EUROPEAN COMMISSION Brussels, 8.12.2021 SWD(2021) 371 final COMMISSION STAFF WORKING DOCUMENT



IMPACT ASSESSMENT REPORT

Accompanying the document Proposal for 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 {COM(2021) 775 final} - {SEC(2021) 418 final} - {SWD(2021) 372 final}



Table of contents 1.Introduction: Political and legal context 2.Illustrative example 3.Problem definition 3.1.What is the problem? 3.2.What are the problem drivers? 3.3.How will the problem evolve? 4.Why should the EU act? 4.1.Legal basis 4.2.Article 207(2) TFEU is expected to be a sufficient legal basis for the purposes of a policy intervention in the situations of economic coercion, as described below. Subsidiarity: Necessity of EU action 4.3.Subsidiarity: Added value of EU action 5.Objectives: What is to be achieved? 5.1.General objectives 5.2.Specific objectives 6.What are the available policy options? 6.1.Options discarded at an early stage – Option 1: No policy change (also the baseline from which other options are assessed) and Option 3: A “Resilience Office” 6.1.1. No policy change (also the baseline from which other options are assessed) – discarded at an early stage 6.1.2. Option 3: A “Resilience Office” – discarded at an early stage 6.2.Options retained for further analysis – Option 2: A legal instrument and design parameters

7.Impact of the policy options 7.1.General remarks 7.2.Economic impact 7.2.1. Non-EU countries that use or contemplate coercion towards the EU or Member States 7.2.2. International relations 7.2.3. UN Sustainable development goals 7.2.4. EU economic operators and consumers 7.2.5. SMEs 7.2.6. Trade and investment flows 7.2.7. Public authorities (EU, national, regional or local administrations) 7.2.8. EU citizens and society as a whole 7.3.Social impact 7.4.Environmental impact 7.5.Fundamental rights 8.How do the options compare? 8.1.Configuration of policy packages 8.2.Policy packages 8.3.Comparison 8.3.1. Effectiveness or the extent to which the policy packages would achieve the objectives (deter, de-escalate, discontinue, counteract) 8.3.2. Efficiency

8.3.3. Coherence with other EU policy objectives, including the Charter for fundamental rights, and with other policy initiatives and instruments 9.Preferred option 10.How will the actual impacts be monitored and evaluated? Annex 1: Procedural information 1.Lead DG, Decide Planning/CWP references 2.Organisation and timing 3.Consultation of the RSB 4.Evidence, sources and quality Annex 2: Stakeholder consultation – synopsis report Annex 3: Who is affected and how? 1.Practical implications of the initiative 2.Summary of costs and benefits Annex 4: Analytical methods Annex 5: Overview of certain existing instruments and their relation to coercion Glossary Term or acronym Meaning or definition Blocking Statute Council Regulation (EC) No 2271/96 of 22 November 1996 protecting against the effects of the extra-territorial application of legislation adopted by a third country, and actions based thereon or resulting therefrom, OJ L 309, 29.11.1996, p. 1–6; as last amended, OJ L 199I , 7.8.2018, p. 1–6; consolidated text . EBRD European Bank for Reconstruction and Development ECFR European Council for Foreign Relations EESC European Economic and Social Committee EEAS European External Action Service EIB European Investment Bank EU Trade Enforcement Regulation Regulation (EU) No 654/2014 of the European Parliament and of the Council of 15 May 2014 concerning the exercise of the Union's rights for the application and enforcement of international trade rules, OJ L 189, 27.6.2014, p. 50–58; as amended, OJ L 49, 12.2.2021, p. 1–5; consolidated text . EU or Union European Union HS Harmonized System DG TRADE Directorate General for Trade GDP Gross Domestic Product INTA Committee on International Trade of the European Parliament ISG Interservice (steering) group MFF The Multiannual Financial Framework of the European Union Member States The Member States of the European Union NGOs Non-government organisations SMEs Small- and medium-size enterprises TEU Treaty of the European Union TFEU Treaty on the Functioning of the European Union REACH Regulation Regulation (EC) No 1907/2006 of the European Parliament and of the Council on the Registration, Evaluation, Authorisation and Restriction of Chemicals, OJ L 396 30.12.2006, p. 1, as amended; consolidated text . CTEO The Chief Trade Enforcement Officer at the Directorate-General for Trade UN The United Nations US The Unites States of America WTO World Trade Organization WTO Agreement Marrakech Agreement Establishing the World Trade Organization GATT 1994 WTO General Agreement on Tariffs and Trade 1994 GATS WTO General Agreement on Trade in Services TRIPS Agreement WTO Agreement on Trade-Related Intellectual Property Rights 1.Introduction: Political and legal context The initiative for the creation of an anti-coercion instrument originates in the legislative process during 2020 to amend the EU Trade Enforcement Regulation, where the European Parliament and a number of Member States raised concerns about the issue of coercion. This led to a political agreement on a Joint Declaration of the Commission, the Council and the European Parliament, to create a new legislative instrument to deter and counteract coercion. The Joint Declaration contains the Commission’s commitment to make a legislative proposal by the end of 2021 at the latest. In particular, the Commission stated its intention to examine further a possible instrument, which could be adopted in order to dissuade or offset coercive actions by third countries and which would allow the expeditious adoption of countermeasures triggered by such actions, in a manner consistent with international law. The Commission shared the view that the practices to seek to coerce the EU and/or its Member States to take or withdraw particular policy measures were of a concern. The European Parliament and the Council committed to consider the proposal in a timely manner.

These concerns surfaced in the light of the possible imposition of trade-restrictive measures by the US pursuant to Section 301 of the US Trade Act of 1974 following an investigation into the digital services tax adopted by France, a taxation policy which the US viewed and continues to view unfavourably. Such tariffs could have affected French exports to the US of cosmetics and handbags of an estimated trade value of approximately $1.3 billion in 2019. The US did not proceed with measures at the time but this possible action has contributed to increased uncertainty for economic operators and pressure on policy makers. Other examples of coercion, for example involving EU economic operators active in China, are also relevant. Consequently, the issue of economic coercion is of broad concern, as the analysis undertaken in the context of this impact assessment confirms. The Commission President henceforth announced the initiative in her Letter of Intent to the President of the Parliament and President in office of the Council of 16 September 2020 under the heading “An economy that works for people”. The Commission Work Programme 2021 identifies the initiative as a key one for the referenced period. The issue of economic coercion features in the EU’s future trade policy. The Trade Policy Review Communication of February 2021 aims at shaping a new consensus for an open, sustainable and assertive trade policy in a challenging economic and geopolitical context. The Communication mentions the need to navigate rising global tensions with trade increasingly weaponised in a geo-economic context. The Communication specifically refers to a future Commission proposal for an anti-coercion instrument. As set out in the Communication, the current geopolitical environment is characterised by uncertainty, rising tensions between major players and a resort to unilateral measures. The Covid-19 pandemic accelerated these trends while highlighting the interconnected nature of the EU’s economy with third country economies and the need for global cooperation. The present initiative is complementary to other, more structural initiatives to enhance the resilience of the EU economy against external pressures. The update of the EU Industrial Strategy of May 2021 aims at strengthening the single market’s resilience. This strategy now plays a key role in the recovery supported by robust competition and trade policies. Furthermore, in January 2021, the Commission announced in its communication "The European economic and financial system: fostering openness, strength and resilience" a strategy to promote the EU’s resilience in economic and financial matters. This includes inter alia considering additional policy options to further deter and counteract the unlawful extra-territorial application of third-country sanctions to EU operators, notably by amending the EU Blocking Statute. The amendment to the Blocking Statute would (i) include additional deterrence mechanisms and (ii) streamline its application, including by reducing compliance costs for EU persons and businesses. A legislative proposal is foreseen for the second quarter 2022. That initiative is distinct but also related to the present initiative. There could be a potential partial overlap between problems identified by the two initiatives, if there were a situation where unlawful extra-territorial third-country sanctions are applied with coercive effect on the EU or the Member States. 2.Illustrative example To facilitate the reading of this document, the following is a fictitious example which illustrates the problem and the preferred option – as will be elaborated throughout the remainder of this report: Hypothetical example of economic coercion targeting the EU and of possible EU reaction under an anti-coercion instrument: The Commission makes a proposal to the European Parliament and Council to adopt a new regulation to protect the environment in some important respect. This new policy is fully compliant with international law. Country X, however, dislikes it because it harms some of its commercial interests. It therefore imposes an import ban on all widgets from the EU. The explicit motivation of Country X is to force the EU not to adopt or to abandon the new policy. The EU widget industry is a significant source of employment and GDP in the EU and Country X an important export market. The import ban therefore makes it difficult for the EU legislator to adopt or maintain the new policy despite there being a clear political majority in its favour. The EU intends to defend its right and ability to adopt and maintain the new policy. It notifies X that it objects to this interference. It first offers (without success) talks on resolving the matter amicably, then sets a deadline for the removal of the coercive import ban, combined with the warning that the EU will otherwise resort to the adoption of countermeasures (given there is a violation of international law). After expiry, the EU implements prohibitive import duties on certain products originating in Country X, selected after stakeholder consultation and to minimise detrimental economic effects in the EU, at a nearly equivalent value as the widget trade loss, demanding that Country X stop its actions. Country X after few weeks enters into talks with the EU. Both sides first agree to suspend both measures for six months while the talks are ongoing; then agree on the definitive lifting of both measures. 3. Problem definition 3.1.What is the problem? The above-referenced Joint Declaration of the Commission, the Council and the European Parliament on this initiative expressly referred to “practices of certain third countries to seek to coerce the Union and/or its Member States to take or withdraw particular policy measures”. The initiative therefore aims to address this problem and those concerns. Definition The initiative is concerned with economic coercion defined as follows: pressure which foreign countries exercise towards the EU and/or its Member States through most often a trade or investment restriction with the objective of attaining a specific outcome falling within the legitimate policymaking space of the EU or a Member State. It is defined as economic because of the use of economic means for the coercion. The definition is a reformulation of the provisional definition, which stakeholders commented on in the public consultation. Substantively, the meaning is unchanged. Coercion, so defined, can be observed in current international relations in various forms on a broad spectrum of intensity, formality and nature, as also confirmed in the consultation process. At one end of this spectrum regarding formality, the foreign government’s involvement may be very informal, unofficial or implicit, not always easily discernible, but unquestionably existing because it is the impulse giving rise to the coercive measure that aims to put pressure on a foreign actors and hence their home governments. At the other end of this spectrum, the government may be acting openly, officially and through formal measures, such as legislation. Coercive measures by third countries targeting the EU or Member States can be considered a breach of customary international law, which prohibits certain forms of interference in the affairs of another subject of international law when there is no basis in international law for doing so. Whether specific coercive measures constitute a breach would depend on the concrete circumstance in individual cases and will be a matter of case-specific analysis. In such an event, the EU and the Member States have the right to respond to the measures in question with the means which international law allows. These means include the right under customary international law, as codified in Articles 49 et seq. of the International Law Commission’s Articles on State Responsibility , to take countermeasures if the coercive act breaches international law. If this is not the case, the EU (or its Member States) is always entitled to resort to a retorsion, i.e. an act per se not inconsistent with international law. In all instances, the EU (or its Member States) can resort to standard diplomatic means, i.e. make representations to the foreign government in question. However, the principle of conferred powers means that the EU and its institutions can deploy the means existing under international law only when empowered to do so.

