EU Trade: 2021 Takeaways, 2022 and Beyond – What to Expect

2021 was an eventful year for international trade law and policy in the EU, with developments in several key areas. The EU strengthens its trade policy toolbox In the light of the recent ongoing problems with multilateralism and the continuing rise of China, the EU focused hard on strengthening its trade enforcement toolbox in a wide variety of trade related areas. This includes the use of recent tools and proposals for new instruments:

• The Amended Trade Enforcement Regulation entered into force on 13 February 2021. This greatly expands the EU’s capacity to adopt trade countermeasures against third countries. It can now do so even before dispute settlement proceedings at the WTO or under other international agreements have been concluded if these are blocked by the other party. This would include, for instance, situations where a trading partner appeals an adverse panel report “into the void” to the non-functioning Appellate Body at the WTO, as well as in relation to a broader range of violations. The Commission is due to undertake a review of the Trade Enforcement Regulation, to consider additional commercial policy measures in the field of trade-related aspects of intellectual property rights, by 13 February 2022.
• The FDI Screening Regulation, which has been in force since the end of 2020, has led to a growing number of FDI mechanisms notified or updated by Member States to the European Commission throughout 2021 (see here). For the EU, which did not have a role in FDI screening prior to this, this mechanism is starting to become a game-changer. In November 2021, the Commission published its first annual report on the screening of foreign direct investments into the EU. Of the 265 cases notified to the Commission between 11 October 2020 and 30 June 2021, 80% were closed by the Commission in Phase 1, whereas 14% of cases proceeded to Phase 2, with additional information being requested from the notifying Member State (the remaining 6% were still under assessment on 30 June 2021). The Commission issued an opinion, with recommended measures, in less than 3% of the notified cases. Actual prohibitions of investments by Member States appear to be limited for the moment, although there have been such instances (like Italy’s prohibition of the proposed acquisition of control in LPE, an Italian semiconductor equipment company, by a Chinese company). Moreover, parties sometimes abandon envisaged transactions prior to a formal prohibition. The imposition of conditions appears more common.
• On 5 May 2021, the Commission published its proposal for a new Regulation to address distortions by foreign subsidies. The Regulation introduces three new instruments that would give the Commission the power to investigate foreign subsidies granted to companies active in the EU and identify whether they are causing distortions in the EU single market. Should the Commission identify distortive foreign subsidies, it could impose redressive measures to counteract their effects (see our blog post describing the Commission’s proposal here). If adopted, which currently appears likely, it would give the Commission far-reaching new powers. The Committee on International Trade, the leading committee in charge of the file within the European Parliament, has released its draft report on the proposal on 17 December 2021, generally supporting the new instruments and suggesting additional protections against home-market monopoly advantages and known future subsidies.
• On 8 December 2021, the Commission published a proposal for a new anti-coercion instrument. The aim of this instrument would be to deter and, if necessary, retaliate against third countries exerting economic coercion against the EU or its Member States in order to influence their political decisions and policy choices (see our blog post describing the Commission’s proposal here). This is another example of a novel instrument in the field of trade that would grant the Commission with robust powers to address trade policy issues.
• Negotiations on a proposed new International Procurement Instrument have also progressed in 2021. This instrument would enable the EU to limit, on a case-by-case basis, access to its public procurement market by companies from third countries which restrict access to their own procurement markets by EU businesses. This would represent a significant overhaul of the EU’s current public procurement system, which is currently one of the more open ones globally.

The EU has also had a strong focus on the green transition and sustainability in 2021, with several proposed measures in this field having a trade policy angle:

• On 14 July 2021, the Commission adopted a controversial proposal for a Regulation establishing a carbon border adjustment mechanism (CBAM). The CBAM aims to address the problem of ‘carbon leakage’, whereby, due to costs related to the EU’s climate policies, businesses move their carbon-intensive production abroad to take advantage of laxer standards. The CBAM aims to equalize the price of carbon between domestic products and imports by requiring EU importers to buy “carbon certificates” reflecting the carbon price that would have been paid under the EU's carbon pricing rules in carbon intensive sectors (see our overview of the Commission’s proposal here). The proposal has seen strong opposition from certain EU trading partners, which has allegedly softened since the UN COP 26 Climate Change Conference. The Committee on Economic and Monetary Affairs of the European Parliament has recently adopted a draft opinion in which it proposes to, inter alia, extend the scope to cover also oil, paper, glass, plastics, chemicals and downstream products.
• Further to the Commission’s announced plans to develop a legislative proposal that would require EU companies to conduct mandatory human rights and environmental due diligence on their supply chains, the European Parliament adopted a Resolution proposing a draft text on 10 March 2021. The Commission’s proposal has not yet been published, with an internal power struggle on the scope of the measure casting uncertainty on its future. Further muddying the waters, the Commission President announced an import ban on products made by forced labour. An import ban was however quickly called into question by the EU Trade Commissioner, who referred to the upcoming due diligence proposal as an “effective way” to address human rights violations, including forced labour.
• On 17 November 2021, the Commission presented a proposal for a Regulation on deforestation-free products. This Regulation would aim at curbing deforestation and forest degradation driven by EU consumption and production. Specifically, it would prohibit the placing or making available on the EU market, or the export therefrom, of certain commodities, unless they are: (i) deforestation-free; (ii) produced in accordance with the relevant legislation of the country of production; and (iii) covered by a due diligence statement (see our blog post describing the Commission’s proposal here). Similar rules are being introduced in the U.S. and the UK (see our blog posts here and here). Affected trading partners are critical of the EU proposal as it is argued that it would impinge on sovereignty and risks becoming a trade barrier. At the same time, questions are being raised by others as to the effectiveness of the EU proposal..

