Opinion 2/15 on the scope of EU external trade policy: Some background information before next week’s hearing

Dr Andrés Delgado Casteleiro

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

Introduction

On September the 13th and 14th the Court of Justice of the EU (CJEU) will hold its hearings for Opinion 2/15, which concerns the EU’s competence to conclude a new Free Trade Agreement (FTA) with Singapore, in a rare sitting of the Full Court of CJEU judges. This blogpost provides a brief overview of some of the relevant issues that will most probably play a role during the hearings. The first part provides some context on the EU’s trade policy. The second part focuses on the main issues concerning the EU´s competence to conclude FTAs. The final section discusses some broader implications that Opinion 2/15 might have – in particular for EU/UK trade relations after Brexit, and the controversial proposed EU/US trade deal (TTIP).

  

EU Trade Policy after the Lisbon Treaty

One of the main innovations introduced with Lisbon Treaty was the expansion of the scope of the EU´s competence over external (non-EU) trade policy, which is mostly known as the Common Commercial Policy (CCP). Article 207 TFEU extended the scope of the CCP as to encompass not only trade in goods but also trade in services, commercial aspects of intellectual property and foreign direct investment.

This expansion of the CCP´s scope meant not only that those subject-matters were an EU competence, but more importantly, following Article 3 (1) TFEU, they were all an exclusive competence of the EU – apart from an exception for transport services. The exclusive nature of the CCP entails two interrelated aspects: first, only the EU can negotiate and conclude trade agreements, and second, EU Member States cannot negotiate and conclude agreements in that area without the prior authorization of the EU. Also, Article 207 provides that usually the EU Council votes by qualified majority on external trade laws and treaties, so Member States have no veto. However, Article 207 does allow for a veto as regards some aspects of services trade, or where there is a veto in another área of EU law (tax, for instance).

In practice, exclusive competence would make things easier for the EU in terms of negotiating, concluding, and ratifying its international agreements, as only the EU would be legally entitled to negotiate those agreements. By contrast, whenever an international agreement concerns an area not covered only by EU exclusive competence, the agreement will be concluded by both the EU and its Member States.

Depending on whom you ask these latter agreements, commonly known as ‘mixed agreements’, could be seen as an awful or a great thing. On one hand, the whole process of concluding and ratifying mixed agreements is more cumbersome, as the EU and its 28 Member States have to conclude and ratify the agreement. The ratification process of mixed agreements normally takes years, as some Member States require that the agreement has to be approved by their national parliaments, although sometimes the EU agrees to apply such treaties (or parts of them) provisionally in the meantime.  On the other hand, mixed agreements could be seen as enhancing the role of the Member States during the negotiations, which can result on a much smoother implementation of the agreement.

In realpolitik terms, the discussion on whether a certain agreement should be mixed or not hides a battle for power between the EU (mostly the European Commission) and the Member States. As mixed agreements give more power to the Member States (often more than they are constitutionally entitled to), it seems rather logical that the EU Commission would like to restrict their use to the bare minimum. This is the underlying conflict in Opinion 2/15: if the Court decides that the EU-Singapore FTA falls within the EU’s exclusive competence, the EU would be able to conclude the agreement alone. If, on the contrary, the CJEU decides that the FTA does not only cover areas of EU exclusive competence, but also shared competence, or even Member States´ exclusive competence, the agreement will be concluded jointly by the EU and its Member States.

The EU-Singapore FTA and EU competence

To what extent does the EU-Singapore FTA fall within the scope of the EU´s (exclusive) CCP?

The EU-Singapore FTA covers broadly speaking four áreas: goods, services, intellectual property and investment. In relation to trade in goods, there is no doubt that this part of the FTA falls within the scope of the EU’s exclusive trade powers. That the CCP encompasses trade in goods has been clear since even before Opinion 1/94 – the key CJEU ruling on the scope of the EU’s trade policy powers before the Treaty of Lisbon. Likewise, trade in services, competition, public procurement and intellectual property would also be covered by exclusivity. While there were some doubts about to what extent they would be covered by article 207 TFEU, the Court seems to have cleared those doubts in Daiichi Sankyo as regards intellectual property, and Commission v Council, as regards services.

The main part of the hearings and, I would assume, the questions of the judges would concern the extent to which the EU´s CCP competence would cover the investment chapter of the agreement. As mentioned before, article 207 TFEU establishes that the EU has competence over Foreign Direct Investment (FDI). Yet, what is FDI?

A first possible way to approach the concept of FDI as enshrined in the Treaties is to understand, that the framers have coined a new and autonomous concept of Foreign Direct Investment. This new definition of FDI would cover all aspects linked to investment protection as enshrined in the EU-Singapore FTA, covering FDI stricto sensu as well as portfolio investment (ie buying minority non-controlling shares in a business), dispute settlement and even protection against expropriation. This position would render the investment protection provisions of the EU-Singapore FTA an exclusive competence of the EU since they would fall within the scope of the CCP.

The main problem with this expansive view of the scope of the EU’s competence over FDI is that would contradict both the international and EU (internal) definitions of FDI. Therefore, it seems rather unlikely that the Court would coin a new understanding of FDI completely detached from the international concept and irrespective of the Court’s case law on direct investment. 

