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Lithuania, China and the new realities of global trade

By Christian Hederer
Christian Hederer is a Professor of Economics and International Economic Policy, at the Technical University of Wildau

From the end of World War II until the 2000s, the international global trading system was characterized not only by the idea of liberalization, but also by the relegation of (power-)political aspects to economic ones. Symbolic of this were, among other things, the most-favored-nation clause and the institutionalized dispute settlement mechanism of the WTO, or GATT, which at least attempted to limit the systematic discrimination of smaller nations against larger ones. Since the Trump administration took office at the latest, however, foreign and trade policy aspects have once again become more closely intertwined worldwide, and thus differences in power and size between states are once again gaining importance in trade policy. One example of this is the Chinese enactment of a de facto trade boycott against Lithuania following the opening of a Taiwanese consulate in the capital Vilnius under the name Taiwan (not Taipei, as is the usual practice).

The fact that the sanction character of these measures was not officially acknowledged by the Chinese side can be interpreted as an attempt to keep them away from multilateral standards, especially those of the WTO, and to primarily focus on a bilateral show of force against Lithuania. However, the European Union quickly expressed solidarity with Lithuania, thus restoring an essentially symmetrical constellation, even though no counter-sanctions were imposed.

The EU subsequently initiated WTO proceedings, but their potential is limited: first, WTO-based authorization for unilateral EU trade defense measures (for example, higher tariffs against illegally subsidized imported products) cannot be derived from the profile of Chinese sanctions. Second, a ruling may take considerable time. Third, even in the event of a ruling in favor of the EU, its implementation would ultimately only be possible in the form of authorized retaliatory measures.

Although such measures have only been necessary in a small minority of cases in WTO proceedings to date, they are the only way for the opposing party to seek justice in the event of non-implementation of a ruling by the defendant, which in the present case does not seem at all unrealistic for China. At the same time, they harbor a considerable potential for new conflict and delay and, in turn, bring the differences in size between conflicting parties to the fore; the value of the WTO as an institutionalized dispute settlement authority is thus considerably diminished.

Lithuania case: a typical dilemma for the EU

The European Union itself was confronted by the Lithuanian measures with a dilemma typical for the European integration process. On the one hand, a reaction at the European level was logical because of the integrity of its internal market and the Union’s external competence in trade and investment policy. On the other hand, Lithuania’s government decided its course within the framework of the member states’ continued foreign policy sovereignty and did not coordinate with other member states. The latter thus bear the potential negative consequences of a policy on which they did not decide.

From an internal perspective, Lithuania’s stance is quite consistent. As early as the fall of 2020, the first signals towards an expansion of relations with Taiwan were made; in the spring of 2021, Lithuania left the “17+1” format of Eastern European states with China, an instrument for China to exert regional influence within the framework of the Silk Road Initiative. Lithuania also had political leeway, in the sense that its economic relations with China are of comparatively limited significance for the Lithuanian economy as a whole. This clearly distinguishes Lithuania’s position from that of Europe – for example, China is now the EU’s most important import partner and third most important export partner – and that of larger member states, for example, Germany and France. Especially since the Chinese reaction to the events in Lithuania did not come as a surprise given the decades-old “One-China-Policy,” there would certainly have been a need for deliberation and probably even a decision at the pan-European level.

This proves that, especially in the situation of a stronger power-political character of international trade policy, the (already taken) integration step of unification of trade and investment policy entails the necessity of a (future) unification of other areas of foreign policy.

The bottom line is that a unified European presence is more necessary than ever in the wake of the international politicization of trade and investment flows, not least to ensure the protection of smaller member states from external repression. If this approach is to be effective, however, European integration of broader foreign policy competencies is essential. The latest steps toward a new EU trade policy instrument against economic coercion by third countries might only be the beginning.

This guest commentary is published as part of the Global China Conversations event series of the Kiel Institute for the World Economy. On Thursday (March 24), Christian Herderer from the Technical University of Wildau and Juergen Matthes from IW Cologne will discuss the topic: “EU-China Trade Conflicts and the Case of Lithuania: What is the role of the WTO?. The program will be moderated by our editor Amelie Richter. China.Table is a media partner of the event series.

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