China’s Economic Coercion  in the EU has Caught the Chinese on the Wrong Foot

By – Dr. Swasti Rao; As the present crisis in Ukraine is worriyingly bringing to strategic attention, the EU is a formidable economic power rather incapable of defending partner nations it sympathises with, or even its own member states and the union itself. Without a credible military capability, the EU hoped its economic weight would translate into geopolitical traction. This strategy has proved inefficient in the current world order emerging in Europe and beyond. As the Russia-China bond gets strengthened over the Ukrainian Crisis, the EU is sidelined and is left to hope that it will once again play a constructive role in managing the challenging security matrix in Europe.  This hope is based on two key variables: one, that its transatlantic security dependence will come to its rescue; and two, that under the leadership of Macron , the EU will soon be successful in maximising its capabilities via its ambitious defence modernization plans and thereby fulfil its goal of strategic autonomy . For this hope to translste into reality, two premises have to be taken into account –that the EU maintains its economic might , and , that it remains united. There has been brainstorming within the EU for achieving European strategic autonomy on a horizontal   cross-policy basis (defence , trade , industrial policy , digital policy, economic and monetary policy ). It would strengthen the EU’s multilateral action, self reliance and resilience, and in turn reduce dependence on external actors, making it less vulnerable to external threats. Two biggest external threats before the EU today are a  resurgent Russia under Putin, and China’s economic coercion. This article analyses the second challenge. China has been extremely successful in converting its economic power into geopolitical influence  with astonishing success worldwide. It is with such confidence that China has been trying to dent the EU unity for the last few months by economically bullying Lithuania, an EU member over the latter’s stand on Taiwan. If the EU fails to respond to China’s divisive and retributive economic coercion adequately, Europeans seem doomed to spend the 21st century being pushed around by outside powers. However, interestingly, the EU is standing united in its support to Lithuania while taking countermeasures to fight off China’s economic coercion joined by major global players like Australia.

Chinese economic coercion against Europe: A deeply worrying trajectory

The EU’s has been witnessing its global value chain role shrinking, and while EU trade integration with China is increasing, it is mainly to China’s benefit, undermining the EU’s external competitiveness. On the one hadn the EU realises that China will continue to be a major trade and investment partner , but the EU needs to devise more fruitful economic strategies for  co – existence with China to counter its economic coercion that most recently came to light when a small EU country, Lithuania, was targeted by China for taking a stand on Taiwan, a red line for China. Lithuania’s digression from China’s policy led to Bejing  downgrade its diplomatic relationship and implement an effective trade embargo against Lithuanian goods. Interestingly, the trade embargo was not considered enough by Beijing as China accounts for only 1% of Lithuania’s exports. Hence Beijing exhibited a fuller spectrum of its economic coercion by introducing extra retributive measures againstseveral European companies that use Lithuanian labour. But in doing so, Beijing dented the very rationale of the EU supply chain that is the core of their economic integration and existence as a bloc. For the EU then, it became a matter of existential conundrum as it  owes much of its economic weight to its regional value chain being embedded into the global value chain. China had intended that the harsh measures would force  the EU to pressurise Lithuania to apologise along the terms acceptable to China. However, contrary to Beijing’s expectations, the European Union rallied behind Lithuania and in January 2022 decided to file a formal complaint at the World Trade Organization against China.

China’s failing ‘17+1’ mechanism has fuelled its overt economic coercion in Europe

There is more to China’s punishing  Lithuania than just for Taiwan. After Xi Jinping came to power in 2012, the quest for China’s influence in the world riding on its aggressive economic statecraft began. Via the Belt and Road Initiative (BRI), China launched a specific program for the East European countries which was a strategic move to divide and weaken the EU and make them economically dependent on China. Back in 2012, the Central and East European countries had welcomed China’s ‘16+1’mechanism, which was later expanded to the ‘17+1’ with the addition of Greece. To China’s chagrin,  the very countries that were supposed to be a ‘Gateway to Europe’, a decade later, have signed a memoranda of understanding with the United States targeting Huawei’s access to their 5G networks or have joined Washington’s Clean Network initiative – a containment policy aimed at Huawei and other Chinese tech companies. The ‘17+1’ group got frustrated with unfulfilled projects as the Chinese BRI dream met with disappointments . For the European Union, the ‘17+1’ became a mechanism whose ultimate goal is to divide the EU because it grouped  11 of  EU member states with 5 non EU member states, thereby undermining the unity of the EU as a single market. Arguments have emerged that the ‘17+ 1’ mechanism has become a zombie mechanism. Similar to the Chinese zombie companies which are kept alive through cheap loans and state aid, only to avoid problems that closing them down would trigger. The CCP also keeps alive degenerating economic statecraft mechanisms to maintain the optics of the infallibility of China’s mega plans. China’s communist political culture does not embrace admitting mistakes and timely abandoning failing projects for the sake of maintaining the narrative of China’s economic statecraft as a success story. Subsequently,  the EU started accusing China of “divide and conquer” tactics more frequently.In May 2021 Lithuania pulled out of China’s ’17+1′ bloc urging the European countries to stick to the unity and solidarity of the EU itself.  Coupled with the realisation of its global value chain role shrinking to China’s advantage, the Lithania- Chia row forced the EU to stand up to protect its core economic rationale. Around the same time in mid-2021, the European Parliament voted overwhelmingly to freeze the legislative process for ratifying the EU’s investment pact with China, unless Beijing lifts sanctions against EU lawmakers that were imposed after the 27 EU countries imposed Xinjiang officials with sanctions over mass internment of the Uyghur minorities. Since the end of 2021 the EU Commission has started strengthening its toolbox of autonomous measures. It adopted a proposal for an Anti-Coercion Instrument, which would give the EU more possibilities to react in the event of economic coercion. The proposal is currently being considered by the European Parliament and the Council of the EU.

