EU’s Newly Assertive Trade Policy: Implications of Enforcement Actions for Business

March 8, 2021, Covington Alert

The European Commission’s recently concluded Trade Policy Review (“TPR”) commits the EU to a more “open, sustainable and assertive” approach to trade. The EU’s emphasis on assertiveness is made credible by a series of reforms that give the EU and Member States new legal enforcement powers and institutions. This reorientation toward enforcement was echoed after a meeting of EU trade ministers on Tuesday to discuss the TPR. Germany’s Peter Altmaier highlighted the need for “modern rules for international trade,” while France insisted that the EU’s trade policy should be less “naïve”.

The EU’s new enforcement regime includes state-to-state trade disputes, trade remedy investigations, import and export bans, investment restrictions, and supply chain due diligence. These can generate both potential business risks and opportunities. Although the EU makes openness a key part of its trade policy, the opportunities for further restrictions abound as the EU integrates trade into the European Green Deal and its geopolitical strategy. Many actors beyond the Commission will likely be involved in shaping ultimate policy decisions and outcomes. Businesses will need to navigate this complex new regime to represent their interests effectively in Europe.

Structural Reforms to Strengthen Enforcement

Last July, the Commission’s Directorate-General for Trade (“DG Trade”) reshuffled its organization, appointing Mr. Denis Redonnet as the newly created Chief Trade Enforcement Officer (“CTEO”). This restructuring brings together all EU trade enforcement powers under the CTEO, who assumes responsibility for the full implementation of the EU trade agreements and trade defense instruments (e.g., anti-dumping and safeguard measures). He also manages the Trade Barrier Regulation investigations.

Critically, the CTEO now oversees the “Single Entry Point,” a new centralized system for trade-related complaints of Member States, individual companies, business/trade associations and civil society organizations from the EU. Complaints can concern a wide variety of commercial as well as social issues, from market access barriers to sustainability and labor rights concerns. The revamped and streamlined complaints systems make privately-induced enforcement of the EU’s trade commitments more likely. It may thereby help companies to lower trade barriers and level the playing field with competitors. Certain businesses may also see greater levels of investigation and enforcement prompted by European civil society actors and competitors.

Legal Reforms to Strengthen Enforcement

To realize the EU’s more assertive trade policy, the CTEO can draw on several new legal instruments.

• The reformed EU Trade Enforcement Regulation has now entered into force. It allows the EU for the first time to suspend trade in services and intellectual property commitments as part of its retaliatory measures. Non-EU technology and life sciences companies may be particularly impacted by the exercise of this new power.

Moreover, new laws add credibility to the EU’s emphasis in trade policy to align commercial and geopolitical considerations.

• Since last year, EU law facilitates Member States to screen foreign direct investment based on national security and strategic autonomy considerations—an activity that the European Commission oversees and coordinates (see here for more information).
• The recently amended Council Regulation (EC) 428/2009 on export controls strengthens the process for restricting the exports of dual-use technologies and enhances the controls for cyber-surveillance technologies. The EU Member States coordinate with one another regularly in export controls enforcement matters.

But DG Trade is pushing for further legal powers. On Wednesday, March 3, 2021, Sabine Weyand, the Director-General for Trade, announced that the Commission intends to reform the EU’s internal rules for the adoption of countermeasures. The Commission aims to bolster the credibility of EU policy initiatives with potential global reach, backing them by a counter-retaliation regime that can deter others from illegal coercion. To achieve this strategic aim, Weyand said she will push for a framework Regulation that could allow the Commission to adopt trade-related countermeasures with only a qualified majority of Member States at a technical level. Specifically, when “a third country tries to force or coerce the EU”, the Commission wants to become faster and more flexible in its response. In cases where a country’s “coercion” contravenes international trade rules (e.g., the WTO’s Dispute Settlement Understanding), the Commission wants to be able to respond in kind.

