Supply Chain Secondary Sanctions: How China Weaponised Lithuania’s Trade Links
Author: Verónica Fraile del Álamo (PhD Researcher, Australian National University) & Darren J. Lim (Senior Lecturer, Australian National University)
This blog is part of the CELIS-L&G special series.
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Introduction
The growing entanglement of economic interdependence and geopolitical rivalry has given rise to new forms of economic coercion that extend well beyond traditional bilateral sanctions. States increasingly seek to exploit not just their direct trade relationships, but the complex web of global supply chains that connect firms across borders, what Farrell and Newman have termed “weaponized interdependence.” When a sender state lacks sufficient direct economic leverage over a target, it may instead look to third-party firms, including companies in other countries whose supply chains pass through the target, as vectors for coercive pressure. In our article, published in Law & Geoeconomics, we call this logic “supply chain secondary sanctions.” Through a theoretical framework and an examination of China’s economic coercion campaign against Lithuania since 2021, we explore how this relatively novel tool of statecraft operates, where it succeeds, and where it falls short.
From Financial Networks to Supply Chains
Secondary sanctions are most commonly associated with the United States (US) and its dominance over global financial infrastructure. The US government’s ability to threaten banks and firms with exclusion from the dollar-denominated financial system gives it extraordinary extraterritorial reach. For most financial institutions, the costs of losing access to that system far outweigh the benefits of doing business with a sanctioned target such as Iran, which makes compliance the rational choice.
China’s position in the global economy is structurally different. China does not sit at the centre of global finance in the way the US does, but it is the largest trading partner for the majority of countries and a vast destination market for manufactured goods. Our paper proposes that this market dominance enables a distinct form of secondary sanctions: rather than threatening exclusion from a financial network, the sender state (in this case, China) threatens to block imports of any product containing inputs sourced from the target country. The coercive pressure falls on third-party firms elsewhere in the supply chain, companies that may have no involvement in the underlying political dispute but whose products pass through the target’s economy on their way to the sender’s market.
The Lithuania Case
The dynamics of supply chain secondary sanctions became visible in the dispute between China and Lithuania over the opening of a Taiwanese Representative Office in Vilnius in 2021. Lithuania does not depend heavily on China as an export market, which limited Beijing’s options for imposing meaningful costs through direct sanctions alone. However, Lithuanian firms supply intermediate inputs — such as car parts — to manufacturers elsewhere in Europe, whose products are then exported to China. Beijing reportedly delisted Lithuania from its customs declaration system and refused to process shipments containing Lithuanian-origin components. None of these measures were formally acknowledged, consistent with China’s well established pattern of imposing economic sanctions without formally acknowledging them as such. The economic pressure in this case, however, extended beyond the bilateral relationship and seeped into European supply chains.
German automotive parts manufacturers Hella and Continental were among the most prominently affected third-party firms. Both companies were informed that they must cut ties with Lithuanian suppliers in order to maintain access to the Chinese market. The German Chamber of Commerce in the Baltic States warned that without a resolution, German companies could be forced to shut down production in Lithuania. The damage to the car industry alone was estimated in the hundreds of millions of euros.
The Third-Party Firm’s Decision-Making Calculus
Our paper places the incentives facing these third-party firms at the centre of the analysis. A firm targeted by supply chain secondary sanctions will confront competing costs regardless of its chosen course of action. Compliance with the sender’s demands — such as removing the target country’s inputs from the supply chain — entails concrete exit costs, which can be substantial when the inputs in question are specialised and difficult to substitute. Both Hella and Continental reported that replacing their Lithuanian suppliers with trusted alternatives would take years. Ignoring the sanctions, on the other hand, would risk losing access to the sender’s market and incurring broader reputational damage from being perceived as defiant.
