Lessons From Lithuania’s David-Goliath Clash With China
By Nathaniel Taplin, July 12, 2022, WSJ

International relations is full of David and Goliath stories right now—most notably Ukraine and Russia—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—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 $28.1 million, up 70% since 2015 but still less than 1% of total FDI in the country.

None of this, however, 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.

However, targeting key links or components of the global supply chain itself has proven far more effective. Huawei, China’s telecommunication equipment champion, is being slowly strangled by the U.S.’s chip ban, as are Russian auto makers. By the
same token, small countries or companies without big direct export exposure to China could find themselves very vulnerable to Chinese pressure if Beijing finds ways to strong-arm their direct customers downstream or withholds key materials or parts.

For now Lithuania’s government has refused to back down: finance from the EU, the U.S. and Taiwan, as well as the unfavorable optics for any major Western firm contemplating pulling out, has buttressed its position. For the West, unity helps ward off
economic coercion, and so does commanding positions atop key global technological supply chains. Should either of those advantages ebb in the future, developed democracies—small and large—may find themselves toeing a far different line.

https://www.wsj.com/articles/lessons-from-lithuanias-david-goliath-clash-with-china-11657633482

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