The European Union (EU) is adding a new tool to its defensive trade measures that will allow it to retaliate against countries trying to coerce it or its member states to take certain action.  In June, its co-legislative institutions - the European Parliament and the Council of the EU - reached a political agreement on an Anti-Coercion Instrument (ACI). This is the third EU regulation adopted recently to allow withholding access to its public procurement market in response to actions by third countries. This post considers the new regulation’s provision for using government procurement as a remedial or retaliatory action and its relationship to other similar restrictions.

The development of the anti-coercion measure began with a Commission proposal in 2021 in response to third countries' targeting deliberate economic pressure against the EU and its member states. While the EU has indicated that the new measure is not directed at any specific country, Borderlex observed “a perfect scene-setter” for the regulation was China’s blockade of trade with Lithuania in response to its opening of a Taiwan representative office in its capital, Vilnius. (For a discussion of the primary and secondary sanctions imposed by China on Lithuania, see “China’s Economic Coercion: Lessons from Lithuania,” published by the Center for Strategic and International Studies in May 2022.)

The EU emphasizes that the ACI is “first and foremost designed to act as a deterrent” against economic coercion. It defines such coercion “as a situation where a third country attempts to pressure the EU or a Member State into making a particular choice by applying, or threatening to apply, measures affecting trade or investment against the EU or a Member State.”  

If the new regulation does not deter coercion, the ACI provides a way to end the coercion. It allows the Union to formally identify instances of economic coercion and to respond - first through dialogue and engagement with the coercing country. If that is not successful, the EU can retaliate against it.

The ACI authorizes the adoption of a variety of anti-coercion measures. The Commission can place restrictions on the import and export of goods and services, intellectual property rights, and foreign direct investment, as well as on access to the EU public procurement market. It could also remove market authorizations for chemicals and food products under the EU’s sanitary and phytosanitary rules.

Regarding the procurement remedy, the Commission may suspend any international obligations providing for participation in EU procurement and exclude the goods, services, or suppliers of the coercing country or tenders with more than a specified percentage of goods or services from that country. It may also impose a mandatory price evaluation weighting penalty on the third country’s tenders, thus increasing the price of its goods or services.

The anti-coercion instrument joins two other measures adopted by the EU in the past year that are “part of a wider range of defensive trade and investment instruments enacted by the EU against perceived encroachments against the integrity of its single market.” The others include the International Procurement Instrument (IPI), adopted in June 2022, aimed at countries that do not provide reciprocal access to their procurement markets to EU suppliers.

The other procurement regulation is the Foreign Subsidies Regulation, which allows the EU to exclude bids from suppliers that have received subsidies that distort competition in EU procurement. That regulation entered into force in June with respect to the ability of the Commission to undertake ex officio investigations. When it becomes fully operational in October, participants in EU procurement will be required to submit notifications of subsidies they have received from foreign governments. If they have received foreign subsidies that are determined to adversely affect competition in EU procurement, they may be prohibited from participating in the procurement. 

These three measures – the IPI, the Foreign Subsidies Regulation, and now the ACI – illustrate the value of access to the large EU procurement market and the perceived benefit of denying such access.

The new anti-coercion regulation is expected to entry into force this fall, after it is approved by the European Parliament and the Council.

Jean Heilman Grier

July 11, 2023

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