EU resorts to bluff in its trade conflict with China – POLITICO

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Expect a flow of statements from EU foreign ministers on Friday when they pledge to stick with tiny Lithuania in its highly unequal trade showdown with China.

Other than warm words at their meeting in Brittany, EU ministers have few cards to play, particularly on tough trade countermeasures. Brussels will not risk an all-out tariff war with China due to restrictions on Lithuania. Instead, the response in the near term is likely to be in support of financial support measures to stem any losses from Beijing which has taken a major hit from the Lithuanian economy.

Much is at stake for the EU as the dispute extends far beyond the city of Vilnius, and raises questions about how far Brussels will go to defend democratic principles and the integrity of the single market against Beijing’s attempts to undermine Europe’s economic unity.

In response to the strengthening of diplomatic relations between Vilnius and Taiwan, China has suppressed not only Lithuanian imports but also goods from other EU countries – such as France, Germany and Sweden – that include parts of Lithuanian supply chains.

Although this disagreement hinges on China’s exercise of its hard power, messages of solidarity still carry some weight, particularly when dealing with Beijing, which is well aware of diplomatic optics. Paris and Berlin struggle to insist they won’t wipe it under the rug. Earlier this week, French President Emmanuel Macron said that “targeted actions against Lithuania remain of concern to us.”

Germany’s Parliamentary State Minister for Economic Affairs Franziska Brantner also Visit Baltic state this week to show support.

“The single market itself is being tested,” she told Politico. “Everyone understands that you cannot let this go on, that together as Europeans you have to find an answer, and send a signal to the Chinese government: our internal market is sacred.”

The flow of diplomatic goodwill is not limited to Europe, where the United States is keeping a close eye on the fate of its NATO ally in the Baltic states. Foreign Minister Anthony Blinken expressed concerns about China’s attempts to “bully” Lithuania, and US Trade Representative Catherine Tay spoke with EU Trade Commissioner Valdis Dombrovskis to express America’s “full support” for Vilnius.

call for action

As the country holding the rotating presidency of the Council of the European Union, France has vowed to respond quickly to Beijing. “We will take action very quickly,” a senior French government official said last week.

But when pressed for conflict, Paris struggles to identify meaningful weapons.

In the coming years, the EU hopes to have a weapon to put on the negotiating table when the union is blackmailed by its trade rivals. An upcoming “anti-coercion tool” is being designed to allow Brussels to respond in precisely such cases.

France wants to speed up negotiations on this instrument. “The case of Lithuania is another example of a gap in terms of tools to combat coercive practices,” said an official in the cabinet of French Trade Minister Franck Riester.

Paris hopes to conclude an inter-EU agreement before the summer, despite the reluctance of some countries on the broad scope of this tool. However, even if the French were to succeed in striking an agreement between the EU capitals, the new legislation would still have to be negotiated between the EU institutions, which could take years.

There are no good cards

Until then, the EU lacks options.

“This is not a classic trade defense issue, which makes retaliatory tariffs difficult,” said Jonathan Hackenbroich of the European Council on Foreign Relations. Aside from the classic sanctions, it’s really hard to see what else France or the European Commission can do.

The French official from Riester’s cabinet said that imposing sanctions on China is a political minefield and is not on the table.

Paris is not ready to launch an all-out trade war with Beijing. Despite his encouraging remarks on Lithuania, Macron was quick to make clear that these tensions should not overshadow the EU-China policy agenda. “Our approach is unity and solidarity, but also the desire to move forward on the topics on which the Sino-European discussion is organized,” he added, referring to cooperation in areas such as climate protection or Africa.

For now, the European Commission is trying to apply pressure through political and diplomatic channels.

“We need to interact with the existing tools, and we are in intense contact with both the Lithuanian authorities and the Chinese authorities to try to find a way to de-escalate this situation,” said EU Trade Head Dombrovskis. He said earlier this week.

Brussels is also preparing a lawsuit at the World Trade Organization in Geneva.

“We think there is enough evidence already that trade flows from Lithuania are being blocked, and concerns not only Lithuania but also trade flows from other EU member states if they have some sort of Lithuanian content in the value chain,” Dombrovskis said.

However, such a measure would take years again and may only address violations in WTO commitments, but not the coercive nature of Chinese measures.

In the meantime, there are options to try to consolidate some of the economic damage Lithuania has inflicted. Here, Taiwan was the fastest-moving ally, pledging more than $1 billion in potential funding for strategic investments in Lithuania.

This is a tactic the EU could also use to show China that it will stand with Vilnius.

“Lithuania can benefit from European solidarity through the classic tools of economic cooperation,” the French official said.

It could also work in France’s favour.

“If a Lithuanian company, for example, needs Chinese components for its production and does not find it due to the Chinese blockage, we will be happy to help by putting it in contact with French companies or other companies in the European Union,” the official added.

Hans von der Burchard and Jacob Hanke Vela contributed reporting.

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