Economist demands “clear edge”
“China is attacking the foundations of the EU internal market”
4/16/2022, 5:24 p.m
At first glance, the trade dispute between Lithuania and China is not a big problem for the EU. The second, however, is behind Beijing’s attempt to drive a wedge into the internal market and thus into the core of the European Union, warns economist Jürgen Matthes from the German Economic Institute. The EU must fundamentally realign China policy.
ntv.de: What’s going on between Lithuania and China?
Jürgen Matthes: Lithuania’s government has taken a more distanced stance towards China for some time. Among other things, in 2021 she withdrew from the controversial “17+1” initiative, with which Beijing is promoting infrastructure projects in Central and Eastern Europe. Most importantly, Lithuania has shown more solidarity than others with Taiwan, while the Chinese government has ramped up its ambitions to take control of the island nation. For example, Taiwan was allowed to open a representative office in Lithuania with the country name Taiwan on the doorplate and not just the name of the capital Taipei, as is otherwise customary in accordance with Beijing’s official one-China policy. This is an affront to the Chinese government, even if the term Taiwan is quite common in international statistics.
China didn’t just stop at diplomatic protests…
Obviously, China imposed a trade boycott on Lithuania, which was never officially confirmed. Lithuanian companies hardly ever get goods through Chinese customs anymore, neither for export to nor for import from China. China officially justified this partly with IT problems, at times Lithuania was no longer to be found as a trading partner in the Chinese customs system. All this is no trifle, but a blatant violation of the rules of the World Trade Organization WTO. The EU Commission, which is responsible for the trade policy of all member states, has now lodged a complaint with the WTO after collecting a wide range of evidence for the de facto trade boycott. Even if a WTO procedure takes a long time and therefore cannot solve the current problems, it is right to denounce China’s completely unacceptable behavior in Geneva in front of all other WTO members.
How big is the economic damage?
Jürgen Matthes heads the international economic order and business cycle competence field at the Cologne Institute for Economic Research.
Lithuania’s economy itself is not directly intertwined with China. However, the Chinese embargo apparently also affects products from other countries, i.e. exports from German companies that contain Lithuanian primary products. Even such goods are often blocked by Chinese customs. Now Lithuania is only a small country within the EU and from an economic point of view the losses are limited. However, individual companies can be hit hard by this. The real problem, however, is that this boycott attacks the very foundations of the European single market.
As the?
Since China cannot exert sufficient pressure directly due to Lithuania’s lack of export dependency, it wants to get companies or investors from other European countries to withdraw from the country and ban Lithuanian products and services from their value chains. This could actually harm the Lithuanian economy. China is also undermining European value chains. They are, so to speak, the bloodstream of the European internal market, which is based on an exchange of goods, services and investments free of tariffs and other trade barriers. Therefore, and out of solidarity with Lithuania, the EU must show a clear edge and defend itself against this attempt by China to drive a wedge in the internal market. This is about the principle.
What should the EU do? Risk an open trade dispute with China?
The EU has rightly already taken the first step with its complaint to the WTO. In addition, however, it must rebalance its entire foreign and trade policy strategy towards China. Officially, this strategy sees China as a partner on the one hand, and as an economic competitor and systemic rival on the other. For a long time, and especially under the previous federal government, the focus was on the aspect of partnership. Such a blatant breach of trade rules as China is now committing towards Lithuania has nothing to do with a constructive partnership. Therefore, the EU must sharpen its tools to deal with such a rival and expand its toolbox as planned. It’s about rules against distortions of competition through Chinese subsidies, restrictions for Chinese companies in European public tenders or a recently proposed EU instrument against coercive measures by other countries, which is now urgently needed in the case of Lithuania.
Isn’t the EU risking a downward spiral in relation to China? And can we afford that given the dependence of the German export industry on China?
This downward spiral started a long time ago, and it was not triggered by the European side. Look at the completely disproportionate Chinese reaction to the European sanctions against individual officials for human rights abuses in Xinjiang. The dependence of the German economy on China is often greatly overestimated. Individual German corporations may now be making up to half of their sales in China. However, this is often largely based on production in China for the Chinese market, i.e. not on German economic performance. Only about 3 percent of German GDP and only about 2.5 percent of German jobs depend on German exports to China.
The German economy and its supply chains are currently heavily burdened by the war in Ukraine and the dispute with Russia. Should the EU take this into account when dealing with China?
The Ukraine war and Beijing’s extensive solidarity with Moscow show even more clearly than before that China is becoming less and less reliable as a partner. Foreign and geopolitics are increasingly dominating economic relations. The EU has proven its ability to act quickly with the sanctions against Russia. This and the unity of the Western alliance are also red flags for China should the Communist Party there consider annexing Taiwan.
Max Borowski spoke to Jürgen Matthes