Much work remains to upgrade the bilateral relationship to a strategic level

In late December, the Taiwanese government purchased about 20,000 bottles of Lithuanian rum destined for China that would have been prevented from entering the country due to informal economic sanctions Beijing placed on Vilnius. Ties between China and Lithuania have been ice cold ever since the Baltic state decided last year to upgrade relations with Taiwan.

With the rum purchase, the Tsai Ing-wen administration scored a major public relations victory. Major international media all ran the story, despite the minor economic impact. China appeared petty and maladroit, while Taiwan came across as savvy. For their part, Taiwan’s people responded to the government’s call to support Lithuania by purchasing the rum. 1,800 bottles available for pre-order sold out in 15 minutes while shoppers quickly snatched up another batch of 1,200 in a retail Taiwan Tobacco and Liquor Corp. store.

Yet beyond the positive publicity, it is unclear what else Taiwan achieved. Rum is not a popular spirit in Taiwan, so once the novelty wears off, the market opportunity for Lithuania is limited.

This speaks to a deeper problem: The Taiwan-Lithuania bilateral relationship does not yet rest on firm foundations. Unlike Southeast Asian countries that form the cornerstone of the Tsai administration’s New Southbound Policy, Lithuania has no historic or cultural ties with Taiwan. There is neither a significant overseas Taiwanese population in Lithuania, nor a large community of Lithuanians in Taiwan.

To be sure, Lithuania and Taiwan have the shared experience of being young democracies living in the face of authoritarian giants but that is where their similarities end. That means the bilateral relationship needs to be constructed from the ground up.

Though the current Lithuanian government seems committed to its relationship with Taiwan – and indeed it filed an application in late March to open a representative office in Taipei – there is a risk that a different administration in Vilnius might want to seek reproach with China. In fact, Lithuanian President Gitanas Nauseda has expressed regret about Taiwan being permitted to open a representative office in Vilnius using the name “Taiwan.”

"I think it was not the opening of the Taiwanese office that was a mistake. It was its name, which was not coordinated with me," Nauseda told the Lithuanian radio station Ziniu radijas. "The name of the office has become the key factor that now strongly affects our relations with China.”

The Lithuanian public also seems ambivalent about their government’s Taiwan policy. Just 13% of those surveyed in an opinion poll commissioned by Lithuania’s Foreign Ministry supported the policy.

Money talks

One reason the Lithuanian public may hesitate to embrace a close relationship with Taiwan is that the benefits for them are uncertain, while the drawbacks of throwing down the gauntlet to China are evident. Indeed, Beijing’s actions are targeted to cause maximum economic pain for Lithuanians engaged in business with China. China’s imports from Lithuania – mainly refined copper, furniture and wheat – fell 88.5% in dollar terms on an annual basis in the first two months of the year, according to data compiled by China’s General Administration of Customs.

Though bilateral trade between China and Lithuania is limited – just US$2 billion in 2020 – Beijing is exploiting the complexity of global supply chains to try and browbeat Vilnius into submission. For instance, the German auto industry sources certain machinery parts from Lithuania. If China refuses to accept any products with Lithuanian inputs, then some European companies will be stuck between a rock and a hard place. 

In early January, the German-Baltic Chamber of Commerce said in a letter to Lithuania's foreign and economy ministers that the sale of Lithuanian products to China had stopped. The chamber urged the ministers to deescalate with China, emphasizing that “the basic business model of the companies is in question and some ... will have no other choice than to shut down production in Lithuania.”

For now, Lithuania is standing its ground and China shows no sign of offering concessions. The European Union, meanwhile, launched a case against China at the World Trade Organization (WTO) over its discriminatory trade practices against Lithuania. “The EU is determined to act as one and act fast against measures in breach of WTO rules, which threaten the integrity of our Single Market,” European Trade Commissioner Valdis Dombrovskis said in a statement.

