Lithuania's Dispute With China Shows Complexity of Global Trade

"International relations are full of David and Goliath stories right now but one of the most interesting ones has gone largely unnoticed by the U.S. public, and carries lessons for the global economy.

In mid-2021 the small Baltic republic of Lithuania -- a European Union member and former Soviet satellite state -- irked Beijing by permitting Taiwan to open a local representative office with "Taiwan" in the name. Most countries with friendly but unofficial relations with Taiwan have long used "Taipei" instead to avoid provoking Beijing, which claims the self-ruled island as its own.

China responded by restricting Lithuanian imports and exports in late 2021 -- and eventually targeting supply chains that run through it.

How the saga has played out so far illustrates both the strengths and the weaknesses of the global trading system in an era of heightened geopolitical tensions.

One might expect that a global heavyweight like China would find it easy to punish a minnow like Lithuania, whose economy in 2021 was about 0.4% the size of China's. But in fact Beijing's initial response -- an unofficial block on Lithuanian exports to China, which plunged by about 80% between September 2021 and March 2022 -- was relatively ineffective.

China is a crucial trading partner for Germany and several other key European economies, but the same can't be said for Lithuania. Even before tensions began spiraling in 2021, only around 1% of Lithuania's exports went to China directly. The story in investment is similar. China has become an enormous investor abroad, pumping out $145 billion in direct investment last year. But the lion's share of that, $112 billion in 2020, goes to Asia or back into the mainland via Hong Kong. The stock of Chinese investment in Lithuania amounted to just 28 million euros in 2020, equivalent to about $28.1 million, up 70% since 2015 but still less than 1% of total FDI in the country.

None of this means that China is without leverage.

In December, media outlets including Reuters and the Financial Times reported that German manufacturers in Lithuania, including car-parts heavyweight Continental AG, were being pressured by Beijing to cut ties with the country. German exports to China containing Lithuanian components were struggling to clear Chinese customs. Some shipments of goods and raw materials from China to Lithuania were also disrupted. Ultimately the EU filed a World Trade Organization case against China and announced a lending facility for affected Lithuanian firms worth 130 million euros, but the Lithuanian government was clearly spooked -- in early January Lithuania's president said the decision on the representative office name had been a mistake.

The way the confrontation unfolded has interesting echoes of other trade conflicts. Recent attempts to force change by targeting an antagonist's direct exports -- for example the Trump administration's trade tariffs on China, China's boycott of Australian wine or the European boycott of Russian oil -- have often been relatively ineffective, in part because so many exports are fungible. U.S. tariffs on China curbed direct imports, but Chinese exports as a whole held up well and simply went elsewhere. European sanctions on Russian crude have forced a discount on Russian oil, but also dramatically lifted global prices, diluting most of the impact." [1]

1.  Lithuania's Dispute With China Shows Complexity of Global Trade
Taplin, Nathaniel. 
Wall Street Journal, Eastern edition; New York, N.Y. [New York, N.Y]. 13 July 2022: B.12.