Tough Trade: The Hidden Costs of Economic Coercion

The times of easy globalisation are over. As the European Union’s economic weight declines relative to that of other powers, it has entered a new phase of globalisation characterised by increasing use of economic tools for geopolitical purposes (or geo-economics) and systemic rivalry with China. These tools include everything from positive economic instruments, such as trade deals, to coercive ones, such as curbs on imports, formal sanctions, and informal sanctions (including so-called “popular boycotts”) – from investments in strategic competitiveness to regulations designed to change company behaviour. As states try out different strategies, this new era will see them alternate between a focus on positive and negative tools. Periods of escalating economic coercion will give way to a focus on strategic competition, and vice-versa. Yet the underlying trend towards the weaponisation of economic relations will remain. This means that economic coercion is here to stay.

China’s geo-economic relations with Europe are on a worrying trajectory. Until recently, serious Chinese economic coercion was something that Europeans only observed from afar. This changed in 2020 – when, for political reasons, China began threatening to impose dire economic costs on Europeans. The first real economic punishment followed in 2021. And, in the last few months, China has blocked trade with Lithuania – including that between the country and other EU member states.

Beijing has used import curbs and what are essentially secondary sanctions to punish Vilnius for allowing Taiwan to open a de facto embassy in Lithuania (a Taiwan Representative Office rather than a Taipei office). China stopped Lithuanian rail freight and even kicked Lithuania off its customs clearance system. Then, it reportedly decided to go beyond bilateral trade with Lithuania, weaponising access to the Chinese market for German, French, Swedish, and other European companies. This approach – which left no paper trail but appeared to have at least some success – involved warning unrelated companies based in third countries, such as German Continental, that they would lose access to that market if they continued trading with Lithuanian firms. For some Europeans, such techniques are reminiscent of US secondary sanctions on Iran (even if these are formal measures, and even if the US has significantly further reach than China thanks to the power of the US dollar). By threatening German Continental and others, Beijing is trying to redirect global trade flows away from Lithuania and even prevent one EU member state from doing business with the others – a form of interference in the single market. This explains why the Lithuania case is particularly worrying: if China is willing and able to threaten European companies over a country it has political disagreements with – in this case, Lithuania – it is easy to imagine it doing so to curb European trade with Taiwan or another country whose political relations with China suddenly deteriorate.

To read the full report from the European Council on Foreign Relations, please click here.