Focus on: From Open Strategic Autonomy to the Green Deal: a tour d’horizon of Developments in Trade and Customs in the European Union (2021 – 2023)

In the early 1950s, the Sino-Soviet alliance was one of the main concerns of post-war policy-makers in Europe.  Seven decades later, in July 2021, about a year and a half before its brutal invasion of Ukraine, the government of the Russian Federation announced that it was “not just allies, but better than allies” with its on-again-off-again friend and neighbor, China.  In a way, it seems that Europe today has come full circle in terms of policy pressures.  Our piece on EU commercial policy starts with the “geoeconomic order” because, for one, what happens in Brussels definitely does not stay in Brussels.  Moreover, over time, the EU has sought “global governance through trade”.

In 2021, the EU announced its new international trade policy: in the specific realm of trade, the EU’s more general “open strategic autonomy” strategy translated to a slightly different three-word moniker: “open, sustainable, and assertive”.  What does that mean exactly?  As we understand it, this means that the EU will continue to be an advocate for free trade but that it now wishes to expand its (and possibly the world’s) trade policy consciousness to create space for “non-trade” concerns (environment, labor, human rights more generally, etc.).  At the same time, the EU will seek to “de-risk” (Ursula von der Leyen said recently that “de-coupling” was a step too far) its economy from (or at least decrease its dependency on) countries that are not its traditional allies.  With its new trade law enforcement “stick“, the EU also seems to be telling the world that it will be getting tough on trade.  Significantly, the EU is no longer limiting itself to resolving its disputes at the World Trade Organization (WTO).  For example, in August 2022, in the first known arbitration between two international organizations (and customs unions), the EU secured a victory over the Southern African Customs Union (SACU) in a free trade agreement (FTA) dispute over bilateral safeguards.

The five axes of EU trade policy right now, as we see it, are: Russia, China, the “Global South” (particularly the big players in Asia, Africa, and South America), the United Kingdom (UK), and the United States of America (US).

Much has been said about the EU’s reaction to Russia’s full-scale war against Ukraine (timeline here; reportage here; academic analysis here).  Suffice to note for present purposes that on 25 February 2023, the 10^th sanctions package against Russia was announced.  The package aims to tighten the noose on Russia’s technological progress and economic stability, particularly by extending the sanctions list to 121 entities and individuals (over 1,600 entities and individuals have been targeted so far).  Furthermore, the new package includes more robust export controls, notably with an additional export ban affecting €11 billion worth of advanced and critical technologies like radars or machinery parts.  To strengthen compliance with the numerous sanctions in place, the EU appointed David O’Sullivan in December 2022 as the ‘International Special Envoy for the Implementation of EU Sanctions’, while discussions abound regarding the creation of a US Office of Foreign Assets Control (OFAC)-like central enforcement system in the EU.  Steadily but surely, the EU has also decreased its direct dependency on Russian energy (oil and gas), with Germany accelerating its weaning off period at an impressive rate.  At present, Germany has diversified its energy infrastructure, with a new liquified natural gas (LNG) terminal speedily built in 8 months.  At the World Economic Forum (WEF) in January 2023, Germany’s Finance Minister, Christian Lindner, told the world that Germany no longer depended on Russian imports for its energy supply.

Moving eastwards: it is not surprising that China continues to be a major influence on the EU’s trade policy, given that the unique (and in some sense, sui generis) characteristics of the country’s economic system have forced a general rethink of the liberal economic global order, centered around the WTO.  While the fact that different EU Member States (MS) have different degrees of economic cooperation and integration with China complicates matters, the EU, as a single unit, has recently attempted to safeguard its interests holistically.

