Directorate General Trade Public Consultation

Position

Directorate General Trade Public Consultation: Mechanism to deter & counteract coercive action by non-EU countries (EU Anti-Coercion-Instrument)

Federation of German Industries e.V. EU -Transparency Register Identification Number: 1771817758-48

Date: 15.06.2021

Consultation: EU Anti-Coercion-Instrument

Contents Summary .......................................................................................... 3 Introduction ..................................................................................... 4 Defining the Challenge – What has changed? ............................ 4 Why is legislation necessary? ..................................................... 4 What do we know so far? ............................................................ 5 How are economic coercion and trade defense related? ............ 5 What German Industry Wants ........................................................ 6 The Scope for Anti-Coercive Measures ...................................... 6 A non-statist, economic definition of coercion ............................. 6 A vision of strategic interdependence beyond deterrence .......... 7 ACI - principled and robust for Europe’s economic interests ...... 7 Deterrence in the service of rules-based trade ........................... 8 Protecting free and open trade ........................................................ 8 The Council in the driver’s seat ....................................................... 8 How to get data on coercion ........................................................... 9 How to react ................................................................................... 9 Leverage available to press for fair and open trade ........................ 9 Interoperability ..............................................................................10

About BDI ....................................................................................... 12 Imprint ............................................................................................ 12

Consultation: EU Anti-Coercion-Instrument

Summary An instrument to deter and counteract coercive action from third countries (ACI) should be used exclusively to ensure open and rules-based trade and effectively shield European economic operators from undue pressures in an increasingly (geo-)politicized global trade environment. Therefore, BDI urges that -

Legislative action be taken in the spirit of preserving global economic exchange and protecting the economic benefits of globalization for Europeans;

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The EU strengthens its political commitment to a strategically interdependent Europe. Such a strategy should include a renewed effort in integrating the common market at home and assuming more responsibilities within the Transatlantic partnership abroad;

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Taking anti-coercive measures is a political endeavor. Europeans should use this challenge to close ranks when it comes to Europe’s foreign policy goals. To do that requires that elected governments take principle responsibility in triggering ACI;

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The Council will have to rely on a continuous flow of information and expertise. A liaison committee providing quantitative and qualitative data on challenges to Europe’s economic resilience should support the Council;

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ACI should be an instrument, which can be deployed ▪ ▪ ▪ ▪

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Proportionally and in recognition of the overall union interest, in a timely and measured manner, in cooperation with economic operators to ensure sound evidentiary footing, WTO-compliant and invariably in the pursuit of deterring coercive action;

The common market is Europe’s biggest asset. It creates business opportunities, provides wealth and anchors Europe’s interdependence economically. Only if necessary and after a cascading approach of diverse countermeasures has proven ineffective should market access be restricted to counter a wide interpretation of effectively coercive measures expressly including forms of extraterritoriality.

Federation of German Industries Member Association of BUSINESSEUROPE

Address Breite Straße 29 10178 Berlin Postal Address 11053 Berlin Germany Contact Dr. Nikolas Keßels T: +493020281518 F: +493020282518 Internet www.bdi.eu E-Mail N.Kessels@bdi.eu

Consultation: EU Anti-Coercion-Instrument

Introduction Defining the Challenge – What has changed?

Geopolitical tensions are on the rise and governments are increasingly drafting the weight of their economies into the service of their respective national (security) and geopolitical interests. This has created a paradigmatic dissonance between economics and politics thought lost with the end of the Cold War and the beginning of a truly globalized economy. Since the division of labor inherently relies on cooperation, economics is a positive-sum game.

This can starkly contrast with international politics, where power is inherently limited and the pursuit of national interest is sometimes conducted as a zero-sum endeavor. It is, therefore, important to note that the resurgence of geo-economics – defined as the use of economic instruments to promote national interests and to produce beneficial geopolitical results – endangers an otherwise overwhelmingly fruitful politico-economic global interdependence. For BDI it follows that when we speak about coercion, we mean economic coercion. We understand economic coercion as a significant deviation from open and rules-based trade by a foreign jurisdiction at the expense of European economic operators likely to economically pressure EU-member states to involuntarily change or adopt policies.1 Why is legislation necessary?