With 2021 being a consequential year for EU trade policy, it appears that 2022 will be no less eventful. The new trade enforcement tools and the instruments related to the green transition and sustainability mentioned above will continue to go through the legislative procedure, and at least one could even be adopted in 2022:

• Foreign Subsidies Regulation –Adoption of the regulation may take place as soon as 2022, with legislative discussions ongoing.
• Anti-coercion instrument – the Commission’s proposal will go through the ordinary legislative procedure in 2022, with adoption possibly taking place in 2023.
• International Procurement Instrument – negotiations over the text are likely to continue in 2022.
• CBAM – debate in the leading environment committee is scheduled for February, with a vote within the European Parliament in May this year. The aim is for it to be adopted in 2022, to enter into force in 2023, and to become fully operational in 2026 (after a 3 year transition period). The Committee on Economic and Monetary Affairs of the European Parliament in its aforementioned report, however, suggests to advance the timing to become fully operational to 2025.
• Mandatory due diligence legislation – the Commission's proposal is expected in 2022, after significant delays (it was originally scheduled for Q1 2021).
• Regulation on deforestation-free products – the Commission’s proposal will go through the ordinary legislative procedure in 2022, with adoption possibly taking place in 2023.

An active year for EU trade defence EU trade defence investigations have also seen a number of notable and novel developments:

• There has been a continued growing scrutiny of foreign subsidies in trade defence investigations, including in anti-dumping investigations. The EU’s 2021 overview of its trade strategy even highlighted that the Commission should use trade defence instruments (TDI) to track new forms of subsidization by third countries, for instance, in the area of investment financing. This should be seen in the wider context of the EU’s focus on tackling foreign subsidies (see above).
• Duty suspension – a tool that has for a long time remained unutilized – is now being considered in a number of trade defence investigations. This is a result and response to unprecedented global supply chain disruptions resulting from the COVID-19 pandemic, and in particular the supply and demand imbalance in the EU market. This situation has triggered a number of requests for suspension in the framework of ongoing investigations and in relation to measures that are already in force. In a surprise move, which has already been challenged, the Commission already took a decision on 8 October 2021 to suspend anti-dumping duties on aluminium flat-rolled products from China.
• China is still the country most targeted by trade defence investigations (albeit less so than in previous years). 2021 has seen 12 new investigations, 4 of which targeting China (as compared to 15 new investigations in 2020, 8 of which against China). The EU’s new dumping methodology under Article 2(6a) is now regularly being applied in anti-dumping investigations initiated against China.
• On 17 December 2021, the Commission initiated an investigation to review the EU’s safeguard measures that have been applicable on certain steel products since the beginning of 2019. The review investigation will take into account, inter alia, the impact on trade flows that may result from the changes to the US Section 232 measures agreed between the EU and the US in October 2021.

Trade defence will also remain high on the agenda in 2022 and beyond:

• Decisions on a number of suspension requests are expected in early 2022. The Commission is in the process of examining suspension requests in several ongoing investigations (iron or steel fasteners, calcium silicon and graphite electrodes system from China) as well as existing anti-dumping duties on products such as urea and ammonium nitrate (UAN) from the USA, Russia, and Trinidad and Tobago, polyvinyl alcohol (PVA) from China, aluminium converter foil from China, and various stainless steel goods from China, India and other countries.
• The safeguard review investigation is set to be concluded by 30 June 2022 at the latest.