Internally, there is the Foreign Subsidies Regulation (FSR), the European Chips Act (ECA), the International Procurement Instrument (IPI), and the Single Market Emergency Instrument (SMEI).  The FSR seeks to combat the supposedly direct and indirect distortive effects of foreign subsidies – i.e. those granted by governments of non-EU countries – on the EU internal market.  Companies involved in large merger and acquisition deals or public tenders are required to report all foreign contributions that they have received from non-EU governments.  The Commission can impose “redressive measures” (such as the divestment of assets reducing market presence or the repayment of foreign subsidies) if it determines that the subsidies in question distort the EU internal market.  The IPI, on the other hand, will allow the EU to restrict access to the EU public procurement market for non-EU companies from countries that impose similar restrictive conditions on EU businesses.  The SMEI, once operational, will allow the EU, through a series of toolkits and an improved governance structure, to better respond in crises and ensure the unabated free movement of goods, services, and persons.  In the realm of semiconductors and chips, the ECA, which mirrors the US Chips Act, seeks to reinvigorate and strengthen the EU’s semiconductor industry by injecting more than € 43 billion in public and private funds.  While the ECA package is at the last stage of the legislative process (trilogue discussions are ongoing), and negotiations for the SMEI are still chugging along (a draft proposal is expected in late 2023), the IPI went into force in August 2022, and the FSR comes legally online in July 2023 (this is when the Commission will be able to start ex officio proceedings), though reporting obligations on companies start to apply from October 2023 onwards.

Externally, most significantly, there is the Anti-Coercion Instrument (ACI), which in March 2023 received the blessing of a provisional political agreement between the Council and the Parliament.  Some have speculated that the EU’s trade spat with China over Lithuania (currently being trashed out multilaterally at the WTO‘s dispute settlement system) is ripe for ACI-action.  The EU continues to engage with China at the WTO dispute settlement system, recently bringing a rather novel complaint regarding the latter’s policy on intellectual property (IP) “anti-suit injunctions”.  While the EU continues to mull over new and innovative ways to deal with China, some have argued that there is much leeway in the existing WTO (legal) framework to deal with China that remains unexplored.

China is also giving the EU a run for its money in places like continental Africa, where despite some recent reversals, China remains a major investor: be it lithium in Zimbabwe and Namibia or cobalt in Congo; or even the building of Kenyan expressways (not to mention the first military base outside China, in Djibouti), China is playing a strategic game all across the African continent.  On the other hand, the EU seems to be scrambling to get its bearings.  The EU’s engagement with the Global South, therefore, remains an important aspect of its trade policy – in particular, since the war in Ukraine has exposed geoeconomic divisions, evident in inter alia the abstention votes at the United Nations (UN) by major developing countries.  The EU’s interaction with the Global South is currently under stress over issues relating to (access to) critical raw materials (CRMs).  This is exemplified by the EU’s sparring with Indonesia over the recent years, featuring tit-for-tat cases on nickel, palm oil, and, most recently, “transnational” subsidies.

The final two spokes of the wheel are EU allies – the UK and the US.  While the wounds of the UK divorce are still healing, the Windsor Agreement will greatly simplify customs controls on products moving between Northern Ireland and Great Britain.  Establishing a new “green lanes” system will permit traders to export goods from Great Britain to Northern Ireland (that do not cross into Ireland) with minimal checks.  Stringent customs controls, however still apply to goods crossing the Irish border.  The Windsor agreement allows Northern Ireland to enjoy reduced UK VAT rates for buildings and fixtures.  Much to the chagrin of the pro-UK Democratic Unionist party, there is still a role left for the European Court of Justice (ECJ) with regard to the implementation of the Protocol on Ireland/Northern Ireland.  The conclusion of the Windsor Agreement also significantly enhances UK-EU cooperation in other areas.  Recently, the EU and the UK have doubled down on defense cooperation, and both parties are in intense discussions regarding the UK’s bid to rejoin the EU’s highly reputed Horizon research programme.  Commentators have also pointed out that the UK’s collaborative exercise of ironing out its differences with the EU concerning Northern Ireland was the catalyst that allowed the UK to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) – as CPTPP members were alarmed by the UK’s previous brazen attempts to override the Northern Ireland Protocol (an agreement it had reached with the EU), raising concerns about the UK’s place in an international-rules based sphere.

EU-US relations have also markedly improved post-Trump (at least on paper): the steel and aluminum compromise; the Boeing/Airbus settlement; and the set-up of the Trade and Technology Council (TTC) all point to healthy transatlantic trade relations.  At the same time, there is trouble brewing in paradise, with the US’ Inflation Reduction Act (IRA) invoking strong reactions in Europe, followed by the EU’s own ‘Make in Europe’ strategy, so to speak.  The EU loosened up State Aid rules and procedures, and Member States are permitted to “match” subsidies granted by the US under the IRA.  It will also be easier and quicker for financial support to be approved for renewable energy projects.  However, given that the support here is “green” in nature, one would be justified in thinking: is this a subsidy war that could actually save the planet?

