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Measured Response: How to design an EU instrument against economic coercion

In the new geo-economic era, trade policy does not just follow trade logics, but also the logic of security policy and geopolitics. The EU needs an effective and credible anti-coercion instrument to meet the challenge. Here is how the EU could go about it. 

Intentions trade law can’t capture

China’s economic attack on Australia in recent months was perfectly legal – or was it?

When Beijing curbed imports of Australian goods in 13 critical sectors, or 10% of all Australian exports, it used anti-dumping and hygiene concerns as justification. Chinese consumers suddenly had to be ‘protected’ from Australian food that had become ‘unsafe’, and Chinese wine producers had to be sheltered from alleged unfair trade practices. The move came just after Australia had called for independent investigations into the origins of the COVID-19 pandemic.

Countries have a right to respond with tariffs and import curbs when hygiene or dumping problems are real. After all, the targeted country can take such defensive measures to the World Trade Organization’s dispute settlement body to clarify whether they are justified.

But in the new geo-economic age we are in, trade is not just a WTO matter, and what China declares as defensive can easily be offensive. Trade is at the center of broader geostrategy. It increasingly gets misused for purposes totally unrelated to trade: for power politics and as ‘punishment’ for instance. Potentially, pure trade law could even consider restrictive measures like Beijing’s justified. In fact, Australia also has more anti-dumping measures in place against China than any other country.

But even trade restrictive measures that can be justified under ‘normal circumstances’ can be imposed at a time and with such impact as to constitute economic coercion, i.e., serving as a means to change another country’s policies on energy, tech, tax, foreign or other issues. Trade law could assess a potential misuse, but not timing and coercive intent – and not always.

By the time a misuse is declared, Beijing or other coercers will in most cases have already achieved their goal: governments have days, weeks or a few months for most policy decisions like on 5G network building or human rights.

Trade as a ‘weapon’, legal grey zones that do not capture coercion fully, and speed – these are the features of economic coercion that can make liberal democracies like Australia vulnerable, and force them to change policy.

Why the EU is vulnerable to economic coercion

The EU is particularly vulnerable. If economic coercion against the EU is conducted well, it will hit individual member states asymmetrically, divide them, and leave some at least indifferent to protecting the concrete EU policies a third country targets from blackmail.

And in recent times, Europe has also become increasingly targeted by China. The latter’s highly asymmetric response to the EU’s human rights sanctions in March leveraged the threat of (further) economic damage to send a clear signal to Europeans not to close ranks with the United States. The Chinese ambassador’s threats of tariffs on German cars if Berlin decided to exclude Huawei from its 5G network definitely had an impact on how Berlin decided.

There is also Russia. Europeans, especially Poles, still remember Moscow’s import bans on European goods in response to the 2014 Ukraine sanctions. Russia also justified them with “public health concerns.” Just a few weeks ago, Russia threatened to ban Czech beer as punishment for the Czech government identifying Russian involvement in a 2014 explosion.

The United States used their Section 301 legislation to threaten France and other European countries with tariffs to induce them to change their digital services tax policies. Even under the Biden administration, few expect the US to stop using extra-territorial sanctionsto pursue foreign policy goals, despite their often negative effects on partners.

So far, the European Union has been defenseless, but it need not be.

Deterrence

Europeans need to come to terms with the fact that trade is now part of broader international power relations. Trade restrictions are increasingly leveraged in attempts to alter another country’s policies, and such uses can violate principles of national sovereignty or non-interference – even if they do not formally violate WTO law. When that is the case, public international law allows for the imposition of countermeasures.

The EU needs to create the possibility to impose such countermeasures collectively. An instrument to deter coercive practices when third countries intent to weaponize trade – then de-escalate – could be the way to go. The European Commission is currently working on exactly such a new anti-coercion instrument – ACI.

Of course, building economic strength, and pursuing a positive, open trade agenda is Europe’s most important response to economic coercion. But the EU needs to complement positive tools with defensive instruments in its toolbox.

The ACI could be a step in the right direction. It needs to be designed well, however. This is why we, at the European Council on Foreign Relations brought together public and private sector actors in a high-level Task Force for Strengthening Europe against Economic Coercion.

On the basis of this work, we – the authors of this piece – would advise the EU to keep the following lessons in mind:

Countermeasures under the ACI need to be both effective and credible. ‘Effective’ in this context would mean that the coercive third country would really care about being targeted by such a measure. ‘Credible’ would mean that the EU’s odd institutional structure would actually allow for a swift response.

The right instruments in the right situation

Tariffs at the border and trade curbs, for instance, might be an obvious choice for EU countermeasures because the EU has the credibility that it could swiftly impose them.

But if there is one lesson from Donald Trump’s ‘maximum pressure’ campaign dangling and imposing tariffs on China, it is that tariffs do not necessarily impress Beijing. Export controls and sectoral divestment, on the other hand, could do so if the EU threatened either to cut China or others off access to a critical product they cannot easily find a replacement for, or to cut investments in areas China where it has tech transfer interests. But the EU can’t impose export control and divestment countermeasures easily and/or swiftly.

In certain situations, however, tariffs, trade curbs, export controls, and sectoral divestment can be effective and credible. The EU should also include in the scope of the ACI other measures such as restricting investment and limiting access to EU public procurement markets.

The EU needs a fairly broad menu of countermeasures that can be deployed on a case-by-case basis. Imposing countermeasures needs to be preceded by a careful vulnerability assessment that analyses each countermeasure’s costs and benefits, and thus identifies which one would be most effective and credible in a specific situation.

Brussels will also need a clear strategy for mitigating the risks that come with the establishment and the use of an ACI. It must clarify the ACI’s legal base to demonstrate that, in contrast to third country coercers, the EU is not using defensive weapons offensively. Misuse or overuse could lead to protectionism, which would undermine the EU’s credibility and damage its economy. Rather, the EU should make the ACI a ‘de-politicization instrument’, using the deterrent of possible countermeasures first and foremost as a measure of last resort that gets rarely if ever used. The aim is to dis-incentivize a third country from coercing the EU and to favor dialogue instead.

The ACI can only function in this way if the EU can also quickly lift countermeasures it imposes.

If designed or applied poorly, the ACI’s countermeasures could cause significant economic costs for the EU’s own economies. These can, however, be kept at a minimum when the goods or services the EU targets are of higher strategic interest to the coercer than to the EU itself. Some companies will bear cost, however, which is why preceding consultations and potential compensations will be important.

Many Europeans will hesitate about establishing an ACI. Many in the trade policy community may fear that the EU could contribute to the erosion of rules-based trade. These hesitations are understandable and important.

But the costs of remaining vulnerable to economic coercion may be significantly higher for the EU and the rules-based order. Without a proper defense mechanism, the EU basically invites third countries to erode that order rather than engage in dialogue and follow the rules. If you want rules-based trade you need to incentivize others to stick to it, and you need to be able to respond if they don’t.

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Jonathan Hackenbroich and Pawel Zerka are policy fellows at the European Council on Foreign Relations (ECFR), leading ECFR’s Task Force for Strengthening Europe against Economic Coercion. As research assistant to the Task Force and current graduate student at Georgetown University’s School of Foreign Service, Clara Sophie Cramer contributed to this piece.

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