The EU Plans to Respond to the Trump Tariffs: What You Need to Know

The Trump tariffs

In our briefing of 27 February, we examined the EU’s plans to respond to Trump’s tariffs. Since then, there have been a number of developments. In addition to tariffs on imports from China, Canada and Mexico, and imports of steel, aluminium, and cars and car parts, President Trump has now imposed so-called ‘reciprocal tariffs’ on almost all countries in the world, regardless of whether they have a free trade agreement with the United States.[1] These tariffs are not consistent with WTO law. As explained in our previous briefing, under WTO law members agree upon the maximum (‘bound’) tariffs which they can impose on imports from other WTO members. They cannot impose tariffs above these amounts, unless specific circumstances exist which justify this action.[2]

Target country reactions

These tariffs have provoked reactions worldwide. Canada and China (and Hong Kong, an independent WTO member) have commenced WTO proceedings. In addition, China has announced that it will impose a 34% reciprocal tariff on US imports (after having already imposed reciprocal tariffs in response to Trump’s first set of tariffs earlier this year, albeit on a targeted basis). And a number of other countries have similarly indicated their intention to retaliate against the ‘reciprocal tariffs’. 

EU response: the legal framework

This updated briefing explains the two main tools that the EU has its disposal to respond to the Trump tariffs, both, incidentally, with a history dating back to the first Trump administration. 

The first tool is the EU’s Enforcement Regulation (Regulation 654/2014), which permits the EU to adopt ‘rebalancing measures’ in several scenarios, including when another country adopts safeguard measures against an unexpected flood of imports. The second tool is the EU’s Anti-Coercion Instrument (Regulation 2023/2675) (ACI), which was inspired by the US threatening to impose tariffs on EU imports during the first Trump administration in response to EU member state digital services taxes. 

The Enforcement Regulation

The Enforcement Regulation was established in 2014 to enable the EU to respond quickly to ‘safeguard’ measures (which are a type of ‘force majeure’ import restrictions to protect domestic industry).[3] When the first Trump administration imposed global 25% steel and 10% aluminium tariffs, the EU invoked the Enforcement Regulation to impose ‘rebalancing’ tariffs on a set of US products chosen for their economic and/or political importance. These included steel and aluminium, agricultural products, denim jeans, Harley Davidson motorcycles, bourbon whiskey, as well as makeup, tobacco and various other products.

In 2020, following a negotiated exemption from US tariffs under the Biden administration, the EU retaliatory tariffs were suspended – but only until 31 March 2025. This suspension has now expired, and the EU is expected to reimpose these tariffs – now valued at €8bn annually – along with new retaliatory tariffs worth an additional €18bn annually.

But there is a twist. The US justified its original steel and aluminium tariffs as a national security measure, not a safeguard measure. Moreover, in 2018, when China instituted WTO dispute settlement proceedings against the US steel and aluminium tariffs, the WTO panel in that case agreed with the national security rationale (even though the conditions of the national security exception in the GATT were not met).[4]  This ruling is not formally binding as a matter of WTO law, because – in another twist – the US appealed it to the (currently non-existent) WTO Appellate Body. But if this characterisation is correct, then the EU’s invocation of the Enforcement Regulation is itself legally fragile.

Anti-Coercion Instrument 

The EU’s second tool is its 2023 Anti-Coercion Instrument (ACI). As noted, this instrument was adopted when the EU realised that it was difficult to respond quickly and effectively to tariff threats by the first Trump administration (in that case designed to prevent France and other EU member states from adopting digital services taxes). Those threats never materialised, and in the intervening period the ACI was more often cited in the context of ‘coercion’ by China. But it is now front and centre of the EU’s likely response to any ‘coercive’ tariffs by the US. 

What is ‘coercion’?

The ACI defines ‘coercion’ as an attempt to pressure the EU or a member state into making a particular choice by applying, or threatening to apply, measures affecting trade or investment against the EU or a member state in order to affect its sovereign policy choices. This might appear to be a legal question, but in fact whether there is ‘coercion’ in any given case is determined by the EU member states (by qualified majority vote), following a European Commission examination. 

