Europe’s anti-coercion instrument is a wake-up call for the global economy

Europe is loaded for the bear.

Last August, Brussels drafted what it calls an “anti-coercion instrument” (ICA). It is a regulation motivated by Europe’s conviction that trade is “increasingly armed”. A document explaining why the AIT is needed cites the “weakened role” of the World Trade Organization (WTO), the “rise of protectionism and the growing deployment of economics as a geopolitical tool”. But will the ICA help or hurt?

If you haven’t heard of ICA Europe, you’re not alone. It didn’t get much attention until China launched a trade war with Lithuania. The background story is that Lithuania invited Taiwan to open a de facto embassy in Vilnius. Beijing took offense to this and imposed import and export bans on goods and services from Lithuania, and even those from other countries that use Lithuanian inputs. The European Union (EU) reacted by filing a complaint with the WTO against China at the end of January.

Few are optimistic about taking this dispute to Geneva. European Trade Commissioner Valdis Dombrovskis had to admit that “we see no other way forward”. Zhao Lijian, spokesman for the Chinese Ministry of Foreign Affairs, warned that the WTO would not be of much help because “[t]he problem between China and Lithuania is a political one, not an economic one. Even if the EU makes a strong case, Hosuk Lee-Makiyama, director of the European Center for International Political Economy, predicts that China is likely to prevail by invoking national security or public morals as an exception.

This is precisely the type of situation that the AIT is supposed to remedy. The regulation states that if a third country is found to be “interfering with the legitimate sovereign choices” of the EU or a member state, through “explicit”, “covert” or “silent” economic coercion, Brussels can retaliate with a wide range of trade and investment sanctions. The problem is that the AIT is not yet finalized.

Brussels talks a lot about China in ACI materials. He literally uses China’s trade bullying of Lithuania as a case study, while pointing to China’s trade squabbles with Australia and Canada as proof of concept. But make no mistake, the AIT is meant to cast a wider net.

Two intriguing themes recur in Europe’s narrative on the AIT. The first is US Section 301. This is actually Exhibit B, right after China’s feud with Lithuania. In fact, Washington’s “threats” to use this unilateral stick to change Europe’s policies on digital trade are cited as an example of “explicit” economic coercion.

The second is a list of cutting-edge issues where Europe says the ACI can help: namely, “climate change, taxation or food security”. This list is worrying. Take food security. Is this an import or export problem? The Commission suggests the latter, but it is overkill. The EU is a defendant in the biggest ongoing food safety dispute at the WTO, from endocrine disruptors to antimicrobials (AMRs). In fact, the fight against AMR will largely take place in third markets, so again, is Europe on the defensive or the offensive?

Speaking of the WTO, it is not mentioned once in the regulations. Of course, the AIT refers to rights under “international law” and certainly admits that the EU could decide to pursue WTO dispute settlement. But those references are mostly about how the sanctions might end, not how they would start.

The plot thickens. Europe recently issued another regulation to deal with the “weakened role” of the WTO, given the disappearance of the Appellate Body. It’s called Regulation 2021/167, and it speeds up EU retaliation against a country that appeals a WTO panel ruling in this ‘legal vacuum’ or refuses to enter into one of its preferential trade agreements.

So, add in Regulation 2021/167 a working ACI, and the UE will be locked and loaded. Not just in terms of relations with China, but with all countries. This is what happens when the rules-based trading system begins to unravel.

Whenever the 12th WTO Ministerial Conference takes place, Russia will certainly be the talk of Geneva. But in addition to debating whether Russia should be suspended or expelled, participants should see the AIT for what it is: a wake-up call. The 1930s are as recent as a state of mind.

Marc L. Busch is the Karl F. Landegger Professor of International Commercial Diplomacy at Georgetown University’s Walsh School of Foreign Service. Follow him on Twitter @marclbusch.

The Hill has removed its comments section, as there are many other forums for readers to join in the conversation. We invite you to join the discussion on Facebook and Twitter.

Mary I. Bruner