Lithuanian growth prospects unfazed by China row – for now

A container ship is leaving the Lithuanian port of Klaipeda.

A cargo ship leaves the Lithuanian port of Klaipėda, 1 August 2020. [Vaidotas Grybauskas (shutterstock)]

While the row with China has not yet influenced the short-term economic development of Lithuania, jittery investors might be a risk for medium and long-term growth prospects, Tadas Povilauskas, chief economist of Lithuania’s largest bank, told EURACTIV.

In December 2021, China suspended nearly all Lithuanian exports and started pressuring international companies to cut links with the country following the government’s decision to open a Taiwanese representative office in Vilnius.

According to EU Commission officials, Chinese customs authorities reported a decrease of Lithuanian exports to China by 91% in December 2021.

However, “imports from China to Lithuania have remained stable,” Povilauskas added.

Imports more critical than exports

According to Povilauskas, the damage to the economy is not yet an issue because exports to China were relatively insignificant at around 1% of total exports. The value of imports from China, on the other hand, is five times higher.

“Material risk would increase if imports from China were significantly lowered”, Povilauskas said, explaining that Lithuanian companies sourced many intermediate products from China that are then used to produce other goods for export.

Vidmantas Janulevičius, who heads the Lithuanian confederation of industrialists, confirmed this sentiment, talking to EURACTIV in mid-January. He said China was already blocking certain strategic goods from being shipped to Lithuania.

Lithuanian businesses grind on under Chinese pressure

As China is putting pressure on Lithuanian businesses and on other firms that deal with Lithuanian businesses, due to a row over diplomatic ties between Lithuania and Taiwan. The businesses themselves, however, remain silent.

For the moment, however, the row with China is not yet at a point that would materially affect the growth prospects for the Lithuanian economy.

“Our economic forecasts for this year and next year remain unchanged”, Povilauskas told EURACTIV. He expected the Lithuanian economy to grow by 3.5% in 2022.

But the long-term risks for the Lithuanian economy are increasing as long as the coercion efforts by the Chinese government persist, according to Povilauskas.

Chinese pressure against international companies to shun products produced in Lithuania might become critical to the Lithuanian economy, with some companies having paused plans to invest in the country already.

“Quick and creative solutions”

“Lithuania and the companies operating here are a part of global business processes, so it is natural that the current China-Lithuania relations may have some effect on the foreign businesses operating here,” Vida Staskonienė, director of business development at the Lithuanian investment promotion agency, told EURACTIV in emailed comments.

“However, it is too early to make generalised assumptions on the impact on foreign direct investment,” she said.

Staskonienė was confident that close cooperation between the business community and the Lithuanian government would help find the best solution, citing an example from 2020 when the Lithuanian institutions reacted to tensions in Belarus by creating a “fast-track corridor for high-value-added Belarussian companies to move all or part of their activity to Lithuania.”

“This is yet another challenge that requires collaboration, quick and creative solutions,” she said, referring to the row between China and Lithuania.

Meanwhile, the EU Commission relies on not so quick and creative, but tested processes. On Thursday (27 January), it started proceedings for a WTO case after having collected evidence of the Chinese coercion efforts over the past months.

“After repeated failed attempts to resolve the issue bilaterally, we see no other way forward than to request WTO dispute settlement consultations with China,” trade commissioner and executive vice-president Valdis Dombrovskis said in a press statement.

The process at the WTO can easily take one and a half years, and even after this time, compliance is not guaranteed. However, Commission officials were confident that China would comply with a WTO ruling.

After a decision at the WTO and an eventual appeal, the EU could take countermeasures if China does not comply with the ruling. Such countermeasures usually come in the form of tariffs against Chinese products.

However, such tariffs would be applied at an EU level, and it would be hard to design them to compensate the Lithuanian economy for damages suffered from Chinese coercion.

In the medium term, the EU Commission hopes to counter coercion efforts by Third countries with a recently proposed anti-coercion instrument, which would allow the Commission to take countermeasures against coercion efforts quickly.

With geopolitics in mind, EU Commission presents new tool to deter trade wars

The European Commission proposed a powerful new trade instrument on Wednesday (8 December) that would give it more power to impose sanctions on third countries.

[Edited by Alice Taylor]

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