David Kleimann and Gesa Kübek*

The Court of Justice of the European Union (CJEU) held hearings on September 13 and 14 to address Opinion 2/15, which focuses on the EU’s authority to finalize the EU-Singapore Free Trade Agreement (EUSFTA). This summary reviews the arguments presented by the Commission, the Council, and member states during the hearing. The initial section provides context and emphasizes the judgment’s systemic significance. Section II outlines the parties’ primary arguments and highlights specific policy-related and novel legal points raised. Lastly, Section III presents an unanswered but crucial legal question arising from the proceedings.

I. The Core Issue of Opinion 2/15

The fundamental question is whether the European Union possesses the authority to independently establish the EU-Singapore Free Trade Agreement (EUSFTA). Specifically, the Commission sought clarification from the Court in October 2014 on whether EUSFTA aspects fall under EU-exclusive, shared, or member states’ exclusive competencies.

The heart of the matter lies in defining the EU’s external competencies. If the EUSFTA falls entirely under exclusive EU authority, its conclusion as “EU-only” would be mandatory. Conversely, if certain provisions are deemed exclusive national competencies, the agreement would necessitate a “mixed” approach involving all EU member states as separate parties. If the FTA involves both EU exclusive and shared competencies, the decision to propose and conclude the agreement as “EU-only” or “mixed” rests with the EU institutions under Article 218 TFEU (treaty negotiation and conclusion) and Article 207 TFEU (Common Commercial Policy).

The Court’s judgment holds significant weight for EU commercial relations with third countries, particularly the EU/US trade deal (TTIP) and EU/UK trade post-Brexit. The EUSFTA’s scope means the judgment will act as a precedent for future EU trade and investment agreements. The Court’s decision in Opinion 2/15 could usher in an era of “EU-only” trade and investment agreements, potentially ending the need for lengthy parallel ratification by EU member states required for “mixed” agreements. As seen in debates regarding the EU-Canada Comprehensive Economic Trade Agreement (CETA), the outcome of Opinion 2/15 has ramifications for the efficiency and credibility of EU trade and investment policy and the legitimacy of multi-level economic governance within the European Union.

II. Commission vs. Council and Member States: Argument Analysis

The hearing centered on four contentious policy areas within the EUSFTA: transport, investment, intellectual property rights, and sustainable development (labor rights and environmental protection). We’ll first outline general legal arguments presented by the parties and then delve into specific legal interpretations related to EUSFTA transport and investment regulations.

1. General Arguments

a. The Commission

The Commission aimed to position the EUSFTA content entirely within the scope of the EU’s exclusive Common Commercial Policy (CCP) competence (Article 207 TFEU) and other implied exclusive EU competencies according to Article 3 (2) TFEU.

First, the Commission proposed a broad interpretation of Article 207, maximizing the expansion of CCP powers after the 2009 Lisbon reform, which included services, foreign direct investment, and trade-related intellectual property rights within CCP exclusive external powers.

Second, they advocated for a broad application of the Court’s “center of gravity” theory. This “predominance-test,” established through case law, dictates using a single legal basis if one of the measure’s aims is primary, with others being incidental (referencing Case C-377/12 on the EU partnership agreement with the Philippines). The Commission argued that EUSFTA rules fall under Article 207 as they “specifically [relate] to international trade in that [they are] essentially intended to promote, facilitate or govern trade and [have] direct and immediate effects on trade” (referencing Case C-414/11 - Daiichi Sankyo).

Third, the Commission frequently utilized Article 3 (2) to argue for implied exclusivity for otherwise shared competencies. Based on ERTA case law, Article 3 (2) TFEU mandates EU exclusivity if international member state commitments might impact EU rules in an area largely covered by those rules (Opinion 1/13 on the Hague Convention on child abduction, referencing Article 3 (2) TFEU). EU exclusive competence may also be implied if achieving the Community objective is inseparable from the international agreement (Opinion 1/03 on the Lugano Convention, codified in Article 3 (2) TFEU).

The Commission built upon these arguments to support EU exclusivity for foreign direct investment (FDI) protection, intellectual property rights, sustainable development disciplines, and areas already largely governed by EU rules, like maritime transport.

