Until now, if an individual EU member is threatened by a non-member (as Lithuania has been by China), the EU can’t retaliate against the threatening party unless it secures the unanimous approval of all 27 EU member countries’ legislatures — a cumbersome and usually impossible procedure. But the European Commission (EC) is proposing the adoption of an Anti-Coercion Instrument (ACI). This proposal, if approved by the Commission and European Parliament and not watered down, will give the EC, the EU’s executive body, a significant foreign policy power that it presently lacks.
The December 13th, 2021 trade report with L.C.
The European Commission released on December 8th a draft of its long-anticipated “Anti-Coercion Instrument” (ACI). Once finalized, the new policy has implications for the international trading system as well as for the EU and could present a challenge to the WTO. It is also likely that other countries will adopt similar measures to fight economic coercion, unilaterally or within alliances.
The Commission is proposing, according to its announcement, “a new tool to counter the use of economic coercion by third countries. This legal instrument is in response to the EU and its member states becoming the target of deliberate economic pressure…. It strengthens the EU’s toolbox and will allow the EU to better defend itself on the global stage.”
This is still a draft and the Commission is seeking further input from “interested parties” for the next two months. It is already controversial and may well be changed – perhaps watered down – before it is finalized. To be adopted, it will have to be approved by the European Parliament and European Council but won’t need approval of individual country legislatures.
Provoked by Section 232
The effort was first sparked by the US imposition of unilateral Section 232 tariffs on European steel and aluminum exports but is now understood to be aimed more at China. China’s coercion against Lithuania, especially since it exchanged representative offices with Taipei, is now the immediate example of what the EU wishes to counter. China’s economic bullying of other countries — most recently Australia but also including South Korea and others — is also seen as a justification for strengthening trade defenses.
The proposed change is also attractive to many EU countries. Currently, if an EU member is hit with an unfair trade action by a non-EU trading partner, it can’t retaliate on its own but only if all EU countries approve. Thus, a single country can veto an EU-wide response leaving no recourse for the injured country. Under the proposed system, the Commission could itself order retaliation and this could only be blocked if a majority of countries vote to do so.
The draft stresses that the proposed measure is intended to be a deterrent and a “last resort.” There will be many steps between determining a country is guilty of coercion and when it might be punished. It would counter coercion only against the EU or a member-country. That is, it wouldn’t be employed against coercive measures targeting a non-EU member, no matter how egregious.
Flexible retaliation
If a situation does evolve to the point where the Commission decides it must impose counter-measures, these can take a variety of forms – tariffs or quotas, import bans, investment curbs, and other blocks, such as no access to government procurement.
But any response must be “proportional” to the harm caused by the coercion, and, as Dombrovskis assured, “in line with international law.”
Action under the new policy would be a Commission responsibility – that is, it would be a Commission “competency,” meaning the Commission wouldn’t have to get approval of each member-state but could act on its own authority – though a majority vote by the EU’s 27 countries could block an ACI action.
Foreign policy implications
That, some analysts noted, would appear to give the Commission major new power in what is really the foreign policy realm, where decisions normally do have to get a buy-in from member-countries (unlike trade policy, which is a Commission competency). Even in trade policy, currently for the EU to impose bloc-wide retaliation against a trading partner requires approval of all countries.
As EU Trade Commissioner Valdis Dombrovskis tweeted – making clear the foreign policy implications – “This delivers on the ambition of our new #EUTrade strategy for EU to act more assertively in the international trade arena” where “Trade is being weaponized for other geopolitical purposes.” This “tool would send a clear EU message. We won’t accept interference in our sovereignty…. It would help us respond to the geopolitical challenges of the next decades.”
A European source was quoted as calling the draft ACI “one of the EU’s biggest gains in foreign policy powers in decades,” another said the Commission’s trade agency “could effectively become the EU’s foreign ministry,” and yet another said the ACI is a “much more political instrument than anything we’ve seen from the EU’s trade department.”
Controversy
Making this powerful trade defense instrument a European Commission competency so it can act against other countries without needing a consensus of all members is already getting some push-back within the EU. China appears the main target and EU countries aren’t all on the same page regarding how to respond to China. Moreover, some in Europe don’t want to give the Commission any more sweeping powers, especially related to the strategic sphere.
