Global supply chains are operating in an increasingly pressured and regulated environment. In this note, we discuss the unique challenges currently faced by entities based in, or with interests in, Lithuania and the impact of these challenges on global supply chains.

A recently-opened Taiwanese Representative Office has impacted Lithuania's trade relationship with China, which has had knock-on effects on supply chains intersecting with interests in the country. We also explore the likely impact of the current sanctions affecting Russia and Belarus on Lithuania.

Trade relations with China

On 18 November 2021, the Taiwanese Representative Office commenced operations in Vilnius, Lithuania's capital city. Representatives indicated their hopes for deeper cooperation in the semi-conductor, laser, and fin-tech industries, among others. However, the chosen name of the office is unusual – diplomatic outposts for the region generally use the name of the city Taipei. As such, trade relations between Lithuania and China have been affected.

Overall, the European Commission reported that Lithuanian exports to China fell 91% in December 2021 compared with the same month in 2020. Key Lithuanian exports to China include refined copper and wheat, and these industries may be among the worst impacted in the region. China has additionally ceased exports to Lithuania, which has impacted the supply to manufacturers of components and materials.

Impact on global supply chains

The measures taken, however, are more far-reaching than the Baltic state itself, as there are reports of difficulties in exporting goods from other countries which include components manufactured or sourced in Lithuania – if a product is manufactured elsewhere in Europe but includes a part made in Lithuania, for example, there are concerns that the product may not be imported into China.

This has proven particularly problematic for Lithuania's technology sector. The Brolis Group, for example, has decided to set up a new factory for the production of laser sensor chips in Belgium rather than Lithuania to ensure that products incorporating the chips can be exported.

This is thought to be the first restriction imposed by the Chinese government in terms of the sources of parts for goods to be sold to China. As such, the potential effects on global supply chains may be wide-ranging – any Lithuanian element in a supply chain may result in disruption to planned exports.

The intersection of global supply chains with Lithuanian manufacturers and exporters is, accordingly, subject to unique challenges and complexities. We are monitoring related developments, including the referral filed by the EU against China at the World Trade Organisation, which cites the impact on the EU's single market.

State of emergency and sanctions

More recently, on 24 February 2022, Lithuania declared a state of emergency in response to the ongoing conflict in Ukraine. Gitanas Nausėda, the current president of Lithuania, has stated that the state of emergency is due to last for two weeks. This will allow greater flexibility in use of state reserves and will strengthen border protections.

It is not currently thought that the current state of emergency will significantly impede the movement of Lithuanian citizens or commercial operations. The ongoing conflict and associated sanctions will, however, affect Lithuanian commerce.

Russia was recently noted as the second-biggest export market for Lithuanian goods. In 2019, for example, Lithuania exported goods worth £4.27 billion to Russia (the most significant products being wine, carbon-based electronics and beauty products). Lithuania also, until recently, had relatively close economic ties with Belarus (in comparison with its European neighbours). For example, Belaruskali (one of the largest state-owned companies in Belarus and a major producer of potash fertilisers) previously exported significant volumes of fertiliser shipments via the Lithuanian Railways (LTG) network, but the agreement between LTG and Belaruskali was recently terminated, on the instruction of the Lithuanian government, due to concerns that the contract jeopardised Lithuania's interests.

Trade between Lithuania – and the Baltic states more widely – will be significantly affected by the new sanctions regimes against Russia. The EU has also recently approved new sanctions against Belarus.

Additionally, Lietuvos paštas (the Lithuanian postal service) has announced on 1 March 2022 that it has suspended commercial shipments to Russia and Belarus. It has also suspended currency transfers between Lithuania and Russia/Belarus via its PayPost service.

All of these factors have the potential to disrupt supply chains involving or relying on Lithuanian entities.