EU to propose trade weapon to prevent China's economic bullying

European Union Commissioner for Economy Paolo Gentiloni gives a press conference following a Eurozone finance ministers' (Eurogroup) meeting at the EU headquarters in Brussels, Dec. 6. AFP-Yonhap

The European Union is set to unveil a powerful new trade weapon that could result in China and other countries accused of economic bullying being shut out of lucrative parts of the EU market.

The anti-coercion instrument will target states that try to "interfere in the legitimate sovereign choices" of the EU or one of its 27 member states "by applying or threatening to apply measures affecting trade or investment," according to a draft proposal seen by the South China Morning Post.

It lays out a large range of punitive actions the EU can take when it is satisfied that coercion is taking place, including tariffs, suspension of market access through the use of quotas or trading licenses, and restricted access to public procurement programs and investment markets.

The move comes as the issue of coercion has been thrust to the top of the EU-China agenda with the spat between Lithuania and China, in which Beijing has been accused of blocking Lithuanian exports after the Baltic nation expanded its ties with Taiwan.

According to the draft proposal, those found to be involved in coercion could be blocked from sourcing goods governed by EU export control guidelines, have their intellectual property rights truncated, be excluded from the bloc's giant financial services or chemicals sectors, or face sanitary or phytosanitary barriers to tapping the EU's food markets.

The document repeatedly states, however, that Brussels sees this instrument as a deterrent and the "last resort" to be used only when other efforts to stop the bullying fail.

"The union should only impose countermeasures when other means such as negotiations, mediation or adjudication do not lead to the prompt and effective cessation of the economic coercion and reparation of the injury it has caused," the draft text reads.

Responsibility for deploying the instrument will lie with the commission, meaning the chances of individual trade actions being blocked by disgruntled EU members at the European Council level are limited, provided the tool becomes law.

Chinese President Xi Jinping / AP-Yonhap

The proposal will be released on Wednesday and then embark on a lengthy legislative process in which it must be approved by the European Council, made up of leaders of the 27 member states, and the European Parliament before being signed into law.

While the genesis of the instrument came as Brussels sought to counter former U.S. president Donald Trump's tariffs, as the process has evolved, China has been central to its thinking ― even though the draft does not mention the world's second largest economy by name.

The instrument will add to a fraught pile of issues that are making this a delicate time for EU-China ties.

On Monday, the EU renewed sanctions for another year on three Chinese officials and one entity for human rights abuses in Xinjiang.

The spokeswoman for the EU's trade directorate, Miriam Garcia Ferrer, confirmed on Monday that Brussels was consulting with both Beijing and Vilnius over allegations that China has removed Lithuania from the list of countries on its customs portal, meaning exporters from the Baltic country are unable to make shipments.

"The Lithuanian authorities have informed us of individual cases of businesses who have been unable to carry out a customs clearance when they endeavor to export to China. We will see whether this is just a one-off or whether this is systematic," she said. "And if that were to be confirmed, we would have to see whether the Chinese action is compatible with WTO rules in parallel. We are also working together with the Chinese authorities to try to seek a clarification."

The Post understands that the EU made contact with Beijing through its delegation in the Chinese capital, while it was reported by Politico that Lithuanian Foreign Minister Gabrielius Landsbergis had written to the EU to ask for concrete support - the second such request within a month.

An EU official, speaking under the condition of anonymity, said that if the allegations of an export blockage were legitimate, they would represent a "clear breach" of WTO rules.

However, they said there is little the EU could do in the short term, with the main tools at its disposal being a WTO case which could take years, or the anti-coercion instrument, which may not be in use until late next year.

The export freeze continued on Monday, according to Vidmantas Janulevi?ius, president of the Lithuanian Confederation of Industrialists, who said that none of his members had been able to confirm an export to China since last week.

Six companies had been affected by Monday lunchtime, he said, in products ranging from hi-tech equipment and beer to wood and meat. When accessing the Chinese customs system, they have been unable to select "Lithuania" as a country of origin, meaning it is impossible to get the export confirmed.

On Monday, five trainloads of organic mineral produce were backed up at Vaidotai railway station, Lithuania's main cargo transit hub, unable to set off for China because of the same technical issue, Janulevicius said.

Around 100 containers full of goods are already on the way from Lithuania to China, with no clarify as to whether they will be accepted at the port when they arrive.

Multiple EU member states have complained for years of Chinese coercion. Sweden faced cancelled business delegations and travel warnings to restrict tourism over recent years after it decided to exclude Huawei and ZTE from parts of its 5G telecommunications network.

But a "blanket ban" on exports, as is alleged to be the case with Lithuania, would be "unprecedented," said Viking Bohman, an analyst at the Swedish National China Centre.

"If China has indeed blocked bilateral trade, I would say that this is a major escalation. I also suspect it would be a clearer case for the WTO. And it also says that China seems to be willing to go further and further with its economic coercion and measures. This is not just one specific incident; we see that the magnitude and frequency of this action actually appears to have grown in recent years," he said.

While Lithuania's situation has put the issue on the news agenda, EU members are torn on whether such an instrument is required. An EU diplomat involved in discussions said a group of diehard free traders led by Sweden have been "outspoken" critics of the tool, while France has been its most vocal supporter.

In official feedback submissions posted to the EU website, the Swedish and Estonian governments urged the EU to work within WTO rules, as did a submission from Japan.

"As far as possible, we should avoid weaponizing EU trade policy and contributing to an arms race, particularly at a time when trade policy relations with the US have improved under the new U.S. administration," read a submission from Sweden's National Board of Trade.

A Japanese government submission urged the EU "to carefully examine possible negative impacts on the international trading system of the implementation of the initiative."