Indeed, for its part, the EU has been slouching towards enviro-legal nirvana.  With the EU’s Green Deal plans, in the face of the UN’s 2023 Intergovernmental Panel on Climate Change (IPCC) Report (“the climate time bomb is ticking“), Europe is gearing itself for what Kate Raworth calls the “sustainability doughnut“.  A flurry of sustainability initiatives has appeared in recent times on the EU legal landscape: the Carbon Border Adjustment Mechanism (CBAM), aimed at preventing “carbon leakage” will start to apply against imports of “dirty” steel, and iron, cement, aluminum, fertilizers, and hydrogen from October 2023; the Deforestation Regulation proposal seeks to keep products (mainly cacao, coffee, cattle, wood, palm oil) off the EU market if their cultivation has led to deforestation or the infringement of local environmental law; similarly, initiatives like the Net Zero Act and programmes like RePowerEU and the Temporary Crisis and Transition Framework (TCTF) are intended to pump money into the development of renewable energy production and associated supply chains.  The March 2023 proposal for a CRM Act seeks to ensure the EU’s continued access to secure and sustainable supplies of CRMs (crucial for the green transition), while the Commission’s desire to revise the Batteries Directive, aimed at achieving better circularity and improving sustainability, has been approved by the environmental committee of the Parliament in January 2023.  Aside from the environment, the EU’s focus has been on the dignity of work.  In this regard, the Forced Labor Regulation (FLR) proposal seeks to prohibit placing products (including imported ones) made with forced labor on the EU market.  Similarly, the proposal for a Due Diligence directive requires companies to meet due diligence obligations with respect to inter alia human rights and provides a channel for enforcement (with possible sanctions and/or civil liabilities in case of breach).  Notwithstanding the debate concerning the WTO-compatibility of some of these initiatives, the intention behind them is in itself laudable.  At the same time, many of these initiatives (CBAM, FLR, and even FSR, for that matter) are examples of what Vidigal calls “reconstructive unilateralism”; such initiatives inevitably cause friction with the developing South since they are viewed as “unilateral renegotiations of the WTO bargain”.

On the flipside lies multilateralism.  And while critics continue to lambast the WTO for failing to reach consensus more repeatedly between (no less than) 164 sovereign countries falling on all sorts of ends on the developmental and industrial spectrum, credit must be given where it is due.  The Fisheries Subsidies Agreement – which featured the EU’s constructive role during negotiations – represents the first trade agreement where the end-goal is not deeper liberalization but rather the protection of a global common (fish in the sea).  This demonstrates that there is rising awareness on the multilateral level that economic growth without concomitant attention given to other elements of human prosperity (a healthy environment, etc.) is leading the planet to ruin.  The multilateral response was also put to the test by COVID-19; and while the jury is still out on whether the TRIPS waiver was (in substance) a success story, the time it took for a coordinated reaction to emerge (in large part due to the EU’s pharma-sponsored foot-dragging) is in itself worrying.  Recall that the EU’s position was simply that the flexibilities already inherent in the TRIPS were enough; the pandemic did not necessitate any change in the law.

At the same time, today, the EU remains one of the main players influencing multilateral trade policy at the WTO.  Recently, it communicated to the WTO its prognosis of the current ills of the organization, emphasizing the need to reaffirm and focus on the “deliberative function” of the WTO (though some have wondered whether this is enough).  Roughly in line with Howse and Langille’s conceptualization of the WTO as “fundamentally pluralist”, the EU, in its communication, has emphasized the need to make trade more “inclusive” by inter alia finding space for matters such as gender and labor. To take a concrete example, the EU suggested in its WTO-communication the setting up of a forum (hosted by the WTO) where collaboration with the World Bank and the International Labor Organization (ILO) can be materialized through joint analysis on, for example, the distributional impacts of trade.

The EU also continues to be a main protagonist in the realm of dispute settlement.  It was co-disputant in the first arbitration appeal at the WTO (against Colombia), utilizing a system that it had pioneered (called the Multi-Party Interim Appeal Mechanism, or the MPIA).  It remains to be seen, however, whether the EU can call upon its leadership abilities to help deliver on the 2022 Ministerial Conference (MC) outcome to have a “fully and well-functioning dispute settlement system accessible to all [WTO] Members by 2024” (some hopeful news on this is here).  While implementation of many of the 2022 MC outcomes is ongoing (the first “fish week” was concluded in March 2023), in the next MC, scheduled for February 2024 in the United Arab Emirates, the EU seeks to continue work on dispute settlement reform, regulation of state intervention (particularly through industrial subsidies), and reinforcement of deliberations on climate change and the environment.  However, since some regulatory areas have seen very limited success on the multilateral front, the EU has sought to achieve outcomes on a regional or bilateral basis.

