Analysis-German big business piles pressure on Lithuania in China row

By Andrius Sytas and John O'Donnell

VILNIUS/FRANKFURT (Reuters) - Lithuania is under pressure from German companies to back down in a dispute with China to end a blockade of the Baltic state, as European trade officials struggle to defuse the row, people familiar with the matter said.

China has pressed multinationals to sever ties with Lithuania or face exclusion from its market, an unusually harsh move that has dragged companies into a political dispute and placed Beijing on a collision course with the European Union. [L1N2SU0G7]

The row erupted after the Baltic state allowed the opening of a de facto embassy by Taiwan, a self-ruled island that China views as part of its territory.

Some of the companies affected have asked Lithuania's political leaders to de-escalate the dispute or risk a corporate exodus, according to people involved and correspondence seen by Reuters.

Many multinationals are affected, but one of the most significant hits is to the German car sector.

In a letter to Lithuania's foreign and economy ministers, the German-Baltic Chamber of Commerce said imports of Chinese machinery and parts and the sale of Lithuanian products to China had ground to a halt and that some firms may have to leave.

Urging the ministers to seek a "constructive solution" to restore relations with China, the chamber said "the basic business model of the companies is in question and some ... will have no other choice than to shut down production in Lithuania".

Last month, Lithuania's Prime Minister Ingrida Simonyte met with business leaders, including executives from German car-parts giant Continental, to listen to their concerns, said one person who attended.

The overall damage to industry runs to hundreds of millions of euros, and she was told this would escalate if the dispute continues to interrupt global production, the person said.

This week, Lithuanian President Gitanas Nauseda also held talks with business executives when he was urged to make an "immediate de-escalation," according to one person with knowledge of that discussion.

The European Union's top trade official, Valdis Dombrovskis, is also attempting to mediate between Beijing and Vilnius, ahead of a possible EU-China summit meeting in the coming months, said a person with knowledge of the matter. Lithuania belongs to the 27-state bloc.

RENAMING

The focus of the dispute is the opening of a representative office by Taiwan in Vilnius, although tensions have mounted since Lithuania's ruling coalition agreed last year to support what it described as "those fighting for freedom" on the island.

Renaming the office to remove the word Taiwan could resolve the dispute. Taiwan has other offices in Europe and the United States but they use the name of the city Taipei, avoiding reference to the island itself.

But salvaging relations will be difficult.

"The Lithuanian government has betrayed China’s trust," the Chinese foreign ministry told Reuters in a statement.

"For China-Lithuania relations to get back on track, Lithuania must first correct its attitude and take practical actions to correct its mistakes," said the ministry, denying that China was exerting economic pressure.

A spokesperson for the European Commission said it would resist "coercive measures", adding: "We stand by Lithuania. Lithuanian exports are EU exports."

The Commission said it was reaching out to China to resolve the situation and "collecting facts and evidence" to see if China was complying with international trade rules. "We will not hesitate to act to defend our rights," said the spokesperson.

So far, there is no sign of a climbdown by Lithuania, with its president telling the business meeting this week that it was up to Brussels, home of the European Commission, to find a solution.

While one Lithuanian official, asking not to be named, said Brussels' involvement as a go-between was critical, another said EU backing was half-hearted and that its officials too urged Lithuania to compromise.

'NO-GO ZONE'

China appeared to reject Brussels' involvement.

"Problems between China and Lithuania should and can only be solved through bilateral channels between China and Lithuania," said China's foreign ministry. "Linking China-Lithuania issues to China-EU relations is ... unlikely to solve the problem."

The stand-off threatens Lithuanian industry, which has built up clusters of factories making parts destined for overseas, such as furniture, clothing, car parts and lasers. Hundreds of containers of goods and parts are in limbo.

It has rippled through global supply chains and, in the case of Continental, has had knock-on effects on customers such as luxury carmaker BMW and Volkswagen (DE:VOWG_p), two of the people said.

Volkswagen said its production is not affected, while BMW and Continental declined to comment.

"Lithuania has become a no-go zone in China," said Joerg Wuttke, president of the EU Chamber of Commerce in China.

"European companies cannot register it as a country of origin for products they are selling here. It's been taken off the map."

France's trade minister Franck Riester promised to help Lithuania.

"If a Lithuanian company needs Chinese components for its production but cannot find them because China is blocking ... we will be happy to help by putting it in contact with French companies or companies from other Member States," he said.

Paris, which holds the EU presidency in the coming months, is attempting to speed up introduction of new EU trade defence measures, said French officials.

The measures could penalise China in such disputes, although it is unclear whether Europe, where countries such as Germany depend on it for trade, will agree to them.

Similarly, it has been difficult for Brussels to launch legal action against China because companies affected are unwilling to be publicly named, one person with knowledge of the matter said.