Tuesday 4 October 2016

The Future of EU External Trade Policy - Opinion 2/15: Report from the Hearing

David Kleimann and Gesa Kübek*

On September 13 and 14, the Court of Justice of the European Union (CJEU) held its hearings for Opinion 2/15, which concerns the EU’s competence to conclude the recently negotiated EU-Singapore Free Trade Agreement (EUSFTA). The CJEU convened in a rare sitting of the Full Court of CJEU judges. It was presided by Judge Lenaerts and Vice-President Tizzano, with Judge Ilešič fulfilling the function of the Court’s Rapporteur. Mrs. Sharpston serves as Advocate General.

This note offers a first-hand report on the hearing and summarizes the exchange of arguments between the Commission, on the one side, and the Council and the member states, on the other side. The first section sets the stage by providing relevant contextual information to the proceeding and highlights the systemic importance of the coming judgment. Section II first outlines the main and general lines of reasoning that the parties presented during the hearing. Secondly, we highlight a selection of policy specific, novel, or even ‘curious’ legal arguments that were advanced by the representatives of the Council and the Commission on the one, and the members of the Court, on the other hand. Section III concludes this note with one of many still unanswered, yet systemically highly significant legal questions that surfaced in the course of the oral phase of the proceedings. There's some further background to the case in an earlier post on this blog.

I.                   The Crux of Opinion 2/15

“Does the European Union have the ‘requisite competence’ to conclude the EU – Singapore Free Trade Agreement [EUSFTA] alone?” More specifically, the Commission, in October 2014, had asked the Court to clarify whether and which areas of the EUSFTA fall under EU-exclusive, shared, or member states’ exclusive competences respectively.

The crux of the matter brought before the Court lies exactly in this precise delineation of EU external competences: If the content of the EUSFTA falls under EU exclusive powers in its entirety, its conclusion as ‘EU-only’ would be mandatory. If certain treaty provisions are regarded as exclusive national competences, the agreement ought to be concluded as a ‘mixed’ agreement, including all EU member states as independent contracting parties. If only EU exclusive as well as shared competences were touched upon by the FTA, the decision to propose the conclusion (on behalf of the Commission) and to conclude the agreement (on behalf of the Council) as either ‘EU only’ or ‘mixed’ is legally optional and referred to the political discretion of the EU institutions involved in the applicable procedures set out in Article 218 TFEU (the general rules on EU negotiation and conclusion of treaties) in conjunction with Article 207 TFEU (the provision on the EU’s Common Commercial Policy).

The importance of the Court’s judgment for the governance of EU commercial relations with third countries – in particular the controversial EU/US trade deal (‘TTIP’) and EU/UK trade relations after Brexit – can hardly be underestimated. Given the broad and deep material coverage of the EUSFTA, the judgment will serve as a precedent for the conclusion of the vast majority of future EU trade and investment agreements. As such, the Court judgment in Opinion 2/15 could possibly mark the beginning of the era of ‘EU-only’ trade and investment agreements and, conversely, the end of the EU member states lengthy parallel ratification procedures required by ‘mixity’. As mirrored by the inter-institutional political debate on the legal status of the EU Canada Comprehensive Economic Trade Agreement (CETA), the eventual outcome of Opinion 2/15 has important implications on both the efficiency, reliability and credibility of EU trade and investment policy formulation, on the one hand, and the de jure legitimacy of multi-level economic governance in the European Union, on the other.

II.                Commission vs. Council and the Member States: The Arguments

Throughout the course of the hearing, the arguments of the parties focused on four contentious policy areas covered by the EUSFTA, notably disciplines on transport, investment, intellectual property rights, as well as sustainable development (labor rights & environmental protection). In the following, we will first outline a number of general legal arguments advanced by the parties that recurred during the hearing in application to all or most issue areas and discernably built on established CJEU case law. Subsequently, we highlight a selection of specific legal constructions that the parties put forward in respect of EUSFTA transport and investment rules.

