European Court of Justice’s New Opinion will Impact Conclusion of Future EU Trade Deals

Kelley Drye Client Advisory

In long-awaited Opinion 2/15 delivered on 16 May 2017, the Court of Justice of the European Union, sitting as a Full Court, held that the Free Trade Agreement between the European Union (EU) and the Republic of Singapore (EUSFTA) cannot be signed and concluded by the EU alone: it has to be signed and concluded both by the EU and by each of its Member States.

New Generation’ Trade Deal: Mixed’ or Not?

The EUSFTA was initialled in 2013 by the European Commission and Singapore. It forms part of a new generation’ of trade agreeements negotiated or in the course of negotiation between the EU and various third countries (see the table published by the European Commission). These agreements go beyond traditional provisions removing customs duties and non-tariff barriers in trade of goods, and include chapters on various trade-related matters such as investment protection, intellectual property, public procurement, sustainable development, etc.

As there was a common perception among Member States that the EUSFTA should be signed and concluded as a mixed agreement’ – namely with the participation of Member States in addition to the EU itself – the European Commission sought guidance from the Court of Justice on the allocation of competence between the EU and its Member States: is the competence of the EU to conclude such an agreement exclusive’, or is it rather shared’ with the Member States?

A Broad EU Exclusive Competence

The Court ruled that most parts of the EUSFTA fall within the exclusive competence of the EU as defined in Article 3(1)(e) and Article 3(2) of the Treaty on the Functioning of the European Union,  inter alia the provisions of the EUSFTA concerning:
  • market access;

  • government procurement;

  • investment protection, in so far as they relate to foreign direct investment;

  • intellectual property;

  • competition;

  • sustainable development;

  • maritime, rail and road transport services.

This definition of the EU’s exclusive competence is arguably fairly broad, and favourable to the European Commission’s arguments. In particular, the scope of the competence is wider than what Advocate General E. Sharpston had suggested in her non-binding opinion in December 2016.

But Noteworthy Elements of Shared Competence

On the other hand, the Court considered that the following provisions of the EUSFTA fall within a competence shared between the EU and the Member States:
  • provisions on investment protection in so far as they relate to non-direct foreign investment (i.e., among others, so-called portfolio investments);

  • provisions on Investor-State Dispute Settlement (ISDS);

  • general’ clauses (objectives and general definitions, transparency, dispute settlement between the Parties, mediation mechanism, institutional/general/final provisions), in so far as they relate to the EUSFTA chapter on investment and to the extent that the latter falls within the shared competence.

The determination on ISDS provisions is particularly worth mentioning, as this kind of provisions have proved to be at the heart of the recent controversies around the signature of the Comprehensive Economic and Trade Agreement (CETA) between the EU and Canada. However, it should be kept in mind that in Opinion 2/15, the Court was called upon to decide merely on the nature of the EU competence to approve ISDS provisions, not on the material compatibility of such provisions with the EU Treaties.

Consequences for Future EU Trade Agreements

The immediate impact of the Court’s Opinion is that, unless it is amended, the EUSFTA will need to be signed and concluded by the EU but also by each of its Member States in accordance with their respective constitutional requirements – which, in some federal States such as Belgium, can involve the approval by several regional parliaments as well. Such a procedure will likely delay – and may even put at risk – the effective conclusion and entry into force of the EUSFTA.

More generally, the Court’s Opinion will, most probably, have similar consequences for other forthcoming EU free trade agreements – including potentially a post-Brexit EU-UK agreement – which would contain provisions on non-direct foreign investment and/or ISDS provisions. To avoid its current global trade policy to be jeopardized, the European Commission might therefore decide, in its future negotiations with third countries, to separate non-direct investment and ISDS provisions from the rest of the agreement: the latter could then be swiftly concluded by the EU alone.