It’s likely to go down as the most epic trade war ever fought over the least amount of commerce.
Since 2021, China has used a potpourri of protectionism against Lithuania, drawing the ire of the European Union (EU) and other allies. This case will soon be heard by a panel at the World Trade Organization (WTO). The ruling isn’t in doubt, but the countries looking to show “solidarity” with Lithuania will actually end up lowering the odds of Chinese compliance with this adverse verdict.
First, some background. Lithuania did several things that upset China, but Beijing was particularly offended when Taiwan was allowed to open a representative office in Vilnius without calling itself “Chinese Taipei.” China saw this as a violation of its sovereignty and retaliated by blocking goods and services from Lithuania, as well as from third-countries that include Lithuanian inputs or content.
The results have been stark. The EU estimates that these “discriminatory and coercive measures,” including import bans on alcohol, beef, dairy, logs and peat, have cut trade with Lithuania by 80 percent from January to October 2022.
Brussels responded by requesting consultations at the WTO in January 2022. Consultations are a required step before the complainant can ask a panel to hear its case. Europe and China held consultations last March 14 and 15, but they failed to reach a mutually agreed solution.
These consultations were destined to fail. China has waged this same brand of economic coercion against Australia and Canada over far lesser slights, and no one expected Beijing to reverse course against Lithuania. But there was another complicating factor: Other countries were seated at the negotiating table, making it less likely that the EU and China would settle their case “out of court.”
Australia and Chinese Taipei asked to be “joined in consultations” on Feb. 8. Canada followed suit on Feb. 10, and the U.S. the next day. In a fit of anger, China said no to the U.S. bid, without explaining why. This was pure politics, since China couldn’t keep the U.S. from reserving third-party rights once the case went before a panel.
China blocked the EU’s first request for a panel in December, but couldn’t get in the way of Brussels’s second request in January. Now that the case is going to trial, 17 countries have announced they’ll participate as third parties, including Australia, Brazil, Canada, Colombia, India, Indonesia, Japan, Korea, New Zealand, Norway, Russia, Switzerland, Chinese Taipei, Turkey, the United Kingdom, the U.S. and Vietnam. Talk about solidarity with Lithuania.
But here’s the rub: The greater the number of third parties, the lower the odds a defendant complies with an adverse ruling. China is going to lose this case. With 17 third parties, however, China will also get its back up (as defendants do under these circumstances) and be far less amenable to negotiating because of higher audience costs. A recent study suggests that this number of third parties could slash the prospects for Chinese compliance from a near-certainty to just a coin flip.
True, it’s possible that China wouldn’t comply even if there were no third parties. But this type of solidarity won’t help Lithuania, or the EU, at the WTO. The U.S. and Lithuania’s other allies should stand with Vilnius. Yet, in a WTO case, this number of third parties is more a curse than a blessing.
To minimize the expected damage of having so many third parties, the challenge will be to focus on linking each legal claim to an overarching narrative about China’s economic coercion. The EU is arguing more than a dozen legal claims, meaning that third parties are at greater risk of getting caught up in a line-by-line debate with China and, worse, with each other.
There’s little commerce at stake in this trade war. Lithuania sends 1 percent of its exports to China, and China sells $1.8 billion of goods and services to Lithuania. As Canada warns, Beijing’s economic coercion is about the future of “the rules-based international trading system and its institutions.” This isn’t the only trade war of outsized importance, but it’s certainly the most improbable one.
Marc L. Busch is the Karl F. Landegger Professor of International Business Diplomacy at the Walsh School of Foreign Service, Georgetown University. Follow him on Twitter @marclbusch.