1.     General Arguments of the Parties

a.      The Commission

As a first and predominant line of defense, the Commission representatives articulated a number of general arguments that aim at fitting the content of the EUSFTA, in its entirety, within the scope of the EU’s exclusive Common Commercial Policy (CCP) competence – Article 207 TFEU – as well as within the ambit other exclusive EU competences that can be implied in accordance with Article 3 (2) TFEU.

As such, the Commission proposed the broadest possible conceptual interpretation of the ordinary terms of Article 207, seeking to attribute maximum meaning to the expansion of CCP powers by the Lisbon reform of 2009, which saw the addition of services, foreign direct investment, and trade related intellectual property rights to the scope of CCP exclusive external powers.

Secondly, the Commission relied on a broad application of the ‘centre of gravity’ theory, which the Court had developed in its case law. The theory’s ‘predominance-test’ requires the use of a single legal basis where one of the aims and components of a measure “is identifiable as the main [one], whereas the other is merely incidental” (COM representative in reference to Case C-377/12, concerning the legal base of the EU partnership agreement with the Philippines). In this way, the Commission defended EUSFTA rules as measures falling under Article 207 where 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” (COM representative in reference to Case C-414/11 - Daiichi Sankyo).

Third, the Commission representatives made frequent use of the provisions of Article 3 (2) to advocate for implied exclusivity of otherwise shared competences. In codification of settled ERTA case law, Article 3 (2) TFEU prescribes EU exclusivity in case “the scope of EU rules may be affected or altered by international [member state] commitments where such commitments are concerned with an area which is already covered to a large extent by such rules” (Opinion 1/13, on the Hague Convention on child abduction, in reference to Article 3 (2) TFEU, 3rd situation). Otherwise, EU exclusive competence may be implied where the “attainment of the Community objective [is] inextricably linked to the conclusion of the international agreement” (Opinion 1/03 on the Lugano Convention on civil jurisdiction, codified in Article 3 (2) TFEU, 2nd situation).

Building on these three main lines of argumentation, the Commission developed a number of specific arguments in support of EU exclusivity in regard of foreign direct investment (FDI) protection and intellectual property rights (first, second, and third argument), sustainable development disciplines (second argument), and areas otherwise covered by EU rules to a large extent, such as maritime transport (second and third argument).

Yet, the Commission found it necessary to draw a second line of defense: in the alternative to full EU exclusivity, it held that the EUSFTA concerned EU exclusive and shared competences only. As such, the conclusion of the EUSFTA as ‘EU-only’ or ‘mixed’ would remain optional – or facultative - in accordance with the procedural rules of Article 218 TFEU in conjunction with Article 207 TFEU.

b.     The Council and the Member States

Living up to observers’ expectations, the Council and the member states’ representatives attacked the Commission presumption of EU exclusivity on various general and issue specific grounds, with an ubiquitous reference to the principle of conferral, which is set out in Article 5 (2) TEU. The EUSFTA concerned, in addition to the EU exclusive competence under Article 207 TFEU, both shared as well as exclusive member states’ competences. In consequence, “mixity is a must” for both the Council and the member states.

In particular, the Council and the member states demanded a narrow text based interpretation of Article 207 TFEU. Secondly, both Council and member states advocated for a restrictive employment of the ‘center of gravity’ theory that, in its application, needed to rest upon “objective factors amenable to judicial review” (member states representatives in reference to Case C—411/06, Shipments of Waste). More than once, the representatives of various parties referred to Opinion 2/00, on the Cartagena Protocol, in which the Court decided that “[w]hatever their scale, the practical difficulties associated with the implementation of mixed agreements (..) cannot be accepted as relevant when selecting the legal basis for a [Union] measure”. Instead, the Council and the member states advocated on several occasions that the choice of the legal basis should take account of the Court’s reasoning in Case C-411/06, where it was held that “[e]xceptionally, if (…) it is established that the act simultaneously pursues a number of objectives or has several components that are indissociably linked, without one being secondary and indirect in relation to the other, such an act will have to be founded on the various corresponding legal bases”.

Third, the parties argued in favor of restrictive reading of implied exclusive competences under Article 3 (2), 3rd situation, in that respective conclusions required a “comprehensive and detailed analysis of the relationship between the envisaged international agreement and the EU law in force” (Council and member states representatives in reference to Opinion 1/13).

