Free trade v freedom of association? The EU/South Korea free trade agreement and the panel report on the EU challenge to South Korean labour law

 

 

Steve Peers, Professor of Law, University of Essex

Has international trade liberalisation, in the form of the World Trade Organisation and free trade agreements between its Members, aided economic growth generally, or rather increased gaps between the rich and poor? Should the pursuit of freer trade take into account concerns about labour standards (and parallel concerns about environmental protection) – and if so, how?

Concerns along these lines have become increasingly prevalent in debates over trade policy, leading in some countries to reluctance to negotiate new free trade deals or demands to renegotiate existing treaties. For its part, the EU has moved towards more assertively applying the provisions relating to trade, labour and the environment in its free trade agreements. 

The EU’s enforcement strategy has recently had its first concrete outcome, in the form of the first panel ruling concerning labour standards under an EU free trade agreement. This concerned freedom of association under the EU/South Korea free trade deal. Note that the EU is recently more active in enforcing other aspects of its bilateral FTAs too: see the recent panel ruling in a dispute brought by the EU against Ukraine (regarding a Ukrainian export ban on wood). Dispute settlement proceedings against South Africa (regarding poultry) and Algeria (regarding import restrictions) are also underway.

This blog post summarises the relevant law in the free trade agreement and its interpretation by the panel, then comments on the ruling in the context of the broader debate about the relationship between trade and labour standards. Finally, I discuss how the ruling might be relevant by analogy to disputes about trade and the environment, to the controversial new EU/China investment agreement and to EU/UK disputes under the new post-Brexit trade deal (see further my summary of that deal and discussion of dispute settlement and human rights, as well as Markus Gehring’s analysis of the environmental rules in the deal).

 

The trade and sustainable development provisions of the free trade agreement

The term ‘level playing field’ is commonly used to refer to these issues (and some other issues) in the recent UK/EU treaty, but the phrase ‘trade and sustainable development’ is used in the EU/S Korea treaty (and more commonly by trade lawyers generally). The EU/S Korea rules are similar to those in a number of other recent FTAs with the EU, and so the panel report may well be relevant by analogy to potential disputes between the EU and (some) other non-EU countries. They are also broadly similar to the recently agreed EU/China investment agreement (not yet in force). However, as discussed further below, the ‘Brexit deal’ provisions go further.

Also, it should be noted that ‘trade and labour’ rules are not unique to agreements with the EU. For instance, free trade agreements with the US contain some provisions on the issue. Indeed, as also discussed below, the panel report distinguishes itself from the ruling in a case between the US and Guatemala.

Chapter 13 of the FTA, the ‘trade and sustainable development’ Chapter, first defines its ‘context and objectives’: the parties ‘reaffirm their commitments to promoting the development of international trade in such a way as to contribute to the objective of sustainable development’ (Article 13.1.1). They ‘recognise that economic development, social development and environmental protection are interdependent and mutually reinforcing components of sustainable development’ (Article 13.1.2). Also, they ‘recognise that it is not their intention in this Chapter to harmonise the labour or environment standards of the Parties, but to strengthen their trade relations and cooperation in ways that promote sustainable development’.

The scope of the Chapter is then defined (Article 13.2.1):

Except as otherwise provided in this Chapter, this Chapter applies to measures adopted or maintained by the Parties affecting trade-related aspects of labour and environmental issues in the context of Articles 13.1.1 and 13.1.2.

Having linked trade with sustainable development, Article 13.2.2 then pushes back:

The Parties stress that environmental and labour standards should not be used for protectionist trade purposes. The Parties note that their comparative advantage should in no way be called into question.

The mixed message continues in Article 13.3, titled ‘right to regulate’, which first refers to ‘the right of each Party to establish its own levels of environmental and labour protection, and to adopt or modify accordingly its relevant laws and policies’, but then qualifies that immediately by stating that ‘each Party shall seek to ensure that those laws and policies provide for and encourage high levels of environmental and labour protection, consistent with the internationally recognised standards or agreements referred to in Articles 13.4 and 13.5, and shall strive to continue to improve those laws and policies.’

What are those international standards exactly? Article 13.4 defines the international labour standards:

1. The Parties recognise the value of international cooperation and agreements on employment and labour affairs as a response of the international community to economic, employment and social challenges and opportunities resulting from globalisation. They commit to consulting and cooperating as appropriate on trade-related labour and employment issues of mutual interest. 

2. The Parties reaffirm the commitment, under the 2006 Ministerial Declaration of the UN Economic and Social Council on Full Employment and Decent Work, to recognising full and productive employment and decent work for all as a key element of sustainable development for all countries and as a priority objective of international cooperation and to promoting the development of international trade in a way that is conducive to full and productive employment and decent work for all, including men, women and young people.

3. The Parties, in accordance with the obligations deriving from membership of the ILO and the ILO Declaration on Fundamental Principles and Rights at Work and its Follow-up, adopted by the International Labour Conference at its 86th Session in 1998, commit to respecting, promoting and realising, in their laws and practices, the principles concerning the fundamental rights, namely:

(a) freedom of association and the effective recognition of the right to collective bargaining;

(b) the elimination of all forms of forced or compulsory labour;

(c) the effective abolition of child labour; and

(d) the elimination of discrimination in respect of employment and occupation.

The Parties reaffirm the commitment to effectively implementing the ILO Conventions that Korea and the Member States of the European Union have ratified respectively. The Parties will make continued and sustained efforts towards ratifying the fundamental ILO Conventions as well as the other Conventions that are classified as ‘up-to-date’ by the ILO.

Article 13.5 then defines international environmental standards. I’ve discussed the application of this ruling to them by analogy separately below.

Article 13.6 is a general statement about the links between trade and sustainable development. Article 13.7 then sets out a rule about ‘upholding levels of protection’, ie reducing standards or failing to enforce domestic labour law.

Skipping over a number of general provisions, the Chapter ends with rules on dispute settlement. Article 13.14 first calls for consultation between the parties on a ‘matter…arising under’ the Chapter. If these do not lead to a settlement within 90 days, a party can call for a panel of experts to be set up (Article 13.15). The panel is to make recommendations, and the parties ‘shall make their best efforts to accommodate advice or recommendations of the Panel of Experts on the implementation of this Chapter.’ This replaces the main dispute settlement system of the FTA, which is switched off for any ‘matter arising under’ this chapter (Article 13.16).

The panel report

The EU’s argument was based on two separate parts of Article 13.4.3 of the FTA, which was set out in full above. First, South Korea’s domestic labour law had not fully complied with ILO obligations as regards freedom of association. Second, South Korea had not made sufficient efforts towards ratifying core ILO treaties. 

Rules of interpretation

The report starts out by asserting that the level playing field provisions must be interpreted in accordance with the normal rules of interpretation of international law, in Articles 31 and 32 of the Vienna Convention of the Law of Treaties (VCLT). This followed from the obligation in the FTA for dispute settlement arbitrators to apply those rules; and the panel of experts was acting in lieu of arbitration.

Jurisdiction

Next, the panel turned to its jurisdiction to hear the case. Jurisdiction can be a dry technical issue, but here the dispute went to the core of the trade/labour nexus.  South Korea argued that the dispute was not ‘a matter arising under’ the Chapter, so could not be subject to dispute settlement at all, because Article 13.2.1 limited the Chapter to measures by a party ‘affecting trade-related aspects of labour and environmental issues’ (emphasis added). There was no direct impact on trade here, therefore no matter could arise under the Chapter.

