A new European sanctions instrument: Proposal for Regulation 2021/0406, on the protection of the Union and its Member States against economic coercion by third countries

On December 8, 2021 the European Commission presented a new proposal for a Regulation to protect the Union and its Member States against economic coercion by third countries.

Increasingly confronted with coercive and aggressive economic practices, in violation of international trade law, the European Union wishes to effectively protect the interests of the Union and its Member States by establishing a new sanctions mechanism.

Economic coercion refers to a situation in which a third country seeks to pressure the Union or a Member State to make a particular policy choice by applying, or threatening to apply, measures affecting trade or investment against the Union or a Member State.

None of the existing European legal instruments address the issue of economic coercion. The proposed Regulation 2021/0406 seeks to remedy this absence.

In terms of its scope, the Regulation would apply, inter alia, when two cumulative conditions related to the action of the third country are met, namely when a third country:

  • interferes with 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;
  • applies or threatens to apply measures affecting trade or investment.

However, only economic measures are covered by the text of the proposal.

As a first step, and in order to determine whether the conditions set out are met, the text refers to a number of considerations related to the measure and the conduct of the third country such as: the intensity, gravity, frequency, duration, extent and magnitude of the third country’s measure and the pressure resulting from it; the country’s pattern of interference, whether its intrusion encroaches on an area of Union or Member State sovereignty etc.

With regard to the procedural steps and actions taken by the Commission under the regulation: it begins with an examination, leading to a determination of the existence of economic coercion, followed by a possible engagement with the third country concerned. This package reflects the preferred approach of adopting retaliatory measures only when necessary and is intended to deter the third country from pursuing economic coercion without having to resort to countermeasures.

On the basis of this new text, the Commission will have the power of initiative to take action on behalf of the Union to respond to third countries in individual cases of economic coercion, including by means of implementing acts pursuant to Article 291 TFEU, and to complete the range of possible countermeasures and adapt the applicable rules of origin by means of delegated acts pursuant to Article 290 TFEU.

The Commission will initiate a dialogue with the targeted economic authorities in order to stop these coercive measures.

As a second step, the proposed Regulation introduces the use of EU response measures.

This more interventionist approach is optional and would only apply if the third country fails to terminate the economic coercive measures after the first round of measures.

Under international law and in accordance with the principle of proportionality, sanctions or retaliatory measures taken by the Union should not exceed a level commensurate with the harm suffered by the Union or a Member State as a result of the third country’s economic coercive measures.  In this respect, the damage caused to the Union or a Member State is understood in international law to include the damage caused to the Union’s economic operators.

To this end, the Commission may decide to apply Union countermeasures consisting of restrictions on foreign direct investment or on trade in services. All the countermeasures are listed in Annex 1 of the proposed Regulation.

The objective of the proposed Regulation is to become the legal basis for a strong, rapid and common economic response by the Union.

The text, currently undergoing its first reading in the Council of the European Union, will soon be presented to the European Parliament under the ordinary legislative procedure.

DS Avocats International Trade and Customs team is at your disposal to provide you with any additional information.