Following these more restrictive of the possible realm of interpretative approaches, the Council and the member states concluded that member states remained exclusively competent for maritime transport, FDI protection, portfolio liberalization and protection and (alleged) non-commercial aspects of intellectual property rights protection. Moreover, the parties held that the EUSFTA’s disciplines on labor rights and environmental protection established various independent and non-incidental aims and objectives that required reference to multiple legal bases in the TFEU.

2.     Policy-specific Arguments of the Parties

Up to until this point, arguably, the Commission, on the one side, and the Council and the member states, on the other, walked on trodden paths of EU primary law interpretation and established case law, in application to an economic treaty of unprecedented scope and depth and a constantly evolving EU internal legislative status quo. In the following few paragraphs, we highlight a selection of rather unconventional and even curious policy-specific arguments in the areas of transport and investment that may yet move the needle on the evolution of EU external exclusive competences.

a.      Transport

In the area of transport, the Commission notably questioned the scope of the carve-out Article 207(5), which exempts “the negotiation and conclusion of international agreements in the field of transport” from the TFEU provisions of the CCP. In a remarkable construction, the Commission argued that the addition of foreign direct investment to the terms of Article 207(1) via the Lisbon Treaty reform of 2009 had moved mode 3 of transport services provision as defined by WTO law, i.e. establishment and FDI, back into the scope of the CCP. Mode 1, 2, and 4 (movement of the service itself, movement of service recipients and providers) remained outside of the CCP’s legal basis as regards transport. The EU, however, was now exclusively competent for the negotiation and conclusion of agreements liberalizing and protecting foreign direct investment in all sectors, including transport. The Council and member states cried foul in reference to Opinion 1/08, in which the CJEU ruled that transport was fully exempted from the CCP, and which remained “good law” even after the Lisbon reforms and protected the full integrity of the 207(5) transport carve-out from the CCP. The Commission, in view of the parties, was victim of its own faulty logic reasoning. Any exemptions from Article 207 (5) would deprive the provision of its effectiveness.

In the area of maritime transport services, the Commission advocated for implied ERTA exclusivity (Article 3 (2), 3rd situation TFEU) based on Regulation 4055/86. The Regulation prescribes broad mode 1 liberalization between EU member state nationals established in EU member states and third countries but does evidently not afford any liberalization commitment to nationals of third countries. The Council and member states hence pointed at the missing pieces for a comprehensive EU internal legal framework for transport services that could otherwise confer implied Union exclusivity. The parties further argued that the wide-ranging EUSFTA disciplines and objectives in this field were not incidental or subordinate to the commercial treaty objectives. Maritime transport services, in the view of the parties, remained a shared competence in accordance with Article 4 (2) (g) TFEU. Moreover, member states remained exclusively competent in regard of the regulation of third country vessels operators.

Inspired by this exchange of arguments, Advocate General Sharpston addressed the Council with a question of systemic relevance: What is, at the end, the decisive criterion or the threshold for the conclusion of an EU agreement in a field that is internally only partly covered by common rules, such as maritime transport? How many “hoops”, Sharpston asked, does the Commission have to “jump through” to prove EU exclusivity to the Council? Mrs. Sharpston further questioned whether internal exclusivity was a necessary condition for external exclusivity of competences. The Council, in response, denied that internal exclusivity was a conditio sine qua non but insisted on “strict conditions” for the conferral of implied exclusivity that were set out in Article 3 (2) TFEU. Moreover, the Council advocated for an application of the gravity theory that advanced “clear dividing lines”.

