ACI is a sign of European departure from the multilateral trading system
Zhou Weihuan and Kong Qingjiang
Flag of the EU and national flag of China. /CFP

Flag of the EU and national flag of China. /CFP

Editor's note: Zhou Weihuan is associate professor, director of research, and member of the Herbert Smith Freehills China International Business and Economic Law (CIBEL) Center, faculty of Law & Justice, UNSW Sydney. Kong Qingjiang is dean of the School of International Law at the China University of Political Science and Law. The article reflects the authors' opinions, and not necessarily the views of CGTN.

The European Union (EU) is contemplating and devising a new instrument to strengthen protection against economic coercion by third countries. According to the legislative proposal of the European Commission, this Anti-Coercion Instrument (ACI) seeks to deter and counteract foreign coercive actions that interfere with the EU's or a member state's "legitimate sovereign choices" and impact on trade and/or investment against the EU. While the ACI does not identify any foreign country, some have observed that it is designed against China in mind.

The EU estranged China when China imposed sanctions on certain European individuals (including a few members of the European Parliament) for their role in what was regarded as interference with the domestic affairs of China concerning Xinjiang Uygur Autonomous Region. In this context, the well-expected approval of the EU-China Comprehensive Agreement on Investment, which was supposed to strengthen the economic ties between China and Europe, was suspended by the European Parliament.

China properly reacted to Lithuania when the latter sought to uplift "diplomatic relations" with the Taiwan region. This was viewed as a violation of the one-China principle, enshrined in the Communique on the Establishment of the Diplomatic Relations between the Baltic country and China. China responded with economic sanctions, and the EU became outraged and blamed China for engaging in coercion diplomacy towards its member and violating international trade rules. These recent incidents are seen as triggers of the introduction of the ACI.  

The question is whether the ACI itself is compatible with WTO rules. In many aspects, the ACI is designed in a way that seeks to minimize criticisms of its legality under the WTO. Like the standard WTO litigation process, the ACI makes consultation a compulsory first step and mutually agreed solution a preferred approach.

When a countermeasure is needed, the ACI incorporates a "proportionality" test requiring the measure to be commensurate to the injury suffered. It also incorporates a "necessity" test, borrowed from the general exceptions of the WTO's rulebook (i.e. Article XX of the GATT), to give consideration to the measure's effect to pursue the objective of inducing the cessation of economic coercion and the availability of less-trade/investment-restrictive alternative means capable of achieving the same objective. Where a WTO decision requires the withdrawal of the countermeasure, the measure must be terminated.

However, to the extent that the ACI allows the EU to take a range of countermeasures governed by WTO rules, it necessarily creates issues of WTO-consistency. Like the actions and countermeasures being increasingly imposed unilaterally by other major economies based on grounds such as national security, the ACI creates the possibility for the EU to sidestep the WTO system and take the law into its own hands.

Indeed, where a dispute over an alleged coercive measure is resolved via consultation, a WTO dispute would not arise. However, where a countermeasure is adopted, it may well lead to breaches of EU's WTO obligations such as applying a tariff beyond the WTO-permitted level and in violation of the Most-Favoured-Nation (MFN) principle.

If the measure is challenged under the WTO, the EU may seek to justify it based on certain exceptions. Here, a major issue concerns how to fit the objective of anti-coercion within one of the WTO exceptions. One possibility is the public moral exception which was interpreted broadly in the recent U.S.– Tariff Measures case in which China challenged the U.S. Section 301 tariffs targeting China.

The Lithuanian Embassy in Beijing, capital of China, August 10, 2021. /CFP

The Lithuanian Embassy in Beijing, capital of China, August 10, 2021. /CFP

The panel held that the concept of "public morals" encompasses the "standards of right and wrong" self-determined by each WTO member which can include economic concerns such as unfair competition.

Accordingly, the EU's concerns about economic coercion may arguably reflect its own "standards of right and wrong" within the ambit of "public morals." The risk of such an interpretation, though, is that it opens Pandora's box for abuse of the public moral exception.

Even if the anti-coercion objective is captured by this exception, whether the countermeasure satisfies the "necessity" test will be assessed by WTO tribunals. Thus, while the ACI itself requires an assessment of the "necessity" of a countermeasure, WTO tribunals may disagree with the EU's own assessment.

Another possibility is the security exceptions. A major challenge here concerns whether the anti-coercion goal can be captured by the limited types of security interests. In Russia – Traffic in Transit and Saudi Arabia – IPRs, the only WTO rulings on the security exceptions, the tribunals dealt with the use of economic/trade sanctions to protect security interests resulting from armed conflict and diplomatic crises. Therefore, it remains unsettled the extent to which the security exceptions provide room for justifying trade instruments such as the ACI for the protection of economic security interests.

China has voiced its opposition to the ACI. It is expected to take further actions when the ACI is to be finally passed into law including bringing the EU to the WTO court and/or drafting its own rules to counteract the impact of the ACI, as it did in response to U.S. sanctions in the past years. 

Such confrontation does no good to the bilateral relations. More broadly, major economies' increasingly taking of the law into their own hands does not bode well for the future of the multilateral trading system.

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