Proposed EU Regulation to Address Third Country Coercion – What is Coercion?

The European Union (“EU”) is considering the adoption of a new “anti-coercion” instrument.  A proposal for the adoption of a “Regulation of the European Parliament and of the Council on the Protection of the Union and its Member States from Economic Coercion by Third Countries” (“Draft Regulation”) was published on 8 December 2021, and is currently under discussion.

The Draft Regulation, if adopted, would empower the European Commission (“Commission”) to adopt a number of actions in response to coercion by third countries. 

In this piece, I will first summarize the approach in the Draft Regulation, to defining coercion.  Then I will turn to the process under the Draft Regulation for identifying coercion, and the potential responses set out in the Draft Regulation.  Third, I will summarize the narrative, under the Draft regulation, that some of the potential responses to coercion will constitute lawful countermeasures under international law.  Finally, I will discuss the critical assumption underlying this narrative of countermeasures, that coercion (as defined in the Draft Regulation) is an internationally wrongful act against which countermeasures can be directed.

Defining “Coercion” under the Draft Regulation

The term “coercion” is defined in the Draft Regulation to cover situations where a third country “interferes 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” “by applying or threatening to apply measures affecting trade or investment”.  There are two elements to this definition: (1) a third country must apply or threaten measures affecting trade or investment; (2) this must be done with the purpose of “interfering in the legitimate sovereign choices” of the EU or a Member State.

In addition to this definition, the Draft Regulation also proposes a few additional indicia which the Commission “shall take into account” in determining whether the conduct of a third country amounts to coercion.  These additional indicia are: (1) “the intensity, severity, frequency, duration, breadth and magnitude of the third country’s measure and the pressure arising from it”; (2) “whether the third country is engaging in a pattern of interference seeking to obtain from the Union or from Member States or other countries particular acts”; (3) “the extent to which the third-country measure encroaches upon an area of the Union’s or Member States’ sovereignty”; (4) “whether the third country is acting based on a legitimate concern that is internationally recognised”; (5) “whether and in what manner the third country, before the imposition of its measures, has made serious attempts, in good faith, to settle the matter by way of international coordination or adjudication, either bilaterally or within an international forum”.  While the Draft Regulation requires that the Commission “shall” take these indicia “into account”, it does not, set out any objective bases for how each of these indicia are to be considered.  Nor does the Draft Regulation preclude, at least expressly, a finding of coercion in circumstances where the definition in Article 2(1) is met, but “taking into account” the indicia in Article 2(2) do not lend additional support to a finding of coercion.  For example, if the definition in Article 2(1) is met, but the third country is “acting based on a legitimate concern that is internationally recognised”, would a finding of coercion be precluded? The Draft Regulation does not say so.  Moreover, what would amount to “a legitimate concern that is internationally recognised”, and who would determine that a “concern” is both “legitimate” and “internationally recognised”?  The Draft Regulation remains silent, and the determination would presumably lie with the Commission.

Identification of, and proposed response to, coercion

Under the Draft Regulation, the Commission will have the power to examine, and determine, whether the conduct of a third country amounts to coercion, as defined in the instrument.  The Commission can launch such an examination on its own initiative, or on the basis of “information received from any source”.  The Commission may seek information from the third country during such examination, or may engage with the third country through negotiations, mediation, or international adjudication, after it determines that coercion exists.

Where the Commission determines that coercion exists, and the issue is not resolved through engagement with the third country, the Commission may impose one of the response actions identified in the Draft Regulation.  The responses may be targeted directly at the third country itself, or against legal or natural persons connected with the government of the third country.  Among the potential responses identified in an annex to the Draft Regulation are suspension of tariff concessions under the WTO framework or under free trade agreements, introduction of restrictions on imports or exports of goods through quotas or licensing requirements, restrictions on transit of goods, restrictions on trade in services, restrictions on foreign direct investments, and restrictions on the protection of intellectual property.  For each of these potential responses, the Draft Regulation also specifies that the applicable international obligations may be suspended where necessary.

The countermeasures narrative

As a general matter, the Draft Regulation requires that “[a]ny action undertaken by the Union on the basis of this Regulation should comply with the Union’s obligations under international law”.  Potentially, the EU could adopt measures which do not violate its international obligations, as a response to coercion.  For example, if the EU or its member States were to cease diplomatic relations with a third country as a purported response to coercion, this would not violate any international obligations.  Here, the EU action is lawful, independent of the fact that it is a purported response to coercion.

