The EU Anti Economic Coercion Regulation - A New Addition to the EU's Toolbox

The increasingly fractious geopolitical environment and a loss of faith in international adjudication has led the EU to develop a more "autonomous" approach in order defend and assert itself on the international scene.  During the legislative process for the amendment of the EU Trade Enforcement Regulation for the purpose of allowing the EU to act autonomously where dispute settlement proceedings are impeded, the Parliament and certain Member States argued for the need to be able to react to "economic coercion" by third countries. This led to the adoption of a Joint Declaration of the Commission, the Council and the European Parliament "on an instrument to deter and counteract coercive actions by third countries" followed by the Commission Communication entitled "Trade Policy Review – An Open, Sustainable and Assertive Trade Policy", both in 2021. The proposal for an Economic Coercion Regulation followed in December 2022 and has been the subject of intense discussion between the institutions, in particular about the control each will be able to exercise over its use.  The European Council and the Parliament appear to have rendered the text considerably more forceful and assertive, including through the inclusion of provision for the involvement of EU economic operators and for any compensation obtained to be transferred to injured EU operators.  The Commission had considered and rejected provision for compensation of economic operators in its impact assessment.

The final compromise text has now been released and will be formally adopted and published soon after translation and legal revision, in particular to remove the provisional numbering of the many new paragraphs that have been inserted.

As we explain in more detail below, the Regulation provides for action against economic coercion by third counties to be initiated by the Commission at its own initiative or following a request from an EU Member State or a complaint by a private party.  Then, following an examination of the matter, the Commission may make a proposal to the Council for a determination that a situation of economic coercion exists and, if appropriate, specifying that the injury must be repaired.  If the matter is not satisfactorily resolved through mediation or negotiation, the Commission may impose response measures which can include the suspension of WTO or other treaty commitments.

What is Economic Coercion?

The Regulation defines "economic coercion" as "the use of or threat of use by a third country of a measure that affects EU's or a Member State's trade and investment interests and is intended to interfere with the EU's or a Member State's sovereign choice by seeking to alter or prevent a change to their policy." A well-known recent example of situation of economic coercion is China's decision to ban the imports of beef, dairy and beer products from Lithuania because of the opening by Taiwan of a representative office in that Member State. Other examples that were given by the Commission in its Impact Assessment Report are:

• The Section 301 trade measures imposed by the USTR under the US Trade Act 1974 upon those Member States that had adopted a digital services tax;
• Indonesia's quantitative restrictions on the imports of EU spirits, wine and dairy products in response to the EU's regulatory treatment of palm oil as fuel for transportation;
• Russia's threat of import prohibition on Dutch flowers following The Netherlands' accusation that Moscow-backed separatists were behind the shooting down of the Malaysia Airlines flight MH17; and
• China's imposition of substantial anti-dumping duties and countervailing duties on the imports of Australian wine and barley in response to Australia's investigation into the causes of the Covid-19 pandemic.

Although the definition refers to the coercion of the EU or its Member States, it is clear that action against EU companies can qualify as economic coercion.  Indeed, many provisions and other features of the Regulation show that the defence of the interests of EU economic operators is an important concern.  For example, "injury to the Union" is expressly defined as including "injury to Union economic operators".

The wide scope of "economic coercion" will mean that it encompasses sanctions imposed by third countries and also, as can be seen from the above examples, countermeasures by third countries against acts of the EU, its Member States and economic operators that are perceived by the third country as illegitimate. The scope for escalation of disputes is immediately obvious.

International illegality or wrongfulness is not as such a requirement for an act of a third country to be declared to constitute economic coercion but there is a requirement for the Commission and the Council to take into account "whether the third country is acting on the basis of a legitimate concern that is internationally recognised" and for international wrongfulness to be considered when deciding on a requirement for reparations.

It is noteworthy that recitals to the Regulation contains a long discussion about the international law principles concerning coercion and wrongful acts, including a statement that the United Nations’ International Law Commission’s Articles on the Responsibility of States for Internationally Wrongful Acts ("ARSIWA") is binding international law.  There is also a statement in the recitals that actions "to uphold a concern that is internationally recognised, such as, among other things, the maintenance of international peace and security, the protection of human rights, the protection of the environment, and the fight against climate change" should not fall within the scope of the Regulation.

Even though none of these qualifications of what constitutes economic coercion is reflected in the operative part of the Regulation, it is to be expected (indeed hoped) that determinations will consider the international legality of the act complained of.

The process

The Regulation provides for a detailed process to be followed and the intention seems to be that the gradual increase of pressure will facilitate a resolution of the issue with countermeasures being a last resort.

The first stage of the process is for the Commission to open an examination on its own initiative or based on information it receives from any source, including Member States and private parties, to determine whether a third country has engaged in economic coercion. The Commission must inform the third country concerned of the launch of the examination and may, but need not, invite the third country to present its views. It is also optional for the Commission to seek information from the public through a notice in the Official Journal or another appropriate public medium.