Presently, there is no legal framework in any of the existing instruments to permit EU action against a third country to respond specifically to coercive measures of third countries. Existing instruments do not address situations of coercion as identified and defined above and thus are neither suitable, nor capable as a response to coercion. It follows that the EU is unable to respond to coercion in a timely and effective manner, should a need arise, even less so to provide any deterrence effect or legal predictability. The EU has so far not adopted any instruments against coercion. Section 6.1.2 (the baseline) presents the analysis of any other possibilities for a response. Individual elements Deconstructing coercion as defined above leads to the following key elements: Coercive intention – the third country’s objective of attaining a specific outcome lying within the legitimate policymaking space of the EU or Member State; it may affect any area of competence of the EU or a Member States; Target – pressure on private actors as a conduit to public authorities of the EU or Member States (also as subjects of international law); Author of the coercive measure – this can be any government agent or other agent whose conduct is attributable to the country in question. It includes state-owned and state-controlled enterprises. Type of coercive measure – these may be explicit, disguised or silent. Manifestation – predominantly trade or investment restrictions, including also restrictions on financial flows. Explicit coercion would be the use of formal measures for coercion. A well-known example is parts of Section 301 of the US Trade Act of 1974, on the basis of which the US takes or threatens to take trade-restrictive actions because a third country maintains a measure which the US regards as unreasonable and unfairly harming commercial interests of US companies without it being in breach of international obligations. Disguised coercion is the abuse of an instrument which per se could have a legitimate purpose. An observed example is the abusive resort by China to trade defence instruments or the selective stepping up of border checks against goods from a particular country or region. Another example is excessive or discriminatory sanitary and phytosanitary (SPS) measures that are introduced with a coercive intention, rather than being introduced on health protection grounds. The internationally illegal coercion in these cases is unrelated to the question of the possible WTO-illegality of the trade-restrictive measures chosen. Silent coercion and boycotts do not come in the form of legislative or regulatory actions but result from informal restrictions applied by private actors under the unofficial direction of the foreign government (e.g. a boycott of goods or services from certain origins, fomented for example via government-controlled media or through informal instructions) in order to influence a foreign government’s policy. This was for instance the case in Turkey which saw the boycott of French products, or China in respect of a number of European, American, Korean and Japanese companies. Extra-territorial sanctions are formal measures imposed to foreclose commercial activities of foreign operators in another third country. Extra-territorial sanctions are directed at EU (and other) operators with the intention to avoid that these operators might undermine the foreign policy of a third country by continuing to engage in business activities there and by even replacing economic operators of that third country in an environment sanctioned by that third country (“backfilling”). They have the purpose of maximising the effectiveness of the sanctions imposed by the third country. An example is the US sanctions on economic operators active in/with Cuba and Iran. However, they also frequently have the effect of coercing the EU or the Member State in the sense that they create pressure for the EU or the Member State to align its policy vis-à-vis the sanctioned third country with the country imposing the sanctions. Where such extra-territorial sanctions simultaneously coerce the home government of the economic operators they fall under the definition of this initiative. If extra-territorial sanctions do not also coerce the home government of the economic operators in question, they do not fit within the definition of coercion with which this initiative has been launched. However, irrespective of this, businesses and other stakeholders voiced strong concerns about coercion of this type. As noted, extra-territorial sanctions are covered under the EU’s Blocking Statute, which is in the process of being amended so as to deter such practices and better protect EU operators. What falls outside the definition? Extra-territorial sanctions will fall outside the definition where they do not have coercive effects towards the EU or Member States. The definition also does not cover coercion against private actors where the conduct which the third country government desires to obtain from private actors is purely related to these operators’ activities in that third country and unrelated to the public policy of the EU or a Member State. Examples would be attempts to pressure a foreign company into surrendering its assets, to transfer technology or to support certain domestic or international policies of that government, abusive anti-trust or anti-corruption investigations, the arbitrary withholding of licences, or the targeting of specific companies for the positions they or their employees are taking or not taking on any matter of legitimate public interest (e.g. on Hong Kong or Taiwan). A number of business associations suggested that the provisional definition for coercion in the public consultation be broadened in these respects. A recurring argument has been that foreign governments can at times achieve their goal directly by pressuring private operators only, rather than going through and pressuring the economic operators’ home government. Other arguments have been that the coercion against private operators nevertheless amounts to coercion against a government, or that one should not, and sometimes cannot, separate and distinguish the two types of coercion precisely. Private actors can in such cases feel coerced in much a similar way as far as their position and interests are concerned. Legally, however, there is a decisive difference compared with situations of coercion falling under the definition above. In the case of coercion against private actors related to these operators’ activities in the third country in question, this does not amount to prohibited interference in the affairs of another state, on the one hand, but is government conduct that is arbitrary, discriminatory, at odds with the rule of law and, internationally, infringing on human rights, the law of aliens or relevant treaties, e.g. those protecting foreign investors. In the case of extra-territorial sanctions that do not also coerce EU public authorities, the difference is precisely the latter absence of a threat to those authorities’ decision-making autonomy, even if both cases amount to a transgression of the limits imposed by international law on the exercise of territorial sovereignty. This might not be easy to distinguish in all cases, and this would require a determination on a case-by-case by basis. Who is affected and what is the impact of the coercion? Coercion affects the addressees of the coercion, i.e. the public authorities of the EU and/or Member States, by exerting pressure on them to change policy. That can undermine the EU’s open strategic autonomy and the freedom of action for the EU and/or its Member States to regulate within their own jurisdictions. The great majority of the participating stakeholders recognised these effects. At the same time, there is an economic and social impact. The non-EU country channels its pressure through EU private actors. Those businesses engaged in trade or investment in the non-EU country in question are affected directly. In line with what stakeholders report in the consultation, depending on the concrete coercive measure, most often there could be direct economic costs such as loss of jobs and business (opportunities) or investment (opportunities) in the non-EU country in question. That may lead to long-term effects as regards businesses growth and development. Ultimately, economic costs may distort competition and have a spill over effect on the markets. Some stakeholders reported that coercion through trade-restrictive measures contributes to the rise of illicit trade. Additionally, stakeholders reported that even temporary coercive acts influence the purchasing behaviour of local consumers substantially. Stakeholders also report that mere threats of coercion give rise to serious concerns and uncertainties among exporters, destabilising their business strategy even before coercive practices actually occur, and that threats are sufficient to disrupt and jeopardise commercial contractual relations. They add that uncertainty associated with the coercion has a negative impact on innovation and economic development as a whole. Moreover, instances of coercion and their impact remain unreported for fear of retaliation or further coercive measures. Similarly, many companies and even sectors reported experience of coercive conduct by third country governments but would not speak openly about specific experiences.

