On 23 October 2023, the Council of the European Union adopted a regulation known as the Anti-Coercion Instrument (ACI), a new trade instrument which will enable the European Union (EU) and its Member States to respond to so-called ‘economic blackmail’ from foreign countries that seek to influence or coerce the EU or a particular Member State to adopt or to decline a specific policy.  The European Parliament had already approved the regulation earlier this month by a margin of 578 votes to 24 and only 19 abstentions.

The ACI breaks new ground in the EU’s arsenal of trade defences in the midst of escalating geopolitical tensions.  It is designed to deter perceived economic coercion primarily through diplomacy and, if necessary, with countermeasures in a wide range of fields, including international trade, investment, and funding.  It is also aimed to secure ‘reparation’ for the injury caused by a third country’s conduct.  The ACI is expected to enter into force before the end of 2023 and will take the form of a regulation binding in its entirety and directly applicable to all Member States.

What is the ACI?

The EU describes the ACI as a legal framework aimed at preventing third countries from taking or threatening to take measures that may seriously disrupt trade or investment and encroach upon the legitimate sovereign choices of the EU and its Member States.  

First announced in a 2020 letter signed by the President of the European Commission ahead of the 2020 State of the Union, according to the European Parliament the ACI was designed to ‘urgently to fill an unfortunate gap in EU law’.  As the world is facing a steady shift from rules-based to power-based international trade, the EU considered that it lacked tools specifically designed to discourage and react to economic coercion on the part of third countries to protect legitimate European interests.  According to European law-makers, recent examples of economic coercion against the Union include Washington’s threat to retaliate against the digital tax of several EU Member States and Russia’s import ban on agricultural goods from EU Member States in the aftermath of the war in Ukraine. When initiating a WTO dispute concerning what the EU considers to be discriminatory trade practices against Lithuania (see DS610 China – Measures Concerning Trade in Goods), the European Commission also referred explicitly to the ACI (at that time still a proposal) as the new tool that would “give the EU more possibilities to react in the event of economic coercion”.

European institutions quickly pursued the ACI initiative.  In February 2021, the Council, the Commission, and the Parliament adopted a joint declaration expressing their concerns over the practices of certain third countries to seek to coerce the Union and/or its Member States to take or to withdraw particular measures and expressed their intention to legislate a mechanism allowing to dissuade such actions in a manner consistent with international law.  Following consultations with the governments of EU Member States, in December 2021 the Commission tabled a proposal for a regulation before the European Parliament. 

On 3 October 2023, the European Parliament adopted the legislative proposal in the form of a regulation.  The Council adopted the regulation on 23 October 2023 and it will enter into force on the twentieth day following that of its publication in the Official Journal of the European Union, probably by the end of 2023.

How does the ACI work?

The procedure envisaged in the ACI consists of a series of steps aimed at inducing the third country to comply with its international legal obligations, cease any economic coercion, and, where appropriate, provide economic reparation for the injury caused.  The ACI process closely mirrors the language of the Articles on the Responsibility of States for Internationally Wrongful Acts (ARSIWA), adopted by the United Nations (UN) International Law Commission, and which have generally been recognized to reflect customary international law. 

Step One: Examination by the European Commission

The ACI process begins with the European Commission.  The Commission may, on its own initiative or upon a duly substantiated request, examine any third-country measure in order to determine whether economic coercion exists.  At this stage, the Commission may solicit information from a wide range of stakeholders, including the Member States, business operators, and the third country concerned.

The purpose of this phase is to determine whether the measure in question amounts to ‘economic coercion’.  This is defined in the regulation as a situation where a third country threatens or applies a third-country measure affecting trade or investment in order to prevent or obtain the cessation, modification, or adoption of a particular act by the Union or a Member State, thereby interfering with the exercise of their legitimate sovereign power to set governmental policies.  Evidently, this is a very broad definition which could enable an ACI examination to be triggered in a wide range of circumstances and at the Commission’s discretion.