Alternatively, the Commission argued that if full EU exclusivity wasn’t accepted, the EUSFTA concerned only EU exclusive and shared competencies. Thus, concluding the EUSFTA as “EU-only” or “mixed” would be optional under Article 218 TFEU and Article 207 TFEU.

b. The Council and the Member States

The Council and member states, as anticipated, challenged the presumption of EU exclusivity, emphasizing the principle of conferral in Article 5 (2) TEU. They contended that the EUSFTA involved shared and exclusive member state competencies alongside the EU’s exclusive competence under Article 207 TFEU, making “mixity” necessary.

Specifically, they argued for a narrow interpretation of Article 207 TFEU and a restricted application of the “center of gravity” theory, which should rely on “objective factors amenable to judicial review” (citing Case C—411/06, Shipments of Waste). They invoked Opinion 2/00 (Cartagena Protocol), where the Court stated that practical difficulties with mixed agreements weren’t relevant when choosing the legal basis for a Union measure. They favored the Court’s reasoning in Case C-411/06, which stated that if an act pursues several inseparable objectives, it should be based on multiple legal bases.

Third, the Council and member states argued for a restrictive interpretation of implied exclusive competencies under Article 3 (2), requiring a comprehensive analysis of the international agreement’s relationship to existing EU law (citing Opinion 1/13).

Based on these interpretations, they concluded that member states retained exclusive competence over maritime transport, FDI protection, portfolio liberalization and protection, and certain non-commercial aspects of intellectual property rights. They argued that the EUSFTA’s disciplines on labor rights and environmental protection had independent objectives, necessitating multiple legal bases within the TFEU.

2. Policy-Specific Arguments

This section highlights unconventional policy-specific arguments related to transport and investment that could influence the evolution of EU exclusive external competencies.

a. Transport

Regarding transport, the Commission questioned the scope of Article 207(5), which exempts transport-related international agreements from CCP provisions. They argued that adding foreign direct investment to Article 207(1) via the 2009 Lisbon Treaty moved mode 3 transport service provision (establishment and FDI) back under CCP purview. Modes 1, 2, and 4 (movement of the service, recipients, and providers) remain outside the CCP for transport. However, the EU now holds exclusive competence for negotiating agreements liberalizing and protecting FDI in all sectors, including transport. The Council and member states disagreed, citing Opinion 1/08, where the CJEU ruled that transport was exempt from the CCP, a decision they argued remained valid after Lisbon and protected Article 207(5).

For maritime transport services, the Commission argued for implied ERTA exclusivity (Article 3 (2), 3rd situation TFEU) based on Regulation 4055/86. This regulation liberalizes mode 1 transport between EU member state nationals established in the EU and those from third countries, but doesn’t offer reciprocal liberalization for third-country nationals. The Council and member states argued this lack of a comprehensive EU legal framework for transport services meant implied Union exclusivity couldn’t be conferred. They argued that the EUSFTA’s wide-ranging transport disciplines and objectives were not secondary to the treaty’s commercial goals, keeping maritime transport services under shared competence (Article 4 (2) (g) TFEU), with member states retaining exclusive competence over third-country vessel operators.

Advocate General Sharpston then questioned the Council: What criteria determine whether an EU agreement is permissible in areas with only partial internal common rules, like maritime transport? How much must the Commission demonstrate to prove EU exclusivity to the Council? Sharpston further questioned whether internal exclusivity was a prerequisite for external exclusivity. The Council responded that while internal exclusivity wasn’t strictly required, Article 3 (2) TFEU outlined “strict conditions” for implied exclusivity. They advocated a “center of gravity” theory application that provided “clear dividing lines.”

b. Portfolio Investment

In a novel argument, the Commission presented a treaty interpretation justifying the EU’s implied exclusive competence over portfolio investment (non-controlling shares), which isn’t explicitly part of “foreign direct investment” in Article 207 (1) TFEU. They deviated from the understanding that only existing secondary EU legislation triggers an “ERTA effect,” which grants exclusive competence when member state external action might affect existing or future “common rules” (Article 3 (2), 3rd situation TFEU). The Commission argued that “common rules” could also be established through EU primary law, citing Article 63 (1) TFEU. They claimed the treaty’s capital movement freedom between member states (and with third countries) constituted “common rules” under Article 3 (2) TFEU. This interpretation implies EU exclusive external powers in this area because member states’ international agreements could impact the Article 63 (1) restriction on capital movement prohibitions. Therefore, the EU had exclusive competence for negotiating agreements on portfolio investment liberalization and protection.

Alternatively, the Commission argued that portfolio investment liberalization falls under shared competence.