If this argument had been accepted, it would have ended not only this particular dispute but also (if the ruling had been taken as a precedent) potentially many other disputes under this and other EU FTAs (as well as the EU/China investment treaty).  However, the panel did not accept it. It pointed instead to the words at the start of Article 13.2.1: ‘Except as otherwise provided in this Chapter…’, which indicated that there were exceptions to the rule that the Chapter only related to trade-related aspects. Article 13.4.3 was one of those exceptions. This was confirmed by the broad references to ILO obligations, the ‘fundamental rights’ aspects of those obligations, the reference to the abolition of ‘all’ compulsory labour, and the impossibility of ratifying ILO Conventions only as regards a limited category of workers. It was further confirmed by a contrario comparison with Article 13.4.1 and 13.4.2, which refer to trade (as to Articles 13.7 to 13.9), and by interpreting the scope of the Chapter in light of the broad context and objectives set out in Article 13.1 and the preamble to the FTA.

South Korea also argued that the EU aimed to harmonise the labour law of the parties, in breach of Article 13.2.2. The panel did not accept this either. Harmonisation meant ‘alignment of actual standards such as minimum rates of pay, maximum hours of work, or access to job security procedures’ as distinct from ‘fundamental principles and rights and core labour standards’, which ‘do not require harmonisation of domestic labour laws or outcomes’. The proof of this was that ‘many of the member States which have ratified the relevant Conventions both comply with their international obligations and maintain disparate systems of industrial relations, with very different substantive outcomes in terms of levels of economic development’. The panel also noted that the domestic right to regulate in Article 13.3 was subject to the obligation to uphold core standards.

Likewise, the panel rejected the argument that the EU aimed at protectionism, referring to ILO research that asserts no link between competitiveness and raising labour standards. With respect, a better argument here might be that the EU was not arguing for a protectionist measure (ie trade retaliation), if only because of the limits on remedies set out in the FTA itself. If there is no link between lower labour standards and trade, why does this Chapter often make that link in the first place? The panel’s interpretation is a hostage to fortune because it might make it harder for the EU to bring a claim in a different case relating to reduction or non-enforcement of labour standards, where it would have to show an effect on trade or investment to win the case.

On that point, next, the panel rejected any comparison with the ruling in the US/Guatemala dispute, because the rule in the FTA in question was a requirement that a party ‘shall not fail to effectively enforce its labour laws, through a sustained or recurring course of action or inaction, in a manner affecting trade between the Parties…’. While this was nearly identical to Article 13.7.1 of the EU/S Korea FTA (‘(a) Party shall not fail to effectively enforce its environmental and labour laws, through a sustained or recurring course of action or inaction, in a manner affecting trade or investment between the Parties’ – though note the extension to include environmental law, and an effect on investment), the EU was not alleging a breach of Article 13.7, ie a failure to enforce South Korea’s labour law. It was  instead alleging a breach of the separate obligation for that domestic labour law to meet minimum standards. More broadly, the context of the two treaties is different: the US/Central America/Dominican Republic treaty ‘does not have the same contextual setting of sustainable development as the EU-Korea FTA, nor does it refer to the range of multilateral and international agreements and declarations which the Parties have included in the EU-Korea FTA’.

Substance: domestic labour law

The panel then turned to the EU’s arguments about South Korean labour law, which were fourfold: a narrow definition of ‘workers’ who can join trade unions (excluding self-employed or dismissed or unemployed workers); the definition of ‘trade union’ as excluding bodies who admit persons excluded from the category of ‘worker’ as members; the requirement that only members can be trade union officials; and the discretionary registration of trade unions.

It started with looking at the different elements of Article 13.4.3. As regards the requirement to act ‘in accordance with the obligations deriving from membership of the ILO’, the panel found that it included the obligation to ensure freedom of association, even where (like South Korea) a country had not signed up to specific treaties on that issue. Moreover, the rulings of the ILO’s Committee on Freedom of Association could be taken into account.

As for ‘the ILO Declaration on Fundamental Principles and Rights at Work and its Follow-up’, the panel decided that the EU was not claiming that it was legally binding as such. What was legally binding between the parties was Article 13.4.3, taken as a whole.

Next, the panel considered the legal strength of the term ‘commit to’. Here the panel rejected South Korea’s argument that this wording was purely aspirational, ruling instead that ‘this represents a legally binding obligation of commitment to respecting, promoting and realising the obligations arising from membership of the ILO and the 1998 ILO Declaration in relation to the principles concerning the fundamental rights’.

It then turned to those specific terms. ‘Respecting’ meant a ‘negative obligation not to injure, harm, insult, interfere with or interrupt freedom of association’. ‘Promoting’ meant a ‘positive obligation on States, which in human rights statements on the content of the freedom of association means that States should ensure third parties do not disrupt workers engaging in their right to freedom of association’. Also, ‘States should create a ‘climate’ in which the civil rights of workers and employers allow them to freely exercise their rights to freedom of association’. As for ‘realising’, this meant ‘a binding requirement involving a commitment to realising the principles concerning the fundamental right of freedom of association’ as distinct from ‘a binding requirement that a Party comply with the terms of Conventions’ as such – which was the subject of a separate complaint, considered below.

Finally, ‘the principles concerning the fundamental rights’ did not mean that there was no legally binding obligation, and the panel was unconvinced by the South Korean argument that these principles were not sufficiently clear.  It did, however, hint that the freedom of association principles were clearer than the others referred to (forced labour, child labour and discrimination), raising the prospect that a case concerning those principles might face an extra hurdle to be successful.

Applying these principles to the EU’s specific complaints, first of all South Korea had wrongly excluded self-employed or dismissed or unemployed workers from joining trade unions. On the first point it noted that this issue arose under some EU Member States’ law too – noting that this might be an issue for discussion between the parties going forward. On dismissed workers, it noted in particular that there were insufficient safeguards against being dismissed for trade union-related activity.

Next, the panel concluded that South Korea had wrongly defined ‘trade unions’ as excluding bodies who admit persons excluded from the category of ‘worker’ as members, noting in particular that some trade unions had been deregistered because their members had been dismissed. Needless to say, this gives employers considerable power over not only individual employees but also entire trade unions by threatening dismissal of a union member. It also ruled against the national law requirement that only union members can be trade union officials, on the basis that ti was up to union members to choose who to represent them.

On the other hand, the panel ruled against the EU complaint regarding the discretionary registration of trade unions, holding that the evidence was contradictory and it was not sufficiently certain that the complaint was well-founded.

Substance: ratification of ILO Conventions

As a reminder, treaty provides that South Korea ‘will make continued and sustained efforts towards ratifying the fundamental ILO Conventions as well as the other Conventions that are classified as “up-to-date” by the ILO’. The EU argument related only to the ‘fundamental’ Conventions.

The panel started out by noting that of the eight ‘fundamental’ ILO Conventions, South Korea had yet to ratify four: two on forced labour and two on trade unions. The first issue here was the legal strength of the word ‘will’: the panel rejected South Korea’s argument that it was not really binding, holding that it ‘establishes a binding legal obligation’.