Coercion may affect any area or sector as it has been observed. Stakeholders stated that there are a variety of areas and sectors that the non-EU country may decide to use for its coercion. They reported a large number of such examples with potentially significant negative impact, among which energy, (new) technology, ICT area, raw materials, financial sector and (critical) infrastructure, R&D, transport, equipment, seeds, ceramics, tiles, furniture, IT/digital industries, textile, footwear, agricultural production, manufacturing, aerospace and defence, chemical, health, retail, product registration, public tenders, public procurement, technical regulations and cooperation with authorities in third countries, services in general, and so on (see results of the public consultation and replies to question 9, in particular, here ). Furthermore, stakeholders observed that a non-EU country may have the means to apply coercive measures instantly or in a very short timeframe, depending on the legal base and domestic system of governance. The speed the coercion may take reinforces the potential negative consequences for the EU public authorities and economic operators concerned as the time for a possible advance reaction is reduced or inexistent. Finally, some coercive measures of the non-EU countries could affect consumers within the EU indirectly if they would produce effects on the EU market. Size and cost of coercion – illustrative examples To illustrate the size and cost of coercion, the report relies on a few selected examples. Those examples were also put forward by stakeholders and are in the public domain. They are by no means exhaustive nor statistically representative. ·In 2020, following an earlier investigation into Australia’s trade practices and at the time of Australia’s advocacy for an independent investigation into the origins and early handling of the Covid-19 outbreak, China reacted in various ways. It levied an 80% anti-dumping and countervailing duty on Australian barley. The Australian national association of grain producers estimated that the tariffs stopped an annual trade worth AUD 1.2 billion (around €750 million) and could cause total costs to the industry of AUD 2.5 billion (€1.6 billion) over the initial five-year period of the tariffs. Around the same time, China applied anti-dumping and countervailing measures on wine from Australia (2019 value of trade of over €700 million). Australian coal was said to disrespect environmental standards, while seafood, beef, copper, cotton, sugar and timber also faced entry barriers. Collectively, these targeted exports to China were worth roughly €15.5 billion in 2019, or 1.3% of Australian GDP. Trade in services is also targeted. Chinese tourism and students were big sources of income for Australia before the pandemic and were singled out as targets. ·In late December 2019, Indonesia “silently” blocked imports of spirits, wine and dairy products from the EU in response to the EU’s regulatory treatment of palm oil as fuel for transportation. With respect to alcohol, Indonesian authorities either refused to grant import licences, or granted partial licences for non-EU products only. The situation started to improve in quarter 4 of 2020, however, only 40% of requested import amounts for 2020 were granted. As a result, EU exports of beer, wine, vermouth and sprits fell by over 60% (€5.9 million) in 2019 and were still 30% less than the pre-ban value in 2020. ·In 2015, Russian authorities threatened to impose a ban on flowers from The Netherlands, which at that time was exporting up to 5% of its flower sales to Russia. Russia alleged that Dutch flowers contained organisms that the EU had failed to recognise as dangerous. This happened at the same time as the Netherlands pointed at Moscow-backed separatists for shooting down Malaysia Airlines flight MH17 with a Russian-made missile and co-sponsored a resolution to set up a UN-backed tribunal to prosecute the culprits. The value of affected Dutch exports was €162 million (HS 0603; in 2014) and they fell by one quarter in 2015 alone, to fully recover only in 2019. ·US tariffs under Section 301 of the US Trade Act of 1974: on 2 June 2021, the US concluded investigations initiated by the preceding US administration under Section 301 into the digital services taxes of Austria, Spain and Italy (and investigations of India, Turkey and the UK), in addition to the previous investigation of France. It opted to enact additional ad valorem import duties of 25% on $3.18 billion worth of goods imported from these four EU Member States because the US considers that each of those countries’ taxes regarding digital services providers is “unreasonable or discriminatory and burdens or restricts U.S. commerce”. At the same time, the application of the tariffs on products from Austria, Spain and Italy was postponed for 180 days, until 29 November 2021, and those on products from France for an indefinite period, with the objective to provide the time necessary to find a multilateral solution at the Organisation for Economic Co-operation and Development. Legally, however, the suspension may be ended at any moment, thus exerting leverage in the tax discussions at the Organisation for Economic Co-operation and Development, or intending to influence the three Member States’ current tax policies or the EU’s or other Member States’ plans for the development of digital services levies. ·As vaccines against the COVID-19 pandemic emerged, two vaccine-producing countries, Russia and China, were described as engaging in “vaccine diplomacy”, meaning that they accompanied vaccine supplies with soft power messages to support their standing or positions. In June 2021, China reportedly succeeded in demanding that Ukraine withdraw from a statement at the UN Human Rights Council in Geneva calling for immediate access for independent observers to Xinjiang, by blocking a large shipment of COVID vaccines until Ukraine do so. Why is this a general problem? Coercive measures restrict policy space in the targeted countries or impose costs on the legitimate use of that policy space. They may affect any area of competence of the EU or a Member States and any sector of the economy, as observed and as reported by stakeholders. They do not allow governments to exercise governmental authority in the interest of the governed people and independently from the demands of the coercing government and without incurring the cost imposed by the coercion. This also has to be seen in the context of the weaponisation of trade, where large economies are taking coercive measures, which have the effect of forcing other countries to act in one way or another trapping EU companies between the two camps. There is large-scale scholarly work that identifies the use and threat of coercion in the current era of global transformation and an increasingly globalized and interdependent world. It has been noted that some actors such as China and Russia are using economic coercion as a foreign policy tool more frequently than they used to, whilst other countries have continued to resort to economic coercion. The ECFR policy brief “ Measured response: How to design a European instrument against economic coercion ” of June 2021 argues that Europe is at ever greater risk of economic coercion coming from several sources, that there is increased coercion of private actors, and points to the use of extra-territoriality and of informal coercion. In illustrating the risk and the problem, it refers to several incidents and types of coercion, such as China’s use of economic punishment to EU businesses and other actors in March 2021 following EU (and US) sanctions on Chinese officials for human rights violations; Russia’s use of public health concerns to ban Polish imports of fruits and vegetables in 2014, following EU sanctions over the war in Ukraine; Turkey’s boycott on French origin goods following France’s announcement of policies to combat extremism; US sanctions on the Nord Stream 2 gas pipeline; US’ use of Section 301 trade restrictions in relation to certain EU Member States’ digital taxation policies; and others. The paper puts forward that the problem lies in the use of economic tools for geopolitical power and geopolitics for economic gain. It argues that there is a gap in the EU’s defence that must be filled. It makes the case for a new legal instrument as a priority. Furthermore, the public consultation showed that economic coercion is a widespread concern for the EU, across the Member States. All stakeholder groups clearly acknowledge the issue and advocate for an appropriate solution. In support of their position, they refer to a number of coercive practices, that affect a variety of sectors and areas (see the results of the public consultation here , in particular replies to questions 1-14, and a summary factual report here ). Other countries’ standpoint as regards the problem

