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

Europe is loaded for bear.

Last August, Brussels drafted something it calls an “anti-coercion instrument” (ACI). It’s a regulation motivated by Europe’s belief that trade is “increasingly weaponized.” A document that explains why the ACI is needed cites the “weakened role” of the World Trade Organization (WTO), the “rise of protectionism and increasing deployment of the economy as a geopolitical tool.” But will the ACI help or hurt?

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

Few are bullish about bringing this dispute to Geneva. The EU’s trade commissioner, Valdis Dombrovskis, had to confess that “we see no other way forward.” Zhao Lijian, China’s foreign ministry spokesman, warned the WTO won’t be of much help because “[t]he issue between China and Lithuania is a political one, not an economic one.” Even if the EU argues a strong case, Hosuk Lee-Makiyama, director of the European Centre 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 the ACI is meant to remedy. The regulation says that if a third country is found “interfering with the legitimate sovereign choices” of the EU or member state, through “explicit,” “disguised” or “silent” economic coercion, Brussels can retaliate with a wide array of trade and investment sanctions. The problem is that the ACI isn’t finalized yet.

Brussels talks a lot about China in supporting materials on the ACI. It literally uses China’s commercial bullying of Lithuania as its case study, while also raising China’s trade spats with Australia and Canada as proof of concept. But make no mistake, the ACI is meant to cast a wider net.

Two intriguing themes come up in Europe’s narrative about the ACI. The first is U.S. Section 301. It’s 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 the example of “explicit” economic coercion.

The second is a list of cutting-edge issues for which Europe says the ACI can help: namely, “climate change, taxation or food safety.” This list is worrying. Take food safety. Is this an import or export concern? The Commission suggests the latter, but this is a stretch. The EU is a defendant in the most important food safety litigation in the pipeline at the WTO, from endocrine disruptors to antimicrobials (AMRs). In fact, the fight over AMRs will largely unfold in third markets, so again, is Europe on the defense or offense?

Speaking of the WTO, it’s not mentioned even once in the regulation. Sure, the ACI makes reference to rights under “international law” and certainly admits the EU could decide to pursue WTO dispute settlement. But these references mostly concern how 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 demise of the Appellate Body. It’s called Regulation 2021/167, and it fast-tracks EU retaliation against a country that appeals a WTO panel ruling into this “legal void,” or refuses to engage under one of its preferential trade agreements.

Thus, add in Regulation 2021/167 to a working ACI, and the EU will be locked and loaded. Not just in terms of dealing with China, mind you, but any and all countries. This is what happens when the rules-based trading system starts to unravel.

Whenever the WTO’s 12th Ministerial Conference happens, Russia is sure to be the talk of Geneva. But in addition to debating whether Russia should be suspended or expelled, attendees should see the ACI for what it is: a wake-up call. The 1930s is as recent as a state of mind.

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