But a legal obligation to do what exactly? Here the panel rejected both South Korea’s argument that the status quo was sufficient, and the EU’s argument that progress towards ratification must continue ‘without interruption’. There was no concrete requirement or target date, and the parties had ‘leeway’ in achieving the objectives. This was an obligation of effort, not result.

Was there sufficient effort then? The panel ruled that it was sufficient that the South Korean government had tabled bills before Parliament in 2019 to ratify three of the treaties concerned. As for the other treaty, concerning prison labour, the panel accepted South Korea’s argument that changes to penal law take time. (One might note that they take very little time when a State responds to a terrorist bomb or other outrage). Overall, while expressing mild disappointment, the panel did not think that South Korea had breached its obligation to make effort towards ratifying the Conventions.

What happens when and if these treaties are ratified? That’s a hypothetical issue, and the panel was not called upon to address it. But it should be recalled that Article 13.4.3 also provides for a ‘commitment to effectively implementing the ILO Conventions that Korea and the Member States of the European Union have ratified respectively’. This would apply already, of course, to ILO Conventions which both sides have ratified. Logically much of the panel’s analysis would apply by analogy to this provision: it falls within its jurisdiction; there is no requirement to show a link to trade or investment; and the word ‘commitment’ entails a legally binding obligation. But here the wording is stronger than the obligation to make ‘efforts towards ratifying’ treaties: ‘effectively implementing’ them arguably suggests rather an obligation of result, going beyond halting and partial ‘efforts’ to do so.   

 

Comments

The EU has won some significant victories here, as regards: jurisdiction; the legal effect of some vague quasi-soft law terms; the absence of a requirement for a trade or investment impact; the references to some ILO Conventions; and the use of ILO ‘soft law’. All of this sends a signal to other non-EU countries, should the EU seek to invoke the relevant provisions (where they exist) in other FTAs or the EU/China investment treaty. Of course, the obligations also apply to the EU – as the panel points out at several places – although labour unions and environmental groups would likely be happy to see the EU held to account as well.

The EU has been successful also on some key points of criticism of domestic labour law. The panel’s close attention to the effect of labour law rules in practice – ie as a means to decertify trade unions simply by firing a member – is significant. On the point where the EU failed to table enough evidence to convince the panel, that is a pointer for how such disputes might be litigated in future.

The EU will likely be disappointed by the panel’s approach to ILO Conventions, where it held that they created a legal obligation but applied a relatively low threshold to assessing South Korea’s compliance with the obligation to move towards ratifying them. As noted above, some aspects of its reasoning (as regards the prison labour Convention, and the ‘disguised protectionism’ point) are particularly unconvincing, with great respect. This sends a converse message to non-EU countries: that a delay of nearly a decade in ratifying such Conventions, including extra tardiness in ratifying one important Convention, is acceptable. However, it should be noted that as discussed above, the obligations to implement ILO Conventions after ratification, while not discussed by this panel report, are arguably stronger.

Of course, the EU’s partial success in its action is inevitably limited by the lack of any further remedies to enforce the panel ruling. It might be possible that the process has some effect on domestic political opinion in the other party, perhaps helping to persuade the government to move faster on the relevant issues. However, considerations like these are only relevant where there is a form of democracy in the other party – so they are hardly relevant in the context of the EU/China investment agreement.  

The context of the panel ruling includes the gradual development of the EU’s own trade policy. A revision of internal EU law on trade remedies (which does not apply to investment treaties) is about to be formally adopted, and will be accompanied by a statement from the Commission, including the following commitment to enforcement of sustainable development provisions in the EU’s FTAs:

In deploying the enhanced enforcement system [regarding alleged breaches of trade agreements], the Commission will pay equal attention to alleged breaches of the trade and sustainable development provisions of EU trade agreements as to alleged breaches of market access systems. The processing of alleged breaches of trade and sustainable provisions will be fully integrated into the system. The Commission will prioritise those cases which are particularly serious in terms of their effect on workers or the environment in a trade context, which have systemic importance and which are legally sound.  

In the same context, the panel ruling is comparable to the 2017 CJEU judgment on the EU’s legal competence to agree the EU/Singapore free trade agreement, which decided (at paras 139 to 167) that the ‘sustainable development’ provisions fell within the scope of the EU’s common commercial (ie trade) policy. Having said that, it is striking that the CJEU took a different view from the panel as to whether lower labour standards might have an effect on trade, ruling that the sustainable development provisions:

are such as to have direct and immediate effects on trade between the European Union and the Republic of Singapore since they reduce the risk of major disparities between the costs of producing goods and supplying services in the European Union, on the one hand, and Singapore, on the other, and thus contribute to the participation of EU entrepreneurs and entrepreneurs of the Republic of Singapore in free trade on an equal footing (para 159).

There’s a context beyond the EU as well: while the new US President will not be tweeting angrily in the middle of the night about trade issues, the Biden administration is nevertheless lukewarm about further trade liberalisation. Whether this means ruling out trade deals entirely, or insisting on more account being taken of labour and environmental standards in such deals, remains to be seen.  

More broadly, concern in wealthier countries about opening up (or retaining) free trade without more enforceable labour and environmental standards may have reached a tipping point. One might draw comparisons with the EU’s own moves to adopt more labour and environmental law in the context of completing the internal market. Free trade’s hardcore advocates have long resisted making a strong link between trade and labour or environmental standards. They may now face a choice not necessarily between socialism or barbarism, but at least between legalism or nativism.

 

Application to environmental law

As noted above, some parts of the panel ruling are relevant to environmental disputes by analogy – in particular to the equivalent provisions on multilateral environmental treaties in Article 13.5:

2. The Parties reaffirm their commitments to the effective implementation in their laws and practices of the multilateral environmental agreements to which they are party.

3. The Parties reaffirm their commitment to reaching the ultimate objective of the United Nations Framework Convention on Climate Change and its Kyoto Protocol. They commit to cooperating on the development of the future international climate change framework in accordance with the Bali Action Plan.

First of all, interpretation in accordance with the VCLT is equally relevant to environmental issues. The panel’s analysis of jurisdiction applies also to environmental disputes by analogy:  Articles 13.5.2 and 13.5.3 are equally exceptions to the rule that the Chapter only covers trade-related aspects of the environment, given that there is no reference to trade only here.

As with the labour provisions, one can interpret the scope of those rules a contrario by comparison with Article 13.5.1 (which does mention trade) and Articles 13.7 to 13.9, and in light of the broad context of Article 13.1 and the preamble. The indivisibility of ILO Conventions applies equally to environmental treaties. The limited scope of the ban on harmonisation of law, the distinction between the right to regulate and the obligation to uphold core standards, and the absence of a requirement to show an effect on trade applies equally to the clause on multilateral environmental treaties.

By analogy with the panel ruling, the words ‘commit’ and ‘commitment’ as regards environmental treaties – appearing three times here – denote a legally binding obligation. A commitment to cooperation is arguably too vague to define in concrete terms; but on the other hand, a ‘commitment to reaching the ultimate objective’ of a treaty is a stronger obligation than ‘continued and sustained efforts towards ratifying’ the ILO Conventions at issue in part of the labour dispute.

