Effective Deterrence? The Coming European Anti-Coercion Instrument

The EU’s anti-coercion instrument (ACI) has been in the making for almost one year and is about to be finalized. The speed of the process is a sign of a growing awareness among EU Member States of the need to be better equipped against the weaponization of trade relations and interdependence by third countries. Mathieu Duchâtel, Director of Institut Montaigne’s Asia Program, takes stock of the negotiating process – including the remaining points of divergence among EU Member States and institutions – and lists the elements that could make the instrument a success, from an appropriate and credible set of countermeasures to coordination with partners outside the EU.

The article was originally published by Institut Montaigne and is republished here with the permission of the author.

“The use of the power to hurt as bargaining power is the foundation of deterrence theory, and is most successful when it is held in reserve.” Many in European institutions would probably agree with this definition of deterrence by Thomas Schelling as accurately describing the goal of an Anti-Coercion Instrument (ACI). The latest version of the European Union’s ACI defines it as “a framework for the Union to respond to economic coercion with the objective of deterring, or having the third country desist from such coercion, whilst enabling the Union, as a last resort, to counteract such coercion.”

The European Commission proposed a first version of the ACI in December 2021. On November 16, 2022 the Council, that is the 27 Member States, agreed to a negotiating position amending the Commission’s proposal. It is now the basis for the ongoing trilogue negotiations between the Commission, the Council and the Parliament. They hope to finalize the instrument by the end of this year though several differences remain between the three EU institutions. We shouldn’t lose sight of the obvious: this is a fast-track decision-making process by EU standards.

This piece aims to clarify the state of the negotiating process and the current internal EU divergence on certain aspects of the instrument. Member States and EU institutions agree on the urgency of the matter and the nature of the threat. Europe is insufficiently equipped to respond to the weaponization of interdependence and needs tools with teeth to adjust to the growing use of economic coercion. There was an early consensus across Europe in defining coercion as measures that a third country takes to “interfere in the legitimate sovereign choices of the Union or a Member State by seeking to prevent or obtain the cessation, modification or adoption of a particular act by the Union or a Member State, and by applying or threatening to apply measures affecting trade or investment.”

Ironically perhaps given how today’s discussions are focused on relations with China, the EU launched the process to respond to the Trump administration. Many in Europe feared anti-coercion practices would seriously undermine the free-trade principles of the Commission. But US sanctions against European companies involved in building Nord Stream 2, which some may retrospectively think of as prescient, played an important role in turning the politics of anti-coercion in Europe from cold to hot. 

Today, the anti-coercion instrument is mostly discussed in the context of China’s record of practicing coercion. The list of China’s recent targets is long, expanding, and includes European nations; Lithuania and Norway join the likes of Australia, Canada, Japan, the Philippines, and South Korea. Interestingly, all of these targets are democratic systems, in which coercion can more easily sow discord between various political forces. 

The success of the EU’s ACI will be measured by its ability to effectively deter coercive behavior. At this stage, close to the finish line, the intra-European negotiations still need to address three critical issues – the outcome of which will decisively determine the strength and credibility of the European anti-coercion instrument.

First, there is the highly political issue of which EU institution gets to make the decisions. At its core, it is about the balance of power between the Commission and the Council. Under the current version, the instrument arranges a decision in three stages:

• In a first step, the Commission will investigate and determine whether coercion occurs based on the legal definition provided by the ACI, but the Council decides by qualified majority voting (QMV).
• Next, the Commission will propose a package of countermeasures (the “implementing act”) to respond to the act of coercion. 
• The 27 Members of the European Council make the final call: they can vote down the package through QMV.

In watering down the executive power of the Commission, this proposed decision-making process, according to critics, creates an opening for disastrous intra-European division. But to its proponents, having the Member States of the EU throw their support behind countermeasures will ensure they carry greater political weight. QMV means it will be very difficult to get the numbers to oppose an implementing act once Member States have decided there actually is coercion, and the risk is therefore low. Nevertheless, positioning the Commission as an implementing body for the Council’s political decisions is not the best guarantee of efficient decision-making.

