Professor Steve Peers

The European Union’s authority regarding trade agreements has been debated for years in the European Court of Justice (ECJ), as it significantly affects the balance of power between the EU and its Member States concerning international economic policies. Treaty revisions, especially the Treaty of Lisbon, have altered these rules, making this issue even more important due to recent controversies surrounding EU trade negotiations (notably with Canada and the USA) and the UK-EU trade talks post-Brexit. A recent, non-binding, but thorough ECJ Advocate-General opinion will likely influence the Court’s final judgment expected in the spring.

This piece summarizes the opinion and suggests its potential implications for Free Trade Agreements (FTAs) with Canada, the USA, and the UK. For more information, see previous posts on this blog about the opinion’s background and the hearing before the ECJ.

Background

The Court must determine whether elements of the EU’s draft trade deal with Singapore fall under the EU’s exclusive jurisdiction, shared jurisdiction with Member States, or solely under Member State jurisdiction. If the EU has exclusive competence, national ratification is unnecessary, and the EU might approve the deal by qualified majority, denying Member States a veto.

If both the EU and its Member States hold jurisdiction, the agreement is ‘mixed.’ The EU can conclude the agreement without Member States if a qualified majority agrees, again assuming no veto applies based on the subject matter.

If an issue falls under exclusive Member State competence, they must be parties to the treaty. Consequently, national ratification and a de facto national veto for each Member State apply.

Article 3(1) of the Treaty on the Functioning of the European Union (TFEU) lists exclusive EU powers, including the common commercial policy (CCP) and fisheries conservation. Article 207 TFEU further defines CCP as applying to ‘goods and services,’ the commercial aspects of intellectual property,’ and ‘foreign direct investment.’ The EU/Singapore case involves interpreting these aspects.

Beyond Article 3(1), Article 3(2) TFEU states that exclusive EU powers over international treaties can also stem from exercising internal EU powers in three scenarios: (a) ‘its conclusion is provided for in a legislative act of the Union,’ (b) ‘it is necessary to enable the Union to exercise its internal competence,’ or (c) ‘in so far as its conclusion may affect common rules or alter their scope.’ The EU/Singapore case concerns interpreting (a) and (c), referred to as the ’legislative authorization’ and ‘affect common rules’ grounds. Notably, ground (b) has limited application due to its narrow interpretation in ECJ case law.

Summary of the opinion

The Commission, supported by the European Parliament, argues for exclusive EU competence to finalize the deal. In contrast, Member States argue for mixed competence over much of the agreement and exclusive national competence for other parts.

The Advocate-General generally argues that the agreement largely falls under the EU’s exclusive jurisdiction, primarily but not entirely within the CCP. A significant portion falls under mixed competence, while a smaller part is purely national.

She reiterates existing ECJ case law: CCP applies to measures directly regulating and affecting trade; mere implications are insufficient. She also interprets the exceptions in Article 207(6) TFEU, which states that the CCP ‘shall not affect the delimitation of competences between the Union and the Member States, and shall not lead to harmonisation of legislative or regulatory provisions of the Member States in so far as the Treaties exclude such harmonisation.’ This clause, in her opinion, has a narrow interpretation and limited impact: it doesn’t prevent the EU from agreeing on measures concerning trade in culture and health services if it doesn’t harmonize those laws within the EU.

The opinion doesn’t address the exceptions in Article 207(4) TFEU, which requires unanimous voting ‘where unanimity is required for the adoption of internal rules’ or ‘(a) in the field of trade in cultural and audiovisual services, where these agreements risk prejudicing the Union’s cultural and linguistic diversity,’ or ‘(b) in the field of trade in social, education and health services, where these agreements risk seriously disturbing the national organisation of such services and prejudicing the responsibility of Member States to deliver them.’

Conversely, the opinion discusses the exception in Article 207(5) TFEU, stating that the CCP doesn’t apply to transport agreements. The Advocate-General argues that this exception applies whenever a treaty includes rules ‘specifically concerning transport.’ This is discussed further below.

The Opinion analyzes the EU/Singapore deal’s provisions. First, the FTA’s opening provisions on creating a free trade area fall under the CCP. Second, based on pre-Lisbon case law, the Opinion concludes that FTA provisions on trade in goods also fall within the CCP (Paras 144-155).

Third, the Opinion examines the FTA provisions on services, establishment, and e-commerce (paras 195-269), concluding that besides transport, these generally fall under the CCP’s service powers. Notably, the immigration of service providers falls under service powers and not EU immigration powers, where the UK and some Member States have opted out (para 203). Financial services are covered by CCP (para 204) as its scope doesn’t depend on prior EU law harmonization (unlike Article 3(2) TFEU). Professional qualifications are also included (para 205).

The transport exception from the CCP applies not only to services but also to activities inseparably linked, such as cargo handling, transport repair, and computer reservation – but not to customs clearance as it also applies to goods. But does the EU hold exclusive power over transport through Article 3(2) TFEU? Regarding aircraft repair, the ’legislative authorization’ ground doesn’t apply as EU legislation establishing an aircraft safety agency doesn’t address this in detail. As for the ‘affect common rules’ ground, there’s insufficient internal harmonization for maritime transport, air transport (except computer reservation systems), and inland waterways – but sufficient harmonization for road and rail transport for the EU/Singapore FTA to fall under exclusive EU powers. Other transport aspects remain shared competence.