The Commission’s assessment must take into account the domestic and international context of the measure as well as its particular characteristics, such as the severity, frequency, duration, and magnitude of the measure, including its impact on trade or investment relations with the Union.

Step Two: Implementing Act by the EU Council

If the Commission concludes that the measure in question amounts to economic coercion, it must then submit a reasoned proposal to the Council for an implementing act (i) determining that the measures in question constitute economic coercion under the ACI; and, where required, (ii) including a request to the third country to repair any injury caused.  The proposal may then be adopted by the Council by a qualified majority for a period not normally exceeding six months.  Should the Council adopt such an implementing act, the Commission must then inform the third country, asking that third country cease the identified coercion immediately—and, where appropriate, provide full reparation for the injury caused to the Union within a reasonable period of time.

The power asserted by the European Union to take retaliatory action is premised on customary international law rules governing countermeasures.  According to such rules, where one State violates its international obligations, the other affected State may adopt proportionate countermeasures so as to induce compliance (cessation and reparation) with the primary obligation. 

Step Three: Consultations with the third country

The concerned third country may be involved at various stages in this procedure.  For example, during its initial examination the Commission must invite the third country concerned to submit its observations, prior to submitting its proposal to the Council.

Where an implementing act is in fact adopted by the Council, the Commission must also provide the third country concerned with adequate opportunity to engage in consultations.  This may entail negotiations, mediation, good offices, or adjudication, all with a view to reaching an ‘early and just settlement of the matter’.  This reflects the eagerness of the EU to actively resort to international means of dispute settlement to defend its interests.

Another notable feature of the ACI is that the Commission may cooperate with third countries affected by the same or similar economic coercion or with any interested third country so as to obtain the cessation of coercion, and seek to coordinate a coherent response with third States before international fora.  This reflects the EU’s recent practice of seeking to coordinate with EU Member States and third States in response to the ongoing armed conflict in Ukraine.

Step Four: Response Measures

If an EU request does not result in the cessation of the challenged economic coercion (and where requested, in the reparation of the associated injury) within a reasonable period of time, the Commission must adopt countermeasures (so-called ‘response measures’) to induce cessation of economic coercion by the third country.  The ‘response measures’ available to the EU are set out in detail in Annex I, and run the full gamut of international trade and investment policy.  They include, inter alia:

  • measures affecting access of foreign direct investment to the EU internal market,
  • non-compliance with investment protection guarantees for existing investments —for example under free trade and investment protection agreements,
  • new or increased customs duties and charges on the import/export of goods,
  • non-performance of obligations concerning tariff concessions,
  • import and export restrictions, such as export controls, quotas, or export licenses or payment restrictions,
  • the exclusion of goods, services or suppliers from public procurement processes,
  • restrictions and measures affecting trade in services.

Union response measures may be adopted either as measures of general application vis-à-vis the third country in question or with regard to specific natural or legal persons who are “connected or linked to the government of the third country”. That government link is assessed on the basis of a number of criteria, such as government ownership; whether the person in question benefits from exclusive or special rights or privileges granted by the third country government or operates in a sector where that government applies or tolerates anti-competitive practices; and whether such person effectively acts on behalf of, or under the direction or instigation of, the government of the third country concerned.

Under the ACI, again consistent with more general international law, the EU’s response must be necessary to protect the interests and rights of the EU and be proportionate to the gravity of coercion and its impact on the interests of the Union and its Member States.  This determination shall be made on a case-by-case basis.  In selecting appropriate response measures, the Commission must give preference to measures that are expected to most effectively ensure compliance with the third country’s obligations.

Moreover, the design of response measures by the Commission must seek to avoid – or at least minimise – any negative impact on EU market actors that may be affected by such measures, in light of available alternative sources for the supply of goods or services.  The design of the measure must also take into account the investment environment in the EU or a particular Member State, including the impact that the measure may have on employment, economic growth and regional development policy.

What does the ACI mean for businesses?

