CJEU rules on EU’s proposed free trade agreement with Singapore

The Court of Justice of the European Union (CJEU) has decided that the EU-FTA cannot be concluded without EU Member State participation. This decision has implications for future EU trade deals, including any future trade agreement between the UK and the EU. In this briefing, we look at some of the key issues for international arbitration and investor-state dispute settlement arising out of the CJEU’s opinion.

On 16 May 2017, the CJEU published its opinion 2/15 on the European Union’s competence to enter into the free trade agreement between the European Union and the Republic of Singapore (EUSFTA). The key question for the CJEU was whether, as asserted by the EU, the EU has the requisite competence to sign and conclude the EUSFTA without the participation and consent of individual EU Member States.

The EUSFTA is a “new generation” free trade agreement, in that it extends beyond matters of customs duties and of non-tariff barriers in the field of trade in goods and services, to address other matters of trade such as direct and indirect foreign investment, intellectual property protection, public procurement, competition and sustainable development. The European Council and governments of a number of EU Member States asserted that the EU could not conclude the EUSFTA by itself because some of these matters are not within the EU’s competence. Instead these matters are either within a competence shared by the EU and EU Member States or within the exclusive competence of EU Member States.

The EUSFTA is viewed as a test case for new generation free trade agreements. If the EU does not have exclusive competence to deal with such matters, these agreements will require the EU and EU Member States to act together. This will hinder the EU’s ability to conclude free trade agreements efficiently and effectively. A high profile example of this is provided by the free trade agreement between Canada and Europe (CETA) which – after seven years of negotiations – faced opposition from the Belgian regional parliament in Wallonia which objected to certain of CETA’s provisions. If the EU has exclusive competence, it can circumvent such obstacles and associated delays. The CJEU’s opinion has therefore wide ramifications for current and future trade agreements and has been eagerly awaited.

The first indicator of the direction the CJEU might take was the opinion of CJEU Advocate-General Sharpston who found that the EU did not have exclusive competence to conclude the EUSFTA. Although large parts of the EUSFTA fell within the EU’s exclusive competence, a number of provisions addressed matters subject to either shared competence with the EU and EU Member States or subject to the exclusive competence of the EU Member States.

The CJEU has now affirmed the overall conclusion of the Advocate-General’s opinion in this regard. The CJEU concluded that two provisions are not within the EU’s exclusive competence, namely, non-direct foreign investment (“portfolio” investments made without any intention to influence the management and control of an undertaking) and a regime for dispute settlement between foreign direct investors and EU Member States (ISDS). These are instead within a competence shared by the EU and EU Member States therefore the EUSFTA – and similar new generation FTAs – are “mixed agreements”. The CJEU found that the EUSFTA cannot be entered into by the EU acting alone, full EU Member State approval is needed. This means obtaining approval from all 38 EU national and regional parliaments.

The CJEU did not clarify why it decided that approval of the EU Member States is needed – in areas of shared competence a political choice is made as to who exercises the competence, the EU or the EU Member States, though in practice the default is usually for both to be involved in the agreement. If the CJEU’s position is (as it appears) that EU Member State approval is required for any agreement in an area of shared competence, this decision potentially has wider ramifications.

There was however some positive news for the EU, in that the CJEU took a more expansive view of the EU’s competence, finding that the EU has exclusive competence over a number of important areas such as transport, labour and environmental standards, which the Attorney-General had found to be shared competence.

The European Commission has proposed to overhaul investor-state dispute settlement to replace the current ISDS system (most commonly, international arbitration) with a permanent Investment Court System (ICS). These proposed reforms are discussed in Issue 8 of the International arbitration report (“The EU’s proposed reform of ISDS”). The EU’s clear intention is to include ICS provisions in all future trade agreements. The CJEU’s opinion represents a set-back to these proposals. The need to obtain EU Member State approval of the ICS provisions in future trade agreements will add to the already substantial difficulties faced by the EU in implementing its ICS proposals. The ICS concept has proved controversial among EU Member States. ICS provisions in CETA were a sticking point and the CJEU’s opinion, which repeatedly states that it does not address whether EUSFTA provisions are compatible with EU law, makes it more likely that a referral to the CJEU on the question of whether ICS/ISDS is compatible with EU law will be made. Some commentators see the CJEU’s opinion as signalling its approach to this question. A more practical issue for the EU is that EU Member States are also unlikely to welcome the substantial investment needed to implement an ICS.

An interesting conundrum arises from the CJEU’s opinion that whilst the EU has exclusive competence over foreign direct investment, it shares competence for agreeing investor-state dispute settlement provisions with the EU Member States. EU Member States are unable to enter into foreign direct investment treaties (except under certain strict conditions and with EU permission). Any EU-made foreign direct investment agreement would be toothless without some form of investor-state dispute mechanism. Yet, the EU cannot unilaterally impose such a mechanism on EU Member States. As a result, the EU and all the EU Member States will need to reach agreement on these matters if they wish to avoid a deadlock. At this point, how they will reach agreement is not clear. If the EU insists on EU Member States adopting ICS provisions, it is likely to face serious opposition. Conversely, if the EU’s ICS proposals are not widely adopted by all EU Member States, it could render the ICS proposals largely redundant.

In Issue 8 of the International arbitration report (“Brexit and investor-state dispute settlement”), we also discuss the impact of the UK’s withdrawal from the EU (so-called Brexit) on the protections afforded to foreign direct investors in the UK and overseas through investment treaties. As noted in that article, part of the uncertainty arises from the lack of clarity over the EU’s powers.

The CJEU’s recent opinion goes some way towards clarifying matters. For instance, it was not clear whether the EU had the power to terminate bilateral investment treaties (BITs) made between EU Member States and non-EU states when agreeing new EU agreements with those non-EU states. This is an issue on which the CJEU has now taken a different view to the Advocate-General. The Advocate-General opined that “the European Union may not…decide alone on the termination of agreements concluded by the Member States with Singapore” and that the competence belonged exclusively to the EU Member States. The CJEU however found that provisions in the EUSFTA terminating pre-existing EU Member State BITs do not encroach on EU Member States’ competence in so far as the provisions relate to an area of EU Member State competence. It found that the EU takes the place of EU Member States when negotiating and concluding agreements with non-EU states in areas of EU exclusive competence and therefore has competence to approve, by itself, provisions in agreements with non-EU states that replace commitments contained in BITs previously concluded between EU Member States and those non-EU states.

The CJEU’s opinion has not resolved all uncertainties. It has not answered whether, following Brexit, the UK will automatically cease to be a party to all or parts of EU negotiated trade and investment agreements. Nor has it resolved whether intra-EU BITs are compatible with EU law. To resolve these matters, we will need to wait for determination of further references to the CJEU.

A question many are discussing is whether the CJEU’s opinion will benefit the UK post-Brexit. The jury appears to be out on this. On the one hand, a “mixed agreement” UK-EU FTA, requiring EU Member State participation, would necessarily entail more difficult, time-consuming negotiations. However, the CJEU’s opinion has helpfully clarified the areas within the EU’s exclusive competence. Therefore, the EU may seek to negotiate narrower trade agreements, fully within its competence. While this would negate some of the concerns addressed in this article, the exclusion of matters of shared competence (for example, indirect investment and direct investment ISDS regimes) may lead to a less beneficial agreement for all. On the other hand, the UK may profit from difficulties the EU is now likely to face in efficiently and effectively negotiating free trade agreements that offer adequate protections to foreign investors. The UK’s ability to more swiftly negotiate and enter into BITs – importantly, containing ISDS provisions – with non-EU Member States could further promote the UK as a favourable jurisdiction for foreign direct investment.