A second possible definition of FDI that the Court could give would follow the international definition of FDI that excludes portfolio investments from its scope. This definition of FDI can be found in multiple OECD and IMF instruments. Moreover, it would also be in consonance with the definition of direct investment that the CJEU has developed in its internal market case law (see Angelos Dimopoulos, EU Foreign Investment Law (OUP, 2011)). Given that the EU-Singapore FTA defines investment in a very broad way as to include: “every kind of asset which is owned, directly or indirectly or controlled, directly or indirectly by investors of one Party in the territory of the other Party, that has the characteristics of an investment, including such characteristics as the commitment of capital or other resources, the expectation of gain or profit, the assumption of risk, or a certain duration”, this reading of the FDI competence would entail that not everything in the Investment Protection chapter would be covered by the CCP. Therefore, those parts not covered by the CCP would be covered either by other EU implied powers, or by EU Member States’ competences. I think that most probably this will be definition of FDI that the CJEU will favour, since it is in line with its internal case law and the relevant international instruments.

The third possible understanding of the scope of the FDI as enshrined in the CCP is the most restrictive one of all three. Based on a literal reading of Article 206 TFEU, it would argue that the EU’s exclusive competence does not cover all aspects related to FDI but instead it only covers the issue of the initial admission of FDI. Article 206 TFEU provides that among the CCP objectives, the progressive abolition of restrictions on international trade and on foreign direct investment is the aspect of FDI which has been 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). Consequently, post-admission measures would fall outside the scope of the CCP. This narrow reading of FDI under the CCP would very much restrict the EU’s powers in the field of FDI, and it seems rather unlikely that the Court given its expansive view of the CCP would adopt it.

Does the EU have any other exclusive competence covering certain aspects of the EU-Singapore FTA?

If the Court decided to choose either the second or third possible definition of the scope of the FDI competence, it would then have to establish whether there are any other implied and exclusive powers that would cover those aspects of the investment chapter of the EU-Singapore FTA not covered by the FDI exclusive competence. This question is especially interesting as regards portfolio investment and whether there might be an implied  and exclusive power stemming 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 in this direction: “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 would mean that one way or another both FDI and portfolio investments would be covered by an EU exclusive competence, so in principle there would no need for the participation of EU Member States in the EU-Singapore FTA based on the inclusion of an Investment Protection chapter in it.

However, it is not very clear how that competence would be exclusively implied since free movement of capital is a shared competence, and the EU has not exercised its competences under Article 64 (2) and 66 TFEU. Thus, it would be difficult to argue that the implied powers doctrine would apply since there is no internal legislation to be affected (P Eeckhout, EU External Relations Law (Oxford, OUP, 2011)). Yet, it would not be impossible, since the EU has established a harmonized regulatory framework for portfolio investments within the EU that makes reference to relations with non-EU countries.

Therefore, it would appear that portfolio investments could be an area largely covered by Union rules (Angelos Dimopoulos, EU Foreign Investment Law (OUP, 2011), p 105), which is the threshold in the case law for determining whether the doctrine of implied and exclusive powers could be applied. Recent case-law on implied powers does not give much clue about how the CJEU could see the issue. While the CJEU has been flexible in understanding whether a certain area is largely covered by Union rules, the fact that these rules must be affected has started to figure prominently in the Court’s reasoning (see Opinion 1/03, Opinion 1/13 and the broadcasting rights case), though not applied in a fully consistent fashion.

Implications of Opinion 2/15

Opinion 2/15 will not only determine whether the EU-Singapore FTA falls within EU exclusive competence, but could have the potential in setting tone for the next FTAs currently being negotiated or in the process or being signed. In other words, if the EU-Singapore FTA is found to fall within EU’s exclusive competence, the next EU FTAs could be concluded only by the EU. Conversely, if it is not within the EU’s exclusive competence, future EU FTAs will likely be mixed agreements.

This is especially relevant when one considers that the issues covered in the EU-Singapore FTA are the same kind of issues currently being discussed in the controversial EU-US negotiations on the TTIP. An Opinion 2/15 ruling establishing a broad scope for the EU’s CCP could allow the EU conclude the TTIP without its Member States alongside, making the ratification process far faster and, more importantly, less prone to surprises within the national parliaments´ ratification processes. By establishing that the TTIP can only be concluded by the EU, only the European Parliament would have to consent to the agreement. While this is by no means an easy task (see the EP´s position on the ACTA and (at first) the SWIFT Agreements), it is a far easier task than getting the TTIP ratified by the EU and its 28 Member States. Given the opposition of most of the European left and some parts of the right to the TTIP, I doubt that the TTIP would survive its ratification process if it is deemed a mixed agreement following Opinion 2/15.

Furthermore, if, as it looks right now, the UK government might prefer to settle its new relationship with the EU after BREXIT with an FTA (Canada + type of agreement) the Court’s opinion could potentially decide whether EU Member States have a veto in negotiating the new trade relationship with the UK. As Robert Peston has suggested, this may prove to be a key political issue in the UK/EU negotiations, as it will be harder for the UK to achieve its negotiating objectives if the remaining Member States all have a veto.

However, it must be pointed out that regardless of whether the Opinion finds that the EU has exclusive competence over the matter covered in the FTA, politics can overrun these legal considerations, as the Commission sadly reminded us back in June. Its decision to propose that CETA (the EU-Canada FTA) must be a mixed agreement regardless of the competences involved and the Commission´s Legal Service opinion marks a very worrying precedent that could undermine the effectiveness of the Lisbon Treaty reforms were Opinion 2/15 to conclude that the EU has exclusive competence to conclude FTAs.

Barnard & Peers: chapter 25, chapter 27

Photo credit: cnn.com