Brussels says it will launch a World Trade Organization (WTO) case to challenge China's alleged "discriminatory trade practices against Lithuania".
The European Commission said China's trade practices were harming Lithuanian exporters and touching other exports from the EU's single market.
"Launching a WTO case is not a step we take lightly," said European trade commissioner Valdis Dombrovskis in a statement.
"However, after repeated failed attempts to resolve the issue bilaterally, we see no other way forward than to request WTO dispute settlement consultations with China."
He said the Chinese measures were threatening the integrity of the single market.
China's foreign ministry denied in December that it was blocking imports from Lithuania.
"The claims that China's authorities 'are not clearing Lithuanian shipments' and that 'they are rejecting import applications from Lithuania' is not true," foreign ministry spokesman Lijian Zhao said.
"If companies face technical problems in exporting certain products to China, they can report to competent Chinese authorities through normal channels."
Zhao added however that "the Lithuanian side bears the sole responsibility for the severe difficulties in China-Lithuania relations."
The dispute is over Lithuania allowing Taiwan to open a representative office or de-facto embassy in Vilnius last November.
The move prompted China to downgrade its relations with the Baltic country as China considers Taiwan part of its territory.
Lithuania's ambassador was expelled and China removed its own ambassador from the country shortly afterwards.
Lithuania is also among a handful of countries that have announced a diplomatic boycott of the Beijing Winter Olympics over China's human rights record.