As demonstrated by the stakeholder consultation and as can be observed in the public domain, economic coercion is not a problem faced exclusively by the EU. It is of a wider concern. The sources and subjects of coercion are multiple. In general, other countries’ standpoint as regards the issue of coercion varies. It may also depend on whether the particular jurisdiction contains an available instrument for a specific anti-coercion action or it does not need a specific legislation in order to act against coercion (see results of the public consultation, in particular replies to question 4 on evidence of legislation or unwritten measures that can be used for coercion, here ). Some countries which have been subjected to coercion chose to accept the coercion and sought to minimise the commercial losses suffered. Others may have disguised their responses and kept them outside a rules-based framework. In any event, contrary to other jurisdictions, which may take anti-coercion measures rapidly and without the need for a framework legislation put in place first, the principle of conferred powers requires the establishment of a legal basis in the EU legal order for the EU to act in specific cases such as coercion. Concrete examples of other countries’ actions are presented below. ØAustralia has so far chosen to raise concerns about coercive practices in WTO bodies and to bring WTO disputes against coercive measures when these allegedly infringe WTO rules (barley, wine). Such WTO disputes can only deal with the WTO-inconsistency of the measures in question, not the separate infringement of general international law that lies in the coercive act and intention. The latter does not fall in the remit of the WTO dispute settlement system. Australia does not possess a dedicated anti-coercion instrument. ØCanada has similarly launched a WTO dispute against China in a case involving import restrictions on canola. Canada does not possess a dedicated anti-coercion instrument. ØThe US has started to be active on the issue of economic coercion including by seeking alliances. Secretary of State Blinken mentioned this in certain speeches. The US does not possess a dedicated anti-coercion instrument. ØChina: In June 2021, China adopted a law on countering foreign sanctions. It largely codifies already existing practices but it is expected to give the Chinese government clearer authority to penalise compliance with foreign government's sanctions on Chinese entities and individuals. Accordingly, the law provides legal support and guarantees for Chinese companies against the measures imposed in third countries’ jurisdictions. Additionally, however, it provides for possible countermeasures applicable to a broad pool of targets: any individual and organization directly or indirectly involved in the formulation, adoption and implementation of the foreign sanctions. This could include the foreign legislators, government officials, law enforcement officers, or even banks, or companies that formulate or implement foreign sanctions. It goes even further, by covering the spouses and immediate family members for individuals, and the management or related companies of sanctioned entities or individuals. The possible countermeasures are of a very broad range that includes the denial/revocation of visa, the denial of entry, deportation, the freezing of assets, and the prohibition or restriction on transactions with listed persons, among others. The law complements the existing legislation on related subjects, such as the Export Control Law, the Rules on Counteracting Unjustified Extra-Territorial Application of Foreign Legislation and Other Measures (modelled after the EU Blocking Statute) and the Unreliable Entity List Regulations. This is not a tool, however, to respond to coercion. International forums In May 2021, the G7 Foreign and Development Ministers’ Meeting Statement concluded that the G7 members would work collectively to foster global economic resilience against arbitrary, coercive economic policies and practices. In June 2021, the EU-US Summit concluded with a Statement towards a renewed Transatlantic partnership on, among other things, plans to increase cooperation and information and expertise exchange to enhance resilience against, and counter all forms of, coercion including economic pressure. In July 2021, at a regular meeting of the WTO Council for Trade in Goods, the EU made a statement as regards a point raised by Australia concerning Chinese trade measures. Noting and respecting Australia’s preference to treat the long list of Chinese measures raised on their individual technical merits, including raising them in technical WTO Committees and WTO dispute settlement, the EU expressed concerns as regards the coercive dimension to the matter raised by Australia. The EU noted that, as it appeared, the underlying true reason for the alleged Chinese resort to those measures, that may be formal or informal, is an intention to put pressure on or sanction Australia for policy choices. The EU further noted that such coercion raises questions of international legality beyond and apart from the WTO-consistency. 3.2.What are the problem drivers? The use of economic coercion for geopolitical ends has increased recently, blurring economic and geopolitical lines. Most recently, power conflicts are re-emerging in a more tense geopolitical environment. Foreign countries’ desire to impose their own economic or political preferences to their benefit (different preferences as to economic policies) In certain instances, this is an expression of foreign countries’ desire to impose on others their own economic or political preferences. The motives can be commercial, in the sense of furthering or protecting economic gains for the country’s economic operators. The motives can also be political and related to divergences of views on issues of international relations. In that sense, the coercion can relate to matters of both internal policy and external relations. The objective of influencing partner countries is not illegitimate in itself, and, certainly, there are legitimate means by which to see to do so. However, the (mis)use of trade or investment restrictions with the objective of attaining a specific outcome lying within the legitimate policymaking space of the EU or Member State goes beyond and should be differentiated from the ordinary use of soft powers to influence partner countries. Geopolitical instability with increased tensions over economic governance A separate global trend is recent geopolitical instability with increased tensions between various countries, of varying intensity, and where some of these tensions give rise to measures of economic coercion. As a result, restrictions on trade or investment are being used by various players with the aim of pressurising other countries to modify their policies, even though international law permits those policies and gives no right to other countries to demand those policies change. Interconnectedness of the world economy and enhanced ability to disrupt economic activities in other countries through restrictions on trade, investment or financial flows

What has also changed over the last few decades is the closer integration of the world economy in the form, inter alia, of more complex value chains in the manufacturing sector, overseas investment and intensively interconnected financial systems. These aspects have contributed to an enhanced ability of certain governments to disrupt economic activities by imposing restrictions on trade or investment. Second, as the examples, have demonstrated, there is a recent trend of more frequent recourse to informal or unofficial restrictions. Third, the interconnection of the world economy has given rise to enhanced recourse, and ability to have recourse, to extra-territorial restrictions, because of at least two reasons: the presence of internationally active economic operators in the market of the coercing country, giving the latter the ability to enforce at home concerns relating to activities abroad; and the ability to control certain elements of the international banking system and thereby to prevent or sanction banking activities abroad. Insufficient deterrence on the part of the EU The fact that there is so far on the side of the EU and its Member States no credible and effective instrument or policy of deterrence and response to economic coercion contributes to the ability of other countries to deploy such means. They may be tempted to assume that there will be no reaction and hence that their action is relatively cost-free. For instance, the mere availability of legal means to apply restrictions on EU market access as a response to coercion could be a powerful deterrent but it is currently lacking. In the public consultation, stakeholders largely confirmed that the existing gap plays a role in driving third countries’ recourse to economic coercion. Some highlighted the impossibility to deal with the problem through standard diplomatic means. Additionally, across stakeholder groups, there is convergence that non-EU countries’ use of coercion is often a means for attempting to avoid political, economic or other effects of actions by the EU and Member States, for preventing these from regulating, for imposing the commercial interests of their national companies abroad, as well as for limiting or influencing the conduct of other countries’ economic operators elsewhere in the world. 3.3.How will the problem evolve? The geo-economic tensions that the international order is currently experiencing are unlikely to dissipate in the coming years. On the contrary, there is no objective reason to assume that they will recede in the near future. There are a number of tensions and standoffs in international relations, which are likely to continue to drive coercive policies. The ECFR policy brief “ Measured response: How to design a European instrument against economic coercion ” of June 2021 argues that Europe is at ever greater risk of economic coercion coming from several sources. From a number of countries, including China, Russia and Turkey, the rhetoric in the direction of other countries often takes on coercive tones (see examples reported in section 3.1. and by stakeholders in the public consultation). It has been noted that some actors such as China and Russia are using economic coercion as a foreign policy tool more frequently than they used to, whilst other countries have continued to resort to economic coercion. The US has a new administration that has changed the tone and atmosphere in international interactions and adopted a more cooperative approach towards partners in multilateral frameworks. There is however still legislation in place, such as Section 301 of the Trade Act (and the investigations into digital services taxation ongoing at the time of the public consultation) or several instances of legislation applying sanctions affecting EU operators. It is impossible to tell the approach of future US administrations to international cooperation. There is also a clear tendency to revert to disguised or silent economic coercion, especially by countries whose domestic governance structures enable the respective leadership to transmit instructions to the private sector and state-owned enterprises, without recourse to formal legal acts. In some instances, they rely on the possibility of plausible deniability of their involvement. This trend poses additional challenges because of the more difficult attribution of the action to the government. It, simultaneously, highlights the necessity of holding such governments to account to safeguard the normative force of international law. Stakeholders observe that instances of coercion have been multiplying in recent years and the EU and Member States have been regular targets of coercion. Stakeholders further report cases representing an imminent or medium- to long-term threat, highlighting the expectation that coercion would not subside on its own. Business associations, in particular, but also other stakeholders, give a pessimistic prognosis that the rise of coercive measures will continue. Even the minority stakeholders, which do not appear convinced about a direct need for an EU policy intervention and consequently called for further analysis, yet recognise the existence of the problem, also in the foreseeable future, and that the EU may or should respond and preferably deter potential coercion from third countries. Accordingly, it is considered unlikely that coercion would disappear on its own or even would recede to the more manageable level that tended to prevail in the past. On the contrary, it is expected that it continues unless addressed appropriately. 4.Why should the EU act? 4.1.Legal basis A possible legal basis for the EU intervention is Article 207(2) TFEU. Article 207(2) TFEU provides for the adoption of measures defining the framework for implementing the common commercial policy. Article 207(1) TFEU defines the scope of the common commercial policy, which refers to, inter alia, trade in goods and services, and the commercial aspects of intellectual property, foreign direct investment, export policy and measures to protect trade. The initiative is concerned with foreign countries’ measures that take the form of trade or investment restrictions towards the EU economic operators. The initiative is also concerned with providing a response to foreign countries’ measures primarily in the area of the common commercial policy. 4.2.Article 207(2) TFEU is expected to be a sufficient legal basis for the purposes of a policy intervention in the situations of economic coercion, as described below.Subsidiarity: Necessity of EU action Article 5(3) TEU provides that the principle of subsidiarity applies in areas which do not fall within the exclusive competence of the EU. Article 3(1)(e) TFEU provides that the EU has exclusive competence in the area of common commercial policy. The possible legal basis, Article 207(2) TFEU, falls into the category of exclusive competences. Therefore, the question of subsidiarity does not arise insofar as the third countries’ coercive measures and/or the EU response falls under the common commercial policy. In any event, only an action at EU level would ensure a uniform EU solution to a problem of concern to the EU as a whole. Member States remain, of course, responsible and able to act in defence of their rights under international law; this includes their right to counteract international coercion, as long as they do so without taking measures for which the EU is exclusively competent. However, it is not possible for the Member States to put in place national legislation in order to cover coercion that is targeted against the EU and not against that Member State. Also, national legislation would not be capable of providing an effective solution in the situation of concern to the EU as a whole or across the Member States. EU action remains the sole option under which the EU can implement its obligation to define and conduct the common commercial policy. 4.3.Subsidiarity: Added value of EU action The added value of an action at EU level lies in the achievement of benefits that cannot be achieved sufficiently, if at all, at Member State level. These benefits relate to deterrence and counteraction against coercion by third countries to defend and protect the EU’s and Member States’ autonomy in policy-making and against trade and investment restrictions used for coercion. 5.Objectives: What is to be achieved?