Rules-based trade is genuinely challenged by geopolitics. The past reapproach of the United States towards relying less on multilateral fora in achieving its foreign policy goals as well as China’s systemic challenge to the liberal-democratic order of the political West ensure that geo-economics is here to stay. This is a significantly adverse development with serious implications for the business interests of German industries. BDI speaks for more than 100,000 enterprises with around 8 million employees – many of whom rely on Germany’s strength in exporting high-end products to markets all around the globe. What is more, 36 million Europeans relied directly on sound export relations in 2017. Therefore, BDI generally supports giving Europeans a tool with which to deter coercive action and to counteract measures that unduly infringe upon the global trading order in the pursuit of geopolitical gains. Because of the global exposure of German industries, BDI also emphasizes that navigating geo-economic conflict should be a political task in the service of open and rules-based trade. Any form of anti-coercion must not rely on an automated administrative process. Otherwise, the potential for inadvertent escalation might result in supercharging the very deglobalizing pressure of geo-economics that anti-coercion supposedly set out to alleviate.

1

Barry E. Carter, Economic Coercion, Oxford Public International Law: <https://opil.ouplaw.com/view/10.1093/law:epil/9780199231690/law-9780199231690-e1518> (accessed 10 June 2021). For a more extensive discussion see: Robert D. Blackwill, Jennifer M. Harris: War by Other Means, Geoeconomics and Statecraft, 2017, p. 20. www.bdi.eu

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What do we know so far?

The European Commission has delineated an “instrument to deter and counteract coercive action from third countries” (ACI) as a tool, the genesis of which is owed to by recent issues between Washington and Brussels regarding section 301 of the United States 1974 Trade Reform Act. The Commission has stated clearly that, while not ruling out sanctions as a field of engagement, it is not designing ACI as a specific deterrent against extraterritorial measures. This straitened approach is the obvious choice when based on recent Transatlantic experiences with section 301 trade measures. First, it serves the design of ACI as a trade defense instrument (TDI) leveraging the weight of Europe’s common market. It would also be a reactive instrument, through which Europe would clearly signal that it does not accept measures it perceives as illegitimate. Lastly, the Commission has emphasized that it is looking for countermeasures to be swift as well as proportionate. The Commission has assured the public that ACI would not be an instrument to short-circuit WTO dispute settlement proceedings and that Europe never be first to step out of the rules-based system.

How are economic coercion and trade defense related?

To gauge whether a new instrument in the service of rules-based trade makes operational sense, such an instrument should be clearly delineated from existing forms of trade defense instruments (TDI). There are three forms of TDI that apply in the EU: anti-dumping (AD), anti-subsidy (AS), and safeguards. Under WTO-law, member states are permitted to impose measures against imports to protect their domestic industries from unfair trading practices (AD, AS) or to provide temporary relief for the affected industry to adjust to a sharp, unforeseen, and sudden increase in imports (safeguards).

In that sense, BDI emphasizes that a defense against geo-economic measures – that is, economic coercion in the pursuit of geopolitical goals – is harder to gauge than traditional TDI. It is also more political. The initial effect of coercion is that it intentionally infringes upon the business interests of foreign economic operators. It is only subsequently that this adverse influence on the material base of a country is supposed to achieve economic coercion’s primary goal: to change the political calculus within the target jurisdiction and influence its behavior in favor of the issuing (or: sender) jurisdiction.

This chronology in the sequence of economic coercion can be described as taking a foreign policy detour by means of economic action. It is, therefore, our view that – while related to TDIs – ACI should be a political instrument to protect economic operators and not an economic tool to protect the immediate political interests of EU member states.