The European Green Deal is also finding its way into the EU’s trade enforcement priorities. Importantly, the Commission notes its legislative initiative on Human Rights Due Diligence throughout the supply chain and that new enforcement measures should “ensure that forced labor does not find a place in the value chains of EU companies.” Over the medium term, pressure is building on the Commission to find a legal basis to restrict the imports of related goods. Such a ban is a credible policy option, as similar measures exist in the areas of the timber trade against illegal logging (Regulation (EU) 995/2010); intellectual property rights (Regulation (EU) 608/2013); illegal fishing (Council Regulation (EC) 1005/2008); and the trade in goods used for capital punishment, etc. (Regulation 2019/125). More immediately, the Commission has indicated that it will publish guidance for companies to prevent goods linked to forced labor and environmental degradation from entering the EU market.

Four Areas of Enforcement Priority: Sustainability, Labor, China, and the UK

The EU is likely to step up enforcement in (at least) the following four areas.

First, early in 2021, the CTEO will launch a review of the Commission’s 15-point Action Plan on the enforcement of Trade and Sustainable Development (“TSD”) chapters in EU Free Trade Agreements (“FTAs”). The review will cover all aspects of the Action Plan but will likely focus on substantiating the scope of commitments of the trading partners, establishing monitoring mechanisms, and possible sanctions in cases of non-compliance. Companies may want to respond to this review with specific concerns about supply chains affected by EU FTA parties, creating a non-level playing field.

Second, the TPR elevates global labor standards and signals the EU’s willingness to use enforcement action to promote these. Forced labor is not only a focus of the forthcoming supply chain due diligence legislation, but adherence to International Labor Organization (“ILO”) standards is also incorporated into FTAs and will be a focus of the upcoming review of the Generalized Scheme of Preferences (“GSP”). The EU’s willingness to act was manifested in the partial suspension of Cambodia’s “Everything But Arms” (“EBA”) tariff preferences after it had found Cambodia’s actions against civil rights and trade unions to be in breach of UN human and labor rights. Similarly, the EU has litigated the FTA commitments on the ILO conventions with South Korea.

Third, China is likely to be a central piece of the EU’s trade enforcement focus. After the conclusion of negotiations for the EU-China Comprehensive Agreement on Investments (“CAI”), the field of action for the Commission now turns to seeking approval for the deal. To this end, the Commission will likely seek to demonstrate that it is committed to existing avenues of enforcement—for example, in its pending WTO case on forced technology transfer or with the FDI screening regime. In addition, the ability to take action against foreign subsidies (as currently under development), as well as actions on forced labor in supply chains, and a focus on China’s ratification of the ILO conventions, may be on the horizon. If it enters into force, the CAI would provide for a bilateral state-to-state dispute settlement system. Firms with offensive or defensive interests related to China may want to monitor these issues, and potentially engage the Commission.

Fourth, with the EU and the UK slowly emerging from what were prominently called the initial “teething pains,” the view is now turning to enforcing the deal where fundamental differences emerge, or where the UK chooses to diverge from EU law. The EU’s enforcement approach to the EU-UK Trade and Cooperation Agreement (“TCA”) will therefore be another important area for businesses to watch. Enforcement is multi-tiered and not only includes consultation and arbitration procedures, but in effect also the more political institutions such as the Specialised Committees and Working Groups and later the (Joint) Partnership Council. The TCA’s potential remedies are diverse, ranging from safeguard measures to general rebalancing, and specific measures against harmful effects of subsidies. The EU’s approach to enforcement is likely of relevance for the medium-term development of the new EU-UK relationship.

The EU’s new trade policy proclaims a turn toward assertiveness—and the laws and institutions in place make this stance increasingly credible. How it chooses to act—and the detail of new measures it adopts—will have implications for any business operating in the EU. 

The team at Covington is well placed to advise on any aspects of the EU’s enforcement actions, or how to proactively engage the European Commission, Parliament, and EU Member States on these issues. Please see our team pages for reference.

Public Policy | International Trade | EU FDI | Environmental | China

If you have any questions concerning the material discussed in this client alert, please contact the following team members.