Three decades after gaining its independence from the USSR, Lithuania is again on the front lines of tension between the liberal democratic world and communist authoritarianism. This time, it’s grappling with the People’s Republic of China and faces intimidation using innovative economic statecraft rather than Soviet military force.

The small Baltic state (population 2.8 million) has been targeted with some of the most extreme tactics yet seen in Beijing’s escalating use of coercive diplomacy. In its intimidation of Lithuania, China attempted to exploit the country’s EU membership and economic dependence, which turned the issue into a dangerous political crisis for the young democracy.

Lithuania’s cardinal sin was allowing the opening of a ‘Taiwanese representative office’ in Vilnius that used the self-governed island’s name rather than the ‘Taipei’ alternative palatable to Beijing. In response, Lithuania was effectively blocked as an importer when it was deleted from the list of countries of origin at customs in China—a tactic not previously documented. Chinese exports to Lithuania have also been curbed and Chinese companies are cancelling orders from Lithuania.

The critical development came in December, when multinational companies like German car parts manufacturer Continental ^[1] were threatened with import restrictions because their supply chains involved Lithuania.

This experience with China’s brand of coercive diplomacy—generally directed at countries and companies for ‘hurting the feelings of the Chinese people’ with words or deeds—was the key reason for the visit to Australia last week by Lithuanian Foreign Minister Gabrielius Landsbergis. The issue is front of mind for like-minded governments looking to increase cooperation and bolster the liberal international order against authoritarian threats.

‘For quite a while, Australia was one of the main examples when China was using economy and trade as a political instrument or one might say even as a political weapon,’ Landsbergis said ^[2] in a joint press conference with Australian Foreign Minister Marise Payne on Wednesday. ‘Now Lithuania joins this exclusive club.’

In bilateral discussions in Canberra, officials and experts heard that Lithuania’s situation was economically and politically manageable while Beijing’s tactics were contained to Lithuanian products. Chinese customs reported a 91% drop in trade from Lithuania in December 2021 compared to the year before, but the country sent only €300 million worth of products to China in 2020—around 1% of total exports.

Lithuania’s problem became more severe in December, however, when the threat was expanded to European corporations with contracts and operations in the country. German companies like Volkswagen and Continental are heavily dependent on the Chinese market and are significant employers in Lithuania.

China was evidently seeking to wedge Lithuania and have European partners pressure Vilnius to back down. These stakes might help explain why one poll in Lithuania indicated only 13% support for the government’s position ^[3], and why President Gitanas Nauseda at one stage distanced himself from the Taiwan office decision ^[4], calling it a ‘mistake’.

The outreach to Taiwan was always going to provoke the Chinese government, which is committed to restricting the island’s international engagement. The move also came after other foreign policy developments in Lithuania that defied China, including Vilnius’s withdrawal from the 17+1 forum with central and eastern European states.

In January, Chinese Foreign Ministry spokesman Zhao Lijian said Lithuania was holding EU–China relations hostage ^[5] and urged the bloc to ‘abide by the one China principle and the solemn commitment it made upon the establishment of China–EU diplomatic relations’.

Beijing hasn’t succeeded in changing policy in Vilnius. ’Lithuania is not backing down,’ Landsbergis told the National Press Club on Thursday. Facing a growing crisis at the end of 2021, the Lithuanian government feels it has rallied domestic political players behind its policy. Engagement with EU partners, especially Germany, has averted any significant public divisions, even if there was anxiety in some corners.

‘I think that there is waking up [to the challenge], but I also think there is a very clear trend not to see certain examples,’ Landsbergis told his Canberra audience. ‘And I know that there was a sentiment among some institutions that were really expecting Lithuania not to speak up.’

The full effect of the EU-wide ultimatum on existing and future investments in Lithuania might not be apparent for some time, and the pain could yet grow for the country’s suppliers and workers.

Whatever the internal misgivings, the EU has come to Lithuania’s aid, announcing in January that it would take action in the World Trade Organization ^[6]. European Commission Executive Vice-President Valdis Dombrovskis said China’s actions were a threat to the integrity of the EU single market.

Australia—which has launched its own WTO litigation over Chinese strikes on wine and barley—has shown solidarity by requesting to join the Lithuanian consultations as an interested third party, along with the US, UK, Canada, Japan and Taiwan.

However, while WTO dispute processes are worthwhile for accountability, they are seen by many as inadequate for remedying cases of coercion. The proceedings are drawn out and, under the trade court’s standards, it’s difficult to prove that ‘grey zone’ tactics are in breach of the rules. So countries are looking for new ways to provide collective security and deter Chinese coercion.

The European Commission has proposed a country-agnostic ‘anti-coercion instrument’ ^[7] that would assess possible economic coercion, facilitate engagement with the perpetrator, and enable countermeasures like retaliatory trade restrictions.

In the US, there is a bipartisan congressional effort to establish a ‘countering economic coercion task force’ ^[8] to explore how to better work with allies to respond to coercive measures and impose costs on aggressors.

While there’s a growing body of literature on this geoeconomic issue from experts in the US, Europe and Australia, there remains a need to substantively advance the global discussion with comprehensive analysis of the concept, intent, methods and impact of coercive diplomacy and the available policy responses. To that end, ASPI has launched a major project on the issue, building on a 2020 report that documented the growing use of coercive ^[9] tactics.

The solutions to the problem aren’t simple. The varying political, economic and strategic circumstances facing different countries make practical, coalition-based action difficult. How do countries that value open trade and free markets intervene effectively without undermining competition and enterprise? Democratic states are also bound by legal frameworks in ways authoritarian regimes are not. For any credible strategy, US partners might need assurance of Washington’s commitment to multilateralism and rules-based global trade.

One idea that has fans in Canberra and Washington is a collective economic security pact that, akin to NATO’s Article 5, treats an attack on one member as an attack on all. That could involve a funding pool to assist affected industries—allowing countries to absorb and neuter coercive strikes—and impose costs on the aggressor. But the proposal is legally and politically underdeveloped.

Some countries that are more economically exposed to China—even if they are quietly anxious—might be wary of joining a vanguard action that risks blowback. On the other hand, they won’t want to miss out on the collective support that could shield them from future harm.

Lithuania finds itself feeling the heat of twin threats to the liberal order as Russia, the more familiar challenge for the Baltic state, continues to mass forces on the Ukrainian border. Landsbergis—a 40-year-old career diplomat, leader of the conservative Homeland Union party and grandson of a famous Lithuanian independence leader—links China’s and Russia’s actions as both fundamentally testing the rules-based international order, whichever region they’re concentrated in. China’s coercive tactics, he says, might have a new label but they resemble longstanding Russian intimidation.

‘It turned out that Lithuania is not an easy country to bully,’ Landsbergis said on Thursday. ‘Maybe because we have met some bullies before.’

What of China’s intent? It can certainly punish countries that step out of line and deter others from following suit—‘kill the chicken to scare the monkey’ ^[10], states the Chinese idiom. But does it genuinely still expect to successfully ‘coerce’ target countries into altering policies when this has rarely panned out? Generally, the tactics have served to harden global opinion towards China and encourage trade diversification.

After the latest meeting of Quad foreign ministers—which prompted criticism from Beijing that the security dialogue is a ‘tool to contain China’—Australia’s Prime Minister Scott Morrison hardened his rhetoric, saying a Russian and Chinese ‘coalition of autocracies’ was seeking to bully and coerce other countries.

In Lithuania’s case, if Beijing thought it could exploit the EU’s economic instincts to force submission on a security issue, that looks like a miscalculation. Europe has been put on notice, however, and China has again raised the stakes in its challenge to the global order.