In its opinion 2/15 on 16 May 2017, the ECJ has stated that member states have shared competence with the EU on non-direct foreign investments and on the regime covering dispute settlements between investors and states.
On Tuesday 16 May, the European Court of Justice published an opinion on the free trade agreement with Singapore which will also have implications for future UK-EU trade relations.
Opinion 2/15 stated that the “free trade agreement with Singapore cannot, in its current form, be concluded by the EU alone.”
This means that EU member states, along with the European Commission, will have to ratify the agreement as well.
“New generation” bilateral trade agreements
These new trade agreements contain, in addition to the classic provisions on the reduction of customs duties and non-tariff barriers in the field of trade and goods and services, provisions on various matters related to trade, such as intellectual property protection, investment, public procurement, competition and sustainable development.
The European Council and the governments of all the member states challenged the European Commission by arguing that certain parts of the agreement fall within a shared competence, or even within the exclusive competence of the member states.
This means that the controversial investor-state dispute settlement (ISDS) is also a shared competence. This is one of the biggest stumbling blocks in the TTIP negotiations, and will further complicate agreements. Several member states oppose these mechanisms which are said to protect investors over states by allowing foreign corporations to bypass national courts and settle disputes with governments through international arbitration.
The ECJ stated that the EU has exclusive competence in the following matters:
Access to the EU market and the Singapore market so far as concerns goods and services (including transport) and in the fields of public procurement and of energy generation from sustainable non-fossil fuel sources;
The provisions concerning protection of direct foreign investments of Singapore nationals in the EU (and vice versa);
The provisions on intellectual property rights;
The provisions designed to combat anti-competitive activity and to lay down the framework for concentrations, monopolies and subsidies;
The provisions concerning sustainable development; and,
The rules relating to exchange of information and to obligations concerning notification, verification, cooperation, mediation, transparency and dispute settlement between the parties, unless those rules relate to the field of non-direct foreign investment.
Implications for a EU-UK trade deal
The ECJ decision actually strengthens the common commercial policy as an instrument of exclusive competence of the EU.
However, because the FTA is considered a mixed agreement, meaning that member states need to ratify as well, it could still pose problems. This conjures up the drama when the Walloon parliament threatened not to ratify the EU-Canada comprehensive trade agreement in October 2016. It showed how difficult it can become to get the approval of each of the member states and how this can be “a significant stumbling block in finalizing mixed agreements, as well as being very time consuming”, according to Michel Petite, Advocate of Counsel at the Clifford Chance Paris office.
Petite stated that:
“One way of avoiding the delay of extended member state ratification and the risk that an agreement could be vetoed by one of the 38 national parliaments or regional assemblies would be to split future deals into separate "mixed" and "exclusive" agreements. Investor-state dispute settlement and indirect foreign investment could be dealt with in a separate bilateral investment treaty (BIT).”
He assessed whether this would be possible with a future trade agreement with the UK:
“The issue of "splitting" agreements it not entirely straightforward however. The main difficulty is that the decision is mostly in the hands of the member states as they decide on the mandate given to the Commission, and ultimately adopt the Treaty. As seen with the example of CETA, EU member states cannot resist demands from their own national Parliaments to hold national ratification. This is particularly true if the treaty in question is a politically sensitive one. It was previously relatively easy for member states to insist that certain issues were "mixed", and it is true that after the Singapore decision the matter is much clearer. It opens up the possibility of the UK being able to conclude a FTA on a wide range of issues whilst avoiding a lengthy ratification process by member states and the ultimate risk that one or more of the member state national or regional assemblies could veto the agreement.”
Petite argued that it “opens up the possibility of a comprehensive agreement being reached between the UK and the EU, and put into two or more separate instruments subject to exclusive EU and mixed ratification procedures respectively.”
“due to the political significance of a possible future EU-UK FTA, there is the strong possibility that member states will not let it happen on the basis of exclusive competence unless it only amounts to a low level Trade Agreement. Even if a splitting can be engineered, the part which is exclusively "trade" will most likely have its entry into force made conditional to the ratification to the other "mixed" part.”
Shared competences in ISDS and non-direct foreign investments
Contacted by Delano, Petite explained the decision of the court to make dispute settlements and non-direct foreign investments a shared competence:
“- on ISDS: the Court takes the view that because an ISDS system deprives national courts of their jurisdiction, it cannot be created without the consent of those States.
- non-direct investments: as opposed to FDI and other new areas of exclusive competence established by the Lisbon treaty, they remain "shared competence", in which the Union has never legislated. As a result, the Union cannot claim it has gained an external competence.
Non-direct investments (portfolios) are not viewed as important, as suggested by the fact that the EU has not so far intervened in the sector. Accordingly, it should not play an important role in the EU/UK relationship agreement.”