European Union: EU Anti-Coercion Instrument: Key Takeaways For Businesses

On December 27, 2023, the European Union's new Anti-Coercion Instrument (Regulation 2023/2675) (the 'ACI') came into force. It aims to protect the European Union (the EU), and its Member States, from economic coercion by third countries. This could be a double-edged sword for businesses, however. While it provides a mechanism for shaping the EU response to injurious third-country measures, it also generates additional regulatory risk for those operating both within and outside the EU.

Background

The ACI was proposed by the European Commission (the EC) in 2021 to address the concern that, in "the modern interconnected world economy", countries have "enhanced" (including hybrid) means for economic coercion. In 2021, notably, Lithuania was subject to economic measures by the People's Republic of China - sanctions and other trade-related measures followed Taiwan's opening of a representative office in Vilnius. China's imports from Lithuania in January 2022 fell 99.8% year-on-year.

International law (including customary international law) gives effect to the principles of non-intervention and sovereign equality. In this context, the ACI is intended to protect against third-country trade and investment measures which constitute interference with the EU's or Member States' "legitimate sovereign choices". Under the EU treaties, common commercial policy falls within the EU's exclusive competence. As a result, economic countermeasures which Member States may wish to adopt in response to third-country trade and investment measures – and countermeasures responding to economic coercion targeted at the EU itself – fall within the EU's exclusive competence. The ACI is therefore intended to provide "an appropriate instrument" to deter and counteract economic coercion and to protect the EU's (and Member States') rights and interests.

It is worth noting that the new ACI is not intended to alter the EU's existing obligations under international law, including the Agreement establishing the World Trade Organisation (the WTO).

Economic coercion

Under Article 2 of the ACI, economic coercion exists where a third country applies (or threatens to apply) a 'third-country measure' affecting trade or investment (i.e., measures to prevent or obtain the cessation, modification or adoption of a particular act by the EU or one of its Member States, interfering with sovereignty). A 'third-country measure' is any act or omission attributable to a third country under international law, and a 'particular act' (by the EU or a Member State) can include the expression of a policy position.

In determining whether a measure amounts to economic coercion, the EC and Council of the European Union (the 'Council') must consider: (i) the intensity and duration of the third-country measure; (ii) whether the measure reflects a pattern of interference; (iii) whether the third country is acting on the basis of an internationally recognised, legitimate concern; and (iv) whether serious, good faith attempts were made to settle the matter through international coordination or adjudication.

Articles 4 and 5 set out detailed procedures for making determinations on this basis. Crucially, determinations will take into account information received from economic operators (see further, below). The Council may also instruct the EC to seek reparation for 'injury to the Union'. Any such reparations will encompass the negative impact on (and economic damage to) economic operators.¹

Union response measures and rectifying injury to the Union

If a third-country measure is found to amount to economic coercion, the EC must first provide adequate opportunity for consultation with that third country, up to direct negotiations. It may also cooperate with other countries subject to the same or similar economic coercion.

Only where such consultation is unsuccessful – and where it remains necessary and in the EU's interest – can the EC choose from a range of approaches to stop the coercion. A list of all potential measures is set out at Annex I of the ACI, and includes measures that could disrupt the European operations of global businesses, such as:

• Imposition or re-imposition of customs duties, including duties beyond most-favoured nation level, and import/export controls, including through quotas and licences;
• Measures applying to transiting goods;
• Restrictions on the right to participate in public procurement tender procedures (e.g., excluding suppliers from particular third countries from tenders and score adjustment for tenders);
• 'Measures' affecting the supply of services and access by foreign investors to the EU;
• 'Restrictions' on the protection of intellectual property rights and their exploitation;
• 'Restrictions' on the access by banking and insurance entities to EU capital markets and other financial services activities;
• 'Restrictions' on placing certain chemicals, sanitary and phytosanitary goods in the EU marketplace.

