Op-Ed: “The EU strengthens its Trade Retaliation Powers” by Yves Melin and Jin Woo Kim
In a nutshell
On 28 October 2020, the European Parliament, the Council of the European Union (EU) and the European Commission reached an agreement to amend the EU Trade Enforcement Regulation of 2014 (Regulation 654/2014 or Enforcement Regulation). Once those changes enter into force, the EU will be able to impose retaliation measures against third countries breaching their international obligations vis-à-vis the EU under the World Trade Organization (WTO), despite the paralysis of the Appellate Body of the WTO dispute settlement body. The changes also broaden the type of measures the European Commission can adopt against third countries infringing their trade commitments vis-à-vis the EU: in addition to retaliatory duties on goods originating in those third countries, the Commission will be able to impose restriction on services provided from, and suspend IP rights of companies established there. The obvious targets of those changes include the United States, and closer to home, the United Kingdom as well.
Overcome the paralysis of the WTO dispute settlement mechanism
In its current form, the Enforcement Regulation entitles the EU to immediately suspend concessions on goods and public procurement, or impose retaliatory tariffs only to respond to illegal safeguard measures adopted by third countries or to react to the unilateral withdrawal of trade concessions by other WTO Members. The EU has resorted to this type of immediate retaliation only once, against the United States, after it imposed Section 232 duties on EU steel and aluminium. The EU considered the Section 232 duties to be illegal safeguard measures (See Commission Implementing Regulation (EU) 2018/724 and Commission Implementing Regulation (EU) 2018/886.)
In all other cases, before retaliating against third countries, the EU must first wait for the outcome of dispute settlement proceedings under the WTO or bilateral (and regional) trade agreements.
The revised Enforcement Regulation expands the EU’s retaliatory powers in the latter scenario: in the context of dispute settlement proceedings. In cases where a dispute settlement mechanism is paralysed, the European Commission will be able to immediately impose retaliatory duties. This targets, primarily, dispute settlement proceedings initiated under the WTO dispute settlement mechanism. Under the current version of the Enforcement Regulation, if the EU prevailed before a panel established under the WTO’s dispute settlement mechanism, and the losing member appeals before the paralysed Appellate Body of the WTO, the Commission cannot impose retaliation measures. The change means to fix that: if a losing member appeals a panel favourable to the EU, and that member has not agreed to an interim appeal arbitration procedure, the Commission will be able to impose retaliatory duties immediately.
This change was tabled by the Commission on the very day the WTO Appellate Body ceased to function, on 11 December 2019, which is when the United States’ continued refusal to appoint new Appellate Body members left too few members to adjudicate on appeals brought against panel reports. It was designed with the United States in mind, but in practice includes all WTO members that have refused to sign up to the Multiparty Interim Appeal Arbitration Arrangement (MPIA) – the interim appeal arbitration under Article 25 of the Dispute Settlement Understanding (DSU) – which was officially notified to the WTO on 30 April 2020. (As of 6 November 2020, there were 21 WTO Members who join the MPIA: Australia, Brazil, Canada, Chile, China, Colombia, Costa Rica, Ecuador, the EU, Guatemala, Hong Kong, Iceland, Mexico, New Zealand, Nicaragua, Norway, Pakistan, Singapore, Switzerland, Ukraine and Uruguay.)
The changes also foresee similar powers for the Commission should dispute settlement mechanisms under regional or bilateral agreements be paralysed in a similar fashion. Dispute settlement under bilateral and regional agreements is rare, and no mechanism is blocked currently. With this amendment, the EU may have in mind future disputes with the United Kingdom, if a trade agreement is reached (before or after the end of the transition period – currently ending on 1 January 2020). The recent past has shown that the European Commission has very little patience for breaches by the UK of its commitments vis-à-vis the EU. Currently, it resorts to litigation before the Court of Justice of the EU, under the terms of the Withdrawal Agreement. In the future, if a trade agreement is reached with the UK, it will be before a new dispute settlement mechanism. The Commission will no doubt demand swift resolution of disputes there, and retaliate immediately when this is not forthcoming.
Create the possibility to retaliate against services and IP rights
Another significant change is the strengthening of the trade retaliatory powers of the Commission. In addition to existing tools at the disposal of the Commission, the imposition of tariffs (the so called ‘rebalancing’ duties) or restricting access to public procurement, it will now be able to impose countermeasures on services and EU-harmonised areas of intellectual property rights.
This is a crucial development, which exposes non-EU companies providing services in the EU, or relying on IP protection in the EU, to new types of market access restrictions resulting from trade tensions. Again, these new powers were created with the United States in mind, but may end up being used against other third countries with which the EU has tensions and providing services to the EU. Here again, the UK comes to mind.
These changes were introduced through an amendment requested by the Council of the EU (composed of the Member States), which the European Parliament agreed to. They are expected to enter into force before the end of the year.
The revised Enforcement Regulation is only one of the trade policy tools that the EU has created to protect better its interests amid the current trade tensions. On 24 July 2020, the Commission appointed Mr Denis Redonnet as the first Chief Trade Enforcement Officer (CTEO), a new post created by the Commission to strengthen the enforcement of EU trade agreements. Further, the EU Foreign Direct Investment Screening Regulation of 2019 (Regulation 2019/452) entered into force on 11 October 2020, introducing the first EU-wide foreign investment screening mechanism.
In addition to these existing tools, the Commission has tabled or announced proposals calling for the creation of new tools, including a new foreign subsidy instrument, meant to address distortion created by foreign subsidies granted in the EU (See the White Paper on foreign subsidies in the Single Market, and the Public Consultation that closed in September), and a new ‘anti-coercion’ instrument that would increase the ability for the Commission to immediately retaliate against third countries, without having to wait for the outcome of dispute resolution proceedings (a Commission proposal is expected in 2021). This anti-coercion instrument is a concession made by the Commission and the Council to the European Parliament, which had initially requested that these powers be included in the Enforcement Regulation.
Yves Melin is an International Trade and Customs lawyer based in Brussels. His focus is on trade remedies (anti-dumping measures, countervailing measures and safeguards), re-balancing duties, customs laws and procedures, sanctions & export and import controls. Yves is also a Member of the Editorial Board of the Global Trade & Customs journal and member of the steering committee of the recently created Customs & Trade Law Academy of the University of Liège, in Belgium.
Jin Woo (Jay) Kim is an international trade and customs lawyer based in Brussels. He advises clients on international trade and customs matters, including EU trade remedy proceedings, World Trade Organization dispute settlement, EU customs rules, EU-Korea trade relations, economic sanctions and trade policy advice.