5.1.General objectives In a context of geopolitical instability, the EU aims to safeguard its open strategic autonomy, that is its ability to make its own choices by remaining open and connected to the world whilst protecting itself from economic coercion. The general objectives of the initiative are the following: -Contribute to preserving the legitimate policymaking space of the EU and Member States; -Protect the international rights and interests of the EU and its Member States; -Protect the economic interests of EU economic operators by preventing or limiting economic losses as a result of foreign countries’ coercive actions. 5.2.Specific objectives The analysis of the drivers of the economic coercion shows that it is primarily the choice of non-EU countries to seek to impose their own policy preferences and their enhanced ability to disrupt economic activities mediated by the interconnectedness of the world economy, tied with geopolitical instability, which drives coercion. At the same time, there is insufficient deterrence exerted by the EU or Member States towards those non-EU countries. There are broader efforts by the EU in managing the geopolitical instability and increasing the EU’s resilience. The present initiative focuses specifically on the issue of economic coercion and the EU’s possible response. It has the following four specific objectives: 1)Deter coercion The prime objective is to deter coercion so that it does not take place in the first place. The deterrence effect will arise from the mere existence of an EU framework to tackle coercion specifically, provided that it is effective, credible and can be deployed quickly. Averting coercion, and thus averting harm and the need for counteraction, is the best-case scenario for this initiative. Nearly all stakeholders recognise and support this key objective. 2)Provide for de-escalation Where coercion nevertheless takes place, the objective is to de-escalate the situation such that the coercion is withdrawn without the need for counteracting it directly. This implies that the initiative may involve the use of a first range of responses rather than leading directly to countermeasures. A majority of the stakeholders strongly supports this objective. 3)Induce the discontinuation of specific coercive measures This implies using a range of responses that are capable of inducing the discontinuation of coercive measures. 4)Counteract specific coercive measures (and/or their effects) As a last resort, where all other avenues are exhausted, the EU may decide to counteract the harm which the coercing country is causing. The table below illustrates the intervention logic, notably the relation between the problem, its drivers, the objectives and the envisaged intervention and outcome. Table 1 Intervention logic Problem The pressure which foreign countries exercise towards the EU and/or its Member States through most often a trade or investment restriction with the objective of attaining a specific outcome falling within the legitimate policymaking space of the EU or a Member State. General objectives Contribute to preserving the legitimate policymaking space of the EU and Member States; Protect the international rights and interests of the EU and Member States; Protect the economic interests of EU economic operators; Envisaged intervention Creation of a framework to tackle coercion specifically; Range of responses without countermeasures to choose from in individual cases; Range of countermeasures to choose from in individual cases; Envisaged outcome or intended change Foreign countries do not resort to coercion in the first place; The foreign country ends its coercive measures quickly without EU countermeasures; The foreign country ends its coercive measures quickly as a result of the EU countermeasures; Consequently, the interests of the EU and of the Member States are protected from coercion Drivers Foreign countries’ desire to impose their own policy preferences to their benefit; Enhanced ability to disrupt economic activities in other countries through restrictions on trade, investment or financial flows; Interconnectedness of the world economy; Geopolitical instability with increased tensions over economic governance; Insufficient deterrence on the part of the EU. Specific objectives Deter coercion in a wider sense; De-escalate specific coercive measures Induce discontinuation of specific coercive measures; Counteract specific coercive measures (and/or their effects).

6.What are the available policy options? In light of the objectives, the report considers the following types of policy options: ·Option 1: no policy change (baseline); ·Option 2: a new legal instrument based on several design parameters; and ·Option 3: a “resilience” office. Options 1 and 3 have been considered but are discarded at an early stage, for the reasons explained below. The report retains for further consideration and thus focuses on option 2 as a suitable option and the various parameters for the design of a legal instrument. 6.1.Options discarded at an early stage – Option 1: No policy change (also the baseline from which other options are assessed) and Option 3: A “Resilience Office” 6.1.1.No policy change (also the baseline from which other options are assessed) – discarded at an early stage The no-policy option presents the currently available framework and relation to international law, and discusses whether possibilities for response to the problem exist. The option is discarded because it is found inadequate to address the problem. As a baseline, it reveals a gap in the current legislative framework and accordingly in the EU’s ability to protect its interests and those of Member States from coercion. The following framework as belonging to the baseline is identified: ØInternational law As pointed out in section 3.1, when facing coercion from third countries, the EU and the Member States have the right to respond to this coercion with the means which international law allows. These means include the right under customary international law, as codified in Articles 49 et seq. of the International Law Commission’s Articles on State Responsibility , to take countermeasures if the coercive act breaches international law. If this is not the case, the EU (or its Member States) is always entitled to resort to a retorsion, i.e. an act per se not inconsistent with international law. However, the principle of conferred powers means that the EU and its institutions can deploy the means existing under international law only when empowered to do so. There is currently no such framework specific to an anti-coercion response. ØDispute settlement The possibility to file a lawsuit under international law before an international tribunal does not exist by default because such avenue of adjudication must first be created through agreement between the EU and the third country concerned. The WTO dispute settlement system and the bilateral dispute settlement systems of trade agreements concluded by the EU are available only for addressing breaches and, in the WTO’s case, other cases of nullification or impairment of benefits under the respective agreement. Coercion in breach of customary international law does not feature among the possible claims that can be submitted to these treaty-made dispute settlement systems. There can be instances in which the third country’s coercive measure is both coercive and represents a breach of substantial commitments under the WTO Agreement. For example, if a third country arbitrarily or selectively initiated an anti-dumping investigation against certain EU exports, for instance without there being any evidence of dumping, this would be an example of coercion and simultaneously a substantive breach of the WTO Anti-Dumping Agreement. Likewise, the coercive action could take the form of excessive and discriminatory border checks for sanitary or phytosanitary purposes, or, a selective import ban or higher-than-bound import duties on products from a particular Member State. All such cases can be challenged successfully in the WTO dispute settlement system, and certain countries (Canada, Australia) are bringing such cases at present. However, such WTO cases, where only the WTO breach forms the basis (and claim) for the legal assessment, do not tackle the question of coercion and its illegality under customary international law. WTO dispute settlement, therefore, is no substitute to the creation of an anti-coercion instrument whose purpose is the EU’s defence not against the infringements of its rights under the WTO Agreement, but of its right, distinct under international law, that third countries do not coercively interfere in the EU’s internal or external affairs. However, as already noted, the principle of conferred powers means that the EU and its institutions can deploy the means existing under international law only when empowered to do so, and currently there is no such framework. ØStandard diplomatic means Standard diplomatic means are available and can be deployed but they are not sufficiently effective in all cases. In particular, they may not, and have not, effectively deterred a third country from taking coercive measures or encouraged it to drop such measures. ØArticle 207 TFEU The European Parliament and the Council can act on the basis of Article 207 TFEU to adopt measures defining the framework for implementing the common commercial policy. Article 207 could allow for the adoption of measures on a case by case basis; however, this would be subject to the ordinary legislative procedure which takes considerable time. A case-by-case approach under Article 207 TFEU would not permit to address economic coercion in individual instances in a swift manner, providing a deterrent effect. Framework legislation, which would provide for swift implementing or delegated acts, does not exist.

