the Lithuanian case, but I think it would be useful to look at how the EU and its member states can change the incentives for companies thinking about whether to cut ties with Lithuania in order to preserve their access to China’s markets. 

Viking Bohman is an analyst at the Swedish National China Centre. The research center is part of the renowned Swedish Institute of International Affairs and conducts research on China-related matters. Bohman has previously worked at the Swedish Ministry of Foreign Affairs and the Swedish Embassy in Beijing.

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