The EU is launching a case at the World Trade Organization (WTO) over China's alleged targeting of goods from Lithuania over Vilnius’ relationship with Taiwan.
Brussels says Bejing is engaging in “discriminatory practices” against Lithuania by refusing to import goods from the EU member state.
China's foreign ministry denied in December that it was blocking imports from Lithuania.
"Launching a WTO case is not a step we take lightly. 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," said Valdis Dombrovskis, European commissioner for trade.
"The EU is determined to act as one and act fast against measures in breach of WTO rules, which threaten the integrity of our single market.
"We are in parallel pursuing our diplomatic efforts to deescalate the situation.”
How did the China-Lithuania dispute start?
Last November, Taiwan opened a de facto embassy in the Lithuanian capital Vilnius under its own name, which triggered an angry response from Beijing, which described it as an “extremely egregious act”.
The move prompted China to downgrade its relations with the Baltic country as Beijing considers Taiwan part of its territory.
According to sources, the EU has built up "substantiated evidence", which it says gives Brussels confidence it can win the case at the WTO.
Essentially it needs to prove that the alleged fingering of Lithuanian goods by Chinese companies and customs administration is attributable to government policy imposed by Beijing.
Brussels has backed Vilnius throughout the dispute, and the action at the WTO is taken with the unanimous consent of all EU countries.
"All member states have given unanimous support – the narrative is not that this is a China-Lithuania dispute, but it's China versus the EU’s single market," an EU source told Euronews.
"It’s possible that other countries could be exposed in the future, so this is a matter of ‘sticking up for the Single Market, and who is going to be next’.
“We’re building a case but this is probably the tip of the iceberg because companies won’t come forward because they still have the hope of doing business in the future and they fear retribution”.
The measures have resulted in a 91 per cent drop in Chinese imports from Lithuania based on figures in December 2020 and December 2021.
Some of the evidence Brussels will point to in order to back up its case will be the impossibility for Lithuanian exporters to process goods during the administrative process.
The most frequent issue reported is from a technical point where an error message appears.
In addition, exporters say they no longer can select "Lithuania" on the customs website for clearance, or they can’t insert information if it comes from a Lithuanian company.
In other cases, Chinese import and export companies have simply cancelled orders to Lithuanian vendors.
Both Vilnius and Brussels have attempted bilateral approaches with Beijing over the issue. China denies that such a policy exists.
Chinese officials tell their European counterparts that the problems – although exclusively linked to Lithuanian goods – are a result of "technical glitches".
'This is the political weaponisation of trade'
“This is similar to the decision with Australia in 2020 when Australia stuck its neck out about transparency over COVID virus, and then bang they started the same – banning Australian wine etc,” Pascal Lamy, former WTO director-general, told Euronews.
"This was a trade measure decided by China but there is no trade ground to do it, it is the political weaponisation of trade.
"The real key to the matter, and how the EU can win the case is for the WTO panel to decide this was a state decision taken by China.
“If the EU wins the case -- which it probably will -- China will have to remove the measure”, or the EU can impose retaliatory measures such as tariffs, says Lamy.
But he agrees with Brussels’ calculation that the EU will win the case and the issue can be resolved successfully, albeit it will take over 18 months to conclude.
“China is among the WTO members that have agreed to keep the system; the WTO is very important to China”, says Lamy.
He points out that a state can take certain trade measures on grounds of national security, but that it would be “way over the top” for China to argue Lithuania is a threat to China.
Brussels had no choice
“The Chinese system is far more statist – it’s difficult to tell apart what is state and what is private policy,” said Holger Hestermeyer, a professor of international and EU Law at King's College London.
“They strongly defend the One China policy and they’re upset in that regard. If the Chinese think this concerns the One China policy, then I think it’s less likely they will comply with the WTO ruling.
‘It also shows the multilateral system is on shaky ground."
Hestermeyer says Brussels had no choice but to launch the case as it has no alternative route other than the WTO.