The European Union has threatened China with a World Trade Organization lawsuit if reports of an embargo on Lithuania's exports to and imports from China prove accurate.

The warning follows accusations by Lithuanian business figures that Chinese customs officials have been blocking goods from being exported to China or imported from the world's second economy to the Baltic country.

The EU confirmed that it was investigating the accusations and warned that Lithuania's relationship with China "has an impact on overall EU-China relations".

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"If the information received were to be confirmed, the EU would also assess the compatibility of China's action with its obligations under the World Trade Organization," said Valdis Drombovskis, the EU's trade chief, in a joint statement with its top diplomat, Josep Borrell.

At a press conference in Brussels on Wednesday, Dombrovskis proposed a powerful new trade weapon that is designed to tackle economic coercion, and said its sights would be trained on Beijing if the alleged trade blocks against Lithuania continued.

The row stems from Lithuania's efforts to expand ties with Taiwan, a self-governing island that Beijing considers a rogue province.

The Chinese government claims Lithuania breached the EU's one-China policy by agreeing to host a "Taiwanese Representative Office" in its capital. Both Vilnius and Brussels deny any deviation from the policy.

"The EU has been informed that Lithuanian shipments are not being cleared through the Chinese customs and that import applications from Lithuania are being rejected," said Dombrovskis.

"We are in close contact with the Lithuanian government and are gathering information via the EU delegation in Beijing in a timely manner. We are also reaching out to the Chinese authorities to rapidly clarify the situation," he added.

Dombrovskis also confirmed that there would be no progress on a proposed EU-China investment deal that has stirred up controversy among EU lawmakers while sanctions remain on members of the European Parliament. Earlier this week, the EU renewed its own sanctions on Chinese officials over rights abuses in Xinjiang for a further year.

The anti-coercion instrument - the details of which the Post reported on Monday, before the proposal was announced on Wednesday - will target states that try to "interfere in the legitimate sovereign choices" of the EU or one of its 27 member states "by applying or threatening to apply measures affecting trade or investment".

While it is billed as a "last resort" and a "deterrent", it could see targets frozen out of lucrative EU sectors.

The measure lays out a large range of punitive actions the EU can take if it concludes that coercion is taking place, including tariffs, suspension of market access through the use of quotas or trading licences, and restricted access to public procurement programmes and investment markets.

According to the draft proposal, those found to be involved in coercion could be blocked from sourcing goods governed by EU export control guidelines, have their intellectual property rights truncated, be excluded from the bloc's giant financial services or chemicals sectors, or face sanitary or phytosanitary barriers to tapping the EU's food markets.

The reported trade embargo on Lithuania "clearly could be a reason to do assessment whether it constitutes economic coercion", Dombrovskis said on Wednesday.

Some Lithuanian exporters have complained about the country being "wiped" from the Chinese customs system. They have been unable to select Lithuania as a country of origin on Chinese customs systems, meaning documentation cannot be completed and orders cannot be fulfilled.

On Tuesday, five trainloads of organic minerals departed Lithuania for China after the exporter was able to access the system correctly, but on Wednesday the disruption resumed, according to Vidmantas Janulevicius, president of the Lithuanian Confederation of Industrialists.

Now, there are concerns that the trains, which have already travelled beyond Belarus, could be rejected on arrival, at the cost of millions of euros.

In a fresh blow, Janulevicius said 10 Lithuanian companies who had already prepaid for Chinese goods ranging from electronics to steel products were unable to import them, saying there is an effective trade embargo.

The goods are now languishing in Chinese ports including Ningbo and Shanghai, while significant costs are being incurred in Lithuania as China-bound containers remain static.

"Since last week, 80 per cent of the goods have not been shipped, this problem is getting very serious," he said, explaining that Chinese buyers suggested there was a "technical issue".

However, there may be little the EU can do about the situation in the short term. If it chooses to launch a WTO case, even on a fast-track basis, this could take months.

The anti-coercion instrument could be even longer in the making. It must now be negotiated and approved by the European Council, made up of the EU's 27 member states, and the European Parliament.

The parliament, which demanded such a tool be developed, is not expected to be a problem.

"The EU is facing geopolitical realities: the recent months and years have illustrated how trade policy is increasingly used as a political weapon. There is a gap in our toolbox that others can exploit," said Bernd Lange, the top trade member in the parliament's Socialist and Democratic grouping.

The tool "will fill that gap, starting today", he added.

But problems could arise among the member states, some of which have expressed concern about a perceived power grab from the European Commission, which would be able to deploy the instrument without requiring unanimous approval from EU member states.

Sweden and the Czech Republic have led the scepticism, urging the EU to make sure the tool is within the rules of the WTO.

"The EU needs to retain its credibility as a leading advocate of multilateral trading system and an upholder of stable trade rules," read a joint letter by the two governments to the commission, seen by the Post.

"This is the case, for example, of China vis-a-vis Lithuania."

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2021 South China Morning Post Publishers Ltd. All rights reserved.

Copyright (c) 2021. South China Morning Post Publishers Ltd. All rights reserved.