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Consultation: EU Anti-Coercion-Instrument

What German Industry Wants The Scope for Anti-Coercive Measures To deter the projection of power by economic means, ACI should be capable to respond to a multidimensional set of issues when compared to traditional TDI. Amongst others, the following scenarios appear to serve as instances of economic coercion in which the EU might deploy ACI: -

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Leveraging of virtual monopolies in natural resources; Tariff- and non-tariff-based actions not sanctioned by the WTO as well as the forbearance to domestically enact and practice internationally agreed upon trading-principles; Secondary financial sanctions and other forms of extraterritoriality; Measures to inhibit the proper functioning of global payment channels; Measures systematically disguised under the subterfuge of national security or national interest, particularly if they can be shown to violate the erga omnes principle (e.g.: investment screening, export controls, market access restrictions, strategic IP-violations, positive or negative lists restricting market access, localization requirements in procurement systems, mandatory joint ventures); Systematic country- and/or industry-specific protraction of domestic administrative procedures (e.g.: drawn out customs-, licensing-, or inspection-procedures).

A non-statist, economic definition of coercion It is paramount that the EU conceives of economic coercion as an issue that, first and foremost, negatively affects economic operators and is to the detriment of fair and open trading principles. While foreign governments employ geo-economic measures to realize relative geopolitical gains at the ultimate expense of other states, it is businesses that bear the brunt of such measures.

BDI therefore stresses that the Commission’s understanding of coercion should be that economic coercion is geared towards businesses for the purpose of subsequently influencing state behavior. Otherwise assuming the purely statist premise of geo-economics, the EU would be accepting and adopting the tit-for-tat, relative-gains logic of geopolitics and not the absolute-gains approach of rules based global trade. An instrument in the service of the latter must make this distinction.

Consequently – and irrespective of whether or not the EU feels sufficiently constrained or compelled –, economic coercion should be identified, first, by the measure taken and, second, by the undue political influence such coercion is aiming to exert. To complicate matters further, all stakeholders must be aware that triggering ACI will create politico-economic ramifications.

Retaliatory measures in response to ACI – coercing countries upping the ante, so to speak – will be part of this inherently political process. Balancing the www.bdi.eu

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larger interests of the European Union with the economic hurt inflicted upon its businesses all the while considering a deterring process through which a reckless escalation can be avoided – all this poses a new and possibly conflicting challenge for Europe.

A vision of strategic interdependence beyond deterrence Because of the conflicting challenge of economic interdependence on the one hand and the robust assertion of our economic interests on the other, BDI emphasizes strongly that ACI must be part of a larger strategic effort. Europe must match its anti-coercive efforts with measures to strengthen the interdependence Europe enjoys with the rest of the globe. This will require investment at home and a renewed commitment by Europeans to further integrate the common market.

Simply put, deterrence will not work if it fails to include a plan that incentivizes economic participation and, hence, raises the stakes in favor of global economic co-ownership. ACI makes sense only as part of a larger effort to strengthen Europe’s strategic interdependence. BDI stresses that European societies rely on economic growth inter alia for innovation, societal inclusion, and employment. Therefore, it should be the sole objective of ACI to deter economic coercion and, if necessary, reciprocate measures in the service of the EU’s long-term economic interests.

ACI - principled and robust for Europe’s economic interests The Federation of German industries, therefore, urges policymakers to predicate an anti-coercion-instrument on the following principles: -

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Europe should premise the use of ACI on the paradigmatic goal of arriving at and retaining open and fair trade relations. WTOcompliance is an integral part of that paradigm; ACI should be a reactive instrument that, first of all, deters forms of economic coercion as described above; Identification of economic coercion should be based on how coercion intentionally creates an unlevel playing-field for European economic operators in the pursuit changing European policies; A determination of economic coercion should not be followed by the EU breaking a butterfly on a wheel. EU member-states should instead pursue an incremental process, in which non-economic measures are deployed to gauge the potential for de-escalation.

