The European Commission’s Proposal for an EU Anti-Coercion Instrument: what to expect from this expansion of the EU’s trade arsenal

Background

On 8 December 2021, the European Commission (“the Commission”) adopted its proposal for an EU anti-coercion instrument (“ACI”). This proposed framework regulation is intended to complement the Commission’s existing trade policy toolbox, providing it with an additional legal instrument to deal with economic coercion by powerful foreign states such as China and Russia but also the United States.

In recent years, there has been a significant increase in coercive practices by foreign countries seeking to influence the decisions of the EU or its Member States in the area of trade and investment. US pressure exerted on France in reaction to the latter’s introduction of a digital services tax is an outstanding example in this context. If not addressed or deterred in some form, these practices have been found to have the potential to compromise the economic and geopolitical interests of the Union, thereby undermining the EU’s new trade policy approach of an open strategic autonomy.

Up until now, the EU has usually found it difficult to respond to coercive practices by third countries. As always in foreign policy, the EU treaties require the unanimous consent of the Member States to impose sanctions. That, in turn, is often impossible to achieve. Especially when it comes to China, individual heads of state and government such as the Hungarian Prime Minister Viktor Orbán have often vetoed EU decisions. Therefore, according to the proposal, the decision on the use of the anti-coercion instrument should largely be left to the Commission. The Member States would only be able to prevent it if there is a qualified majority in the Council against a measure proposed by the Commission. There is little doubt that this majority reversal in the participation of the Council (instead of the former unanimous consent needed to adopt a measure) is ultimately the very core of the proposal.

Shortcomings of the existing instruments to address unfair trade practices

The Union has at its disposal a wide variety of instruments to address unfair trade practices (trade defence instruments, dispute settlement mechanism at the WTO, provisions of bilateral agreements), but it does not have a specific instrument aimed at deterring economic coercion.

In the Letter of Intent relating to the State of the Union 2020, Commission President von der Leyen announced that a legislative proposal on an instrument to deter and counteract coercive actions by third countries would be adopted by the Commission at the latest by the end of 2021. The legislative proposal was listed in the Commission Work Programme for 2021 and at the beginning of the year, the Commission, the Council and the European Parliament agreed on a Joint Declaration on an instrument to deter and counteract coercive action by third countries.

On 7 September 2021, following the Inception Impact Assessment and a first public consultation, the Commission published a report with the detailed results of the public consultation. Contributions came from business associations, companies from different sectors (automotive, aerospace and defence, textile, healthcare, energy, telecommunications, semiconductors…), public authorities, trade unions and academia. The majority of them recognized that economic coercion poses a problem and were in favour of the introduction of an anti-coercion instrument.

Key aspects of the proposal

In the first instance, the objective of the proposed regulation is to deter foreign countries from using coercion or the threat of coercion against the EU or its Member States, thereby protecting the interests of the Union and its Member States.

In the proposal, economic coercion is defined as pressure exercised by a third country through measures affecting trade or investment of the EU or a Member State in order to obtain a specific outcome, such as the adoption, modification or cessation of a particular decision/act by the Union or one of its Member States. On its own initiative or following information received from a Member State or a legal and natural person, the Commission will examine whether the measure at issue is indeed coercive in nature.

The proposed regulation establishes a multistep procedure, leaving the use of countermeasures as a last resort. At first, the Commission will engage with the third country in order to find a solution, through negotiations, mediation or arbitration. The Commission is also called upon to enter into consultations or cooperation with any other country affected by the same practice. In case no solution is found, the Commission will consider the use of countermeasures, setting a deadline for their application.

The annex of the Regulation lists a number of Union response measures related to the fields of goods and services, but also of intellectual property rights and foreign direct investment. In addition to that, there are various restrictions on access to the European market as well as on EU-funded programmes. However, the Commission may also decide to take a measure not listed in the regulation.

Any measures taken must be proportionate and temporary. Natural or legal persons can be subject to the Union response measure in case they are linked to the government of the third country or they have been involved with the economic coercion. The involvement of relevant stakeholders and Member States is essential for the selection of the measure. The Union response measure is adopted by the Commission via an implementing act, after consultation and a positive opinion (qualified majority) by the Committee of technical experts from Member States. The European Parliament and the Council are kept informed during the preparation of the act and have a right to scrutiny, but they cannot block its adoption.

It deserves particular mentioning at this point that the proposal does not contain provisions on any sort of financial compensation for economic operators negatively affected by economic coercion measures. This concern has been raised by stakeholders during the public consultation but remains unaddressed for the moment.

The Commission services are supposed to review the functioning of the instrument and its application no later than three years after the adoption of the first implementing act or six years after the entry into force of the regulation, whichever is earlier. The Commission would then report to the European Parliament and the Council.

Legislative procedure: next steps, expected hurdles and concerns

The proposal follows the ordinary legislative procedure, that means the European Parliament and the Council have to internally adopt their positions on the basis of the Commission’s proposal before negotiating with each other on a final text.

Even before the proposal was presented by the Commission, the Council and the European Parliament expressed their commitment to consider the proposal in a timely manner. The chair of the International Trade Committee of the European Parliament, which will be in charge of the file, Mr Lange, confirmed the intention of the lawmakers to work swiftly in order to have the proposed instrument in place as soon as possible.

If, as far as the Parliament is concerned, it is possible to see a certain shared enthusiasm amongst European lawmakers for the proposal, the same cannot be said for the Council. Some Member States (including Sweden, Czech Republic, Ireland and the Nordics) already stated their concerns about the proposal which, according to them, could lead to more protectionism. On the contrary, others support the new instrument as a way to help the Union defend its interests.

Another problematic aspect expected to create divergences among Member States concerns the voting system. More precisely, the proposed new instrument falls under the realm of EU trade policy, which allows the regulation to be passed by a qualified majority instead of unanimity.

The EU legislative process lasts on average a year and a half but it can easily take up to three years if a compromise between different positions is not easy to find. An important role is played by the Presidency of the Council, which is responsible for driving forward the Council’s work, chairing meetings of the preparatory bodies and determining the agenda. France, which welcomed the proposal, will be chairing the Council in the first half of 2022. The second half of next year will be the Czech Republic at the helm of the Council, followed by Sweden, which already expressed some doubts on the proposal.

Final remarks

The proposed new tool represents a building block of the new EU trade agenda released last February: at a time of economic transformation and geopolitical challenges, the EU intends to strengthen its ability to defend its interests and values. At the same time, the EU seems well aware of its existing obligations under public international law and has made it clear that the proposed mechanism is not intended to replace recourse to WTO dispute settlement as primary tool to address unfair foreign trade practice by foreign states. It is still to be expected that fellow WTO Members will scrutinize the new mechanism and its practical application very carefully.

The ACI is intended to complement existing EU instruments (investment screening mechanism, export controls) and future initiatives to further deter and counteract the unlawful extra-territorial application of unilateral sanctions by third countries to EU economic operators, including amending the so-called Blocking Statute (Regulation 2271/96), as set out in the Communication “The European economic and financial system: fostering openness, strength and resilience” of last January.

Stakeholders can still provide feedback on the proposal during the next eight weeks; the Commission will then report on to the European Parliament and the Council on the comments received.