China in the Crosshairs as Major Economies Target Economic Coercion

The U.S. and several major allies are strengthening their efforts against economic coercion, a practice they have frequently accused China of utilizing, but the European Union has gone even further by adopting a new policy allowing retaliatory measures.

The U.S., Australia, Canada, Japan, New Zealand, and the United Kingdom issued June 9 a joint declaration expressing “serious concern over trade-related economic coercion and non-market policies and practices that undermine the functioning of and confidence in the rules-based multilateral trading system by distorting trade, investment, and competition and harming relations between countries.”

The declaration specifically highlights coercion that uses or threatens measures affecting trade and investment “in an abusive, arbitrary, or pretextual manner to pressure, induce, or influence a foreign government into taking, or not taking, a decision or action in order to achieve a strategic political or policy objective, or prevent or interfere with the foreign government’s exercise of its legitimate sovereign rights or choices.”

The declaration notes that non-market policies and practices have also been used as tools for economic coercion and raises particular concern over industrial policies and practices that promote excess capacity, pervasive subsidization, discriminatory and anti-competitive activities of state-owned or -controlled enterprises, the arbitrary or unjustifiable application of regulations, forced technology transfer, state-sponsored theft of trade secrets, government interference with or direction of commercial decision-making, and insufficient regulatory and market transparency.

The declaration differentiates between the above measures and those “that are adopted and maintained in a transparent manner, in good faith, and for the purpose of a legitimate public policy objective.” These include health and safety regulations, environmental regulations, trade remedies, national security measures and sanctions, and measures to protect the integrity and stability of financial systems and financial institutions from abuse. The U.S. and others have consistently accused China of taking the former approach while asserting that they utilize the latter, while Beijing has argued the opposite.

It is noteworthy that the declaration does not specify any consequences for economic coercion, which some believe could limit its influence on China’s decision-making. Instead, the signatories pledged to work among themselves and with others to “identify, prevent, deter, and address trade-related economic coercion and non-market policies and practices.” This could take the form of cooperation in World Trade Organization committees and disputes; sharing information, data, and analysis; and exploring “the development of new diplomatic and economic tools that support and reinforce the rules-based multilateral trading system.”

In the meantime, the European Union recently advanced a new policy that does allow retaliation for economic coercion against EU members. The European Commission said that while the Anti-Coercion Instrument “is first and foremost designed to act as a deterrent,” it also allows the EU to take steps to halt coercion when it does happen, starting with dialogue and engagement and progressing to countermeasures such as the imposition of tariffs, restrictions on trade in services, and limitations on access to foreign direct investment or public procurement.

The EU’s new policy is expected to take effect this fall, likely putting the bloc ahead of the U.S., where the White House does not appear to have a defined anti-coercion strategy and Congress has only recently begun to consider the matter. Legislation has been introduced that would authorize retaliatory measures, including higher tariffs on those engaging in economic coercion and lower tariffs on those subject to it, but neither the House nor the Senate has yet taken any further action.