The strongest obligation here may be the obligation ‘to the effective implementation in their laws and practices of the multilateral environmental agreements to which they are party’. This closely parallels the commitment in the labour provisions ‘to effectively implementing the ILO Conventions that Korea and the Member States of the European Union have ratified respectively’ – discussed further above.

Just as the panel report may be relevant by analogy to the labour provisions in other EU FTAs and the EU/China investment treaty, this extension of its reasoning could be relevant to the environmental provisions of those FTAs and the EU/China treaty too.

Application to the EU/China investment treaty

Comparing the EU/S Korea FTA with the EU/China investment treaty, the latter (understandably) refers only to investment aspects throughout, rather than trade also. However, it does not limit its scope in the same way as the EU/S Korea treaty, so South Korea’s jurisdictional objections (which were unsuccessful anyway) would not be applicable. The two treaties have a similar clause on their context, and comparable provisions on environmental treaties.

As regards labour standards, the non-regression and non-enforcement clauses are similar to the EU/S Korea treaty. The provision on ILO standards and domestic law, and ratification of ILO Conventions, provides:

1. Each Party, in accordance with its obligations assumed as a member of the International Labor Organization (“ILO”), and its commitments under the ILO Declaration on Fundamental Principles and Rights at Work and its Follow-up, shall respect, promote and realize, in good faith and in accordance with the ILO Constitution, the principles concerning the fundamental rights which are the subject of the fundamental ILO Conventions.

2. Each Party is, in accordance with the commitments of the members of the ILO and the 2019 ILO Centenary Declaration for the Future of Work, committed to effectively implement the ILO Conventions it has ratified and work towards the ratification of the ILO fundamental Conventions. In particular, in this regard, each Party shall make continued and sustained efforts on its own initiative to pursue ratification of the fundamental ILO Conventions No 29 and 105, if it has not yet ratified them. The Parties will also consider the ratification of the other Conventions that are classified as "up to date" by the ILO.

It is notable that this wording leaves out the list of fundamental rights in question, thereby omitting to mention forced labour explicitly. However, it is nevertheless covered by the general reference to ILO principles, in light of the panel interpretation.

The wording is basically similar to the clause in the EU/S Korea treaty which the panel interpreted, and so should logically be interpreted the same way, particularly in light of the use of the stronger word ‘shall’ at two points. Remember that the panel interpreted the word ‘committed’ (here referring to effective application of ILO Conventions once ratified) as legally binding.

As with the EU/S Korea FTA, the weak message on ratification of ILO Conventions (in this case, two forced labour Conventions) is arguably compensated for by the stronger wording on the domestic implementation of ILO principles. But this is subject to the important caveat above – that the recent panel ruling suggests that freedom of association principles might be easier to identify than the other ILO principles being referred to. The particular risk here is that the crucial issue of forced labour could not be effectively addressed. Whether this is sufficient will likely be subject to much debate in the near future. 

Finally, the dispute settlement system is essentially the same as for the EU/S Korea FTA, although the parties merely ‘discuss measures’ following any panel ruling.

Application to the EU/UK treaty

Comparing the EU/S Korea FTA with the EU/UK deal (chapter 8 of the ‘level playing field’ rules), the list of international measures includes some later measures in the latter treaty, but the references to integrating sustainable development into the EU/UK relationship are shorter. Conversely, the EU/UK treaty makes more references to transparency. The wording relating to ILO Conventions is only slightly different, bringing together the rules on promoting and effectively implementing such Conventions: ‘each Party commits to respecting, promoting and effectively implementing the internationally recognised core labour standards, as defined in the fundamental ILO Conventions’.

But there are additional commitments to: implementing the parts of the Council of Europe Social Charter that each party has signed up to; promoting the ILO Decent Work Agenda; protecting the social dialogue; and cooperating in multilateral fora on ‘trade-related’ labour issues.  There is a much longer list of environmental obligations as compared to the EU/S Korea FTA.  

Crucially, there is no general clause limiting the scope to ‘trade-related’ matters; such wording appears only in a handful of provisions of chapter 8. There is no rule against harmonisation or protectionism either.  So the various jurisdictional objections raised by South Korea could not so easily be made; and in any event, this panel report’s rejection of such arguments might well serve as a precedent. The panel’s findings that terms like ‘will’ and ‘commitment’ contain are legally stronger than one might think could also be relevant by analogy.

However, one similarity between the UK/EU and UK/S Korea treaties is crucial: the relevant provisions are both subject to a relatively limited form of dispute settlement, consisting of consultation followed by expert panels. No trade remedies can result, even if the panel finds a breach of the treaty. On the weak legal effect of a panel report, the EU/UK treaty is even blunter than the ‘best efforts’ clause in the EU/Korea treaty: ‘the Parties share the understanding that if the Panel makes recommendations in its report, the responding Party does not need to follow these recommendations in ensuring conformity with the Agreement.’

Conversely, though, the references to upholding domestic legal standards – ie the cases similar to US/Guatemala, not EU/S Korea – are removed from the ‘fluffy’ sustainable development chapter, being placed instead in separate chapters in the UK/EU treaty, where trade retaliation can apply.  It is worth comparing the substantive test in full. First of all, the EU/UK treaty provides:

A Party shall not weaken or reduce, in a manner affecting trade or investment between the Parties, its labour and social levels of protection below the levels in place at the end of the transition period, including by failing to effectively enforce its law and standards.

(There’s an identical provision for environmental law). The EU/S Korea treaty provides:

1. A Party shall not fail to effectively enforce its environmental and labour laws, through a sustained or recurring course of action or inaction, in a manner affecting trade or investment between the Parties.

2. A Party shall not weaken or reduce the environmental or labour protections afforded in its laws to encourage trade or investment, by waiving or otherwise derogating from, or offering to waive or otherwise derogate from, its laws, regulations or standards, in a manner affecting trade or investment between the Parties.

Note that there are two rules in the EU/S Korea treaty – non-enforcement and non-regression – which are in effect merged in the EU/UK treaty. In the EU/S Korea treaty, non-enforcement is subject to two different thresholds: not only ‘in a manner affecting trade or investment’ but also ‘sustained or recurring course of action or inaction’. As for non-regression, it is also subject to the ‘manner affecting trade or investment’ test, but also a requirement that the reduction in standards must take the form of a waiver of a derogation of its laws ‘to encourage trade or investment’.

By comparison, while the EU/UK treaty also contains a threshold of ‘in a manner affecting trade or investment between the Parties’, it does not contain the requirement that any non-enforcement must take the form of a ‘sustained or recurring course of action or inaction’. Nor does it require that a reduction in standards take the form of a waiver of a derogation of its laws ‘to encourage trade or investment’. Any reduction of standards will do, not just a waiver or derogation of them, although unlike under the EU/S Korea treaty, the time period to judge the reduction of standards is fixed at a particular date: the end of the transition period. On the face of it, there is no scope for a dynamic interpretation, ie a reduction of standards in 2025 from a higher level which was legislated in 2022 would not fall within the scope of the EU/UK clause, unless that drop in standards went so far as to drop also below the level at the end of 2020.

However, a development like that might fall within the scope of the ‘rebalancing’ clause in the EU/UK treaty, which concerns future developments, and is also subject to potential trade retaliation.  Here there is a different threshold: the rule applies where ‘material impacts on trade or investment between the Parties are arising as a result of significant divergences between the Parties’ as regards labour, environment or subsidy laws.

