China’s Economic Coercion: Lessons from Lithuania

The most recent country to feel the heavy hand of Beijing’s economic coercion is Lithuania, which in November 2021 opened a “Taiwan Representative Office” (駐立陶宛台灣代表處) in Vilnius. The name choice—“Taiwan” (台灣) rather than “Taipei” (台北)—was regarded by Beijing as a violation of its One China principle, which holds that there is one China and Taiwan is a part of it. Vilnius’s action unleashed a torrent of condemnation from China’s wolf warrior diplomats, quickly followed by the implementation of coercive economic actions.

In many ways, Lithuania is a textbook case of Chinese economic coercion, encompassing many of the key characteristics seen in previous cases, including in Australia, Canada, and South Korea. As in the past, the event that triggered the coercive measures challenged a “core interest” of the Chinese Communist Party’s, namely, the territorial sovereignty of China. In addition, the coercive measures against Lithuania were implemented in both a disproportionate and informal manner. Overnight, the small Baltic country disappeared from China’s customs system, effectively blocking all bilateral exports and imports. However, due to the small amount of trade between the two countries, Beijing found that its actions had little economic or political effect in Lithuania, prompting an adjustment in its tactics—which Beijing has previously shown it can do.

After its export embargo failed to change Vilnius’s position, China unveiled a new tactic not seen before: informal secondary sanctions. In December 2021, Beijing warned firms that sourced products from Lithuania that they too could find their commercial relations with China restricted. Not long thereafter, it was reported that automotive parts produced by Continental, a major German company that sources components from Lithuanian firms, were unable to clear customs in China. Continental, along with the German-Baltic Chamber of Commerce, have called on Lithuania to seek a “constructive solution” with Beijing, while the Federation of German Industries has been more sympathetic, supporting a World Trade Organization (WTO) complaint filed by the European Union on behalf of Lithuania. The full impact of China’s secondary sanctions on German firms is not known, as individual firms decline to comment publicly for fear of retribution.

These informal secondary sanctions have also increased the economic price borne by domestic firms in Lithuania. Before the new measures went into effect, Lithuanian firms could exploit the country’s membership in the European Union to shift production of China-bound exports to subsidiaries in third countries, circumventing the restrictions and limiting the already minimal economic impact of China’s actions. This was the approach favored by Lithuania’s laser industry, one of Lithuania’s most exposed sectors, with 30 percent of its exports going to China.

As well as increasing the costs to Lithuanian industry, Beijing’s targeting of German firms reveals another trait of China’s economic coercion: it aims to increase indirect political pressure on the target country. The laser industry is popularly perceived in Lithuania as patriotic due to its work with the country’s military and NATO; when it voiced concerns about Vilnius’s policy, the public found the concerns credible. Likewise, German pressure on Vilnius carries disproportionate diplomatic weight given Lithuania’s dependence on Europe’s largest economy.

Initially, China’s novel tactic appeared to have some effect. Lithuania’s president referred to the naming decision as a mistake, and rumors began circulating that Lithuania may have been looking for a linguistic loophole that would allow Vilnius to deescalate tension without losing face. However, on the fundamental issues the small Baltic republic has yet to yield to China’s demands.

This illuminates another feature of Chinese economic coercion: its frequent ineffectiveness. Although often credited with strategic prowess, Beijing has a decidedly mixed track record with economic coercion. To be sure, it is difficult to measure the deterrent effect that China’s coercion may have on third countries, which may decline to adopt policies that run counter to Beijing’s interests after witnessing the examples made of countries that did. However, overall, it seems that China’s use of economic coercion has not furthered its long-term strategic interests but instead has often had the opposite effect.

Over the last decade, Beijing’s bullying behavior has not only contributed to a precipitous decline in its favorability rating around the world, but it has also often failed to achieve its intended policy objectives. For example, Australia has remained defiant in the face of Chinese calls to address the “14 grievances” and instead moved to strengthen security ties with the United States. Although Tokyo eventually released the Chinese fishing boat captain whose detainment sparked a spat with Beijing in 2010, Japan has since diversified its critical mineral supply chains away from the mainland. Likewise, Ottawa released Huawei’s Meng Wanzhou but now appears poised to block Huawei from its 5G networks. In South Korea, although the outgoing administration promised no future deployments of U.S. missile defense systems, those batteries already deployed remain in place, and the newly elected conservative president has expressed support for overturning his predecessor’s moratorium.

Beijing appears to be headed toward scoring another own goal in Vilnius. The European Union as a whole has remained united behind Lithuania. French president Emmanuel Macron pledged that during France’s EU presidency, he would vigorously pursue the adoption of an anti-coercion instrument to respond to economic aggression directed at member states. The European Union also moved quickly to initiate a WTO case against Beijing over its arbitrary trade restrictions, and in late April, Brussels approved a €130 million support package for firms affected by China’s coercion. The United States, too, is discussing its own $600 million trade support package for Lithuania.

However, in an ironic twist, it is the support provided to Lithuania by Taiwan that best underscores how China’s use of coercion can work against its own interest. China’s coercive actions against Lithuania aimed at undermining Taiwan’s legitimacy have instead created a strategic opportunity for Taipei to solidify its dominance in the semiconductor market. Taiwan has adroitly sought to develop and incentivize joint ventures between its semiconductor firms and Lithuanian laser firms, whose products represent key components of photonic chips. In addition to having the potential to be smaller and faster than current electronic chips, photonic chips do not need to be produced with extreme ultraviolet (EUV) lithography equipment—the complex machinery needed to etch infinitesimally small features on the surface of today’s most advanced chips. U.S. export controls have successfully frustrated Chinese attempts to gain access to EUV technology, impeding China’s ability to move up the technology curve. Photonic chips, however, represent a possible path the Chinese semiconductor industry could take to advance without EUV equipment, potentially even leapfrogging ahead of leading semiconductor manufacturers from advanced countries. Instead, thanks to China’s own coercive actions, Chinese firms have lost access to the Lithuanian laser industry, while at the same time, Taiwanese firms are better positioning themselves to dominate this potential next-generation semiconductor technology.

As U.S. policymakers begin to grapple with how to address China’s economic coercion, it is important to keep in mind the key characteristics of Beijing’s approach: informality, ingenuity, targeting of politically sensitive sectors—and, in many cases, ineffectiveness. On this last point, it may be wise to consider the advice of a diminutive French strategist from a bygone era of great power competition: “Never interrupt your enemy when he is making a mistake.”

Matthew Reynolds is a research associate with the Economics Program at the Center for Strategic and International Studies in Washington, D.C (CSIS). Matthew P. Goodman is senior vice president for economics and holds the Simon Chair in Political Economy at CSIS.

Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

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Matthew Reynolds

Matthew Reynolds

Former Fellow, Economics Program
Matthew P. Goodman

Matthew P. Goodman

Former Senior Vice President for Economics