The EU has never really shied from collaborating (outside the WTO framework) with other “like minded” countries to seek agreement on issues that have not, as yet, witnessed a critical mass of sponsorship at the multilateral level.  Thus, the EU-Singapore Digital Partnership, for example, is designed to remove barriers to trade in the digital economy and to promote the development of new and innovative digital products and services.  The EU’s FTA with New Zealand is also seen by some as a model of sustainability (and of the use of trade agreements as a force for good): the agreement contains the EU’s first FTA-provision on fossil fuel subsidy reform; moreover, the entire trade and sustainable development (TSD) chapter has been made subject to legally binding dispute settlement.  In a similar vein, the explicit embedding of gender equality in the EU’s more recent agreements signals to some an “evolving and advanced gender responsiveness”.

In all, there is much to look forward to in the future of EU trade law. To practitioners, what would be of most interest would be the expansion in the “trade protection” toolkit of the EU. Beyond the more traditional trade defense measures (anti-dumping, anti-subsidy, and safeguards), new (one could say: “next generation”) measures are cropping up.  The EU industry now has at its disposal new means to block trade that it considers unfair: from FLR to FSR; CBAM to ACI; there is much that the EU authorities (and industry) can dig their teeth into.  However, most of the practicalities regarding these new initiatives remain unclear; the EU has not as yet revealed the details of how many of these instruments would work in practice.  Thus, the EU (and the complainant bar in the EU) will need some time (and a few ‘trial runs’) to understand how they can operationalize the grievances of their clients through these new channels.  Meanwhile, trade defense measures and customs procedures continue to constitute the “bread and butter” of lawyers.  Thus, while we began our piece at the macro (geoeconomic) level, we end it at the micro level, by getting into the nuts and bolts of trade and customs law.

In the field of trade defense, in 2022, the Commission imposed or maintained definitive duties at the end of almost two dozen investigations.  The products at issue ranged from fatty acid to optical fibre cables (OFC) to road wheels.  Iron and steel remain the primary sectors where trade defense action is concentrated.  In the 2021-2022 period, the Commission focused its attention on tightening enforcement and, in that spirit, opened a litany of anti-circumvention investigations as well as two anti-absorption investigations (which have been fairly uncommon in recent years).  The EU also decided to re-open investigations in Glass Fibre Fabrics from China and Egypt (in light of the EU’s modernization of trade defense legislation) and Fasteners from China (where the re-opened investigation featured an interesting “special monitoring clause”).  EU courts, for their part, continued to exercise limited judicial review of trade defense measures and granted the Commission a wide margin of discretion in making factual and legal assessments.  Moreover, the General Court in Azot entirely disregarded WTO jurisprudence when finding that there was nothing wrong with the Commission rejecting the actual producer costs and replacing them with higher hypothetical costs (in the event the Commission finds the existence of “significant market distortions”).  Even more surprisingly, in March 2023, the General Court in Jushi held that the Commission was allowed to countervail what some call “transnational” subsidies (essentially, foreign direct investment) based on a tenuous reading of EU, WTO, and public international law.

Furthermore and finally, in the area of customs law, stakeholders are eagerly awaiting further updates concerning the EU’s plan to introduce and incorporate binding valuation information (BVI) decisions into the EU customs legislation.  This will allow companies to obtain binding decisions from the customs authorities (which will be binding on all the customs authorities of the EU MS) with regard to how the customs value of their products will be calculated.  As the Commission puts it, BVIs will “increase transparency, legal certainty, compliance and uniformity in customs valuation, to the benefit of economic operators, customs authorities and the financial interests of the Union.”  Given diverging approaches on the issue of customs valuation (especially with regard to, for example, the treatment of transfer pricing adjustments and royalties) by the customs authorities of the EU MS, the introduction of BVIs will be a welcoming and logical tool for companies to use, particularly given that similar procedures exist with regard to tariff classification and origin.

In all, exciting trade and customs times lie ahead: for clients, lawyers, and policy-makers alike.

By www.vvgb.law.com