Does China’s trade war breach its Bilateral Investment Treaty with Lithuania?

It has been three weeks since China downgraded its diplomatic ties with Lithuania, following Taiwan establishing a de-facto embassy in Vilnius. In this short period of time, the Chinese Government has blocked all imports from Lithuania by no longer listing the country in its list of origin countries and called for corporations to boycott Lithuania or facing being frozen out of the Chinese market.

Beyond a general call for solidarity from EU Member States, there has been little in the way of a unified EU response. Instead, China’s trade sanctions have exposed once again the bitter divisions amongst EU Member States when it comes to the EU’s relationship with China. Reflected by the fact that the EU Foreign Ministers meeting this week failed to meaningfully discuss the growing trade tensions between China and Lithuania.

The EU Commission’s response has not fared much better. It’s attempts to mediate have largely been rebuffed by the Chinese Government. On 8 December 2021, the Commission announced a proposal for a new Anti-Coercion Instrument, which it states will ‘empower the Commission to apply trade, investment or other restrictions towards any non-EU country unduly interfering in the policy choices of the EU or its Member States’. However, in its briefing note realised alongside the proposal it noted that ‘deterrence is its primary function, therefore the instrument would be most successful if there is no need to use it’. In short, the EU will negotiate with China on Lithuania’s behalf, but it shouldn’t expect much in the way of action.

Of course, China’s actions as one EU diplomat described it as a formulaic strategy of “killing a chicken to scare the monkey”, designed to scare other Member States away from considering strengthening relations with Taiwan. It comes at the same time that the EU Commission has shelved its own plans to upgrade trade ties with Taiwan, despite the EU Parliament passing a motion backing the opening of trade talks.

The response from Commission officials to the ongoing trade dispute, may be driven more by concern over the impact it will have on the Commission’s beleaguered efforts to push for the ratification of the EU-China Comprehensive Agreement on Investment under the French EU Presidency, than the question of EU-Taiwan relations.

This certainly appears to be the case for the EU Trade Commissioner Weyand Sabine, who said on 9 December 2021 that “The importance of the Chinese economy is much bigger for the EU than it is for the US.” An interesting comment, given that China’s market accounts for just over ten percent of EU exports.

As with Australia before it, China’s trade war with Lithuania directly undermines the pre-existing investment and trade arrangements that exist between the two countries. Lithuania’s Bilateral Investment Treaty, signed with China in 1993, guarantees Lithuania Most Favoured Nation Status which allows Lithuania companies to operate on a level playing field in China. As part of this agreement, they are able to seek redress through an investor dispute mechanism if China introduces laws or takes action that harms their profits.

A fair assessment would conclude that the blocking of Lithuanian imports and the decision by Chinese customs to longer list Lithuania goods in its list of origin countries appears to breach this investment treaty. So, what should the Lithuania Government do?

First, it could seek to trigger the investor dispute mechanism clause within the treaty. The problem, however, is that would require taking the case to domestic courts in China which lack independence from the Chinese state.

Second, Lithuania could raise this issue at the World Trade Organisation. The downside of this is that China is already facing a number of cases against it at the WTO, these cases stretch on for years, and unless the WTO Appellate Body (which deals with these claims) is reformed the chances of success are low.

Third, the Lithuanian Government could consider suspending the Bilateral Investment Treaty. This would send a clear signal to Beijing that Lithuania will not offer Chinese companies’ preferential treatment, while the Chinese state blocks its imports from clearing customs and call for a corporate boycott of its country.

Of course, recognising that China’s actions undermine and possibly breaches its bilateral investment treaty with Lithuania is a sticky issue, which many within Europe would rather ignore. Yet, it cuts to the heart of the EU’s confused and contradictory approach when it comes to China.

After all, how can the EU seek to grant China improved access for its companies to invest in European markets, while at the same time China violates an existing investment treaty with an EU Member State?