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On December 8, 2021, the European Commission adopted its proposal for a regulation to deter and counteract economic coercion measures by non-EU countries, such as Russia and China. The Commission committed to make a legislative proposal by the end of 2021 at the latest in a joint declaration by the Council, European Parliament and Commission in February 2021 highlighting the gap in the EUs international trade protection instrument armory.

It appears be an attempt to use the EUs exclusive legislative powers under the Common Commercial Policy (Article 207(2) TFEU) to allow the European Commission to adopt a new range of sanctions against foreign countries, companies and individuals beyond the current sanction regime, which only applies where consistent with international law. By assigning the tool to the realm of trade policy instead of foreign policy, the regulation may be passed by a qualified majority of governments, circumventing the usual unanimity requirement that frequently hampers the EUs foreign policy.

The mechanism is designed to target actions by third countries intended to coerce the EU or a member state to take or withdraw specific policy measuresin other words, state-sponsored efforts that exploit economic links, such as trade and investmentto push for political change in a national government or across the whole EU. However, coercion from private companies and individuals will also be penalized if the conduct is part of an subversive campaign led by a state actor.

The coercive measures that might trigger application of this instrument are not linked to the form of the measures but to the level of their intent to coerce the EU or a member state. The result is a very broad potential scope for coercive measures covered by the proposal.

While the 12 categories of Union Response measures listed in Annex I will require implementation by the member states, the Commission alone has the power to open an investigation of its own initiative and to adopt response measures. These could include:

The EUs countermeasures can target individuals, companies and/or third countries.

The instruments main objective is not to impose punitive measures; rather, it aims toward deterrence in order to preserve the EU and the member states legitimate right to make policy choices and decisions and prevent serious interference in the sovereignty of the EU or its member states. This objective suggests that sanctions will be used as a last resort, after all forms of international engagement have been exhausted.

Any member state, company or entity can bring a complaint to the Commission, which will then investigate the situation and gather the necessary evidence to see if the dispute amounts to economic coercion or relates to measures that fall under the WTOs jurisdiction.

If the Commission establishes that economic coercion has been used, it will proceed by engaging directly with the relevant country and begin negotiations to find a solution. However, if ultimately, such mediation fails and the coercion persists, the Commission can recommend countermeasures, which are then first debated before they can be approved by the member states. In certain urgent situations, the Commission is entitled to act alone to adopt temporarily measures, subject to subsequent scrutiny by the European Parliament and Council.

Once approved, all 27 member states will have to enforce the sanctions against the third country, even if they are not direct victims of the coercion campaign. Unity and solidarity remain key to uphold our values and interests, according to Commissioner Valdis Dombrovskis, who is responsible for EU trade policy.

The European Parliament and the Council have undertaken to consider the proposal in a timely manner. It has thus far received strong support in feedback in response to the Commissions previous consultations. A new consultation has been opened for the next two months, until February 14, 2022, providing stakeholders and citizens an opportunity to submit additional feedback, which the Commission will report to the Council and Parliament.

In addition, the proposal now needs to be discussed and agreed by the European Parliament and the Council of the European Union. It will be considered under the Ordinary Legislative Procedure, whereby the Parliament and Council will internally develop their positions before negotiating with each other in Trilogue discussions with the assistance of the Commission.

France and Germany appear to support the proposal alongside other member states expressing their concern about the growing trend of increasing economic coercion.

However, other countries like Sweden and the Czech Republic, the Nordics, and Ireland have expressed their unease with the far-reaching scope of the instrument, and the potential that it will lead to more protectionism. They emphasized that sanctions should remain exceptional, comply with international law and that their harmful effects on the blocs overall economy should be kept to a minimum. In a joint statement, Sweden and the Czech Republic stated that it would be extremely difficult (especially in a short time) to quantify economic and political damage and find appropriate countermeasures.

The main fear is that the economic coercion proposal would escalate trade disputes, by becoming a trade irritant instead of an effective deterrent against giants like Russia, China and the US. An EU countermeasure could trigger a chain of retaliation measures under the WTO Agreement, which can target completely different sectors. Such escalation is exactly what worries some countries within the EU as well as the blocs like-minded trading partners. It remains to be seen, therefore, if EU capitals will succeed in diluting the instrument.

Additional questions have been raised by economic actors operating in the EU regarding the consequences of potential measures countering coercive third-country actions. For example, the instrument does not provide (so far) for an opportunity to claim compensation for damage suffered by economic operators arising from the EU reactive measures and other actions under the instrument.

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