Finally, just for fun: it’s a moot point now, but can we make any analogies between the EU/S Korea panel’s interpretation of the obligation to move toward ratification of the ILO treaties and the provision in the withdrawal agreement about negotiating a future relationship treaty? Here’s that text:

The Union and the United Kingdom shall use their best endeavours, in good faith and in full respect of their respective legal orders, to take the necessary steps to negotiate expeditiously the agreements governing their future relationship referred to in the Political Declaration of 17 October 2019 and to conduct the relevant procedures for the ratification or conclusion of those agreements, with a view to ensuring that those agreements apply, to the extent possible, as from the end of the transition period.

The wording is far from identical. But in general, remember that the panel report found an obligation of effort, not result, which was moreover not very strict. So the panel report is far from helpful to those who claimed that the EU was in breach of the clause for being ‘mean’ to the UK by not agreeing with the UK’s negotiation position. (Nor would it help anyone making an argument the other way around).  And suffice it to say that while the panel made extensive reference to primary and secondary literature, it did not find that any legal obligations derived from power point slides or tweets from EU officials.

Barnard & Peers: chapter 9; chapter 24; chapter 27; chapter 20; chapter 22

‘We *aren’t* the world’: the CJEU reconciles EU law with international (investment) law

Professor Steve Peers, University of Essex

Background

In recent years, investor-state dispute settlement (ISDS) has become a political minefield. Its critics argue that ISDS is a secret court system designed to allow multinational corporations to thwart any progressive legislation approved by democratically elected governments. Its defenders argue that these claims are exaggerated, and that ISDS performs a useful function attracting investment and securing property rights.

The arguments about ISDS are worldwide, but they have increasingly arisen within the particular framework of EU law. From 2009, the Treaty of Lisbon gave the EU exclusive competence over foreign direct investment as part of its common commercial (trade) policy, alongside goods, services and trade-related aspects of intellectual property. EU trade policy developed to include negotiations for ISDS as part of trade negotiations (although pre-existing investment treaties between EU Member States and non-EU countries were grandfathered, with a process in place to regulate negotiation of such treaties in future).

However, this led to political and legal difficulties in negotiating trade agreements: the former because of public concern about ISDS in both the EU and the non-EU countries, and the latter because of uncertainty about whether the EU had sole competence to negotiate treaties with ISDS provisions, or shared it with the Member States. Shared competence means that Member States have to become parties to the treaties concerned, meaning unanimity is required to agree them and there is a process of national ratification, although in practice the EU and the non-EU countries concerned often agree to provisional application of the trade-related parts of the treaty pending such national ratification.

The legal position was clarified when the CJEU ruled in 2017 that ISDS, like 'portfolio' investment (ie non-controlling shares in companies) did not fully form part of the common commercial policy (CCP), but was rather a shared competence between the EU and its Member States. (There’s EU legislation dividing up responsibility between the EU and its Member States in the event of successful investor claims.) Otherwise the Court took a broad view of the scope of the CCP. Coupled with the political concerns about ISDS, this was an opportunity to rethink the role of ISDS in trade policy, either leaving it out of talks completely (Australia and New Zealand, along with the mandate for stripped back trade negotiations with the USA), concluding a trade agreement without insisting on an investment agreement (Japan), or separating the issues into two distinct treaties (Singapore and Vietnam). This revised approach, splitting up trade and investment on a case by case basis, was confirmed more broadly by a Commission communication of 2017 and subsequent Council conclusions in 2018.

In parallel to these developments, the EU responded to concerns about the legitimacy of ISDS by seeking to reform it into a system more palatable to Main Street, rather than Bay Street, as a centre-left Canadian politician might say. A discussion paper of 2015 sums up the Commission’s approach, in particular securing greater transparency, limiting the scope of controversial provisions of investment law, confirming the ‘right to regulate’, and transforming investment tribunals into a quasi-judicial system, with the longer-term intention of establishing a multilateral investment court. Subsequently, the Commission tabled a proposal for such court, and the Council approved a negotiation mandate to that end. (For further details of the negotiations, see here).

Many EU trade and investment policy disputes came to a head early in 2017, when there was a delay in approving the Canada-EU Free Trade Agreement (CETA) because of concerns about ISDS and other issues in one Belgian region. (There were also national constitutional court proceedings challenging CETA in France and Germany, as well as an EU General Court judgment on whether a European Citizens’ Initiative could be launched to stop its ratification). This kerfuffle, coming shortly before the CJEU ruling clarifying the scope of the EU’s common commercial policy, partly prompted the move to downgrade investment objectives in EU trade policy, as discussed above. And part of the overall settlement of the dispute over CETA was the Belgian government asking the CJEU whether the CETA ISDS rules – renegotiated in light of the reformed approach to ISDS – were compatible with EU law. 

The Belgian government’s request – submitted on the basis of Article 218 TFEU, which allows the CJEU to rule on proposed international treaties – was answered by the Court of Justice this week (Opinion 1/17).  In the meantime, in its judgment in Achmea (discussed here) the CJEU had found that investment treaties between Member States were potentially incompatible with EU law.  Those treaties were duly wound up, but it remained to be seen if the Court would have the same concerns about investment treaties with non-EU countries. More generally, the Court has always had concerns about protecting the autonomy of EU law from international courts (see, for instance, Opinion 2/13 on accession to the ECHR, discussed here). Could these concerns about autonomy possibly be reconciled with the nature of ISDS tribunals?

The judgment

First of all, the CJEU ruled that the case was admissible. Although the Court only has jurisdiction to rule under Article 218 as long as a treaty has not yet entered into force, the provisional application of the trade provisions of CETA did not stand in the way of the Court’s jurisdiction. (Indeed, it appears that the Court would have found the case admissible even if the whole of CETA, including the investment disputes section, was in force provisionally).

The Court then examined the compatibility of the CETA investment provisions with EU law from three angles: the autonomy of the EU legal order; equal treatment and effectiveness; and the right of access to an independent tribunal. In each case, the Court set out the principles and then applied them to CETA.

On the the autonomy of the EU legal order, the Court first recalled its case law that in principle, the EU could sign up to an international treaty which created an international court which could give rulings binding the EU. However, the Court also recalled that any such planned international court cannot infringe the autonomy of EU law. (In practice, the Court has usually been quick to complain that such courts do raise an autonomy problem). This autonomy is, in particular, guaranteed by the EU’s judicial system, which provides for ‘national courts and tribunals and the Court to ensure the full application of that law in all the Member States and to ensure effective judicial protection, the Court having exclusive jurisdiction to give the definitive interpretation of that law’.

For the Court, the crucial factor was that ‘the envisaged ISDS mechanism stands outside the EU judicial system’. The CETA investment court system created by CETA is not part of the domestic court system of Canada, the EU or its Member States. This did not necessarily mean that the ISDS system ‘adversely affects the autonomy of the EU legal order’, because as regards international treaties, the EU judicial system ‘does not take precedence over either the jurisdiction of the courts and tribunals of the non-Member States with which those agreements were concluded or that of the international courts or tribunals that are established by such agreements’. While those treaties form part of EU law and ‘may therefore be the subject of references for a preliminary ruling’ to the CJEU, they ‘concern no less those non-Member States and may therefore also be interpreted by the courts and tribunals of those States’. The ‘reciprocal nature’ of international treaties means that the EU can sign up to treaties creating an international court that is not bound by the interpretations of that treaty given by the courts of any of its parties.