In the face of China’s economic coercion of Lithuania, Taiwan should aim to deepen trade and investment ties with Vilnius. Doing so would help blunt efforts to appease China while illustrating that Taiwan’s importance to Lithuania goes beyond shared political values.

The Tsai Ing-wen administration has already taken some steps in the right direction. It has announced a US$200 million fund to prioritize investment in Lithuania and a US$1 billion credit fund to facilitate bilateral economic cooperation. The credit loan fund will be available to any project that benefits the development of Taiwan and Lithuania relations, Kung Ming-hsin, chief of Taiwan's National Development Council (NDC), said in January.

At the same time, Taiwan has signaled interest in cooperating with Lithuania in the highly strategic semiconductor sector in which Taiwanese companies are global leaders. In February, the Taiwan and Lithuania Center for Semiconductors and Materials Science opened in Vilnius.

Its first project will reportedly be to develop thin-disc solid state laser using advanced crystal and laser technology from both countries. In March, a Taiwanese delegation arrived in Lithuania with this project on the agenda. They met with Lithuanian Economy and Innovation Minister Aušrinė Armonaitė and visited the production facility of networking and tracking device maker Teltonika, Lithuania’s Centre for Physical Sciences and Technology, and laser producers Ekspla, Light Conversion and Eksma.

Lithuanian officials appear eager to secure Taiwan’s commitment to build a semiconductor fabrication facility in Lithuania. “We are in the process of assessing investment opportunities for Taiwan Semiconductor Manufacturing Co., United Microelectronics Corp. and other firms,” Armonaitė said in March.

Strategic foothold

If Taiwan can establish a major semiconductor fab in Lithuania that serves the broader European market, it will gain a strategic foothold on the continent that was previously out of reach. The Taiwanese semiconductor industry will grow more influential globally and could play a paramount role in helping Europe develop cutting-edge and resilient supply chains. Given the importance of the automotive industry to Europe and persistent chip shortages, Taiwan’s help is needed now more than ever.

Government support will be instrumental to the prospects of Taiwan’s foray into semiconductor production in Europe. Chipmakers had previously been skeptical of such expansion due to the perceived challenge of turning a profit. However, government subsidies can offset some of their capital expenditure. Further, Lithuania’s labor costs are low by European standards and comparable to Taiwan’s at just 1,600 euros (about NT$51,000) a month in the manufacturing sector, according to Trading Economics.

At the same time, Lithuania’s leading laser industry is attractive to Taiwanese chipmakers as it could help them produce more efficient photonic chips. Such chips are increasingly in demand for use in big data and artificial intelligence applications that require speedy transmission of vast data troves. While Taiwan’s semiconductor industry is a global leader in many areas, silicon photonics is not one of them. Cooperating with Lithuania could help Taiwanese chipmakers narrow the gap with Intel, generally considered a pioneer in silicon photonics technology.

Before China blocked trade with Lithuania, Vilnius exported about 1/3 of its laser products to China and just 2% to Taiwan, Quartz noted in a January report. Now that Lithuania is prioritizing ties with Taipei, it could sell more lasers to Taiwan.

Should Taiwan successfully develop a chipmaking facility in Lithuania, it could consider setting up fabs in the Czech Republic and Slovakia as well. Both countries have expressed interest in working with Taiwan on semiconductors. NDC head Kung said in November that Taiwan would set up working groups with Lithuania, the Czech Republic and Slovakia focused on chipmaking cooperation and also provide scholarships for technical training.

All three of these Eastern European countries are wary of close cooperation with China and have flexibility to push back against Beijing due to limited reliance on its markets. Therein lies an unusual opportunity for Taiwan, which often sees its interests compromised because firms and governments prioritize access to the enormous China market. 

Taiwan can never compete with China on market size, but it can offer advanced strategically important technology and the trustworthiness that comes with being a free-market liberal democracy that plays by the rules of global trade. Those attributes have become more important than ever in the wake of Russia’s brutal invasion of Ukraine that Beijing has failed to condemn, and indeed, for which it blames the United States and NATO.