That said, as noted above, the Draft Regulation also foresees that the EU may take certain actions inconsistent with its international obligations, and may have to suspend the relevant obligations, in response to coercion.  The EU’s justification for doing so seems to rely on the public international law concept of countermeasures.  The Draft Regulation recalls the international law on countermeasures, and consistent with the International Law Commission’s Articles on State Responsibility (“ARSIWA”), the Draft Regulation obliges the Commission to abide by requirements of notice and proportionality while responding to coercion.

While notice and proportionality are indeed important rules disciplining the use of countermeasures, the indispensable precondition for imposition of countermeasures is the existence of a prior internationally wrongful act attributable to the State against which the countermeasure is directed (ARSIWA, Art. 49(1)).  That is, for the EU to adopt lawful countermeasures in response to coercion by a third country, the act described as coercion must amount to an internationally wrongful act. 

Some open questions on legality

To recall, the Draft Regulation defines coercion without regard to whether or not the act committed or threatened by the third State is lawful in itself.  Instead, the Draft Regulation assumes that “[c]oercion is prohibited under international law” when it is used to secure an action from the country against which it is directed, which that country is not obligated to perform under international law.

The legality of any countermeasures adopted by the EU under the Draft Regulation hangs on the correctness of this assumption. 

Where a third State threatens to use force unless the EU or a Member State alters a “sovereign choice”, this would surely constitute an internationally wrongful act.  That conclusion flows from the prohibition in Article 2(4) of the UN Charter against not only use, but also threat of force.

Where a third State threatens to breach one of its international obligations (short of a threat of force) unless the EU or a Member State alters a “sovereign choice”, this threat may also constitute a violation of international law.  The exact nature of the violation will depend on the nature of the obligation which the third country threatens to violate.  For example, a threat to violate obligations under investment treaties may violate the obligation to create a predictable and secure investment climate.  Where a treaty contains an obligation to cooperate, threats of violation of the treaty may violate that obligation.  More generally, the use of threats of violation of international obligations may violate the rule of good faith in international relations.

In sum, in both of the above instances – that is, where a third country threatens force or a violation of other international obligations to obtain a change in a “sovereign choices” by the EU or a Member State, it is likely that there is a prior internationally wrongful act by the third country, capable of being redressed through countermeasures by the EU.

However, where a third country engages in, or threatens to engage in, conduct which is not itself unlawful, does the fact that that conduct is motivated by the desire to secure a change in an EU or Member State “sovereign choice” bring into existence an internationally wrongful act justifying EU countermeasures?

To take an example, let us assume a third country has a tariff binding of 100% for “Product A”, under the WTO regime.  Let us also assume that the only producers of Product A in the world are all European entities.  Let us further assume that the third country currently applies a 0% tariff on Product A.  Under WTO law, the third country would be within its rights to increase the applied tariff on Product A at its discretion, so long as the applied rate remains below the bound rate (here 100%).  If the third country increases (or threatens to increase) the applied tariff on Product A to, say, 10%, that in itself would not violate WTO law or any other applicable rule of international law.  Would the conclusion be different – such that the increase or threatened increase would be an internationally wrongful act against which countermeasures can be adopted – if the increase or threatened increase is for the purpose of securing a change in an EU or Member State “sovereign choice”?

In academic literature, as well as State practice, there is some support for the proposition that “economic coercion” is an unlawful act (e.g. Carter (2021), Tzanakopoulos (2015), Helal (2009), Benneh (1994), Bowett (1972)).  Most commentators supporting this proposition rely on the broader norm of non-intervention.  However, there is a lack of consensus on what would constitute prohibited intervention or unlawful coercion.

A starting point for any discussion on the topic is the International Court of Justice’s judgment in the Nicaragua case, which discussed inter alia, the legality of a trade embargo by the United States against Nicaragua.  In that case, the Court summarised the customary rule of non-intervention, in the following words:

The principle [of non-intervention] forbids all States or group of States to intervene directly or indirectly in the internal or external affairs of other States.

A prohibited intervention must accordingly be one bearing on matters in which each State is permitted, by the principle of State sovereignty, to decide freely. One of these is the choice of a political, economic, social and cultural system, and the formulation of foreign policy. Intervention is wrongful when it uses methods of coercion in regard to such choices, which must remain free ones. The element of coercion, which defines, and indeed forms the very essence of prohibited intervention, is particularly obvious in the case of an intervention which uses force, either in the direct form of military action, or the indirect form of support for subversive or terrorist armed activities within another State (emphasis added).

While the Court says it would be wrongful for States to use “methods of coercion” to intervene in matters which other States are entitled to choose freely within their sovereign remit, the Court does not define the expression “methods of coercion”.  The same is true for a number of General Assembly resolutions and other international instruments which reference “economic coercion” (for an overview, see Benneh (1994)). 

