Dr Andrés Delgado Casteleiro

Senior Research Fellow, Max Planck Institute Luxembourg for International, European and Regulatory Procedural Law

Introduction

On September 13th and 14th, the Court of Justice of the European Union (CJEU) convened a full court hearing to discuss Opinion 2/15. This opinion focuses on the EU’s authority to establish a new Free Trade Agreement (FTA) with Singapore. This blog post will provide a concise summary of the key issues likely to arise during these hearings. The initial section will offer context regarding EU trade policy. The subsequent section will delve into the primary concerns surrounding the EU’s authority to enter into FTAs. Lastly, the concluding section will explore the broader potential implications of Opinion 2/15, particularly for post-Brexit EU/UK trade relations and the debated EU/US trade deal (TTIP).

EU Trade Policy in the Post-Lisbon Treaty Era

The Lisbon Treaty brought about significant changes, notably expanding the EU’s authority over external trade policy, commonly referred to as the Common Commercial Policy (CCP). Article 207 of the Treaty on the Functioning of the European Union (TFEU) broadened the CCP’s scope. This expansion encompassed not just trade in goods, but also services, commercial aspects of intellectual property, and foreign direct investment.

This expanded scope meant that these areas fell under EU competence. More significantly, as per Article 3(1) TFEU, they became the EU’s exclusive competence, with the exception of transport services. The exclusive nature of the CCP has two interconnected implications. First, only the EU can negotiate and finalize trade agreements. Second, EU member states cannot engage in such activities without prior authorization from the EU. Article 207 also stipulates that the EU Council typically votes on external trade laws and treaties by qualified majority, meaning individual member states have no veto power. However, a veto is permissible for specific service trade aspects or when a veto exists in another EU law area, such as taxation.

This exclusive competence simplifies the EU’s process of negotiating, concluding, and ratifying international agreements. In essence, the EU becomes the sole entity legally authorized to handle these agreements. Conversely, when an agreement involves areas beyond the EU’s exclusive competence, both the EU and its member states partake in its conclusion.

These agreements, known as ‘mixed agreements,’ are viewed with mixed opinions. On one hand, concluding and ratifying them is a more complex process as both the EU and its 28 member states must be involved. This process often spans years, with some member states requiring national parliamentary approval, although provisional application of certain treaty provisions may occur during this period. On the other hand, these agreements can empower member states during negotiations, potentially leading to smoother implementation.

The debate surrounding mixed agreements often masks a power struggle between the EU, primarily the European Commission, and its member states. Given that mixed agreements grant more power to member states, often exceeding their constitutional entitlements, it’s understandable that the Commission prefers to limit their use. This dynamic underpins the conflict in Opinion 2/15: if the court rules that the EU-Singapore FTA falls under the EU’s exclusive competence, the EU can proceed unilaterally. However, if the CJEU determines that the FTA encompasses shared competence or even member states’ exclusive competence, both the EU and its member states must jointly conclude the agreement.

The EU-Singapore FTA and EU Authority

To what degree does the EU-Singapore FTA fall under the purview of the EU’s (exclusive) CCP?

The EU-Singapore FTA broadly addresses four areas: goods, services, intellectual property, and investment. Regarding goods, this aspect undoubtedly falls under the EU’s exclusive trade powers. The CCP’s inclusion of trade in goods predates even Opinion 1/94, a pivotal CJEU ruling on the scope of EU trade policy powers before the Lisbon Treaty. Similarly, trade in services, competition, public procurement, and intellectual property are also covered by exclusivity. While there were initial doubts about their inclusion under Article 207 TFEU, the court seemingly clarified these doubts in Daiichi Sankyo regarding intellectual property and Commission v Council regarding services.

The crux of the hearings, including the judges’ inquiries, is expected to revolve around the extent to which the EU’s CCP competence encompasses the agreement’s investment chapter. Article 207 TFEU states that the EU has authority over Foreign Direct Investment (FDI), but the definition of FDI is a key question.

One approach interprets FDI, as enshrined in the Treaties, as a new, independent concept. This definition would cover all aspects of investment protection outlined in the EU-Singapore FTA, including traditional FDI, portfolio investment (acquiring minority, non-controlling shares in a business), dispute resolution, and even protection against expropriation. This broad interpretation would place the investment protection provisions of the EU-Singapore FTA solely under EU competence as part of the CCP.

However, this expansive view of the EU’s FDI competence clashes with both international and internal EU definitions of FDI. It’s unlikely that the court would establish a new understanding of FDI that deviates significantly from international norms and disregards its own case law on direct investment.

Another potential definition the court could adopt is the internationally recognized one, which excludes portfolio investments from FDI. This definition is present in numerous OECD and IMF instruments. It also aligns with the CJEU’s definition of direct investment in its internal market case law (see Angelos Dimopoulos, EU Foreign Investment Law (OUP, 2011)). Given the EU-Singapore FTA’s broad definition of investment – “every kind of asset…owned or controlled, directly or indirectly by investors of one Party in the territory of the other Party, that has the characteristics of an investment” – this interpretation of FDI competence would mean that not all aspects of the Investment Protection chapter would fall under the CCP. Consequently, those aspects would be covered either by other implicit EU powers or by the competences of EU member states. This definition seems more plausible, aligning with existing case law and international agreements.