The buck does notstop with Lithuania

Following Lithuania’s departure, 11 other EU countries still remain in the16+1 grouping: Bulgaria, Croatia, the Czech Republic, Estonia, Greece, Hungary, Latvia, Poland, Romania, Slovakia and Slovenia. Out of these, two more countries have openly challenged China’s Taiwan policy. The next to attract China’s wrath is likely to be the Czech Republic, whose successive governments have issued independent statements on Taiwan against China’s Taiwan policy. In 2020 Czech senate’s visit to Taiwan had angered China but the Czech republic did not buckle under the latter’s mighty economic coercion and, to China’s consternation, this visit was returned by Taiwanese Delegation’s Eastern Europe Tour in October 2021 to the Czech Republic, Slovenia and Lithuania. The latest to join the list of Taiwan supporters in the now ‘16+1’ bloc is Slovenia, whose President Janes Janza recently criticised Beijing’s economic coercion and vowed to strengthen relations with Taiwan. Days after this controversial statement the Slovenian trade groups reported Chinese backlash. According to the Slovenian Press Agency, the Slovenian-Chinese Business Council said Chinese partners were already “terminating contracts and exiting the agreed investments”. Business groups in Slovenia apprehend they could become the target of Beijing’s economic coercion like Lithuania.

EU takes China to the WTO

China’s harsh embargos on Lithuania has triggered a domino effect within the EU and beyond. After months of failed bilateral diplomatic attempts following China’s sanctions , Brussels has reciprocated a fitting response. It went ahead than merely contemplating a proposal to counter economic coercion more effectively within the EU.  In January 2022, the EU launched  a case against Beijing at the World Trade Organization (WTO) for targeting goods from Lithuania, an EU member, over its stance on Taiwan. This move by Brussels further deteriorated ties between China and the bloc, with a long-negotiated investment deal already on the rocks. The complaint, which seeks a ruling from the WTO, alleges that China has violated the trade body’s rules by carrying out coercive actions against Lithuania that interfered with the EU’s all-member-inclusive single market and supply chain. The key, however, is for the EU to remain united in their stand. While Lithuania alone will not affect China’s economic interests, a united EU will. As of 2021, the EU is China’s  biggest trading partner.  Janka Oertel from the European Council on foreign relations said, “By Europeanising the problem, China has turned this into a test for the entire EU.” China’s punishment to Lithuania might lead to a leap forward in the EU’s ability to defend its interests in the global arena through their economic might because trade is one of the few areas where the EU is indeed a global heavyweight. It is heartening to see a more confident EU, under the French presidency, backing Lithuania and, through this, learning to convert its economic might into strategic leverage. As the China policy of diving the EU gets thwarted by combined efforts across the EU, in a latest, Australia has taken a keen interest in the ongoing dispute between Lithuania and China. Lithuania’s Foreign Minister Gabrielius Landsbergis, in a recent visit to Canberra pledged to support Australia’s pursuit of a free trade deal with the European Union, after earlier negotiations stalled in the aftermath of French anger with AUKUS. Australia, on its part, despite not being a party to the dispute, has nonetheless requested to be included in the WTO’s consultation process. Australia is arguing that since it also been a target of China’s economic coercion, it has a substantial interest in the consultation process to help establish firm rules by the WTO against China’s global trend of economic coercion as a strategy of its economic statecraft. China’s divisive tactic in the EU is failing as it sets a “bad international precedent” which will discourage other European countries from trusting China as a bankable economic partner, further thwart the China- EU investment deal,  internationalise the issue and weaken the now ‘16+1’ mechanism as the Czech Republic and Slovenia refuse to buckle down to China’s pressures. The EU needs to evolve principles that should guide Europe’s quest for economic sovereignty. It needs to build strong defences and a comprehensive resilience architecture, with an anti-coercion instrument to identify and rectify the costs of third party economic coercion. In this regard, the WTO case against China is a significant step forward.

Dr. Swasti Rao is Associate Fellow at the Europe and Eurasia Center, Manohar Parrikar Institute for Defence Studies and Analyses. She has a Masters in Politics (spl’n. IR) and an M.Phil in East Asian Studies from Jawaharlal Nehru University, New Delhi. She has completed her PhD in Advanced International Politics from Tsukuba University, Japan. She is a recipient of Japanese Education Ministry Fellowship (MEXT) in 2011 and also a recipient of the ‘Okita Memorial Scholarship’ in 2010 from ICCR. She holds an adjunct position at the Tokai University, Japan in the capacity of a foreign collaborator for the Japan Society for Promotion of Science (JSPS) funded research project on “Civil Society and Urban Governance in Asia,2020-2025”.

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