Given the wide spectrum of response measures available to the EU, the ACI could potentially have far-reaching repercussions on economic operators trading or investing in the EU.  The margin of discretion available to the Commission suggests that third-country businesses may potentially be exposed to severe economic measures affecting their operations, should their home State be found to have been engaged in coercion as defined under the ACI.  At the same time, the ACI is meant to protect EU businesses from measures taken by third countries that may affect their own operations abroad. 

It is therefore essential for businesses active in the EU or otherwise engaged in trade with the EU to keep abreast of any developments on this front.  This includes, in particular, allegations of coercive behavior against third countries; any determinations made on such allegations by the European Commission or the Council; any efforts at conciliation or resolution vis-à-vis third countries, as well as the design of any potential countermeasures by the Commission, which could have a highly detrimental impact on economic operators operating in countries subject to ACI action.  Indeed, there are many instances foreseen in the mechanism for private economic actors to engage:

  • Businesses themselves have the right to report instances of alleged economic coercion to the European Commission, which may then initiate an investigation.
  • The ACI designates economic operators and trade unions as ‘reliable sources’ for the purposes of collecting information during its examination phase. To that end, the EU Commission will create an online portal where businesses can submit relevant information.
  • The Commission must inform and consult stakeholders, especially associations acting on behalf of Union economic operators and trade unions, who may be affected by potential Union response measures.
  • When seeking to adopt a response measure vis-à-vis a specific natural or legal person, the Commission must inform that person and provide the possibility for that person to submit observations.
  • Finally, EU response measures must be designed on the basis of objective criteria, including their potential to provide relief to Union economic operators affected by coercion and minimising negative economic effects.  Accordingly, the Commission’s analysis must include a thorough assessment of impact on both upstream and downstream industries and final consumers within the Union.  In gathering this kind of information, the Commission must, before adopting any such response measures, solicit the views of EU economic operators on the impact of any proposed measures, either by publishing a notice in the Official Journal of the European Union or through other suitable means of public communication.  The Commission must also inform and consult associations acting on behalf of EU economic operators and trade unions that could be affected by potential ACI action, as well as the administrative authorities of EU Member States that may be involved in the preparation or implementation of legislation that regulates these sectors.

Economic operators may therefore provide effective checks-and-balances to ensure that any decision taken does not disproportionately affect their business interests.  It is important in this juncture to note that the process must secure the protection of confidential information and the identity of the person supplying information. 

One step forward, two steps back?

The ACI is undoubtedly an important addition to the EU’s arsenal of trade defences to make Europe more resilient in a time of growing geo-economic and political rivalry between global players.  It forms part-and-parcel of the EU’s wider action plan to maintain ‘strategic autonomy’ against the use of ‘weaponised interdependence’ by its trading partners and signals the EU’s preparedness to defend European interests in the face of coercive action. 

It remains to be seen whether the lawfulness of the ACI will be tested both from the perspective of the EU’s internal legislation, and from the perspective of external obligations undertaken by the EU and its Member States, notably under the principles of the World Trade Organization. The instrument might in particular raise questions regarding its consistency with Article 23 of the Dispute Settlement Understanding, which forbids WTO Members from taking countermeasures unilaterally in response to perceived violations by other Members.    Moreover, customary international law, as reflected in the ARSIWA, places important limitations on the ability of sovereigns to resort to counter-measures, derived from the principle of proportionality.   

Arguably, the EU’s new trade instrument simply reflects instruments already adopted elsewhere.  Other governments have adopted similar trade instruments in the past – including, for example, the long-established Section 301 of the U.S. Trade Act of 1974.  Section 301 enables the U.S. to adopt tariff-based and non-tariff-based retaliation so as to obtain the removal of any act, policy, or practice of a foreign country which violates an international trade agreement, or is otherwise unjustifiable and burdens or restricts U.S. commerce.  The EU’s adoption of the ACI thus signals a further step away from the multilateral trade system, leaning towards unilateral action and self-judging decisions.  As such, it is an instrument to which businesses will need to pay attention.