ACI should be deployed proportionally, in recognition of the Union’s interest, and clearly attributable to the effects of a foreign government pursuing geopolitical influence by means of economic harm; Coercive measures can only be deterred efficiently, if they are at once reciprocated in a timely manner and implemented with a minimum of up- and downstream externalities for economic operators;

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The Transatlantic partnership is of the utmost importance to Europe’s interests. ACI should be part of a larger political effort to expand the EU’s role as Washington’s reliable and globally assertive partner.

Europe, therefore, needs to commit to take on an enhanced international role across the full range of foreign policy-issues important to the Transatlantic Alliance.

Deterrence in the service of rules-based trade Protecting free and open trade

BDI has concerns about the Commission using Section 301 of the U.S. Trade Act of 1974 as a starting point for its thinking. Designing a tool on past experiences in trade disputes with the United States comes with inevitable path-dependencies that are not well suited for the geo-economic challenges of an increasingly multipolar world. As a somewhat tweaked trade defense tool, ACI would only respond to the logic of past economic disputes. ACI would, however, be unsuited for countering the full range of economic coercion by third countries promoting and defending national interests in the pursuit of beneficial geopolitical results. In short, Europe does not need a regulatory update on its TDI-toolkit, it needs a politico-economic answer to a world, in which the liberal consensus on open, fair, and mostly apolitical economic exchange is significantly challenged.

The Council in the driver’s seat

For ACI to become an instrument in the service of rules-based global trade, two issues must be clear. First, as a predominantly political tool, it should be within the purview of the European Council to deploy ACI – any form of automated, administrative response could inadvertently lead to an escalation and must be avoided. ACI should, second, describe a process by which EU member states consider a range of political, administrative, diplomatic and other non-economic options in response to economic coercion before they deploy reciprocal measures under ACI. Protecting those who are hit first by economic coercion while avoiding fueling further geo-economic escalation is an admittedly tall order. Halting the politicization of global trade and the trend of de-globalizing markets is an inherently political pursuit. To that end, only elected governments can be held accountable for the potential consequences and ramifications of actions taken under ACI. The European Commission should have a significant supporting role. But because of – rather than despite – the state of the Common Security and Foreign Policy in the EU, the Commission cannot replace elected governments in determining essential foreign policy objectives of the European Union.

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How to get data on coercion

The EU should implement a liaison resilience committee to keep Council and Parliament constantly informed about foreign economic measures that can be reasonably linked to attempts to illegitimately influence EU policy-making.

It is important that such a process providing information and detailed analysis is implemented, because only if continuously up to date can the Council make determinations carefully calibrating a strategic European response.

Obviously, expertise already available in the Commission – particularly at DG Trade – has to play a prominent role in such a resilience committee. But since BDI strongly emphasizes a predominant role for the Council in strategically triggering ACI, such a committee should be institutionally outside of the Commission. Linked tightly to the Council, member states should consider providing expertise from all available sources.

It should be within the purview of the resilience committee to compute the economic damage, provide a corresponding “coercion margin”, and keep the European partners quantitatively and qualitatively informed about ongoing developments. This reporting activity should serve to establish a more common understanding of Europe’s exposure and policy options.

Consequently, a resilience committee should also serve as a low-threshold access-point for businesses and their associations to exchange data on coercive actions as experienced by economic operators. To safeguard the integrity of this process, such exchange should be strictly privileged to the necessities of the work of the resilience committee and confidential. Only a trusted, ongoing, and continuous exchange between the private sector and the committee can ensure EU-readiness when Europe has to proportionally reciprocate in a geo-economic conflict.

How to react

As a tool bridging foreign policy and economic policy interests, ACI should be deployed through implementing acts. The resilience committee should facilitate substantial outreach when it concludes that legislative action through the ACI might become imminent. Once legislative action is triggered – and due to the necessarily time-sensitive nature of such a deployment –, ACI implementing acts should be preceded by a curtailed three-weeks consultation period.