Compatibility with global trade rules is also a concern. In comments received before release of this draft, reportedly Japan along with Sweden and Estonia urged that the new trade defense system fully comply with WTO rules. Sweden’s comments said the Commission must “specify which threats are of the first order and justify developing… response options at the EU level,” since a misstep on this could be perceived as unfair abroad and undercut EU credibility.
Another source pointed out that the response under the ACI must not be to threats made by a trading partner but only to actions carried out. The EU’s fact sheet on the ACI says it could respond to countries “introducing (or threatening to introduce) extra, discriminatory import duties, intentional delays or refusing (or threatening to refuse) authorizations needed to do business.”
Long-time Europe-based trade analyst Hosuk Lee-Makiyama pointed to a significant problem: “The question is whether the proposed design will actually be an effective deterrence against coercive superpowers – or just another trade irritant…. The use of this instrument is based on an assumption that the hostile country will not retaliate, and that they have more to lose than the EU. That is rarely the case since the EU is the largest exporter in the world.”
Such retaliation, however, would be less likely if the ACI dropped its self-weakening prohibition on allying with non-EU members to thwart egregious coercive behaviors.
Lithuania
The example that is most immediately raising the profile of the ACI is that of Lithuania. China has not only downgraded diplomatic relations explicitly because it doesn’t like the country’s warming relations with Taiwan, but it has now, according to various accounts (denied by Beijing), blocked all trade with Lithuania – reportedly removing it from its customs data base – and pressured companies from other countries to shun business there as well.
Lithuania’s foreign minister has called on Brussels for help, pointing out that within the EU system, “While third countries can target a member state with economic sanctions, member states cannot take any to counter these measures” since trade is the responsibility of the European Commission, not individual countries. If indeed China has effectively embargoed trade with Lithuania, that would violate WTO rules and Brussels is reportedly looking at the situation, including the possibility of a WTO complaint.
On December 8th, Dombrovskis and EU High Representative (for foreign affairs) Josep Borrell issued a joint statement “on China’s measures against Lithuania.” In line with the new push to defend against economic coercion, it said: “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…. The EU is ready to stand up against all types of political pressure and coercive measures applied against any member state…. If the information received were to be confirmed, the EU would also assess the compatibility of China’s action with its obligations under the WTO…. Within the framework [of the EU’s One-China policy], the EU will pursue cooperation and exchanges with Taiwan in areas of common interest.”
The WTO has been used by some countries that were hit by economic coercion, but it is not clear that it can be used effectively if the coercion takes a form that does violate WTO rules or if the coercive country claims national security grounds. The US has already initiated the broad use of Article XXI in defending its Section 232 tariffs in particular. A few other WTO members have copied the US in using the provision: the Gulf states in defense of the Qatar embargo and Russia in defense of transit restrictions on Ukraine.
US seeks narrow economic framework in Asia
Meanwhile, Commerce Secretary Gina Raimondo, in remarks made at a December 9th event sponsored by Bloomberg News, laid out the Biden administration’s desire for an economic agreement with Asian countries that would focus on the US’s major concerns but not on elements that would normally be in a trade agreement. It is not clear that Asian allies would welcome such a narrowly focused accord. Many have been calling for the US to enter the CPTPP and have warned that Washington’s refusal to work for broad new trade agreements with the region will concede influence to China.
The Biden administration’s proposed Asian Framework could run into resistance as countries see the US seeking – rather than a mutual and reciprocal trade agreement – an arrangement within which the US could focus on re-shoring manufacturing back to the US. Remarks this week by Treasury Secretary Janet Yellen reconfirmed this US goal. Speaking to the Financial Times, she declared, “It’s possible that policies that people will describe as protectionist are going to be necessary in order to create the appropriate incentives to produce things at home.” The controversy over the proposal to subsidize electric vehicles manufactured in the US suggests that trading partners will push back against any framework or initiative aimed at “supply-chain resilience” that also aims at forcing re-shoring to the US. If the ACI is adopted by the EU, the Biden administration’s proposed re-shoring of the electronic vehicle (EV) industry would likely face united EU retaliation.
L.C. reports on trade matters for business as well as Founders Broadsheet.
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