The most restrictive interpretation relies on a strict reading of Article 206 TFEU. It posits that the EU’s exclusive competence doesn’t encompass all FDI-related aspects but focuses solely on the initial entry of FDI. Article 206 TFEU states that the progressive elimination of restrictions on international trade and FDI is the aspect entrusted to the EU (Jan Asmus Bischoff, ‘Just a little bit of “mixity”? The EU’s role in the field of international investment protection law’ (2011) 48 Common Market Law Review, Issue 5, pp. 1527–1569). This implies that measures taken after FDI entry fall outside the CCP’s scope. However, this narrow interpretation would significantly curtail the EU’s authority in the FDI arena. Given the court’s history of expansive interpretations of the CCP, this approach seems less likely.

Does the EU possess any other exclusive competences that encompass certain aspects of the EU-Singapore FTA?

Should the court opt for the second or third interpretation of FDI competence, it would then need to determine if other implicit and exclusive powers cover those aspects of the investment chapter not covered by the FDI competence. This question is particularly relevant for portfolio investment and whether an implied, exclusive power arises from Article 63 TFEU concerning the free movement of capital from non-EU countries.

The Commission, in its Communication “Towards a comprehensive European international investment policy” (COM (2010) 343 final), argues that “to the extent that international agreements on investment affect the scope of the common rules set by the Treaty’s Chapter on capitals and payments, the exclusive Union competence to conclude agreements in this area would be implied.” This suggests that both FDI and portfolio investments would fall under an exclusive EU competence, theoretically eliminating the need for EU member state involvement in the EU-Singapore FTA based on the inclusion of an Investment Protection chapter.

However, it’s unclear how this competence would be exclusively implied, given that the free movement of capital is a shared competence and the EU hasn’t exercised its powers under Articles 64(2) and 66 TFEU. It would be difficult to argue for the implied powers doctrine’s applicability in the absence of internal legislation to be impacted (P Eeckhout, EU External Relations Law (Oxford, OUP, 2011)). However, it’s not entirely implausible, as the EU has established a harmonized framework for portfolio investments within the EU that references relations with non-EU countries.

Therefore, portfolio investments could be considered largely governed by EU rules (Angelos Dimopoulos, EU Foreign Investment Law (OUP, 2011), p 105), a key criterion in case law for determining the applicability of the implied and exclusive powers doctrine. Recent case law offers limited insight into the CJEU’s potential stance. While the CJEU has been flexible in interpreting whether an area is largely covered by Union rules, the requirement for these rules to be affected has gained prominence in its reasoning (see Opinion 1/03, Opinion 1/13, and the broadcasting rights case), though not always consistently applied.

Potential Implications of Opinion 2/15

Opinion 2/15’s significance extends beyond determining the EU-Singapore FTA’s competence. It has the potential to set a precedent for future FTAs being negotiated, signed, or in progress. If the EU-Singapore FTA is deemed to fall under the EU’s exclusive competence, subsequent EU FTAs could be concluded solely by the EU. Conversely, if it’s not, future FTAs will likely involve both the EU and its member states.

This is particularly relevant considering that the issues at the heart of the EU-Singapore FTA are mirrored in the ongoing, and often contentious, EU-US TTIP negotiations. A ruling in Opinion 2/15 that establishes a broad scope for the EU’s CCP could allow the EU to conclude the TTIP without requiring member state involvement. This would expedite the ratification process and, perhaps more importantly, make it less susceptible to surprises during national parliamentary ratifications. If the TTIP is deemed to fall solely under EU competence, only the European Parliament’s consent would be required. While not a simple task (as demonstrated by the EP’s stance on the ACTA and initially the SWIFT Agreements), it’s considerably less complex than navigating ratification by the EU and all 28 member states. Given the opposition from much of the European left and segments of the right, it’s doubtful the TTIP would survive the ratification process if classified as a mixed agreement following Opinion 2/15.

Furthermore, if the UK government, as seems likely, opts for an FTA (similar to the Canada model) to define its post-Brexit relationship with the EU, the court’s opinion could determine whether individual member states have veto power in these negotiations. As Robert Peston has indicated, this could become a pivotal political factor in the UK/EU negotiations. If every remaining member state has veto power, the UK’s path to achieving its negotiating goals becomes considerably more challenging.

However, it’s crucial to acknowledge that political considerations can sometimes override legal ones, as demonstrated by the Commission’s actions in June. Its decision to propose classifying CETA (the EU-Canada FTA) as a mixed agreement, irrespective of the competences involved and the Commission Legal Service’s opinion, sets a concerning precedent. If Opinion 2/15 concludes that the EU has exclusive competence over FTAs, this precedent could potentially undermine the effectiveness of the Lisbon Treaty reforms.

Barnard & Peers: chapter 25, chapter 27

Photo credit: cnn.com