However, any countermeasures must be proportionate, not exceed the injury caused to the EU, and respond only to actions attributable to a third country under international law.²

The ACI is also explicitly intended to protect the EU investment environment and knowledge economy, and the interests of EU industries. To that end, certain discrete powers are specifically limited by the legislation itself. For instance:

• Response measures targeting foreign investors or the trade in services must only apply to entities established in the EU which are owned or controlled by persons of the third country concerned.³
• Response measures affecting the granting of public authorisations or licences needed for commercial activity should preferably target authorisation procedures not yet concluded (minimising retrospective application of the law).⁴

In addition, Article 11 sets out detailed criteria which the EC must use when designing response measures. In particular, the EC must give preference to measures which (as well as stopping coercion) avoid or minimise the negative impact on EU actors. It must consider relief for EU economic operators affected by the economic coercion.

Key implications for business

The ACI is a reminder of the importance of broad geopolitical measures, alongside focused company-specific measures (like the Foreign Subsidies Regulation). As the number of direct and indirect measures with potential ramifications for global trade and investment increase, risk management becomes more complex.

We expect, however, that the EC's use of the ACI will be targeted. In addition to only being triggered by a third country engaging in certain types of coercive conduct, measures will only be deployed as last resort (when negotiation fails). Further, because such measures must be proportionate, they may first target specific (legal) persons, linked to a third country government. The EC will also have to continually assess response measures, and amend, suspend or terminate them when they are no longer necessary.⁵

Given all of this, the implications of the ACI depend on a business' circumstances:

1. Businesses that are the target of economic coercion by a foreign country Article 13 of the ACI provides a new mechanism for businesses, and trade associations, to alert the EC to economic coercion. Businesses can provide input to the "single point of contact" at the EC (here), and then continue to engage through that single point of contact to supply views on the design of appropriate response measures. This represents a potentially useful tool to provide input on the potential for disruption to supply chains and distribution, exploitation of technology and deployment of capital etc. However, while the ACI does include standard confidentiality safeguards for businesses engaging with the EC, it is unclear whether the EC can practically protect complainant businesses, for instance while the EU is determining the extent of coercion and consulting with the third country. This is especially so in circumstances where a complainant's identity can be easily deduced. As a result, businesses will need to consider whether, by alerting the EC, they risk triggering a retaliatory cycle that could further exacerbate disruption of trade.
2. Businesses controlled or directed by countries engaging in economic coercion Coercive action by a third country which causes harm to economic activity in the EU (and in that third country) are subject to the ACI. This includes trade or investment through entities controlled or directed by that third country that are present in the EU. As a result, such entities need to be aware of the possibility that their actions could be part of the economic coercion, and that they might become the subject of retaliatory measures.
3. Businesses with operations or supply chains impacted by economic coercion

All businesses operating in the EU should prepare for more muscular EC intervention in global trade. While a number of measures that can be adopted under the ACI are most likely to be targeted at specific entities from third countries engaging in economic coercion (e.g., restrictions on IP rights protection in the EU or on further European acquisitions or investments), others are potentially much broader in scope, creating risks of collateral impact (e.g., the imposition of customs duties and measures affecting transiting goods). For example, if a hypothetical third country bans imports of electric vehicles from the EU, the EC might impose customs tariffs or quotas on lithium batteries (and inputs thereto) from that country. Potentially broad knock-on effects on a range of industries in the EU that use such batteries would follow.

The authors wish to thank Oscar Baker, Trainee Solicitor, Norton Rose Fulbright LLP Brussels for his contribution.

Footnotes

1. See, for instance, Recital 13 of the ACI, which notes that 'injury to the Union or a Member State is understood under international law to include injury to Union economic operators.'

2. See Recital 11 and Article 3 of the ACI.

3. See Recital 27 together with Article 11(4) of the ACI.

4. See Article 11(3) of the ACI.

5. See Recital 28 of the ACI.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.