But while EU law did not prevent the creation of such courts, it did place limits on what they could do: ‘they cannot have the power to interpret or apply provisions of EU law other than those of the CETA or to make awards that might have the effect of preventing the EU institutions from operating in accordance with the EU constitutional framework’. It was therefore necessary to address two points: (a) no power for the CETA bodies ‘to interpret or apply EU law other than the power to interpret and apply the provisions of that agreement having regard to the rules and principles of international law applicable between the Parties’; and (b) no power to impact EU law indirectly, by issuing ‘awards which have the effect of preventing the EU institutions from operating in accordance with the EU constitutional framework’.

On the first point, CETA explicitly specifies that its bodies will not have jurisdiction ‘to determine the legality of a measure, alleged to constitute a breach of this Agreement, under the domestic law of a Party’. This was different from treaties which the CJEU had criticised in the past, which would have given an international court the power to interpret EU law. In particular, it was different from an investment treaty between Member States only (which the Court criticised in Achmea), because the EU law ‘principle of mutual trust’…. ‘is not applicable in relations between the Union and a non-Member State’.

Furthermore, the Court was pleased that the CETA investment bodies could not determine the division of powers between the EU and its Member States, unlike the treaty on accession of the EU to the ECHR (on the Court’s ruling in the latter case, see my discussion here).  This distinction between the international and domestic systems was consistent with the lack of a prior role for the CJEU, or any power of the CETA bodies to send a reference for a preliminary ruling to the CJEU. It was also consistent with the lack of any national court review of an investment body decision.

On the indirect impact point, several Member States were concerned that a CETA tribunal might rely on the EU Charter ‘freedom to conduct business’ to rule on whether an EU measure is ‘fair and equitable’ under investment law, or ‘whether it constitutes indirect expropriation’, or it is ‘an unjustified restriction on the freedom to make payments and transfers of capital’ as defined in CETA. The CJEU noted that the provisions of CETA were broad and the EU could not block a decision being made against it or an obligation to pay damages, and that a challenger under the CETA investment rules could concern an EU measure ‘of general application’. There was a risk that a series of damages awards might mean that the EU decides to give up the level of protection concerned. Such an indirect impact could, in principle, be incompatible with EU law:

150    If the Union were to enter into an international agreement capable of having the consequence that the Union — or a Member State in the course of implementing EU law — has to amend or withdraw legislation because of an assessment made by a tribunal standing outside the EU judicial system of the level of protection of a public interest established, in accordance with the EU constitutional framework, by the EU institutions, it would have to be concluded that such an agreement undermines the capacity of the Union to operate autonomously within its unique constitutional framework.

In this context, the Court asserted that ‘EU legislation is adopted by the EU legislature following the democratic process defined in the…Treaties’, subject to EU ‘principles of conferral of powers, subsidiarity and proportionality’, and subject to judicial review by the CJEU ‘to ensure review of the compatibility of the level of protection of public interests established by such legislation with, inter alia, the…Treaties, the Charter and the general principles of EU law’.

However, the Court was satisfied that there were enough safeguards against this indirect impact upon EU law. One provision of CETA states that the investment rules:

…cannot be interpreted in such a way as to prevent a Party from adopting and applying measures necessary to protect public security or public morals or to maintain public order or to protect human, animal or plant life or health, subject only to the requirement that such measures are not applied in a manner that would constitute a means of arbitrary or unjustifiable discrimination between the Parties where like conditions prevail, or a disguised restriction on trade between the Parties.

So the CETA Tribunal ‘has no jurisdiction to declare incompatible with the CETA the level of protection of a public interest established by the EU’ in such cases. Therefore it could not ‘order the Union to pay damages’. The Court was also reassured by provisions that state that parties can ‘regulate within their territories to achieve legitimate policy objectives, such as the protection of public health, safety, the environment or public morals, social or consumer protection or the promotion and protection of cultural diversity’, and that regulation which ‘negatively affects an investment or interferes with an investor's expectations, including its expectations of profits, does not amount to a breach of an obligation under this Section’. It also relied upon the Joint Interpretative Instrument to CETA, which states that CETA ‘will … not lower [the standards and regulations of each Party] related to food safety, product safety, consumer protection, health, environment or labour protection’, that ‘imported goods, service suppliers and investors must continue to respect domestic requirements, including rules and regulations’, and that the CETA ‘preserves the ability of the European Union and its Member States and Canada to adopt and apply their own laws and regulations that regulate economic activity in the public interest’.

The Court summed up its view that the CETA bodies’ powers: ‘do not extend to permitting them to call into question the level of protection of public interest determined by the Union following a democratic process’. This was also confirmed by another provision confirming that ‘except in the rare circumstances when the impact of a measure or series of measures is so severe in light of its purpose that it appears manifestly excessive, non-discriminatory measures of a Party that are designed and applied to protect legitimate public welfare objectives, such as health, safety and the environment, do not constitute indirect expropriations’.

While the CETA Tribunal has jurisdiction to apply the broad ‘fair and equitable treatment’ test of investment law, the CJEU was satisfied that this power was limited, only applying to ‘inter alia, situations where there is abusive treatment, manifest arbitrariness and targeted discrimination’. So again, in the Court’s view ‘the required level of protection of a public interest, as established following a democratic process, is not subject to the jurisdiction conferred on the envisaged tribunals to determine whether treatment accorded by a Party to an investor or a covered investment is ‘fair and equitable’.’

More generally, the CETA tribunals ‘have no jurisdiction to call into question the choices democratically made within a Party relating to, inter alia, the level of protection of public order or public safety, the protection of public morals, the protection of health and life of humans and animals, the preservation of food safety, protection of plants and the environment, welfare at work, product safety, consumer protection or, equally, fundamental rights.’ So they did not ‘adversely affect the autonomy of the EU legal order’.

The Court then moved on to the principle of equal treatment and effectiveness. Here, the issue was whether CETA had to be compatible with Article 20 of the Charter (‘equality before the law’) and Article 21(2) of the Charter (non-discrimination on grounds of nationality). On this point, the Court first confirmed long-standing case law that treaties which the EU signed up to had to be compatible with fundamental rights. This issue could also be examined in an Article 218 proceeding, and extended to the Charter. (Indeed, see a 2017 CJEU ruling on another treaty with Canada, concerning the exchange of passenger data, discussed here).

In the Court’s view, Article 21(2) of the Charter did not apply, since it banned discrimination on grounds of nationality only as between EU citizens. However, Article 20 could apply, as its personal scope was not limited. While Article 20 does not oblige the EU to treat all non-EU countries the same (ie, the EU has no internal equivalent to the WTO’s Most Favoured Nation rule), it could apply if there is a difference of treatment within the EU of non-EU citizens on the one hand and EU citizens on the other. As for the principle of effectiveness, it only arose where a CETA Tribunal might find that a fine implementing EU competition law was a breach of the investment guarantees.

Applying these principles, the equal treatment issue was that EU citizens and companies could not invoke the investment provisions in the EU, whereas Canadian citizens and companies could. However, the Court ruled that these two groups were not comparable. The principle of effectiveness was not breached because if the EU or national competition authorities overstepped the limits of EU competition law, their decision could be struck down by the courts anyway.