ØArticle 215 TFEU The Council can act pursuant to Article 215 TFEU to take restrictive measures against third countries and against natural and legal persons, based on a decision in the area of the common foreign and security policy under Article 29 TEU. Article 29 TEU, in turn, is the basis for upholding the values laid down in Article 21 TEU. However, Article 215 TFEU is not a dedicated instrument dealing specifically with the issue of economic coercion, setting out the EU’s overall approach to it and the conditions under which the EU can counteract coercion. It follows that Article 215 TFEU is not an appropriate legal basis to achieve the objectives of this initiative. ØOther existing instruments The Blocking Statute is the EU’s principal tool to counteract the extra-territorial application of laws, regulations, and other legislative instruments of non-EU countries that purport to regulate activities of natural and legal persons under the jurisdiction of the Member States. It applies exclusively to the legal acts listed in its annex (currently only to measures of the US concerning Cuba and Iran although it can be adjusted by delegated act). Whenever extra-territorial sanctions are applied with the intention to coerce the EU’s or Member States’ public authorities, there is an overlap with problems identified by the current initiative. Stakeholders systematically referred to this overlap. It follows that consistency and coherence between the two instruments must be ensured. However, the Blocking Statute is not an option addressing this initiative’s objectives. It does not have a deterrent effect as regards coercion. The baseline scenario could consider solely the Blocking Statute as it stands today. Amendments of the Blocking Statute are under preparation (inception impact assessment published in August 2021, public consultation open until 4 November 2021) in parallel to the present initiative, so as to render it more efficient in deterring extra-territorial sanctions and in protecting EU operators from them. A possible legislative proposal for the amendment the Blocking Statute is expected for quarter 2 of 2022, thus falling outwith the timeframe for the present impact assessment. Some stakeholders (mainly public authorities) referred to several existing instruments. Such instruments would be the trade defence instruments (anti-subsidy measures and safeguards, in particular), the Foreign Direct Investment screening regulation, the Enforcement Regulation, the Foreign Subsidy Instrument, the International Procurement Instrument (the latter two are currently in the legislative process and thus are not in force and deployable yet). These stakeholders argued that in the presence of these instruments, the creation of a new legal instrument is not needed or justified. However, none of these instruments are either designed or able to address specifically the issue of economic coercion because they pursue different objectives and apply to different situations. The legal conditions for their application are unconnected to coercion by third countries, as defined in this document. Consequently, their use with the specific objective of countering acts of coercion would be legally impossible as a matter of EU law, and such use could also be questionable under international law, given the triggers for these instruments are not aligned with the relevant conditions under international law for responding to coercion. As a result, these instruments are not suitable for or capable of addressing economic coercion and they do not fill the gap. It follows that they do not form part of the baseline. Annex 5 contains an overview of these instruments, where potential overlap is claimed, and illustrates that they are unconnected to the problem of coercion. ØNational legislation Specific national legislation to address economic coercion towards individual Member States could not be identified. Member States can, like many third countries, adopt retorsions or reprisals (countermeasures) against other states, based on international law and in line with internal constitutional requirements, which may or may not require the passage of formal legislation. In three ways, however, this avenue is not suitable for tackling effectively the problem of coercion targeting the EU. First, where coercion is directed against the EU and the EU has, under international law, the right to respond, that right cannot automatically be exercised by individual Member States, as a matter of international law. Second, a uniform reaction of the EU would require action at EU level. Third, the exclusive competence of the EU in the area of notably the common commercial policy but also in other areas precludes action at Member State level if the response measures fall into this area. ØInternational initiatives International initiatives in this area have been discussed (see section 3.1) and may offer scope for cooperation in the future. They are an important means in principle and stakeholders attached great value to those. However, such alliances and cooperation are no substitute for the EU’s ability to take action. Moreover, it is relevant to the EU’s ability to take part in such cooperation to have an instrument available at EU level which permits the EU to respond. It needs to be recalled that, whilst the possibility for cooperation may develop further, specific interests may not always align and it is therefore important that the EU maintain the ability to act where cooperation is either not possible or remains too general to address some of the specific problems to be addressed by this initiative. The above demonstrates that the existing EU framework does not provide for instruments to deter and counter coercion in a prompt, coordinated and credible manner. As things stand, the current array of available instruments does not produce a strong and credible deterrence effect. Thus, there is no possibility for taking prompt, coordinated trade, investment or other policy measures or to address the evolving forms of coercion, where the need arises. There is no system to provide for de-escalation, nor to induce discontinuation, where coercion takes place. The baseline scenario is consequently inadequate to address the problem in a comprehensive and satisfactory manner. The baseline reveals a gap in the current legislative framework and accordingly in the EU’s ability to protect its interests and those of Member States against coercion. This conclusion reflects the majority view in the public consultation. The baseline scenario is an unsuitable option for most stakeholders across the groups, in particular in the long-term. They argue that it would allow the coercion to continue and damage EU businesses, including SMEs, the EU’s autonomy in decision-making and the EU’s credibility on the international scene. 6.1.2.Option 3: A “Resilience Office” – discarded at an early stage Option 3 proposes the creation of a dedicated entity either within the Commission or within the EU institutions (commonly referred to as a “resilience office”) with specific functions in relation to the deterrence and counteraction of coercion, which would be complementary to option 2. Thus, it is not a self-standing solution to the issue of coercion, nor an alternative to the anti-coercion instrument. The option has been considered due to the considerable support among some stakeholders. However, it is not retained, at this stage and is discarded as not feasible in terms of being created in this specific instrument, for the reasons set out below. Some business associations, some Member States, and ECFR, put forward the idea of a “resilience office” (also referred to as “watch tower”, “coordination unit/cell”) either within the Commission or within the EU institutions (some suggestions were about a liaison resilience committee linked to the Council as the institution to trigger the use of instrument, and so institutionally outside the Commission). The idea originates in the ECFR policy brief “ Defending Europe’s economic sovereignty: New ways to resist economic coercion ” of October 2020. That policy brief, and references to it in the policy brief of June 2021 on the future anti-coercion instrument, suggest creating a dedicated entity, which should essentially oversee relevant policies and provide better support to EU businesses. Suggested specific functions include: monitoring, information collection and documenting, cost assessment and analysis of economic coercion, investigations, identifying deterrence and countermeasures and assessing their potential impact (across available instruments), providing a corresponding “coercion margin”, contact with third countries, keeping international partners informed about developments, liaison with Member States and access point for businesses, and various assistance and support to EU businesses. There are suggestions about functions also as regards EU sanctions and other foreign economic tools. A Special Representative for Economic Coercion (similar to the Chief Trade Enforcement Officer (CTEO)) could head the office, comprising experts with various backgrounds, and using state-of-the-art analysis tools. The idea resonated with businesses and Member States and came through the public consultation contributions, although no question addressed it. The idea has merits in pooling and coordinating relevant knowledge, expertise, action and assistance on the subject. A dedicated office may well enhance the deterrence function of the instrument. However, this legislative instrument would be the appropriate vehicle to create a resilience office, which, if it were to be created, is rather a question of internal organisation for the Commission or between the EU institutions. At this stage, it can be noted that if an anti-coercion instrument is created, it will fall under the operational responsibility of the Commission’s CTEO. Existing structures are already capable of ensuring effective coordination of policies within the Commission and between the Commission and the EEAS, with the appropriate involvement of the other EU institutions and Member States in line with their respective responsibilities. 6.2.Options retained for further analysis – Option 2: A legal instrument and design parameters Option 2 considers developing a new legal instrument to address the problem of economic coercion and fill in the identified gap. This would be a framework regulation of the European Parliament and the Council allowing EU action in situations of economic coercion under certain conditions. The majority view of stakeholders is supportive of a new instrument. During the public consultation, in response to the specific question on whether an EU policy instrument is needed to tackle coercion, no respondent expressed disagreement; respondents agreed or strongly agreed, or were neutral. Those who were not immediately convinced about the need for a new legal instrument, welcome the approach to have an impact assessment that can examine if a new instrument is justified. Obviously, when it comes to the design of the instrument, stakeholders have various views and some concerns (as discussed below). Moreover, stakeholders defined the need for an instrument as pressing (the majority, among which mostly business associations but also other groups) or as medium- to long-term, or a possible need. The urgent/pressing need was justified inter alia by preserving the EU’s credibility on the international stage and providing a long-term vision, the growing tendency towards the weaponisation of trade and investment measures, geopolitical tensions and tendencies towards protectionism. In light of the four specific objectives for this initiative, presented earlier, the following components are considered to be the main design parameters for drawing up the instrument: (A) Triggers for action; (B) Threshold for action; (C) Possible action; (D) Selection conditions for countermeasures; (E) Decision-making; (F) Activating the instrument; (G) Stakeholders involvement.