In addition, as Francesco Galietti argues in his article, as it is – and because anti-coercion does not fall within the exclusive competence of the Commission – there will always be a need for a European political majority in favor of counteraction. The Parliament as a result will play an important role to unlock resistance and trigger the anti-coercion process.

Second, there is the question of what countermeasures the EU uses to respond to anti-coercion. Here, the risk for Europe is to deliver a half-baked instrument that lacks deterrence credibility. If the objective of the instrument (“obtaining the cessation of a measure of economic coercion”) is to be attained, the possible package needs to instigate fear in would-be coercers.

What should the package of countermeasures include to constitute a credible threat and deter coercion? The current proposition goes beyond trade tariffs. It allows the imposition of quotas, export restrictions, limitations on IP rights, participation in public procurement procedures and on foreign direct investment, restrictions of access to banking services and European financial markets, and even sanctions targeted at “natural and legal persons” when they act on behalf of the government of the third party concerned. The final ambition of the list of countermeasures is still subject to internal debate, but the temptation to water down the initial proposal of the Commission has been successfully resisted. On paper, the list of possibilities is clearly impressive.

Yet, there is a major weakness in the current text, resulting from a difficult debate on whether the EU should compensate Member States that are victims of coercive practices. In the tabled versions of the ACI, compensation has not been included. 

The decision against a compensation mechanism reflects the victory of those within European institutions who think that compensation would encourage member states to take excessive, even dangerous risks in foreign policy. Preventing moral hazard to preserve the coherence of the European Union is the key consideration behind the thinking of that camp, who considers Lithuania at least partly responsible for Chinese coercion against it because Lithuania broke ranks with established European practices by opening a de facto embassy in Vilnius named the “Taiwanese Representative Office” – using the name “Taiwan” in the title – without prior intra-EU coordination. 

The anti-compensation camp may have won the argument already, but many doubt that a system without a compensation mechanism will be efficient enough. This is one of the arguments deployed by both Luke de Pulford and Luke Patey. In the end, compensation may still be needed, but outside of the ACI, through unilateral sovereign decisions, or by coalitions of states, intra-European or not. After all, the ACI does not necessarily represent the totality of a European response to an act of coercion.

Third, the Council and the Commission do not agree on whether European individuals and companies directly affected by coercive measures can claim damage and reparation from the coercive party. The version of the Council completely erased the part on damage and reparation initially proposed by the Commission – the argument being that holding natural or legal persons from a third country liable for a state policy of coercion will create more problems than solutions for the European Union. However, as a result, the instrument is currently weaker than it initially was – but final decisions are still to be made, and the damages/reparation issue is still up for discussion in the trilogue.

In sum, the ACI should be thought of as one tool in a larger toolbox, and one element of a larger foreign policy response. In the case of relations with China, a critical mass of like-minded states showing collective determination will usefully complement the ACI.

This is partly because compensation, even though it is not in the ACI, will always be a critical issue in the broader fallout. The coerced state/parties will seek compensation from various sources to make up for their losses in terms of market access: the United States provided critical help to Lithuania, just as Japan provided critical support to Taiwan. When coercion is not limited to market access but targets supply chains, concerted action beyond countermeasures against the coercive state will be extremely important.

This is also because, in actual cases of coercion, escalation control will be central to the game – particularly when dealing with a great power like China, which coerces in the name of national security and geopolitical interests, not in the name of trade, and seeks to make other parties believe that it is willing to escalate.

If in the future, Europe responds to Chinese coercion with a package of countermeasures, China will be tempted to demonstrate that it is undeterred. If a cycle of escalation begins, Europe will need its international partners. Therefore, deterring coercion should remain a priority on the agenda of European consultations with key countries having faced similar attacks in the past, in addition to G7 format discussions – Australia, Canada, the Republic of Korea, Japan, Norway and the United Kingdom are the most obvious candidates. In short, the ACI will carry much greater weight if the EU works with its partners too.