b.     Portfolio Investment

In a genuinely novel line of reasoning, the Commission advanced a treaty interpretation that would justify the implied exclusivity of Union competence over portfolio investment (ie, the purchase of non-controlling shares in companies), which is not included in the ordinary meaning of the term ‘foreign direct investment’ in Article 207 (1) TFEU. In doing so, the Commission departed from the otherwise currently uncontested notion that existing secondary EU legislation is the only contingency that can trigger an ‘ERTA effect’. The ‘ERTA effect’ confers exclusive competence in areas where member states exercise of external competence would otherwise affect already existing or even prospective ‘common rules’ (Art. 3 (2) 3rd situation TFEU). Such ‘common rules’, according to the Commission, however, could also take the shape of EU primary law. With reference to Article 63 (1) TFEU, the Commission representatives voiced the opinion that the treaty-prescribed freedom of capital movement between member states (as well as member states and third countries) sufficed to constitute ‘common rules’ within the meaning of Article 3 (2) TFEU. The possibility of member states concluding international agreements that affected the prohibition of restrictions on capital movements as codified in Article 63 (1) implied EU exclusive external powers in this area. The Union was therefore exclusively competent for the negotiation and conclusion of agreements covering rules on portfolio investment liberalization and the protection of such investments.

In the alternative, according to the Commission, portfolio investment liberalization falls under the Union’s shared competences.

The Council and the member states took pains to counter the Commission’s line of reasoning with a larger number of sometimes diverging arguments. First and foremost, the parties noted the fact that that Article 63 (1), by itself, only codifies a prohibition of restrictions, but falls short of conferring legislative powers upon the Union. Using Article 63 (1) TFEU as a legal basis for external action was merely a “legal fix” that constituted an instance of “legal imagination” on behalf of the Commission. To the Council, it appeared inconceivable that a provision, which did not suffice as a basis for internal legislation could imply an (exclusive) external competence. Only the exercise of an internal competence may  pre-empt external member state action. Belgium and Germany, secondly, took the stance that such a wide interpretation of Article 3 (2) 3rd situation TFEU facilitated an undue circumvention of the deliberate choice of the treaty makers to exclude portfolio investment from the scope of Article 207 TFEU and Article 64 TFEU. The two parties insisted on exclusive member state competence for portfolio investment. The representatives of Finland and Slovenia, on the other hand, appeared to suggest that the member states may share external powers with the Union in this area.

Countering the Council’s attack, the Commission, in response to an oral question asked by the Court, held that there was a “simple but very good reason” for the fact that the treaties did not codify a legal basis for the internal liberalization of portfolio investment: Article 63 (1) TFEU itself prescribed a comprehensive prohibition of restrictions to that end.

In another unprecedented interpretation of the treaties, the Commission cited Article 216 (1) in conjunction with Article 63 (1) TFEU as the correct legal bases for external Union acts that covered portfolio investment liberalization. The Council and several member states, in contrast, insisted that Article 216 (1) TFEU only conferred general treaty-making powers upon the Union and was unsuitable to serve as a legal basis for the conclusion of international agreements by the EU.

Upon inquiry of Judge Rapporteur Ilešič, the Commission and Council representatives found themselves in a rare moment of agreement to the extent that Article 64 TFEU could not serve as a legal basis for the internal liberalization of portfolio investment. According to the Commission, the harmonization of EU internal rules on portfolio investment could, however,  “maybe” be based on Article 114 or 352 TFEU – a statement that inspired the Court’s President Lenaerts to remind the Commission of the fact that the choice of the correct legal basis for a Union act was not “à la carte”.

In light of the circumstance that the Commission partly relied on a legal basis for an external competence, which allegedly did not require its internal exercise ex ante, Advocate General Sharpston questioned the Commission on the precise difference between the third situation governed by Article 3 (2) TFEU (as referred to by the Commission) and the second situation provided for by the same rule. Mrs. Sharpston’s enquiry, however, remained unanswered.

Secondly, the Advocate General questioned the Commission’s perception of the risk that member state agreements could ‘alter the scope of common rules’, whereas the common rules that the Commission referred to were in fact EU treaty provisions. The only way to alter the scope of primary law, Sharpston stated, was a treaty reform via the applicable constitutional provisions. In response, the Commission, in reference to the terms of Article 3 (2) TFEU, clarified that its argument did not extend to the alteration of the scope of treaty rules, but to the probability that the primary legal norm of Article 63 (1) could be affected by independent international member state agreements.