The Council and member states countered these arguments, stating that Article 63 (1) only prohibits restrictions without conferring legislative power. Using it as a basis for external action was deemed a “legal fix” and “legal imagination,” as a provision insufficient for internal legislation shouldn’t imply exclusive external competence. Only exercising an internal competence can preempt member state external action. Belgium and Germany argued that this interpretation of Article 3 (2), 3rd situation TFEU, circumvented the intentional exclusion of portfolio investment from Article 207 TFEU and Article 64 TFEU. They asserted exclusive member state competence over portfolio investment. Finland and Slovenia suggested member states might share external powers with the EU in this area.

The Commission responded to the Court’s question by stating that the lack of a legal basis for the internal liberalization of portfolio investment was due to Article 63 (1) TFEU already providing a comprehensive prohibition of restrictions.

The Commission, in another unprecedented interpretation, cited Article 216 (1) and Article 63 (1) TFEU as the legal basis for EU external acts on portfolio investment liberalization. However, the Council and several member states argued that Article 216 (1) TFEU merely grants general treaty-making powers and can’t be used for concluding international agreements.

Responding to Judge Rapporteur Ilešič, both the Commission and Council agreed that Article 64 TFEU couldn’t be used for internal portfolio investment liberalization. The Commission suggested that harmonizing internal portfolio investment rules could “maybe” be based on Article 114 or 352 TFEU. However, Court President Lenaerts reminded the Commission that choosing a legal basis wasn’t an “à la carte” process.

Advocate General Sharpston questioned the difference between the third situation in Article 3 (2) TFEU (cited by the Commission) and the second situation, as the Commission argued for external competence without prior internal exercise. This question remained unanswered.

Sharpston also questioned the Commission’s concern about member state agreements altering common rules when those rules were EU treaty provisions, as only treaty reform through proper channels could alter primary law. The Commission clarified that their argument wasn’t about altering treaty rules but about how member state agreements could affect the application of Article 63 (1).

c. Termination of Bilateral Investment Treaties

Another debated point involved the supersession and termination of existing bilateral investment treaties (BITs) between member states and Singapore once the EUSFTA’s investment protection provisions become applicable. Article 9.10 EUSFTA states that member states’ BITs “shall cease to have effect and shall be replaced and superseded by this Agreement.” A footnote clarifies that agreements between EU member states and Singapore will be considered terminated by this agreement under Article 59 (1) (a) of the Vienna Convention on the Law of Treaties. However, this article states that a treaty is considered terminated if all parties conclude a subsequent treaty on the same subject matter and “it appears from the later treaty or is otherwise established that the parties intended that the matter should be governed by that treaty.”

The Commission argued that past EU practice includes precedents for superseding member state treaties with EU external agreements. However, Judge Rapporteur Ilešič and Advocate General Sharpston questioned the legal basis for this and whether the EU had the competence to terminate member states’ BITs with Singapore through Article 9.10 of the EUSFTA. Both inquired whether the Commission invoked Article 4 (3) of the TEU (duty of sincere cooperation) to justify terminating the BITs. If not, how could the Commission include a provision in an “EU-only” agreement that terminated member state bilateral agreements with Singapore, given that the EU isn’t a party to those agreements? This remained unanswered.

III. Concluding Remarks

Opinion 2/15 raises crucial legal questions regarding the division of competencies between the EU and its member states. The Court’s judgment’s impact extends beyond designating the EUSFTA as “EU-only” or “mixed.” It will likely clarify and redefine member states’ roles in the EU’s external economic relations, taking into account the Lisbon Treaty reforms, evolving EU secondary legislation, and the complexities of 21st-century trade and investment agreements.

This note concludes with an important unanswered question posed by Advocate General Sharpston to all parties: If the Court in Opinion 2/15 determines that the EU-Singapore FTA is a mixed agreement, what implications would this have for the treaty’s conclusion? Considering the EU’s extensive exclusive powers under the CCP, could a single member state veto the entire agreement?

David Kleimann and Gesa Kübek

Passau, October 4th, 2016

Barnard & Peers: chapter 24

Photo credit: www.cnaint.com

* David Kleimann is a Researcher at the Law Department of the European University Institute (EUI) in Florence (david.kleimann@eui.eu). Gesa Kübek is a Research Assistant at the Law Faculty of the University of Passau (gesa.kuebek@uni-passau.de). This report is based on hand-written notes that the authors prepared during the hearing. All potential errors are attributable to the authors alone.