What does CETA tells us about Brexit?

27 Oct 2016

The Comprehensive Economic and Trade Agreement (CETA) that the EU has negotiated with Canada has attracted considerable publicity. Its fate is uncertain at the time of writing, as the Walloon Parliament in Belgium has voted against its signature and provisional application (the signature of CETA was scheduled originally for Thursday 27 October 2016). Its outcome notwithstanding, this episode is instructive about the legal complexities of Brexit.

What is CETA? 

CETA is one of the most comprehensive trade agreements that the EU has negotiated (the text of the agreement is available here).

Negotiations started in 2009. The Agreement introduces considerable liberalization in trade in goods, opens up public procurement in Canada at national, regional, and local level, and covers areas such as intellectual property rights and sustainable development. It also covers services, but does not liberalise financial services (and includes numerous exceptions and reservations). It covers technical standards but without introducing mutual recognition: the accredited standardisation bodies in the EU and Canada would be competent to confirm compliance with the standards of the other party, hence simplifying trade for business.

Which aspect of CETA has attracted attention? 

The approach of CETA to investment-State dispute settlement has attracted considerable attention. The Agreement provides for a permanent investment tribunal with jurisdiction to hear investor-State disputes. Companies may sue States directly before the tribunal for violations of the principle of non-discrimination, the most favoured nation treatment, the principle of favourable and equitable treatment, including denial of justice and fundamental breaches of due process, and expropriation without compensation. The tribunal is permanent and its members are appointed by the EU and Canada. The Agreement also provides for an appeal system.

The provision for a permanent investor tribunal was introduced by the EU after the text of CETA had been finalized. It illustrates a shift from the traditional investor-state dispute settlement system which is prevalent in international investor treaties and which is based on ad hoc arbitration. This system has attracted considerable attention recently. Its detractors attack the avoidance of national courts and suggest that the traditional investor-State dispute settlement system lacks transparency and undermines the regulatory authority of States. This criticism has been expressed in strong terms in the context of the negotiation of the Transatlantic Trade and Investment Partnership (TTIP) between the EU and the United States.

CETA is a mixed agreement  – what does this mean?

The procedure governing the signature and conclusion of an international agreement negotiated by the EU depends on the content of the agreement. If the latter falls within the exclusive competence of the EU, it is signed and concluded by the EU alone (eg the agreement on trade in wine between the EU and South Africa). This procedure may make the process of negotiating, signing, and concluding treaties easier (Article 207 TFEU, for instance, provides for qualified majority in the Council for the conclusion of agreements on trade in goods, and there is no need for ratification in Member States, as the latter are not parties to such agreements).

If, on the other hand, the agreement covers areas over which the EU and the Member States share competence, it is concluded by the EU and its Member States. This is a mixed agreement. The form of this agreement has implications for its application and entry into force: the ratification in each and every Member State, in accordance with national constitutional rules, is required.

Whether an international agreement should be an EU-only or a mixed agreement is often a matter of legal controversy. This is because this issue pertains to the politically sensitive question about the division of competence in international economic relations between the EU and the Member States. The European Court of Justice is currently considering these matters in a request by the Commission on the conclusion of the Free Trade Agreement that the EU has negotiated with Singapore (the controversial issue is competence over investment policy, transport services, intellectual property, and sustainable development).

Why is the vote of the Walloon parliament relevant?

Whilst the European Commission is of the view that CETA ought to be concluded by the EU alone, Member States disagreed. In order to avoid a delay in its application (and given the pending dispute before the Court of Justice), the Commission proposed in July 2016 that CETA be signed, provisionally applied, and concluded as a mixed agreement.

It is in this context that the vote at the Walloon parliament has attracted such attention. The signing and provisional application of CETA require the agreement of, amongst the other Member States, Belgium where all six regional assemblies would have to give their approval.

The objections raised by the Walloon assembly have to do with concerns about the impact of CETA on environmental, labour, and consumer standards, as well as the establishment of the investment tribunal and the impact this might have on national regulatory autonomy.

Is this a CETA-specific problem?

The legal and practical issues outlined above are not unique to either CETA or Belgium. The Netherlands has not ratified the Association Agreement that the EU negotiated with Ukraine following a non-binding referendum on 6 April 2016. As for CETA in particular, its signature was by no means a foregone conclusion in Germany and Austria. In Germany, the Federal Constitutional Court was asked to issue an injunction against the provisional application of the Agreement. It declined in a judgment rendered on 13 October 2016 (for a summary in English, see here.

The issues raised by the CETA episode may well arise in the context of any other comprehensive economic agreement negotiated by the EU, a point that the controversy surrounding the negotiation of TTIP illustrates all too clearly.

What does this tell us about Brexit?

The problems raised by the signature of CETA illustrate the legal challenges that the UK may face in its effort to agree its future relationship with the EU. If the latter were governed by a rather basic trade agreement, confined, for instance, to traditional trade barriers in goods, the agreement could be concluded by the EU alone (it would require qualified majority in the Council and the consent of the European Parliament). If, on the other hand, the agreement had a more comprehensive scope, its conclusion would require ratification in all 27 remaining Member States, and the consent of the European Parliament.

The form of the agreement (as an EU-only or a mixed one) would be a matter of legal assessment and political expediency. As far as the former is concerned, the ruling of the Court of Justice on the EU-Singapore Agreement is expected to clarify the issue of competence in policy areas which might be covered (the hearing took place on 13 and 14 September 2016). As for the political dimension, it is recalled that the conclusion of CETA as a mixed agreement was viewed as politically necessary, even though, in legal terms, the Commission deemed the agreement within the Union’s exclusive competence.

The above legal constraints have policy and practical implications too. First, they illustrate the wide range of national concerns that would need to be addressed for the UK-EU agreement to materialize. These would have to reflect the economic, political, and policy interests of 27 Member States – and these interests may vary considerably, both between and within Member States. In the case of CETA, for instance, the Walloon assembly was against the Agreement while the Belgian Government was in favour of it.

Secondly, the legal constraints outlined above suggest that it might take longer for a comprehensive agreement on the future UK-EU relationship to be negotiated, let alone for such an agreement to enter into force. In other words, the mixed nature of such an agreement would have an impact on the practicalities of its negotiation and application. The ruling of the Court of Justice on the EU-Singapore Agreement would be important. The United Kingdom made written submissions before the Court in which it argued for the continuing competence of the Member States and against the Union’s exclusive competence. It is somewhat ironic that, were the Court to accept these arguments, yet another layer of complexity would be added to the UK-EU negotiations.

Thirdly, the legal and practical issues outlined above suggest that serious thought should be given to the application of transitional arrangements. These may be required for the period between the adoption of the withdrawal agreement and the application of the agreement on the future relationship between the UK and the EU.