EU Anti-Coercion Instrument: Key takeaways for businesses

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

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. 

Interplay with the EU Foreign Subsidies Regulation?

The FSR grants the EC powers to control distortion of competition in the EU resulting from third-country subsidies.

The ACI and FSR obviously differ both in their stated purpose, and the way they impact business. The latter is a direct regulatory instrument, giving the EC ex ante powers to review concentrations and public procurement processes. Obligations imposed on, or prohibitions of, specific conduct are mandatory and have direct effect.

That said, the two sets of powers may become intertwined if the FSR comes to be treated by third-country states – and state enterprises – as empowering protectionism in the EU.

Under the new FSR framework to date, the EC has launched a number of investigations, both in depth investigations following notifications (concerning, for example, Bulgarian railways and a Romanian solar photovoltaic tender ), but also using its ex officio powers (e.g., in April 2024 the EC announced an investigation of wind turbine manufacturers from China in five national markets: Bulgaria, France, Greece, Romania and Spain (see reporting here).

In response to the wind turbine investigation, the China Chamber of Commerce to the EU, stated that the “EU side’s continuous deployment of the FSR against Chinese enterprises forges an act of economic coercion”.⁶ This response highlights the potential for the use of the FSR to be seen as an instrument of international trade and economic coercion, in response to which third countries may choose to retaliate. That risk may become more of a concern as the EC ramps up ex officio investigations under the FSR. For instance, in late April 2024, the EC – alongside national authority counterparts – carried out its first ever unannounced inspection (or dawn raid) in the Netherlands at the premises of a Chinese security equipment company, on the basis that it may have received distortive foreign subsidies.

Meanwhile, in the speech announcing the wind turbine investigation, Executive Vice-President Vestager directly linked distortions of competition with economic security. She also categorised both the EC’s trade defence investigation (concerning Chinese EV imports, in October 2023 and initiated under separate EU and WTO rules), and these FSR investigations, as part of the same strategic effort.⁷ In a similar vein, Action 12 of the EU’s October 2023 Wind Power Package explicitly states that “if justified, the EC will activate its trade defence instruments” to protect the bloc’s wind industry from unfair competition.⁸ The ACI is now clearly one such instrument, and the FSR could be viewed as another.

These should prompt two key takeaways for business:

• The introduction of both the ACI and FSR may increase the likelihood that the EU will use these new anti-coercion powers more widely. If application of the FSR is viewed outside the EU as a protectionist measure, European undertakings may become subject to the sort of economic coercion the ACI is designed to address. Businesses should be prepared for this, and the implications we have identified above. It appears that the EC (at least) sees its trade defence powers and the FSR, as part of the same muscular toolkit.
• The ACI may also embolden the EC to use its ex officio powers under the FSR more widely. It knows that third countries may exercise greater restraint in the face of new EU trade measures but also that it can now respond with measures under the FSR, should the need arise.

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