Finally, as for the right of access to an independent tribunal, the principles were that Article 47 of the Charter bound the EU when entering into international treaties. In the Court’s view, the CETA bodies were very similar to courts, and bound by similar principles of independence. Although the Court was concerned about the accessibility of ISDS for small and medium-sized businesses, it was ultimately satisfied by a statement by the Commission and Council that the issue would be addressed, given that approval of CETA by the EU depended upon that commitment. On the independence of CETA bodies, the Court was satisfied that there was sufficient protection against removal of members, and the rules on payment of members would not preclude their independence. It was unproblematic that the parties could issue a binding interpretation of CETA, since this was a usual feature of international law. In any event, the EU could only agree to interpretations that were compatible with the principles set out in the Court’s opinion, and such interpretations could not have retroactive effects.

Comments

First, the Court’s confirmation that the case was admissible is useful. This means that the EU and non-EU countries can decide to apply a treaty provisionally while an Article 218 case is pending before the CJEU. However, this does risk legal complications in the event that the CJEU ultimately finds that the treaty concerned is incompatible with EU law – by analogy with the Council’s statement (no. 20 in the list of statements for the Council minutes) that if a national constitutional court or parliament objects to ratification of CETA, provisional application must be terminated.

As for the substance of the Court’s ruling, its analysis of the equal treatment and effectiveness rules was rather brief. Like the French constitutional court ruling on CETA, there was no clear explanation of why Canadian investors in the EU were in a different position than EU investors. (Possible answers are that the ISDS offers equivalent protection for EU investors in Canada, and that EU investors in the EU can rely on EU internal market law). The assessment of effectiveness takes it for granted that an ISDS body and the EU or Member States’ national courts will reach the same conclusions about the correct application of EU competition law, which is hardly a foregone conclusion. As for the independence of the ISDS system, the Court largely follows its usual approach to defining judicial independence.

The heart of the Court’s judgment is its reconciliation of the autonomy of EU law with the ISDS system. There’s an unusually strong acceptance by the Court of the EU legal system’s co-existence with international law – rather than supremacy over it. But that acceptance is conditional upon the safeguards which the Court then sets out. Here, there is a fundamental tension between the procedural aspect of the ruling (separate court system) and the substantive aspect of preserving the ‘right to regulate’. What if an ISDS body does issue a ruling that arguably infringes the capacity of the EU to decide on the appropriate level of regulation? Given that it’s essential that the ISDS system stands outside the national and EU court systems, how can the boundaries – also essential – which the Court insists must be set upon that system be enforced? The division between ISDS and national courts systems is simultaneously part of the solution and part of the problem.

In short, in British English, the key question for the Court was whether it was willing to throw a spanner into the works of the international investment system. The Court’s answer, in Canadian English, is like having a black fly in your chardonnay.

Is there a way to square this circle? The power of the CETA Joint Committee to issue interpretative rulings would arguably not go far enough to ‘fix’ the problem of an ISDS body ‘running wild’, as such rulings cannot be retroactive and Canada might not agree to them anyway. So let’s return to the courts. The Court rules out a national court review of an ISDS decision. However, it also refers to the possibility of national courts asking the CJEU questions about CETA.  Arguably, then, it’s possible to enforce the limits on ISDS bodies by a Member State or the EU refusing to pay a damages award ordered by an ISDS body, leading to a court challenge of that refusal to pay by the winning party – which is technically not a court review of the ISDS body’s decision as such. It would be similar to the well-known case of Kadi, in which the CJEU did not rule on the validity of a UN Security Council measure as such, but on the legality of its application in the EU legal order.

Is the judgment relevant to Brexit? At first sight the judgment is encouraging for those who would like to avoid any role for the CJEU as regards the UK after Brexit, given the Court’s willingness to reconcile the EU legal order with international law. However, that was not the sole factor in the Court’s reasoning, which distinguishes (rather than overturns) prior case law on the autonomy of EU law. A key part of the Court’s reasoning is that the ISDS body, unlike previous international courts which the Court objected to, does not have power to interpret EU law. The position is quite different under the Brexit withdrawal agreement (as I discuss here), and it remains to be seen if it might also be different as regards EU/UK future relationship treaties.

Finally, given that the new ruling concerns a reformed ISDS, how can it be enforced as regards unreformed bilateral investment treaties between EU Member States and non-EU countries (see the most recent list of such treaties here), to the extent that they do not comply with the standards set out by the Court and may apply to issues falling within the scope of EU law? Here the 2012 Regulation grandfathering pre-existing treaties, which also puts in place a process to regulate negotiation of such treaties in future, may be relevant. The review of pre-existing treaties, and control of future treaties, which that Regulation provides for may be applied taking account of the criteria in the Court’s judgment, so as to coordinate updating such treaties to ensure that they are compatible with EU law. This could be similar to the earlier process of updating bilateral aviation treaties between EU Member States and non-EU countries, in light of a series of CJEU judgments on their EU law compatibility.

It's too soon to say whether the reforms of the ISDS, as endorsed by the CJEU in its ruling, will satisfy a sufficient number of critics of the system to reduce the political opposition which ISDS has attracted in the past. Maybe the Court's judgment will turn out to be a death row pardon, two minutes too late. But it's striking that unlike many prior rulings, the CJEU does not appear intrinsically hostile to an international court, but willing in principle to find a way to accommodate it. Furthermore, the constraints the Court insists upon are not justified (as is usually the case) in terms of the Court's own institutional interests in the autonomy of EU law, but in terms of the EU's political institutions' accountability to the democratic process. To adapt the Canadian term, this is a judgment for Main Street, rather than the Kirchberg plateau. 

Barnard & Peers: chapter 24

Photo credit: cbc.ca

Guide to the Brexit Negotiations

Professor Steve Peers

Last week the Brexit process formally got underway, as the UK formally sent the ‘Article 50’ withdrawal letter to the EU on March 29, and the EU in turn drew up a draft of its Brexit negotiating guidelines.

The following is a detailed annotation of the text of the EU’s draft guidelines, which I compare throughout to the UK position – which is most fully set out in Theresa May’s Chatham House speech in January (discussed here). The draft guidelines might be changed before final adoption (due for April 29), but at present it seems unlikely there will be radical changes (if any), so my analysis is based on the text as it now stands. I will update this blog post if there are significant amendments.

I also make reference to the draft position of the European Parliament (EP). This is less important than the draft EU position, since the European Parliament is not (even partly) the negotiator in the talks – no matter how much it might claim to be, or how much some in the UK media believe that it is.  However, the EP position is still worth considering because the EP has a veto over the final Article 50 deal, and this power could influence the actual negotiators’ position. (There’s a full discussion of the EP’s role here). My comments are both legal and political – although we should keep in mind that most legal analysis about Article 50 TEU (which sets out the process of leaving the EU) is purely speculative in the absence of any ECJ case law.

While the initial attention in the UK has focussed on a misunderstanding of what the draft EU guidelines say about Gibraltar, the most significant issue is actually that the EU and UK in principle have many negotiating objectives in common. Most notably, the EU has accepted the UK’s objective of aiming towards a comprehensive EU/UK free trade agreement (FTA) without provisions on the free movement of persons or contributions to the EU budget.   