c.      Termination of Member States’ Bilateral Investment Treaties

Another point of legal debate that prominently featured in the hearing concerned the supersession, suspension, and termination of existing member states’ bilateral investment treaties with Singapore once the investment protection provisions of the EUSFTA will be provisionally applied or enter into force when the treaty is concluded. Article 9.10 EUSFTA provides that member states bilateral investment treaties “shall cease to have effect and shall be replaced and superseded by this Agreement”. A footnote to this provision stipulates that “the agreements between Member States of the Union and Singapore […] shall be considered as terminated by this Agreement, within the meaning of subparagraph 1(a) of Article 59 of the Vienna Convention on the Law of Treaties.” Yet, article 59 (1) VCLT prescribes that “a treaty shall be considered as terminated if all the parties to it conclude a later treaty relating to the same subject matter and: (a) It appears from the later treaty or is otherwise established that the parties intended that the matter should be governed by that treaty”.

While the Commission argued that past EU practice entailed an array of precedents for the supersession of member state treaties by EU external agreements, Judge Rapporteur Ilešič and Advocate General Sharpston questioned the appropriateness of the chosen legal modality as well as the EU competence for the termination of member states’ bilateral investment treaties (BITs) with Singapore via Article 9.10 of the EUSFTA. Both the Judge Rapporteur and the Advocate General, advanced a, however, unanswered request for a clarification as to whether the Commission wanted to argue in favour of the termination of the BITs via the duty of sincere cooperation enshrined in Article 4 (3) of the TEU. Otherwise, how would the Commission argue that it can include a provision in an ‘EU-only’ agreement that effectuated not only the succession but also the termination of member state bilateral agreements with Singapore under international law, given that the EU is not a contracting party to these agreements?

III.             Concluding Remarks

Opinion 2/15 raises a vast amount of general as well as policy area specific legal issues that are – in aggregate and in some instances individually - of tremendous importance for the delineation of EU competences vis-à-vis the Union’s member states. The significance of the Court’s judgment very much transcends the question of whether the EUSFTA is characterized as an ‘EU-only’ or a ‘mixed’ agreement in its entirety. Rather, the Court’s much awaited clarifications will have both systemic horizontal as well as policy area specific vertical implications for the operation of the EU’s legal system and its external relations.  Moreover, the judgment will likely clarify and may redefine the role and reach of the member states’ presence in the Union’s external economic relations in adaptation to the primary law reforms of the Lisbon Treaty, constantly evolving EU internal secondary legislation, and the expanding scope and depth of 21st century trade and investment agreements.

We conclude this note with a question posed by the British Advocate General Mrs. Sharpston, at the very end of the hearing, to all parties. The question, however, remained unanswered.

If the Court, in Opinion 2/15, held that the EU-Singapore FTA is a mixed agreement, what would be the consequence for the conclusion of the treaty? Given the extensive scope of EU 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.


  1. Thank you David and Gesa for this report - very interesting indeed!

  2. PS I'm sure many Eurosceptics will be interested in the answer to the last question of the AG, in the light of the Dutch referendum on the EU-Ukraine Agreement...

    1. Thank you for your interest in the report, Wybe. We will publish an article on "The Signing, Preliminary Application, and Conclusion of Trade and Investment Agreements in the EU - The Case of CETA and Opinion 2/15" very soon. There, we discuss the question raised by the AG in some detail. We will send you the paper as soon as it is out.

    2. Кostadin Shopov1 November 2016 at 10:55

      Dear David, thank you for the report. I find it very, very interesting and it opens a lot of questions about the future of FTAs. CETA is a clear example of the problematic nature of mixed agreements. When do you plan to publish the above-mentioned article?

    3. Dear Kostadin, thank you very much for your comment and the kind words. My apologies for the late reply. We published the EUI Working Paper last week. You can access it here: http://cadmus.eui.eu//handle/1814/43948
      Best, David

  3. Dear Gesa and David, thank you for the interesting report. One other issue that came to me while reading the report is the expectation that, with Brexit, the negotiations for the Mercosur-EU trade agreement will speed-up, since the common agricultural policy, the topic which prevents the execution of the agreement is not an issue of the British's concerns. So, in Mercosur's perspective, Brexit has oppened a path to deal or exclusively with England (without the problems represented by the CAP), or to get a better deal from the EU countries. Even though the execution of this agreement might not be a priority under the current political scenarium of the EU, this particular situation also demonstrates that, for countries outside the E.U. Brexit might represent some leverage to bargain conditions betweem the E.U and England, specially when those agreements would have similar benefits, regardless the signatories (U.K or E.U), when,for instance, the third-country is looking for obtaining a benefits related to services or goods that are comparable in both areas. Great topic!

