Most Favoured Nation: Trade Batman

Anti-coercion, local content and the UK-Singapore digital agreement

[Sorry that this week’s edition of MFN is a little late. As mentioned on twitter, I may have fallen asleep when I was meant to be writing it …]

Economic coercion is a slightly odd concept. Using economic means to pressure another country into doing, or not doing , something is both BAD and … quite common. If you’re a big country … you probably do it. I mean, let’s do a quick quiz:

Which of the following could be considered economic coercion?

1. Threatening to cut off a financial services equivalence decision if the other country doesn’t sign up to an [unrelated] institutional framework agreement?

2. Removing a country from your customs system – effectively blocking all imports – because it officially recognised as an independent country a nation you deem to be part of your sovereign territory?

3. Threatening to cut off the energy supply to a country if it doesn’t give your fishing boats more licenses?

4. All of the above?

Answers on a postcard. Bonus points if you can guess the countries involved.

I think Dmitry puts it nicely when he says that the reason countries can kick up a fuss about coercion at the same time as being prime culprits is because they all view themselves as Batman: “It’s different when the one doing it is strong, rich, and me.”

Dmitry Grozoubinski @DmitryOpines

@SamuelMarcLowe I think it's the same way Batman defines himself as a crime fighter despite himself committing a thousand crimes every night: "It's different when the one doing it is strong, rich, and me."

As such, Batman/the EU has decided that economic coercion is bad when others do it and is introducing a new tool to allow it to hit back at offenders.  The anti-coercion instrument (ACI) will allow the EU to take 12 possible countermeasures including tariffs or exclusion from EU procurement programmes if another country [see: China … but also others such as the US and, let’s be honest, the UK] is engaging in coercive actions against the EU or its member-states.

Quite a lot has already been written about the ACI. The general consensus seems to be that it’s fair enough the EU wanting the means to defend itself against coercive practices [other countries similar tools], but there are questions about whether the retaliation would be compatible with the EU’s WTO commitments and indeed whether it would even work, or just lead to further tit for tat.

But here are some additional observations from me:

• Process. Despite Articles 3,4,5 and 6 of the ACI setting out a process which would see a potential aggressor given time to withdraw its coercive measure [useful flowchart here], the regulation also includes provisions allowing the Commission to bypass this process and apply countermeasures immediately (Article 7(6)). In such circumstances, as per Article 15 (3) the Commission would be able to immediately adopt an implementing act (time-limited to 3 months) without first running it past member-states. Member-states in committee would then be able to decide whether to retain the measure. (Process laid out in Article 8 of this regulation).

• Countermeasures. The possible countermeasures are listed in Annex I. However, as per Article 7(7), the Commission can amend this list via delegated legislation. So it could easily grow over time.

• Origin. Annex II sets out the definitions the Commission will rely on to determine the origin/nationality of a good service, service provider, investment or intellectual property rightholder (for the purpose of targeted countermeasures). Article 13 gives Commission power to adopt delegated acts to amend the rules of origin if necessary. While determining origin for goods is uncontroversial (will rely on pre-existing non-preferential RoO), doing so for services, IP, investment etc. can be much trickier. I think this could get messy.

• Proportionality. Article 9 covers the criteria for selecting and designing EU countermeasures. I’m slightly intrigued by requirement to be commensurate with injury suffered by EU or member-state – lots of this stuff will be quite difficult to measure! (Although I’m sure EU will find a way.)

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Build Back Better (Local Content Edition)

As part of its Build Back Better agenda, the Biden administration is planning to introduce an electric vehicle tax credit of $12,500. Nice!

But $4,500 of this tax credit would be contingent on the EV being built in the US by union workers. Wait a minute …

As you can imagine, Canada is not happy about what it views as an illegal local content requirement, which would unfairly discriminate against Canadian EV producers. And when I say not happy. I actually mean FURIOUS.

In the letter below, Canada’s Deputy PM and Trade Minister threaten to suspend USMCA provisions on dairy and copyright reform if the US goes ahead with the measure.

Katie Simpson @CBCKatie

This three page letter is the most aggressive posturing from Canada — outlining what will happen if the EV tax credit goes ahead.

And the Canadians aren’t the only ones who are concerned. EU trade chief Valdis Dombrovskis has reportedly raised concerns with the tax credits would “result in unjustified discrimination against EU car and car component manufacturers”.