China-Lithuania tension: German firms may have to shut factories in Baltic state amid Beijing retaliation

China denies it is targeting multinational companies to discourage them from using Lithuanian-produced parts, but business groups report a ‘trade boycott’
German industries group warns it could be a ‘devastating own goal’ that shows China is willing to decouple itself economically from politically disagreeable partners

China-EU relations

Teddy Ngin Hong KongandKinling Loin Beijing

Published: 6:00am, 25 Dec 2021

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German businesses have warned that China’s attempts to target Lithuania over its relationship with Taiwan could be a “devastating own goal” as it forces decoupling on “politically disagreeable” partners.

Beijing has denied that it is targeting multinational companies to discourage them from using Lithuanian-produced parts, but business groups said Beijing was carrying out a “trade boycott with repercussions throughout the EU” and warned that German firms may be forced to close manufacturing operations in Lithuania.

Ties between the Baltic state and China plunged after Taiwan set up a representative office in Vilnius. Beijing – which opposes Taiwan having official ties with other nations because it sees the island as a breakaway province – said the move violated the one China policy – an allegation the European Union disagrees with.

02:17

‘One China’ explained

Since then, European businesses have accused Beijing of blocking imports from Lithuania while reports suggested China was pressuring other companies, such as German car manufacturer Continental, to stop using components made in Lithuania.

The German-Baltic Chamber of Commerce warned the Lithuanian government in a letter that German investors might need to close their facilities in Lithuania unless there was “a constructive solution to restore Lithuanian-Chinese economic relations”, Lithuanian news website LRT reported.

Companies involved in peat, lasers, car parts and hi-tech sectors faced difficulties, the letter said.

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“We cannot continue investment projects (product expansion), as we no longer receive necessary components from China. We are no longer able to import parts needed for production from China. We cannot export finished products (with Lithuania as a country of origin) to China”.

Officials and observers said Lithuania’s direct exports to China accounted for just 1 per cent of the Baltic state’s GDP, but Beijing’s could target the country indirectly.

“We are very concerned about how quickly the EU and individual EU countries’ relations with China are deteriorating,” the Federation of German Industries said in a statement.

“China’s recent measures against Lithuania are having the effect of a trade boycott with repercussions throughout the EU.”

02:05

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It said imports from China needed for German factories in Lithuania and exports from Germany to China containing Lithuanian components had also been affected.

“In the long run, the escalation on the Chinese side is a devastating own goal. It shows that China is willing to decouple itself economically from politically disagreeable partners,” it said.

Even though Beijing has denied using multinational companies to put pressure on Lithuania, it had warned that Vilnius must pay the price for moving closer to Taiwan. It downgraded its diplomatic relations with the nation and Lithuania recalled its diplomats in China citing concerns about their safety.

Lithuanian Foreign Minister Gabrielius Landsbergis has called for support from the EU and the US to offset Beijing’s retaliation.

The spat happened at a time when China’s relations with the EU were already fraught. The EU-China Comprehensive Agreement on Investment (CAI) was agreed in December last year but efforts to ratify it stalled following tit-for-tat sanctions between the two parties over alleged human rights violations in Xinjiang.

And an annual high level dialogue between the two sides was postponed until next year after there appeared little chance of making progress in key areas.

Gabrielius Landsbergis, Foreign Minister of Lithuania. Photo: AFP

But China is trying to stabilise ties with the EU. Chinese President Xi Jinping told new German Chancellor Olaf Scholz in their first phone call on Tuesday that Germany should play an active role in developing the relationship between China and the EU.

Ding Chun, director of the Centre for European Studies at Shanghai’s Fudan University, said China was still taking a careful approach to Lithuania.

“China sees Lithuania as making proactive moves challenging the bilateral relationship, but this does not affect China’s overall stance of still wanting to see an easing of tensions in the China-EU relationship,” he said.

A Beijing-based researcher with a government affiliated institute on China-EU relations said he did not expect the downturn in Lithuania-China relations to escalate to a level that would affect China-EU relations.

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“Yet Lithuania has brought it to an EU level. And now this matter becomes Lithuania being part of the EU production chain, instead of just bilateral trade, and thus becoming a sticking point in the larger China-EU relations,” the researcher said on condition of anonymity.

“It is bad for both China and the EU given the trade and market size of both economies.”

“It is hard to say whether or not this trade problem will be that worrying in the long run. But China and EU relations were built largely on trade, and the stalling of the CAI was already a big problem for both sides. This new trade problem related to Lithuania was really unnecessary.”

Additional reporting by Laura Zhou

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