Concluding Free Trade Agreements: the EU-Singapore Opinion and Brexit

17 May 2017

On 16 May, the European Court of Justice rendered Opinion 2/15 (here) on the conclusion of the Free Trade Agreement between the European Union and Singapore.

What is it?

The Opinion is a legally binding ruling rendered on the basis of a procedure laid down in Article 218(11) TFEU. This procedure enables certain EU institutions and any Member State to ask the Court questions about the compatibility with the EU Treaties of international agreements that the EU is about to conclude. The rulings of the Court are binding (for instance, the EU has been unable to accede to the European Convention on Human Rights because, in an Opinion of December 2014 (here), the Court held that the Draft Accession Agreement that had been negotiated between the EU and the Council of Europe was not compatible with the EU Treaties).

What is it about?

After approximately 4.5 years of negotiations, the EU and Singapore finalised a Free Trade Agreement in October 2014. This took the form of a deep and comprehensive free trade agreement: its content went beyond the traditional tariff and non-tariff barriers to trade in goods and services, and covered areas such as intellectual property rights, public procurement, competition, sustainable development, and investment.

The Opinion is about who has the power to conclude the Agreement: the EU on its own, or along with the Member States? The answer to this question depends on whether the content of the Agreement falls within the exclusive competence of the EU, or whether the Member States share competence (in which case the agreement could be mixed).

Why does it matter?

This is a matter of considerable legal and practical significance. If the EU is exclusively competent, the Agreement would be concluded by the Council alone (Article 218(8) TFEU) and with the consent of the European Parliament (Article 218(6)(a) TFEU). If, on the other hand, the Agreement was mixed, it would be concluded by the Council and every Member State, the latter ratifying the Agreement in accordance with their constitutional procedures. This process may not be smooth. It is recalled that the conclusion of the Comprehensive Economic and Trade Agreement between the EU and Canada (CETA) was nearly derailed by the Walloon Parliament in Belgium in October 2016 (I examined this issue in this blog entry: here).

The Opinion on the EU-Singapore Agreement was anticipated eagerly. The underlying issues are central to the conduct of the Union’s external trade policy, and the Opinion was expected to shed light on the reforms introduced in the area by the Lisbon Treaty. The Opinion, furthermore, would have implications for the conclusion of the trade agreement that the UK would conclude with the EU about their post-Brexit relationship.

The significance of these issues is illustrated by the fact that the Opinion was rendered by the Full Court, that is a composition that is rarely convened and only for the most important matters. It is also noteworthy that the Governments of 25 Member States made submissions.

What did the Court hold?

The Court held that the EU-Singapore Agreement was mixed and that the EU could not conclude it on its own. This is because two parts of the Agreement were covered by shared competence. These were about:

  • Indirect foreign investment (such as portfolio investment, that is any investment involving the movement of capital for personal gain without any intention to influence the management and control of the undertaking where the investment is made);
  • the establishment of an investment-State dispute settlement (ISDS) (investors are given the right to bring an action against either party before an arbitral tribunal).

The Court held that the EU had exclusive competence over all the other provisions of the EU-Singapore Agreement covering the following:

  • trade in goods and services (including transport services and public procurement);
  • foreign direct investment (that is investment by an EU national in Singapore, or vice versa, involving movement of capital enabling the investor to participate in the management of an undertaking or in its control)
  • intellectual property rights;
  • competition;
  • sustainable development (including environmental protection and labour standards).

As far as the ISDS mechanism is concerned, the Opinion was confined to the question of competence. It did not address the compliance of the mechanism with EU law, in general, and the principle of autonomy, in particular. It is only a matter of time before this is raised before the Court of Justice (Belgium has undertaken to raise it in the context of the ISDS system laid down in CETA).

Is this a victory for the Member States?

As the Court sanctioned the participation of the Member States in the conclusion of the EU-Singapore Agreement, the Opinion may appear to suggest a victory for the Member States. Appearances, however, may be deceptive. The arguments of all the intervening Member States about a more narrow reading of exclusivity were largely rejected, and the Court went farther than Advocate General Sharpston had suggested (here). Overall, the exclusive competence of the Union in international trade has been bolstered considerably. For instance, the Opinion construes broadly the scope of the Common Commercial Policy (CCP), where the EU is exclusively competent under Article 3(1)(e) TFEU. By bringing the sustainable development provisions of the Agreement within the scope of the CCP, the Court has given the Lisbon reforms teeth. In many respects, the Opinion makes it easier for the Union to conclude trade agreements.

What are the implications for the EU-Singapore Agreement?

In the light of the Opinion, the EU-Singapore Agreement, in its present form, will be concluded by the EU and its Member States, of the one part, and Singapore, of the other part. Given the participation of Member States, national parliaments and, in some cases, regional assemblies will be involved in order to ratify the Agreement in accordance with the constitutional law of each Member State.

In order to speed things up, the parties may decide to apply provisionally the parts of the Agreement that fall within the Union’s exclusive competence. Provisional application requires a decision by the Council once the Parliament has given its consent. This decision would apply until the agreement had been ratified by all Member States.

The EU-Singapore Agreement could be concluded by the EU alone only if it was amended in order to comply with the Court’s Opinion. This would entail the removal of its parts dealing with indirect foreign investment and ISDS, a development that would, of course, require its renegotiation.

What are the implications for Brexit?

The negotiation of the post-Brexit UK-EU agreement is bound to be complex. It is, therefore, in the UK’s interest to reduce the number of legal obstacles that may derail this process. Viewed from this angle, a UK-EU only agreement, that is without the participation of the Member States, is the most attractive formula for the British negotiators: there would be fewer constituencies to satisfy, the unpredictable role of national parliaments would be avoided, and the whole process would take less time to complete.

The conclusion of the EU-Singapore Opinion may suggest that Member States would have to participate to such an agreement. This, however, would be deceptive: as most areas covered by the Agreement fall within the EU’s exclusive competence, a free trade agreement which would not cover indirect foreign investment and which would not provide for a ISDS mechanism would be concluded by the EU alone. A separate Bilateral Investment Treaty, dealing with the above two issues, could be, then, negotiated between the UK and the EU and its remaining 27 Member States. Given the UK’s insistence for joint participation in trade negotiations, it is somewhat ironic that the rejection of most of its arguments might make it easier for it to negotiate its post-Brexit relationship with the EU.

There are two qualifications. First, it by no means follows that the content of a UK-EU agreement would mirror the EU-Singapore Agreement. Whilst the latter is comprehensive, it may not provide a model for the former which would be negotiated, after all, in unique circumstances.

Secondly, the broader the scope and deeper the content of a UK-EU Agreement, the more complex its conclusion. If, for instance, such an agreement were an association agreement, its conclusion would require unanimity in the Council (Article 218(8) paragraph 2 TFEU). The UK Government has suggested that this type of agreement would be of no interest, and that it would negotiate, instead, for a ‘big, very ambitious free trade agreement’ (David Davis, Secretary of State for Exiting the European Union, reported in The Times, 15/5/2017, p10). The negotiations, however, have not started yet, and, therefore, the shape of the post-Brexit Agreement is unclear.