Critically, reputational costs operate in both directions. Complying with China’s demands carried its own reputational risks, particularly as the European Union (EU), the US, Taiwan, and other allies rallied behind Lithuania. The EU launched a case against China at the World Trade Organization, the US offered a $600 million export credit line, and Taiwan announced a billion-dollar investment programme. German officials visited Vilnius on multiple occasions to reassure their Lithuanian counterparts. In this environment, German companies moved to publicly signal that they would not be leaving the Lithuanian market; this was likely calculating that being seen as acting on behalf of Beijing would damage their standing with EU governments and public audiences.
Why Supply Chain Sanctions Face Structural Limitations
The Lithuania case invites comparison with the more established model of secondary sanctions: the US’ use of financial secondary sanctions against states such as Iran. When measured against that benchmark, a central finding of our analysis is that unilateral supply chain secondary sanctions are structurally less effective, because the asymmetry in costs facing third-party firms is less pronounced. When the US threatens a bank with exclusion from global dollar clearing, the costs of non-compliance are catastrophic and the costs of compliance — forgoing business with a relatively isolated pariah state — are manageable. For supply chain secondary sanctions, this calculus is less favourable to the sender. China is an attractive market, but it is typically one market among several: a firm blocked from selling to China may be able to redirect sales elsewhere. Meanwhile, the costs of compliance, which include restructuring established production processes and replacing specialised suppliers, can be prohibitively high.
The informality of Chinese sanctions further compounds the challenge. The US enforces sanctions through OFAC, a dedicated agency with extraterritorial legal authority, the capacity to conduct investigations and a track record of imposing substantial fines on non-compliant firms, with the ultimate threat of exclusion from the dollar-based financial system. The penalties are formal, public, and severe enough that firms often self-disclose violations rather than risk being caught. China has no equivalent institutional apparatus. Instead, enforcement in the Lithuania case operated through customs officials who declined to process shipments. This was not done through explicit directives, but instead through system errors, technical problems, lack of documentation or sanitary and phytosanitary justifications. When challenged, the disruptions could therefore be attributed to technical glitches or routine regulatory processes and, if needed, shipments that had been blocked would sometimes quietly resume. The plausible deniability afforded by this approach gives China flexibility, but it undermines the long-term credibility of enforcements. Firms facing disruptions that are uncertain, potentially temporary and officially denied may choose to absorb the risk rather than undertake costly and irreversible supply chain restructuring.
Broader Implications
The Lithuania case carries implications that extend well beyond the Baltic nation. As Cichanowicz and Zhang demonstrate in their contribution to this journal, advanced democracies are increasingly securitising their trade relationships with China and constructing “small yards with high fences” around strategically important products. Our paper reveals the other side of this dynamic: China is simultaneously developing new coercive tools that reach into the supply chains connecting third-party firms to target states. And as Schmitt and Vlasiuk Nibe argue, firms in this environment are not passive market actors but instead strategic players that are navigating competing pressures from rival states — sometimes as partners, sometimes as opponents, and sometimes caught in between.
For firms embedded in global value chains where upstream and downstream segments of the supply chain sit in different geopolitical camps, the Lithuania episode offers a cautionary precedent. The logic of efficiency-maximising and just-in-time supply chains is difficult to sustain in a world where geopolitical risk has become a significant supply chain variable. That said, diversification and resilience are costly, and most firms may opt to bear the risk rather than pay for insurance they hope to never need. In that case, it may fall to governments, whether through ex ante restrictions on firm choices or ex post support for affected communities, to provide the policy responses.
Finally, the case offers a sobering assessment for would-be senders of supply chain secondary sanctions. Whatever economic pressure Beijing imposed, the Taiwanese Representative Office remains open under its original name more than five years later. The campaign galvanised European solidarity, featured prominently in debates around the EU’s Anti-Coercion Instrument, and damaged China’s political relationships in Europe. Future research should examine how other states, both senders and targets, learned from this episode. Whether supply chain secondary sanctions will become a more prominent feature of the geoeconomic toolkit or remain a tool whose costs outweigh its coercive potential will remain a central question going forward for policymakers, firms, and scholars.
