Overview
On September 19, 2022, the European Commission (“Commission”) presented the Single Market Emergency Instrument (“SMEI”), a crisis management framework designed to secure supply chains of “identified, strategically important goods and services” within the European Union (“EU”) during times of emergency. The SMEI was introduced as a response to the significant structural issues in the EU’s supply chain of critical goods and services, which were highlighted by the COVID-19 pandemic. Comments on the Proposed Regulation are currently due on December 17, 2022.
Summary of the Proposed Single Market Emergency Instrument
Under the Proposed Regulation, the Commission would be granted executive power to ensure the availability of critical goods and services under certain enumerated circumstances. In particular, the Commission, pursuant to advice and assistance from Member States through an advisory group, would be able to restrict or permit production or the movement of critical goods, as well as direct companies to provide certain information or to prioritize production of critical goods.
The proposed SMEI framework classifies risk to the Single Market into three stages.
1. Contingency. During times of non-emergencies, Member States are encouraged to establish crises protocols and early warning systems for potential threats to the Single Market, including “administrative arrangements for timely cooperation and secure exchange of information between the Commission, the relevant Union-level bodies, and member States.”
2. Vigilance. The Commission will have the authority to initiate the vigilance stage when a threat to the supply of critical goods and services in the Single Market has been identified. During the vigilance stage, the Member States, with the Commission’s participation, must identify the most relevant economic operators of critical goods and services, and monitor the supply chains of such goods and services. Member States will have the authority to request voluntary information from the most relevant operators regarding information pertaining to the availability of critical goods and services. Additionally, the Commission may require Member States to stockpile critical goods in preparation for a Single Market emergency.
3. Emergency. The emergency mode can be activated only if the vigilance mode has been previously activated. The European Council (“Council”) must pass an implementing act to make such a decision. The following are key emergency measures that will be implemented with the activation of the emergency mode:
- Member States cannot introduce intra-EU export bans on critical goods and services, or restrict critical goods and services, in a manner that is disruptive to the supply chain or create shortages of such goods and services in the Single Market.
- Member States cannot restrict the movement of people or services in a manner that will disrupt the supply chain of critical goods and services, unless “inherent to do so to the nature of the crisis.”
- Member States must notify the Commission of any draft measures restricting the movement of goods and services relevant to the crisis, as well as provide justification for enacting such measures. The Member State in question must postpone the adoption of the draft measure for 10 days to allow the Commission and the advisory group to examine the draft measure and provide comments, except where immediate action is needed due to serious and unforeseeable circumstances. The adoption of the draft measure may be further delayed, for instance, if the Commission finds that the draft measure is not consistent with EU law.
- The Commission may invite or compel (only when dual activation emergency measures have been implemented) economic operators in crisis-relevant supply chains to accept and prioritize certain orders for the production or supply of critical goods (i.e. “priority-rated orders”). If an economic operator cannot fulfill or accept a priority-rated order, it must provide justification.
4. Dual Activation Emergency Measures. Upon passage of a further implementing act during an emergency mode, the Commission may compel economic operators in crisis-relevant supply chains to provide information and redirect production towards priority-rated orders, at the risk of penalties.
- If an economic operator “intentionally or through gross negligence, supplies incorrect, incomplete or misleading information in response to a request . . . or does not supply the information within the prescribed time limit,” the Commission may impose monetary fines up to 200,000 Euros. The imposition of fines also applies to instances in which operators, either intentionally or through gross negligence, fail to comply with or accept priority-rated orders, or fail to prioritize certain priority-rated orders.
- In addition to compelling economic actors to provide information, the Commission may allow certain critical goods to be placed on the Single Market through targeted derogations of the harmonized product legislation.
The emergency mode can be activated for a maximum of six months. However, it can be extended in six-month increments, if the Commission proposes an extension no later than 30 days before the expiry of the activated period.
Notwithstanding the above, the proposed SMEI is intended to complement existing EU crisis management frameworks. Based on the proposal, the SMEI would apply, without prejudice, to certain crisis-relevant provisions under existing EU Regulations, including the Union Civil Protection Mechanism. However, specialized crisis response and preparedness frameworks provided in recently proposed initiatives (e.g., European Chips Act) will take precedence over the SMEI.