This section presents the design parameters and suitable options for them, starting with an overview in Table 2. Section 8 presents the most suitable configurations of parameters and options and examines how they compare, while section 9 identifies the preferred option. Table 2 Overview of design parameters and options under consideration Design parameter Options under consideration (A)Triggers for action (A1) Explicit, disguised, silent coercion and boycotts (A2) (A1) without extra-territorial sanctions (B)Threshold for action (B1) Quantitative threshold (B2) Qualitative threshold (C)Possible action (C1) First resort actions and Countermeasures restricting trade in goods or services, commercial aspects of intellectual property rights, access to EU public procurement market, as well as foreign direct investment (C2) (C1) and Additional countermeasures (C3) (C2) and Financial compensation (D)Selection conditions Effectiveness, minimal damage, minimal administrative burden, general EU interest (E)Decision-making Treaties’ framework: Delegated/Implementing acts (F)Activating the instrument (F1) Complaint mechanism (F2) Ex officio (G)Stakeholders involvement (G1) Comprehensive approach (G2) Case-by-case approach Design parameter (A) Triggers for action The triggers for action are the specific situations of coercion where it would be appropriate for the EU to be able to respond to under the instrument. Determining which situations would trigger a response precisely means addressing the existing gap in the legislative framework. As clarified above, there is currently no legal instrument which enables the EU to act in situations of coercion as identified in this report, in order to address and respond to coercion precisely and directly. Given the multitude of sources of coercion, as discussed in the problem definition, the scope of the trigger ought to be country-neutral in all scenarios and in any option. The parameter is highly relevant for the deterrence value of the instrument because it defines the scope of application of the instrument; the broader the scope, the broader the deterrence effect, but eventually it defines the situations where the EU may adopt countermeasures, if the need arises. The mere identification in a legal act of situations that are undesirable and would attract countermeasures where necessary, should have the effect of discouraging third countries from creating such situations in the first place because third countries are expected to want to avoid countermeasures or other negative effects. The following alternative options are considered as suitable in the respect of establishing of an appropriate scope of application: (A1) The option stands for a comprehensive scope capturing any situation where there is an intention or effect to coerce the EU or Member States into a particular policy choice, by applying any trade or investment restrictions. This can be achieved by introducing these conditions for application in the legal instrument. The fulfilment of these conditions would be assessed in any individual case, and where they are found to be met, the third country’s measure in question would fall within the scope of the instrument and so may trigger an EU response. Therefore, the scope extends to all identified types and manifestations of economic coercion in section 3.1, notably explicit, disguised, silent and boycotts, as well as any other possible action satisfying the conditions. Accordingly, the option comprises instances of coercion towards the EU or Member States also through extra-territorial sanctions (but it does not include instances of extra-territorial sanctions merely used to pressure EU private economic operators which are exclusively addressed by the Blocking Statute). Instances of coercion through extra-territorial sanctions may fall within to the scope where their objective or effect would be to force the EU or its Member States to align their policies towards a target country with the coercing country’s policy as regards that target country, by restricting trade or investment. As referred to in the baseline, the Blocking Statute (currently also being amended) is the dedicated instrument to address extra-territorial sanctions and this is irrespective of their perceived intent towards EU or Member States policies. Therefore, from the perspective of coherence, this option implies a co-existence of two instruments, where both instruments can be available to respond to the same situation, if such arises, but to address different issues (extra-territoriality and coercion). As a matter of co-existence, it could be considered that the Blocking Statute is the leading instrument in relation to extra-territorial sanctions, while the legal instrument for the present initiative can complement the EU’s ability to act under the Blocking Statute in these specific cases of coercion through extra-territorial sanctions.The specific choice of instrument in any given case, can be left for the implementation stage and should be a decision for the Commission to take in specific circumstances. If the specific choice of an instrument is left for the implementation stage, the situation would not be novel. It should be a policy choice between two available avenues guided by the specific circumstances in individual cases taking into account that the legal instrument of the current initiative would be the only one available to address coercion and no other instrument is able to do so. In any event, coherence is achievable. Finally, the scope does not extend to situations of coercion purely against private actors where there is no intention to coerce the EU or Member States (see section 3.1 on what falls outside the problem), but it includes situations of coercion where the third country uses private actors as vectors of coercion towards the EU or Member States. (A2) This is option (A1) but explicitly excluding extra-territorial sanctions on the basis that they have specific distinctive features and are covered by the Blocking Statute and the upcoming amendment thereof. From the perspective of coherence, the exclusion will ensure a delineation between the two instruments with one instrument addressing all coercive measures except extra-territorial sanctions and the other addressing only extra-territorial sanctions. An exclusion would restrict the scope of application as described under option (A1). Design parameter (B) Threshold for action This means that the EU may consider responding to coercion, where the coercive action, which otherwise falls within the conditions of application of the instrument (see discussion under design parameter (A)), reaches a specific level of intensity as opposed to responding to any incident of coercion. It would complement the trigger (design parameter (A)) as it would introduce further layers in the assessment whether an individual coercive measures necessitates an action under the instrument. Reaching a certain threshold however should not result in an obligation to act. It is rather that action would not be appropriate below certain threshold. The parameter is relevant for all the specific objectives and can be particularly effective in deterring coercion. The following options are considered: (B1) quantitative – monetary or economic thresholds, i.e. action considered if the harm (potential or inflicted) reaches a certain minimum monetary or economic threshold; (B2) qualitative – action considered on a case-by-case basis e.g. in light of the degree of encroachment upon areas of the EU’ or Member States’ sovereignty, and the intensity, severity, frequency, duration, breadth and magnitude of the third country’s measures as relevant in individual cases. The impact is not necessarily defined in monetary or economic terms. This type of threshold can also capture a situation of patterns and series of actions and provide for flexibility in the application. This would render the instrument more effective and its use more efficient. Stakeholders in the public consultation are divided on the question of a threshold in terms of its effectiveness and usefulness. the majority were neutral, while those in favour are slightly fewer than those against a threshold. On a related question on whether the EU should respond to each case of coercion, stakeholders were also divided with negative replies prevailing over affirmative and over neutral ones. Those who see the need for a threshold tend to prefer a flexible, case-by-case approach, based on qualitative option. Specific reasons against a threshold include the consideration that any limitation of the scope of application would invite more coercion and be counterproductive for its usefulness, timeliness and or/effectiveness. Some argued that not tolerating coercion of any size as a matter of principle. Design parameter (C) Possible action This is a fundamental design parameter as it concerns the specific action which the EU may take under the instrument and it is of fundamental importance for the effectiveness of the instrument. It is suggested to have a two-step, gradual process. The first step is the same in all options for this design parameter, and it comprises initial measures whose objective and potential is to end the coercion in a manner not involving recourse to countermeasures, without imposing costs on the coercing country or other actors. That step has the potential to be effective also as regards the objective of de-escalation. If that fails in halting the coercion, the second step becomes available (but not mandatory). This entails an array of potential countermeasures and/or financial compensation (to choose from in the concrete use of the instrument), whose objective is to counteract and whose potential is to induce discontinuation of the coercion, i.e. it is interventionist and imposes costs. The launching of each step would be a matter of assessing if the relevant substantive conditions are met and conducting respective procedural steps. Any assessment would be supported by evidence.

The figure below illustrates the sequence of the EU’s main actions in the two-step process, relevant for all options for this design parameter, bringing together the other relevant design parameters. Figure 1 Sequence of EU’s main actions under the two-step process In general, the mere availability of responses towards the third country’s measure, and the range of these responses, has an important direct deterrence effect in the first place because it is reasonable to expect that the mere availability of appropriate response has the potential to discourage a third country from contemplating coercion towards the EU or Member States in the first place as the third country is expected not to want to face such countermeasures or other negative effects. The parameter is also crucial in achieving the other objectives of de-escalation, inducing discontinuation and counteracting. Thus, this parameter is of fundamental importance for the effectiveness of the instrument, as also recognised by stakeholders. Stakeholders across the groups systematically alluded to a gradation in the process of taking action under the instrument. The two-step process corresponds to this. Stakeholders insisted that countermeasures sanctioning the third country must be a last resort. This stems from considerations of the potential costs and negative consequences of countermeasures but also from the idea to curb escalation first through diplomacy and negotiation. Dissenting views included the contention the efforts to reach a diplomatic solution may cause delays in effectively using the instrument, and the use of countermeasures should not be delayed on this account. Accordingly, in light of their potential to bring about effectiveness, the following alternative options are considered as suitable: (C1) A two-step process: initial measures of first resort involving the identification of coercion, and if they fail, measures of last resort: countermeasures. Step 1: Measures of first resort do not involve countermeasures and include the following: a formal determination as regards a coercive measure on the basis of a set of conditions (design parameter (A)), space for a dialogue and negotiations, mediation, undertaking steps towards the joint submission of the dispute to third party adjudication, i.e. an independent international tribunal (while the coercive measures are suspended until at least the end of the adjudicative process). Their objective is to obtain the discontinuation of the coercion in the short term without imposing costs through EU countermeasures (costs to the coercing country and potential costs to the EU economy) and to de-escalate tensions. Some may be appropriate in situations of a threat as well, thus in preventing coercion. This stage does not require any step taken by private actors, it can be exclusively carried out by the EU institutions. The formal determination as regards the coercive measure does not currently exist as a legal possibility because no available legal instrument sets out which conditions should be assessed for such a determination. Thus, a dedicated instrument would deliver this new possibility. Otherwise, the rest of the measures of first resort can be pursued even in the absence of a dedicated instrument (i.e. diplomatic means and resort to adjudication in any event). Nevertheless, it is considered that a dedicated instrument would formalise and structure such possibilities in order to achieve more effectively both the deterrence objective and the objective of inducing discontinuation without the use of countermeasures. Thus, a dedicated instrument would bring about a benefit. ØConditions and criteria for launching the first step As regards the substantive conditions and criteria, there would be an assessment of whether a concrete third-country measure in individual cases falls within the scope of the instrument (design parameter (A)) and whether a certain threshold is reached (design parameter (B)). Procedurally, the assessment may involve gathering of additional information from stakeholders (design parameter (G)). A public affirmative determination at EU level may follow such an assessment (i.e. the first measure under the instrument). The EU may call on the third country to end its measures at this point. Depending on the cooperation of the third country in question, an affirmative determination may lead to subsequent measures, such as direct negotiations, mediation or international adjudication, with a view of ending the coercion. The choice of such subsequent measures would depend on the circumstance of any individual case and may differ from one case to another. Any action under this step should be justified and supported by evidence that the relevant conditions and criteria are met. The evidence base would include elements such as evidence that an individual measure by a third country meets the conditions of application of the instrument (design parameter (A)), and that a certain threshold that justifies action is reached (design parameter (B), evidence of efforts to enter into consultations with the third country in question and of consultation of stakeholders (design parameter (G)) where necessary. Step 2: Measures of last resort (i.e. countermeasures) would include measures under the common commercial policy that temporarily restrict trade or investment. More specifically, the scope potentially extends to the following: -new or increased customs duties and quantitative restrictions on export and import of goods; -additional charges on imported or exported goods; -restrictions on the transit of goods; -quantitative restrictions on imports or exports of goods through quotas, non-automatic import or export licences or through other measures; -new or increased restrictions on trade in services; -restrictions on investments, in particular new investments; -restrictions on the protection of intellectual property rights or their commercial exploitation, in relation to right-holders who are nationals of a third country concerned;