Nor, perhaps surprisingly, is it entirely clear that there is coercion in the case at hand. The US has justified its car and car part tariffs as based on national security, and it has justified its ‘reciprocal’ tariffs as necessary to address a trade imbalance. This is not quite the same thing as coercion. It might therefore be difficult for the EU to decide that the condition for application of the ACI is met.

Retaliatory measures

If, on the other hand, the EU Council decides that there is coercion, the next steps are as follows. First, the Commission must notify the coercing country, share relevant information, and invite it to consultations for a reasonable period, seeking cessation of the coercion and a potential mutually agreed solution. This mandatory engagement offers a diplomatic resolution pathway before countermeasures are imposed.

If, however, consultations fail, the Commission may propose ‘rebalancing’ measures, taking into account factors such as proportionality, reducing harm to the EU, and the broader EU interest (although this proposal is also not the final word: EU member states can reject it by qualified majority vote).

The menu of rebalancing measures which the EU may choose to adopt includes:

• goods: imposing duties and other charges, as well as other restrictions on imports and exports.
• services: imposing restrictions on trade in services, which includes limiting the rights of investors in services.
• intellectual property: withdrawing IP protection or commercial exploitation.
• government procurement: restricting the award of government contracts.
• foreign investment: withdrawing foreign investment protections.

Potential targets

The retaliatory measures can be targeted at an entity where that entity is ‘linked’ to a given state (usually state-owned enterprises, or similar). But more commonly, they must be measures of ‘general application’. This means that they must be drafted as applicable to objectively defined economic interests (e.g. a given service sector). However, in practice even measures of ‘general application’ can be very targeted at specific economic sectors.

Importantly, the targets of these measures are defined as being:

• services supplied from the territory of the coercing country; or
• services supplied by persons located in the EU (even if EU persons) which are majority owned or controlled by nationals of the coercing country.

This means that, should there be a determination of US coercion under the ACI, potential targets would include any EU subsidiary with majority US ownership or control. Further, the services that can be targeted include not only intra-EU services, but also services exported from the EU to third countries (including the US). Given that the measures selected must take into account the potential harm they might cause EU actors, it is not inconceivable that such exports will be high on the EU’s target list.

ACI decision-making process - what can be done and when?

As highlighted above, if the EU determines that there is ‘coercion’ under the ACI, it will have a large range of options for retaliation, including freezing US-owned or controlled companies from procurement contracts, additional tariffs, and taxing or otherwise restricting services supplied by US owned or controlled companies. This is obviously of concern to all US companies that have established EU operations.

However, before these measures can be adopted, ‘coercion’ needs to be determined by a formal examination, and this might not be so straightforward. Even if ‘coercion’ is established, under the terms of the ACI, the EU has to consult with the US, as well as with EU stakeholders, on how to react. This can take time. Indeed, the ACI’s own suggested timeline is 10 months, even if it is possible that it can act much more quickly, perhaps even in a matter of days or weeks, in an emergency situation. Moreover, by law, multiple factors have to feed into the decision as to which sectors to target, including proportionality and potential harm to the EU itself. 

In short, there is time for potentially affected businesses have an opportunity to put a case to the EU as to why they should not be included in any EU measures. 

[1]                   Except for Canada and Mexico which are party to the United States-Mexico-Canada Agreement (USMCA), a free trade agreement between these countries. 

[2]                  These tariffs are individual to each WTO member and are set out in each WTO’s member’s ‘schedule of concessions’. There is reciprocity, but it is not done on a product-by-product basis, and it is also not necessarily done on a country-by-country basis. It is the negotiation as a whole that has to make sense for each WTO member. The US did not need to agree to a bound rate of 2.5% on cars, while allowing the EU to impose 10% on cars. However, it decided to do so because overall, it received sufficient other concessions from the EU (e.g. in agriculture or services), and it would also have decided the same for all other WTO members. 

[3]                  In 2021, the Enforcement Regulation was amended to allow the EU to respond to failures of its trade partners to engage with WTO and FTA dispute settlement procedures in good faith

[4]                  WTO Panel Report, US - Steel and Aluminium Products, WT/DS544/R, paras 7.100 and 7.101.