The fragmentation of production and emergence of global value chains provides authoritarian states like China with new avenues for exercising political coercion via indirect trade relations and final demand exposure to their markets. This paper provides a quantification of Baltic states’ final demand exposure to China and the potential risks of trade weaponization.
The 2021 Chinese coercion of Lithuania via supply chains has attracted the headlines both due to the novelty of the tool and its brazen execution and has since ignited heated discussions on the management of supply chain-related risks. Calls were made for the introduction of new policy instruments, and economic de-risking is high on the policymakers’ agenda.
In this paper, we posit that trade weaponization is not a new phenomenon in the Baltic region and attempt to place Chinese actions within a broader geo-economic context. The three Baltic countries have been on the receiving end of Chinese trade coercion since at least a decade ago. The visits of the Dalai Lama to all three countries in the early 2010s elicited aggravated diplomatic responses from Beijing, followed by economic threats. We look at the direct exports from Baltic states to China in the months following the Dalai Lama’s visitations in order to determine whether Chinese threats actually materialized in trade enforcement. Nevertheless, the local wariness toward trade weaponization ran much deeper, especially in the case of Lithuania, where the country faced a de facto Soviet trade embargo in the weeks after the country’s declaration of independence. The Russian Federation has continued in its predecessor’s attitudes and, on multiple occasions, imposed sanctions against the Baltic states. The long-term experience of an uneasy relationship with their major trading partners is thus a defining element of their foreign economic policy.
The above cases are examples of direct trade weaponization, which is traditionally studied by using bilateral trade statistics.
The 2021 attack on Lithuania, in a departure from China’s previous approach, was an example of indirect trade weaponization via exploiting Lithuania’s indirect supply chain dependencies on China. To understand the impact of the attack, we assess the scope of each country’s vulnerability to such an attack. An econometric analysis of global value chains allows us to quantify the volume of indirect exports, both in absolute terms as well as a proportion to total trade, to locate risks that may be present.
To gain a more complex picture of the trade-embedded vulnerabilities, we drill deeper into the most exposed sectors. The export of agricultural products, essentially a direct export commodity, has been central in the trade relations with Russia and also played a role in the Sino-Baltic economic ties. The exports of machinery and vehicles establish indirect links between the Baltic countries and China, as they are routed via third countries, mainly Germany. It should not surprise then that it is precisely this avenue that China used for conducting its attack on Lithuania in 2021. Again, an econometric analysis of the export dependencies in these markets allows us to determine the level of vulnerabilities.
The quality of policy instruments is, to a large degree, a function of the quality of the data they are based on. This analysis strives to provide new insights and data points on trade that could inform the policy-making process and eventually lead to better policy decisions.