However, it is notable that the ICJ rejected Nicaragua’s claim that the United States’ stoppage of aid (which the United States was under no international obligation to provide) was an act of unlawful intervention.  The Court found that it was “unable to regard such action on the economic plane as is here complained of as a breach of the customary-law principle of non-intervention” (para. 245).  In the same paragraph, the Court also appears to draw distinctions between acts which were not alleged to violate specific legal obligations (other than the rule of non-intervention) on the one hand, and acts which were alleged to violate specific provisions of economic treaties.  While the Court does not expressly lay down the proposition that inherently lawful measures, when used to influence behaviour of a State, do not amount to unlawful coercion, that proposition may be implicit in the Court’s distinction between stoppage of aid and the trade embargo.

Academic literature on intervention and coercion often references the concept of “domaine réservé” (e.g. Helal (2009)).  To those using that expression, domaine réservé signifies areas where a State has not undertaken international obligations, and that are therefore within the State’s sovereign remit.  Authors postulate that certain kinds of economic measures, when aimed at influencing choices within domaine réservé would be unlawful intervention, or coercion; there is a lack of consensus as to the scope and defining features of such economic measures (including, on whether those measures should be inherently unlawful).  Helal (2009) defines unlawful intervention as “the pursuit of unlawful ends through unlawful means”, and in testing the legality of “means” with respect to economic measures, references WTO rules and other international economic treaties. 

I note that there is some academic support for the proposition that actions which are not otherwise unlawful can, under certain circumstances, still amount to unlawful intervention or coercion.  For example, Helal (2009) argues that when a combination of lawful and unlawful acts are used with the purpose of intervening in the domaine réservé of another State, the individual lawful acts may be considered part of overarching unlawful conduct.  Also, Paust & Blaustein (1974) argue that economic pressure aimed at influencing another State’s behaviour would not only amount to unlawful intervention, but also violate Article 2(4) of the Charter.  Lillich (1977) rejects this view, in light of the negotiating history of the Charter.  Although Bowett (1972), proposed, with an analogy to English law tort of conspiracy, “that measures not illegal per se may become illegal only upon proof of an improper motive or purpose”, he himself did not appear to advocate this to be a reflection of positive law, but a proposal for a norm that “would emerge as a concept better suited to current needs than that reflected in U.N. resolutions”.

To me, it is not necessary to resolve the exact contours of “economic coercion” for the purposes of this piece.  Where a State takes an action which lies in its own domaine réservé to influence the choice of another State with respect to a matter within that State’s domaine réservé is that action necessarily unlawful?  Is there no room for States to freely seek and give concessions on actions lying within their respective domaines réservé, in conducting their diplomatic relations?  If that is the case, how do States conclude new economic treaties, giving and receiving concessions in areas where obligations had not previously been undertaken?  If some, but not all, trade and investment measures aimed at influencing choices within a State’s domaine réservé amount to economic coercion, then, does the Draft Regulation ensure that any countermeasures are targeted solely against such measures, and not against other third country measures?

Let us return to the example of Product A above.  Let us consider the third country threatens to raise tariffs on Product A to 10% unless the EU agrees to continue a zero percent applied tariff on Product B on which the EU’s bound rate is 50%.  As long as the applied tariff remains under the bound tariff (50%), the choice of tariff to be levied on Product B lies within the domaine réservé of the EU.  Similarly, so long the applied tariff remains below the bound tariff (100%), the choice of tariff to be levied on Product A lies within the domaine réservé of the third country.  In proposing a bargain where each party makes a concession within its domaine réservé, to the advantage of the other, does the third country somehow violate international law?

As summarized above, there are two elements to the definition of coercion in Article 2(1) of the Draft Regulation, both of which would be satisfied by the third country’s action in this example.  First, the third country threatens to take a measure “affecting trade or investment” (i.e., to increase tariffs on Product A).  Second, the third country does so with a purpose of influencing a sovereign choice on the part of the EU (i.e., to ensure that the EU does not increase tariffs on Product B).  According to Article 2(1) Draft Regulation, the third country’s conduct would be unlawful, “shall be referred to as measures of economic coercion”, and could be the legitimate target of countermeasures.  As discussed above, it is possible, but not necessary, that this conclusion could be modified by consideration of additional indicia listed in Article 2(2).

Many would perhaps differ with the characterisation of the third country’s conduct in this example, under Article 2(1) of the Draft Regulation as “economic coercion”, and simply call what the third country does in this example “diplomacy”.

The views expressed in this article are exclusively those of the author and do not necessarily reflect those of Sidley Austin LLP and its partners. This article has been prepared for informational purposes only and does not constitute legal advice. This information is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. Readers should not act upon this without seeking advice from professional advisers.