How Europe’s ‘commercial bazooka’ works

Leaders of European Union (EU) countries are under pressure to take measures to respond when US President Donald Trump last weekend threatened to increase import tariffs on eight countries because of the Greenland issue. These countries include Denmark, Norway, Sweden, France, Germany, UK, Netherlands and Finland.

In addition to imposing import tariffs on US goods, according to a plan prepared last year, Europe also has its own tools to deal with trade threats. It is the Anti-Coercion Mechanism (ACI), also known as the “commercial bazooka”.

Through 2023, this tool is designed in the context of the US and China – the world’s two largest economies – becoming increasingly assertive in promoting national interests through import taxes and weaponization of natural resources. According to the regulations, economic coercion is defined when a third country “applies or threatens to apply measures affecting trade or investment, with the aim of forcing the European Union or a member state to terminate, amend, or adopt a specific action”.

Last weekend, President Trump said he would impose import tariffs on eight European countries from February until an agreement to buy Greenland – an autonomous island of Denmark – is reached. In theory, this could be considered coercive behavior.

Last year, the EU considered many retaliation options when the US threatened to sharply increase tariffs on the bloc in April. Brussels then created a list of US products that could be targeted, mainly products of states led by Republican governors. When tensions between the two sides peaked, the EU said it would impose tariffs on 93 billion euros worth of goods, including bourbon, aircraft components, soybeans, poultry and many other items.

However, the bloc ultimately decided not to retaliate and accepted a trade deal with the US. Accordingly, the tax imposed on this bloc’s goods increased threefold, to 15%, while the tax on US industrial goods decreased to 0%. Although the agreement is considered unbalanced and tilted in favor of Washington, the European Commission (EC) believes that it brings clarity and stability to businesses in a difficult geopolitical context.

At that time, the idea of ​​using a “commercial bazooka” was only mentioned and never seriously considered. The reason is that this anti-coercion tool is also considered a nuclear option.

ACI allows the EU to cut off access to the European common market, which currently has 500 million consumers. This tool can limit commercial licenses and the ability to participate in government procurement packages. This means that the European market will be closed to US service providers.

However, ACI is not automatically enabled and takes time to deploy. For many, its real power lies in its ability to deter. Once the “trade bazooka” is launched, the EU sends a clear signal that it is ready to enter a confrontation, with the leverage of the European common market.

According to regulations, when the issue of trade coercion is mentioned, the European Commission has up to 4 months to evaluate the situation and actions of the third country. EU member states will then vote to decide whether to activate the tool or not.

If approved by a majority, the negotiation phase with third countries will begin. When negotiations fail, the EU can deploy a series of other retaliatory measures, not just import taxes.

The tool covers areas from services and investment to access to public procurement. It also allows for measures such as excluding foreign businesses from EU tenders or partially suspending intellectual property protection.

However, the use of ACI requires very careful consideration. The first problem is that ACI has never been used. Member states regularly discuss this instrument, but it is not really known what political and economic consequences it will entail.

Therefore, countries from Germany to Italy have repeatedly warned against implementing this tool too quickly or without a solid legal basis. Using strong measures like ACI with the US could be counterproductive and damage transatlantic relations. Last year, Germany and Italy were also two of the countries that most strongly supported reaching a trade agreement with the US.

In addition to the US, the EU also considered activating ACI after China last year began weaponizing export licensing of rare earths and strategic minerals. These are essential minerals for the European technology and defense industry. However, in the end, the EU still chose dialogue.

This time, to use ACI, EU leaders will have to determine whether Mr. Trump has crossed the line or not and gather enough majority to activate the tool. They have said they will not be intimidated and expressed solidarity with Denmark and Greenland. Denmark has also repeatedly affirmed that it will not negotiate the transfer of sovereignty over Greenland and has rejected any possibility of selling the island.

However, applying ACI will likely lead to a new trade war and escalate tensions between the US and the EU – “the most cohesive economic relationship in the world” according to the EC’s assessment. In 2024, trade turnover between the US and EU will reach nearly 2,000 billion USD, equivalent to nearly 30% of global trade and 43% of global GDP. ACI may therefore only be the “last resort” the EU uses to deal with challenges like these.