China Since having named China an economic competitor and systemic rival in 2019, the EU relationship with China has become more contentious and a key underlying element in much of EU (trade) policy, with several actions having been taken:

• The Commission’s trade policy Communication of February 2021 sets out building a fairer and rules-based economic relationship China as a key priority. The Commission describes the EU’s current policy on China as a combination of active engagement (both at bilateral and multilateral level) and parallel development and implementation of domestic instruments necessary to protect EU businesses and ensure a level playing field.
• The Comprehensive Agreement on Investment (CAI) was agreed in principle between the EU and China in December 2020. Widely criticized in the EU and beyond, its ratification was blocked in May 2021 by the EU Parliament in opposition to Chinese sanctions on EU individuals and entities, as well as wider human rights and other policy issues.
• China is the elephant in the room regarding many of the new enforcement trade tools discussed above. While seemingly origin neutral and in principle applicable to any third countries, China is often a key underlying concern of the EU. This is especially the case concerning the EU’s new FDI Regulation, the proposed Foreign Subsidies Regulation, and the proposed anti-coercion instrument.

Unsurprisingly, the trade relationship with China will also stay high on the agenda in 2022 and beyond, with at least two high profile issues dominating the agenda:

• The ratification of CAI is currently blocked, and Members of the EU Parliament have stated that they will not consider ratification until Chinese sanctions on EU individuals and entities are lifted.
• The end of 2021 saw a crisis unfold between China and Lithuania, after Lithuania allowed the opening of a new representative office under the name of “Taiwan”, rather than China’s preferred “Chinese Taipei”. In response, China has allegedly blocked customs clearance of Lithuanian imports (China has not publicly announced any ban on Lithuanian products). It is speculated that, if this situation continues, the EU may take China to the WTO over its alleged measures against Lithuania.

US After a contentious period of transatlantic relations under the previous US administration, the EU has been working on rebuilding the relationship with the US, in particular in the field of trade policy:

• During the EU-US Summit that took place on 15 June 2021, the two blocs agreed to set aside some of their differences and collaborate on a number of new trade initiatives. These include the creation of a new Cooperative Framework for Large Civil Aircraft, aiming to overcome longstanding differences over subsidies in this sector, and avoid future litigation. In the context of this initiative, both sides agreed to suspend application of their countermeasures for a period of 5 years.
• The EU and the US also launched the EU-US Trade and Technology Council (TTC) at their summit on 15 June 2021. This will be a forum to coordinate approaches to key global trade, economic and technology issues (see the Joint Statement). The TCC includes 10 Working Groups, and, notably, a dedicated track on semiconductor supply chains focusing on diversification and coordinated investment in this sector. The next meeting is likely to be held in the spring.  Previous transatlantic fora have a mixed record of success, but it is possible that the two sides could reach agreement in certain areas where there is common concern regarding China.
• On 31 October 2021, the EU and the US adopted a Joint Statement on Steel & Aluminum, whereby they agreed to:
  • the removal of US tariffs on $5.5 billion of EU steel and $1.2 billion of EU aluminium exports;
  • the suspension of EU retaliatory tariffs; and
  • the suspension of their respective WTO cases over the steel and aluminum tariffs.

UK While the first of January 2021 may have been the first “real” day of Brexit, with the end of the Brexit transition period, Brexit continued to dominate the headlines throughout 2021:

• There have been ongoing demands by the UK for the Northern Ireland Protocol to be revised, together with threats to formally trigger the safeguard mechanism laid down in Article 16 of the Protocol. The UK argues that this would be justified, as the Protocol’s implementation has been disrupting trade between Northern Ireland and Great Britain and giving rise to political instability and disorder in Northern Ireland.
• There have also been growing tensions between France and the UK over the issuance of post-Brexit fishing licences, with France accusing the UK of unduly rejecting the applications of many small French fishing vessels. At the end of 2021, a French minister even indicated that France would be willing to launch EU-UK TCA dispute settlement proceedings against the UK over fishing rights in early 2022.
• Post-Brexit formalities have resulted in significant delays and other supply chain issues affecting the trade of goods to and from the EU in 2021.

Brexit will certainly continue to make headlines in 2022, but much depends on how the negotiations regarding the Northern Ireland Protocol will unfold. Triggering by the UK of Article 16 would lead to imposition of “safeguard measures” and retaliatory measures by the EU in response – and could further lead to dispute settlement proceedings between the two blocs or even partial (or complete) termination of the EU-UK TCA. However, based on the current status of negotiations this has become somewhat less likely than it was a month or two ago. WTO – multilateral trading system The (dis)functioning of the WTO has also been on the EU’s trade agenda. The EU has expressed its intention to pursue reform of the WTO, including through new rules to avoid distortions of competition due to state intervention and negotiations to restore a fully-functioning WTO dispute settlement with a reformed Appellate Body. However, with the US still not having lifted its blockage of appointments to the Appellate Body, it remains to be seen whether much, if any, progress will be made on this front in 2022.

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