Leverage available to press for fair and open trade

Certainly, the Union’s common market creates opportunities for businesses from third countries. Access to the EU’s market should be leveraged only in the service of incentivizing fair and open trade relations. Countermeasures could assume the following forms based on the EU’s lesser-duty-approach used in other instances of trade defense: -

Punitive tariffs on goods and/or services hurt by coercive action;

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Curbs on public procurement and/or investment opportunities against entities from the coercing jurisdiction; Prohibiting – or imposing restrictive quotas on – the sale of certain goods and services.

BDI reemphasizes that such measures are appropriate only under the following conditions: -

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First, the Council should commit to a cascading approach that ensures that non-economic as well as low-intensity economic measures are applied before leveraging ACI as a measure of last resort.

Second, ACI should be firmly based on reasonable evidence upon which a coercion-margin can be established.

Third, such measures should serve to level the playing field for economic operators affected by geo-economic conflict.

Fourth and most importantly, ACI should be levied proportionately to signal discontent within a coercion-margin, display a willingness and ability to act, all the while preventing an escalation of measures and a geo-economic race-to-the-bottom.

Interoperability

ACI should be an instrument within a larger strategic architecture to provide the EU with a substantial scope of action in future geo-economic conflicts.

This has larger consequences and requires for the EU to integrate ACI into the wider neighborhood of our foreign as well as economic relations. ACI should be accompanied by a substantial reform of the EU Blocking Statute (Regulation (EC) 2271/96). BDI insists that an instrument that in effect penalizes economic activity in globally significant markets cannot be part of the EU’s efforts to resist coercion. Instead, the regulation – as it stands today – is a cautionary tale of statist, non-business centered, economic dysregulation. In particular, any effort by the resilience committee in acquiring data on economic coercion from businesses will be frustrated by the provision in article 5 of the blocking statute.

BDI emphasizes that the state-centered bias of the regulation has already created unintended consequences. This view is explicitly supported by a recent ruling by the European Court of Justice (Case C124/20): “[…] the EU blocking statute is a very blunt instrument, designed as it is to sterilise the intrusive extraterritorial effects of US sanctions within the Union. This sterilisation method will inevitably bring casualties in its wake […] these are matters which the EU legislature may well wish to ponder and consider.”

BDI will constructively participate in the necessary reforms of the blocking statute in the future. Today, we emphasize with regard to ACI that not committing the instrument primarily to the needs of economic operators will www.bdi.eu

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weaken ACI’s usefulness as a tool to project our shared interests in a rulebased global trading order. Therefore, all parties involved should have a clear view on the interoperability of all instruments that have anti-coercive capability and, therefore, provide increments for political decision-makers to defend Europe’s strategic goal of open and free trade relations.

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About BDI The Federation of German Industries (BDI) communicates German industries’ interests to the political authorities concerned. She offers strong support for companies in global competition. The BDI has access to a widespread network both within Germany and Europe, to all the important markets and to international organizations. The BDI accompanies the capturing of international markets politically. Also, she offers information and politico-economic guidance on all issues relevant to industries. The BDI is the leading organization of German industries and related service providers. She represents 40 inter-trade organizations and more than 100.000 companies with their approximately 8 million employees. Membership is optional. 15 federal representations are advocating industries’ interests on a regional level.

Imprint Federation of German Industries e.V. (BDI) Breite Straße 29, 10178 Berlin, Germany www.bdi.eu T: +49 30 2028-0

Contact Matthias Krämer Head of Division External Economic Relations +49 30 / 2028 - 1562 m.kraemer@bdi.eu Dr. Nikolas Keßels Senior Manager External Economic Relations +49 30 / 2028 - 1518 n.kessels@bdi.eu

BDI document number: D 1400

www.bdi.eu

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