Fourth, concerning investment (paras 305-398), the opinion examines the CCP and Article 3(2) TFEU. It defines the EU’s CCP powers over foreign direct investment as investments ‘which serve to establish or maintain lasting and direct links, in the form of effective participation in the company’s management and control, between the person providing the investment and the company to which that investment is made available in order to carry out an economic activity. In applying that definition, I consider that the fact that the direct investor owns at least 10% of the voting power of the direct investment enterprise may offer evidentiary guidance but is certainly not determinative’. Importantly, the opinion posits that the CCP power covers investor protection (paras 324-342).

For other investments – ‘portfolio investment’ – the CCP doesn’t apply. However, could Article 3(2) TFEU be relevant? While there’s no specific legislation, EU Treaty provisions on capital movements to non-EU countries exist, which the Commission believes fall under the ‘affect common rules’ ground. However, the Opinion argues this ground for exclusive competence only applies when prior EU harmonization results from legislation, not the Treaty. However, the EU and its Member States still share competence on most investment issues except terminating bilateral investment treaties.

Fifth, regarding government procurement, previous case law stated that CCP applied only to goods procurement and limited service aspects. The Opinion concludes that with the Lisbon Treaty’s amendments to the CCP’s scope, this power now fully applies to government procurement except for areas covered by the transport exception (paras 401-408).

Sixth, the Opinion analyzes the CCP power’s scope concerning intellectual property (paras 424-456). While prior case law concluded that CCP applied to the ‘TRIPS’ (the intellectual property agreement within the World Trade Organisation system), this doesn’t automatically extend to IP rules in EU FTAs (‘TRIPS+’ clauses).

To determine if a TRIPS+ clause falls under CCP, the test (para 435) isn’t based on the remedy but on whether the obligation governs trade rather than harmonizing IP law, has a direct and immediate effect on trade, and aims to prevent trade distortions caused by monopolies. CCP application doesn’t depend on whether the EU has internally harmonized an IP issue. The Opinion also argues that rules on court procedures don’t necessarily fall outside the CCP.

Applying this test, enforcement and plant variety rights fall under CCP, but some EU/Singapore provisions don’t, like moral rights, which aren’t covered by Article 3(2) because the EU hasn’t harmonized them internally. However, the EU shares competence as it could harmonize them based on its internal market powers.

Seventh, the Opinion examines competition law (paras 459-466). The FTA rules on this matter fall under the CCP, as they extend EU rules to Singapore and are closely linked to goods and services trade.

Eighth, the Opinion addresses the FTA’s provisions on environment and sustainable development (from para 478). Here, rules on renewable energy fall within the CCP due to their strong link to trade and investment. However, since rules on labor and environmental standards aren’t closely tied to trade, the EU shares competence with Member States (no argument was made for Article 3(2) application). Rules on fish stocks fell under another exclusive EU competence: fisheries conservation.

Finally, rules on transparency and judicial review are ancillary to the FTA’s substantive provisions (paras 508-13), as are rules on dispute settlement and mediation (paras 523-44). Notably, the controversial rules on investor-state dispute settlement aren’t addressed here (para 536). Belgium has committed to raising the relevant provisions in the EU/Canada FTA with the Court. Lastly, the final provisions are either accessory or minor, not altering the legal assessment (paras 548-553).

Comments

The Advocate-General’s analysis of goods, services, and intellectual property aligns with previous case law. However, the analysis of investment is more debatable. Her argument for investor protection falling under CCP is convincing, as inadequate protection might discourage investment (linking back to market access). Conversely, the analysis of portfolio investment prioritizes form over substance: why does it matter whether ‘common rules’ stem from Treaties or EU legislation? Additionally, terminating bilateral investment treaties should logically be a consequence of exercising other (exclusive or shared) EU competences rather than purely national competence. It’s unfortunate the Commission didn’t seize this opportunity to request a Court ruling on the controversial investor-state dispute settlement rules.

The implications for other FTAs and Brexit depend on their specific commitments, as this Opinion analyzes the EU/Singapore FTA. Other FTAs might require unanimity under Article 207(4) TFEU, which wasn’t addressed here.

Generally, for other FTAs, a mixed agreement might be necessary based on the interpretation of the transport exception, portfolio investment, and labor and environmental standards. Besides terminating investment treaties, it becomes a political question whether Member States agree to such treaties solely on behalf of the EU or insist on being parties as well.

A post-Brexit FTA might present different issues. The UK and EU might not prioritize negotiating investment or intellectual property measures as they are in current EU FTAs. If they focus on goods and services, the EU’s exclusive CCP competence would apply except for transport, and the EU often concludes separate transport agreements with non-EU countries. While one could argue that a deal might require unanimity under Article 207(4) TFEU, a counter-argument is that a post-Brexit trade deal simply preserves existing UK market access to the EU, posing no threat to health or audiovisual services.

Even regarding transport, labor, or environmental standards, case law suggests that exclusive competence based on Article 3(2) applies when the EU extends its laws to non-EU states. If the UK accepts a treaty preserving market access in exchange for complying with EU rules, this opinion, if upheld by the ECJ, might provide a roadmap for negotiating an agreement based on free trade in goods and services and adherence to specific EU legislation, potentially bypassing national ratification and, depending on the subject, national vetoes.

Barnard & Peers: chapter 24, chapter 27

Photo credit: Singapore Hotels and Guide