The second stage is for the Commission, based on the results of its examination, to make a proposal to the Council for an implementing measure determining the existence of a situation of economic coercion to the third country concerned, requesting the latter to cease the economic coercion and, if appropriate, compensate for the injury that the EU or its Member States (including their economic operators) incurred.

If the Council makes this determination (by qualified majority), the Commission must then, in a third stage, engage with the third country with a view to resolving the matter through direct negotiations or negotiations in an international forum, mediation, conciliation, good offices or international adjudication.

If the above actions fail to result in the cessation of the economic coercion and compensation for the injury caused to the EU or a Member State within a reasonable period of time, the Commission may, in a fourth stage, adopt "Union response measures" from a list set out in Annex I to the Regulation or pursuant to another EU legal instrument provided that they are necessary for the protection of the EU's and Member States' rights and interests in a particular case and pursue the EU interest as a whole.

Annex I lists the following Union response measures without this list being static (it can be subsequently modified by the Commission through the delegation act procedure):

• The suspension of any applicable tariff concessions;
• Restrictions on access to EU-funded research programmes;
• Import and export restrictions;
• Measures affecting trade in services;
• Measures affecting foreign direct investment;
• Restrictions on registrations and authorisations under EU's sanitary and phytosanitary legislation;
• Restrictions on intellectual property rights protection;
• Restrictions on participation in public procurement tender procedures;
• Restrictions on registrations and authorisations under EU's chemicals legislation; and
• Restrictions on access to EU's financial market.

Not all these measures will constitute violations of the EU's international law commitments, in particular restrictions on access to EU-funded research programmes.  Only where the economic coercion of a third country constitutes an internationally wrongful act may the Union response measure include a non-performance of the EU's international obligations towards that third country.

The Regulation contains some quite detailed criteria on the design of response measures which must be proportionate and be based on the consideration of factors such as:

• The initial determination of economic coercion and the criteria that informed such a determination;
• The EU interest;
• The measures' contribution to the objective of inducing the third country to cease the situation of economic coercion;
• The measures' negative implications for other EU policies;
• The adoption of countermeasures by other countries affected by the same or a similar situation of economic coercion;
• The need to avoid disproportionate administrative complexity and costs; and
• Other relevant international law factors.

Union response measures can either target the third country as a whole or specific individuals and legal persons that are somehow connected or linked to the third country concerned. These two types of measures are not mutually exclusive and must take the form of implementing acts.

In what may be considered a fifth stage, the application of Union response measures will normally be deferred by up to three months in order to allow notification of the measures to the third country concerned together with an invitation to cease the economic coercion and where necessary repair the injury (in which case the response measures would be terminated).

The whole process is subject to some fairly short, but non-binding, time limits and there is considerable flexibility arising out of the many stages of the process. It constitutes in effect a formalisation of the process of international dispute resolution. For example, in 1996 the EU adopted a series of ad hoc measures against the United States in response to the Helms-Burton Act that sought to sanction EU economic operators that traded with or invested in Cuba.

International law constraints

The procedures established by the Regulation are designed to allow the EU to defend its interests but also to do so in a manner consistent with international law. However, one international constraint appears not to be sufficiently addressed and so deserves comment.

The WTO Dispute Settlement Understanding (DSU) is designed to avoid the imposition of retaliatory measures on an autonomous basis in trade disputes.  It prohibits not only the imposition of retaliatory measures in the form of suspension or non-performance of WTO obligations without authorisation from the Dispute Settlement Body following a dispute settlement proceeding but also the unilateral determination of the existence of a violation of WTO obligations by another WTO Member.

The problem is well illustrated by the WTO dispute brought by the EU in the US – Section 301-310 Trade Act case.  The contested provisions empowered the US Trade Representative to adopt countermeasures in case of unreasonable, unjustifiable and/or discriminatory act, policy or action attributable to a foreign country and affecting US' trade interests or in case of a breach of a trade agreement by a third country.  The EU complained to a WTO panel that this allowed retaliatory action on the basis of a unilateral determination of violation and without prior authorisation from the WTO Dispute Settlement Body.  The case was dismissed only after the US made a commitment before the Panel that it would render determinations in conformity with its WTO obligations.

A recital to the Regulation does state that all action under it should be consistent with international law, including the WTO, but this is not expressly repeated in the operative part of the Regulation.  The Commission proposal was more explicit in the need to ensure that countermeasures are permitted by the WTO.  The Regulation may still provide sufficient discretion to allow for the avoidance of a breach of the DSU and so it may be that the Regulation is not "as such" in violation of the WTO (as the EU argued in the above case).  However, if in a concrete case, the EU were to decline to bring an instance of economic coercion that is also a breach of the WTO Agreement to a dispute settlement proceeding before taking action under the Regulation it may find itself in breach of the DSU for exactly the reasons that it invoked against the US.