-the exclusion from public procurement of suppliers of goods or services established in and operating from a third country concerned; -a mandatory price penalty on tenders of suppliers of goods or services established in and operating from a third country concerned and/or on that part of the tender consisting of goods or services originating in a third country concerned; -any other restrictions of access to public procurement; -blocking exports of products subject to export control measures (i.e. those that would otherwise be permitted). A similar scope exists under the EU Trade Enforcement Regulation (most notably without investment and with some limitations regarding intellectual property rights, public procurement access and measures on trade in goods), and a further extension should be examined in its review due by February 2022. None of the above types of measures are novel. They are known from various common commercial or other instruments but they are deployable under specific objectives and purposes, distinct from anti-coercion. In other words, in the absence of a respective legal basis, none of the above measures is deployable to address coercion, even less so to deter coercion. Moreover, as mentioned above in the baseline discussion, their use with the specific objective of countering acts of coercion would not only be legally impossible as a matter of EU law, but such use could also be questionable under international law, given the triggers for these instruments are not aligned with the relevant conditions under international law for responding to coercion. In that sense, a dedicated legal instrument would deliver precisely the legal basis to permit the use of the above measures. A new legal instrument would introduce no overlap as no other instrument contains a comparable legal basis for action against coercion. At the same time, the provision of the same or similar types of measures in other instruments with the objective to inducing a third country to comply (for instance, under the EU Trade Enforcement Regulation to induce compliance with a WTO ruling), as well the acquired experience of their application, supports the proposition that such measures are a capable tool to encourage a third country to end its coercion as it would be the objective in the present case. Stakeholders across the groups broadly support this scope in terms of effectiveness and appropriateness, with those in disagreement being in the minority (also across the groups). Moreover, stakeholders felt that this scope is the minimum that the EU should envisage. At the same time, identified sensitivities relate mainly to intellectual property rights, but also to trade in services and in goods, and public procurement, depending on the stakeholder (see section 7). In the use of the instrument, this stage would involve consultations with relevant stakeholders on the economic interests potentially affected by any countermeasures considered as well as by the coercive measure. Depending on the countermeasure in each case, public authorities may need to take action in applying the measure (e.g. levying and collecting customs duties; applying the access restriction to public procurement markets). ØConditions and criteria for resorting to countermeasures The second step of the gradual process, i.e. the imposition of countermeasures, would follow the completion of the first step only where efforts have not led to discontinuation of the coercion and the coercion is still ongoing. In that regard, the substantive conditions and criteria for proceeding with the second step would be that the first step was unsuccessful in ending the coercion and that it remains necessary for the EU and Member States to protect their interests and rights from the ongoing coercion. Before applying countermeasures, the EU would call on the third country in question one last time to end the coercion and find a solution. Procedurally, the second step would also involve information gathering from stakeholders (design parameter (G)) particularly as regards their interests in relation to the design of countermeasures. The choice and design of countermeasures would depend on the circumstance of any individual case and may differ from one case to another. Design parameter (D) discusses in detail the range of conditions for selection and design of countermeasures in individual cases. Any action under this step would be supported by evidence. The evidence base would include the evidence that the measures of first resort were unsuccessful and protection from ongoing coercion remains necessary, consultation of stakeholders as regards their relevant interests, notifications of the third country in question before action is taken, and evidence of the likely impact of potential countermeasures in terms of effectiveness but also collateral damage, proportionality of response, EU’s general interest (design parameter (D) conditions). (C2) Option (C1) with additional countermeasures The two-step approach could be complemented with additional possibilities for last resort responses (option (C1)). These potentially include: -Withholding of EU funding to partner countries through financing managed by the EIB, EBRD or other institutions and other programmes managed by the EU; -Restrictions on authorisations for banking, insurance and other activities (licence); financial transactions, financial services; -Restriction of access to EU capital markets; -Restrictions on registrations and authorisations under the REACH Regulation and the hazardous chemicals legislation or similar actions;

-Listing of companies that would then be subject to various restrictions mentioned above in this list of above (in particular state owned enterprises); -Restriction of access to EU research programmes or exclusion from EU research programmes; -Visa measures – this could, amongst other options, include suspending the issuing of multi-entry visas, suspending optional fee waivers etc. In applying these and other restrictions (listed under C1) it would be necessary to analyse, on a case-by-case basis, the extent to which existing authorisations/permissions/grants should be withdrawn given these might impact an already established legal environment and whether the focus should be on future authorisations/permissions/grants. The availability of such measures in other instruments supports that they have the potential to be effective. Thus, they have the potential to be effective in pursuing the objectives of this initiative. Adding the above countermeasures to the second-step range of actions under option (C1) justifies considering the package as a separate option because of the specificities of the additional countermeasures. The additional countermeasures are not the classic type of common commercial policy measures as under option (C1). They relate typically to other areas but most of them can be construed as belonging to the common commercial policy for the purposes of this instrument. The rest can be construed as belonging to other areas of exclusive EU competence. Stakeholders are generally positive about expanding the scope of possibilities for countermeasures. The main preference expressed is to have a choice of measures that are less costly and burdensome, in particularly on EU businesses (normally tariff measures have costs for EU business which are consuming the products concerned) but that are also effective towards the coercing country (both deterrence and counteraction). Stakeholders put forwards measures such as: restrictions on mutual recognitions, licensing and certification, data flow restrictions or mandatory access to companies’ sensitive data, restrictions on individual persons. Similarly to option (C1), in the use of the instrument, this stage would also involve consultations with relevant stakeholders and possible action by public authorities in applying the concrete measure. As for option (C1), the same conditions and criteria as well as evidence base would be applicable for both the first and second step, respectively. (C3) Option (C2) with the addition of a financial compensation – the two-step approach can be complemented with the possibility to compensate EU economic operators suffering losses either from the coercive measures of the foreign state or from the EU countermeasures. This would require the creation of a fund for use under the instrument and for compensating businesses, with criteria for paying compensation while ensuring a certain degree of flexibility. The need for flexibility results from the difficult predictability of possible level of financing necessary in terms of frequency of the acts of coercion or their impacts in individual cases. Private actors could request compensation and provide data for the losses suffered showing also the actions taken to mitigate losses. There would need to be a designated administrative structure to deal with the requests. The option corresponds directly to the objective of protecting economic operators, but it is also relevant for the deterrence effect of the instrument under the logic that if public budgets absorb the losses from coercion, it will not be (as) effective. Stakeholders were split on this issue. Around half of the respondents in the public consultation (mainly businesses) supported the possibility, while the other half (including public authorities) were sceptical or did not take a position. Some suggested that tariff-based EU countermeasures could fund the specific compensating mechanism. As for option (C1), the same conditions and criteria as well as evidence base would be applicable for both the first and second step, respectively. Additionally for the second step under option (C3) the following would be necessary: assessment of the applicability of the financial compensation, in parallel to the possible use of countermeasures. Design parameter (D) Selection conditions for countermeasures A range of conditions under the instrument could guide and frame the narrowing down of the possible available countermeasures in individual cases. The conditions could assist in calibrating the envisaged measures in any given case so as to manage the risks associated with the instrument (such as provoking escalation, harming international relations and increasing collateral costs). They relate to the following objectives for the initiative: deterrence, discontinuation, counteraction. At the same time, they would be a central part of the evidence base for the use of countermeasures. In light of the specific objectives, the following cumulative conditions are identified: Commensurability – this condition stems from the general principle of proportionality of international and EU law and in practice would mean that the response to a harm must not exceed the harm. A related question is about measuring the harm in order to ensure proportionality. It may be that harm caused by some coercive measures would be more challenging to measure, at least in theory, than in other cases (depending on the availability of data). It would also be the case that the sheer uncertainty caused by the coercive measures is a harm in and of itself. Another aspect of commensurability is the duration of the measures. They should last no longer than what is necessary to produce the intended effect, and be repealed when no longer useful. Stakeholders broadly support having countermeasures in place until the coercion is discontinued. Differing views emerged suggesting countermeasures should be imposed for a limited period of time (e.g. suggestions for a short term of 3 to 6 months) and renewed if necessary, as leverage. Objective of discontinuation of the coercive measure – the condition implements one of the specific objectives of the initiative. In practice, it means that the selection and design of any concrete measures in a given case must seek to achieve that objective. Nearly all respondents agreed with this objective. Seek to provide relief to affected EU economic operators, to the extent possible – this condition is intrinsically linked to the specific objective of discontinuation but it implements the general objective of the initiative that is the protection of economic interests. In practice, the condition would mean that where there is a choice between otherwise equally effective available measures, those that have the potential to provide relief to EU actors should be selected. Smallest possible collateral damage to EU economic operators – this is the cost that is associated with the countermeasures which must be kept to a minimum. In practice, it means selecting those measures, among various available options, that are less harmful for EU actors (industries and consumers). Possible compensation for such actors to encourage them to diversify away from relying on the country taking the coercive actions and can also reduce the collateral damage (option C3)). Smallest possible administrative burden for implementation and application of measures by EU national authorities – this stems from the general principle of avoiding administrative bur