Comparing the Proposed SMEI against the U.S. Defense Production Act of 1950
In proposing the SMEI, the Internal Market Commissioner of the EU, Thierry Breton, commented that the SMEI would allow the EU to be equipped with tools that its trading partners have, such as the U.S. Defense Production Act of 1950 (“DPA”).[1] Specifically, Commissioner Breton commented on the use of the DPA to “oblige companies to accept priority rated orders” in response to the COVID-19 pandemic.
There are a few similarities between the proposed SMEI and the DPA. For example, they both require companies involved in the production of critical goods to prioritize certain orders. However, the DPA appears to grant the U.S. President broader authorities than those that would be conferred on the Commission under SMEI. First, the DPA confers authority to the President to act in times of non-emergencies so long as the acts are to support “national defense” (e.g., activities related to the military, emergency preparedness, “homeland security, stockpiling, space, and any directly related activity”).[2] With respect to use during emergencies, the DPA has been invoked extensively as of late, and the authorities available to the President seem to go significantly beyond what the proposed SMEI framework would grant the Commission. Recent measures implemented by the Biden Administration under the DPA include actions to increase production of COVID-19 vaccines, diagnostic tests, and protective equipment; ensure the supply of infant formula; and, most recently, accelerate clean energy production in the United States.
Key similarities and differences between the SMEI and the DPA are summarized in the table below:
| SMEI | DPA |
| Restrictive measures can be imposed only when emergency mode is activated by the Council; more restrictive measures require dual activation by the Commission | Restrictive measures can be imposed by the President as long as it is “necessary or appropriate to promote national defense” |
| Recommend economic operators to retool, repurpose, or expand production of crisis-relevant goods during vigilance and emergency modes. Require economic operators to prioritize or expand production of critical goods only if dual activation measures have been implemented by the Commission | Require performance or acceptance of priority-rated contracts or allocate materials, services, and facilities to priority-rated contracts that President deems necessary or appropriate to promote national defense |
| Require stockpiling of critical goods | Require stockpiling of critical goods |
| Impose fines on economic operators that fail or provide incomplete or misleading response, up to 200,000 Euros | Impose penalties of fines and/or jail time for failing to accept or perform on priority-rated contracts |
| No intra-EU export bans/restrictions of critical goods and services | No similar provision; see below |
| No similar provision | Allocate or control the distribution of goods and services (e.g., prevent price gouging and hoarding of critical goods, impose export bans of critical goods) |
| No similar provision | Provide economic incentives (e.g., loans, loan guarantees) to secure domestic industrial capabilities during periods of emergency, or, if the incentives are the most “cost-effective, expedient, and practical alternative” ways of meeting national defense needs |
| No similar provision | Enter into voluntary agreements with private industry to provide for the national defense, providing legal defense to contracting parties for actions that would otherwise violate antitrust or contract laws |
| Compel companies producing or supplying critical goods and services to provide supply chain information, only if dual activation has been implemented by the Commission | Compel businesses to provide necessary or important information for the administration of the DPA through subpoenas |
| Require conformity assessment bodies to prioritize conformity assessment applications of critical goods and presume conformity of critical goods if they meet comparable national and/or international standards | No similar provision |
| Request the Commission to procure critical goods and services on behalf of Member States | Ensure timely procurement of material and services for the production or provision of critical goods and services |
As the chart demonstrates, while there are similarities between the proposed SMEI and the DPA, the DPA goes further in the types of emergency measures that can be implemented by the President. Based on this comparison, certain emergency measures under the DPA that were undertaken throughout the COIVD-19 pandemic, such as making investments into special projects to increase production of medical supplies and to reduce foreign reliance, as well as preventing 3M from exporting respirators from the United States, would not be feasible under the SMEI.
Conclusion
The proposed expansion of the Commission’s powers in the SMEI proposal has been met with criticism across EU industries. Trade groups, such as Germany’s VDMA and the Eurochambres, have expressed concerns with the Commission’s authority to impose certain restrictions or obligations on companies in the production of certain critical goods, as well as the impact the SMEI might have on labor rights of employees involved in the production of critical goods. Moreover, concerns have been raised regarding SMEI’s potential impact on other EU regulations with respect to supply chains and even other EU proposals aimed at ensuring sustainable supply chains. While the most restrictive and coercive measures under the SMEI would be limited to times of emergencies, some remain concerned with the discretion granted to the Commission to extend and/or renew the emergency mode to maintain emergency authority. Also, EU Member States have expressed concerns regarding the SMEI.
[1] 50 U.S.C. §§ 4501 et seq.
[2] 50 U.S.C. § 4552.