  4. Dear Arthur, thank you very much for your very interesting comment and the important perspective that you provide. I would assume that the Commission's Brexit negotiator and the relevant services in the Commission will take this scenario into account when negotiating the terms of the British departure, as well as in ongoing negotiations with MERCOSUR. My best guess is that, now more than ever, COM will delay and backload an agreement with MERCOSUR on agricultural tariffs and TRQs for both practical and tactical reasons, and adapt respective commitments to the outcome of parallel Brexit negotiations. In any case, I agree with you that it will be easier for MERCOSUR to negotiate an agreement with the UK alone, both because of complementarity of the trade portfolios that you mention, and shifting power asymmetries in favor of MERCOSUR. Once the UK has its own WTO tariff, tariff-rate quota, subsidies, and services schedule of concessions that is. The fact that the UK currently doesn't have such schedules, and thus lacks a negotiation baseline, will, in my view, delay any negotiation or agreement with MERCOSUR for at least another two years after the May government triggers Article 50 TEU - a circumstance that plays into the hands of the Commission's MERCOSUR negotiators. But there are diverging positions on the UK's WTO status. Peter Unphakorn's and Lorand Bartels' ICTSD articles may best exemplify the two ends of this ongoing debate. Yet another thrilling subject of this saddening storyline.




  5. I would have supposed that answer to the last question from the Attorney General would be a simple 'yes'. If a Member State is not willing to sign, then it can't go ahead. The Commission and Singapore would then (I would have supposed) be at liberty to renegotiate it, if possible, removing the parts for which unanimity could not be reached.

    But from the way you left the question hanging, I infer that it is not as simple as that. I would be interested to learn why this is. Thanks, Andrew

    1. Dear Andrew - thank you very much for your comment and my apologies for the late response. We have addressed AG Sharpston's question in the EUI Working Paper, which we published last week, and which you can access here: http://cadmus.eui.eu//handle/1814/43948

      In our paper, we elaborate on the view that EU member states can only veto the signing and conclusion of those parts of the agreement that do not fall within the scope of EU exclusive competence. We outline two scenarios, in which a facultative mixed agreement can be concluded even if opposed by an individual member state government. pp. 22-24 Best, David

  6. I would like to find out the relationship between two issues:
    i) Is unanimity needed in the Council? - Article 218(4) TFEU
    ii) Can the Agreement be concluded with the EU only, or do the Member States have to sign it too? I believe this is the same as asking whether it is mixed or not.

    Do the two sets of criteria tend to catch the same type of provisions in an FTA? Are the two issues separable in principle? Are all 4 permutations possible? -:
    a) simple, QMV
    b) simple, unanimity
    c) mixed, QMV
    d) mixed, unanimity.

    Any clarification much appreciated. Andrew

    1. The questions are what the CJEU will answer - particularly the second question. We can only speculate on what it will say at this point. And all four permutations are possible, not necessarily in a pure trade agreement, but once trade is combined with another legal base. It's only theoretical to talk about a mixed agreement where unanimity applies, because there would be de facto unanimous voting.

    2. Thanks, Steve, much appreciated.

  7. Very interesting analysis. Wrote my LLM thesis on issues with IP and the "mixed" agreements (i.e. the TTIP) in early-mid 2016. Wish I had had some of this material available then. The fact that the Commission did not answer properly to the AG's question can be seen as a sign of the fact that this is exactly what is a key concern. From an economical perspective, which is often mentioned by those in favour of the FTAs, there is still no properly verified proof that FTA's like the TTIP provide for any economic or other benefit or improvement for anyone outside of the international corporate environment either in the short or long run.