The devil will therefore be in the considerable details. For example, the EU and UK still disagree on the timing of Brexit talks, (possibly) the role of the ECJ, financial issues (the ‘divorce bill’), the Gibraltar issue (although this will be an issue for bilateral talks with Spain), whether the UK should comply with environmental and other standards as part of a deal, and whether ‘sectoral’ deals are possible. Further points of detailed disagreement will surely emerge as the talks get underway.

Is an EU/UK relationship based on a free trade deal the right way forward? Frankly, in my view, it’s not the first or even the second best option. But it is still a vastly better option than reversion to trade with the EU on a ‘WTO-only’ basis, as some are contemplating. This would lead to significant tariff and non-tariff barriers on many goods and services traded, and therefore hurt both sides.

There’s a democratic dimension to this too. Many of those voting ‘Leave’ were particularly concerned about EU budget contributions and the free movement of people, and an UK/EU FTA would resolve both concerns. But equally the ‘Leave’ side argued repeatedly that any concerns about a drop in UK trade with the EU were misplaced, because the UK and the EU would sign a free trade agreement without commitments relating to the free movement of persons or EU budget contributions.

They also claimed that such an agreement could be reached quickly and easily, on the UK’s terms. This was an obvious falsehood, as the EU’s draft negotiating guidelines have confirmed.  But rather than focus on this untruth, I believe we should move forward. It’s up to the government to move on with the negotiations, never forgetting that a reversion to a WTO-only trading relationship with the UK’s largest trading partner would both make a nonsense of the government’s aim of a free-trading ‘Global Britain’ and lack the slightest shred of democratic legitimacy. Moreover, it would damage both sides, and in particular put many people in the UK out of a job. These negotiations won’t be easy, but they are necessary. The time for fantasies, flag-waving and faffing about is over.

Annex I

On 29 March 2017, the European Council has received the notification by the United Kingdom of its intention to withdraw from the European Union and Euratom. This allows for the opening of negotiations as foreseen by the Treaty.

Note that the guidelines refer throughout to ‘negotiations’. Some have erroneously asserted that the EU will draft a text and present to the UK on a ‘take-it-or-leave-it’ basis. This is incorrect: Article 50(2) TEU refers several times to ‘negotiations’, and the draft guidelines reflect this.

The guidelines do not refer to any possible withdrawal of the UK notification, although the EP resolution (point L) assumes that a withdrawal of the notification is possible with consent. There is also an argument that the time period for withdrawal in Article 50 could be extended indefinitely. I will return to this issue another time.

Some have speculated that the EP might insist that the UK hold a referendum result on the outcome of the talks, as a condition for its consent to the deal. This would almost certainly backfire spectacularly, and in any event the draft EP resolution does not address this.

European integration has brought peace and prosperity to Europe and allowed for an unprecedented level and scope of cooperation on matters of common interest in a rapidly changing world. Therefore, the Union's overall objective in these negotiations will be to preserve its interests, those of its Member States, its citizens and its businesses.

The United Kingdom's decision to leave the Union creates significant uncertainties that have the potential to cause disruption, in particular in the UK but also in other Member States. Citizens who have built their lives on the basis of rights flowing from the British membership of the EU face the prospect of losing those rights. Businesses and other stakeholders will lose the predictability and certainty that come with EU law. With this in mind, we must proceed according to a phased approach giving priority to an orderly withdrawal.

The EU expressly asserts here its goal of an ‘orderly withdrawal’. Indeed Article 50(2) creates an obligation to negotiate with the withdrawing Member State (implicitly in good faith, as with any other negotiation under international law). Legally the wording of Article 50 equally suggests it aims to ensure an orderly withdrawal, and the ECJ is very likely to interpret it the same way. This necessarily implies that the EU cannot simply walk away from negotiations. However, in the event of a legal challenge it is unlikely (based on its prior case law on the EU’s international relations, which emphasises political discretion for the EU institutions) that the ECJ would rule that the general obligation to negotiate requires the EU to adopt (or refrain from adopting) specific negotiation objectives.

Politically this paragraph (and other similar references) confirms that the EU is aiming to reach a deal with the UK. So it would be false for anyone to assert that it is not.

In these negotiations the Union will act as one. It will be constructive throughout and will strive to find an agreement. This is in the best interest of both sides. The Union will work hard to achieve that outcome, but it will prepare itself to be able to handle the situation also if the negotiations were to fail.

The first sentence confirms that the EU will negotiate as a bloc, as Article 50 provides for (‘the Union shall negotiate and conclude an agreement with that State’). This does not preclude informal bilateral talks between the UK and key Member States’ governments, which is common when the EU discusses trade deals with non-EU states.

The overall tone here is diplomatic and asserts an intention to reach a deal, although the final sentence also asserts that the EU will prepare itself for a ‘no deal’ scenario as an alternative. This would likely entail getting draft EU laws ready for approval and gearing up national customs administrations et al for a UK departure presumably in one of two scenarios: a) on the date set out pursuant to Article 50; b) if the UK purports to leave the EU in breach of the terms of Article 50. In the latter scenario the EU Member States might not wait for the end of the Article 50 period, but declare that the UK has committed a material breach of the EU Treaties within the meaning of Article 60 of the Vienna Convention on the Law of Treaties, and suspend the UK from the Treaties.

The guidelines make no mention of amending the Treaties to remove reference to the UK, but one would not expect them to, since logically that is not an issue which the EU would negotiate with the UK.  It is not yet clear whether the EU will embark upon such a course; legally it might be argued that Article 50 is ‘self-executing’ in the sense that references to the UK automatically become legally irrelevant on Brexit Day. One issue might be whether other changes to the Treaties might be made at the same time; if so, this would become difficult to negotiate. Even a purely technical Treaty amendment which only removes references to the UK would take some time to ratify, so one would expect work to get underway soon, if it is going to happen – although there could be a legal problem in that in principle the UK ought to participate in the Treaty amendment process as long as it is a member. One solution might be to draw up such a treaty after Brexit Day, and backdate its application date.

Paras 30 and 32 of the draft EP resolution refer to possible changes to EU law as a result of the UK’s departure as an issue for the EU-27, although they make no specific reference to Treaty amendment.

These guidelines define the framework for negotiations under Article 50 TEU and set out the overall positions and principles that the Union will pursue throughout the negotiation. The European Council will remain permanently seized of the matter, and will update these guidelines in the course of the negotiations as necessary.

Article 50(2) states that the negotiation must take place ‘in light of’ these guidelines. It is unclear precisely what legal effect this has. For instance, could an outvoted Member State challenge the Article 50 deal for breaching the guidelines? As it happens, there is a pending ECJ case which raises (among other things) the legal effect of European Council guidelines in the asylum context, discussed here.

The predominant effect of the guidelines will of course be political; note that the European Council is prepared to ‘update’ them (ie amend or elaborate upon them further). They will necessarily be fleshed out in detail in a rather longer treaty text, on the basis of drafts tabled and negotiated by each side.

I. Core principles

1. The European Council will continue to base itself on the principles set out in the statement of Heads of State or Government and of the Presidents of the European Council and the European Commission on 29 June 2016. It reiterates its wish to have the United Kingdom as a close partner in the future. It further reiterates that any agreement with the United Kingdom will have to be based on a balance of rights and obligations, and ensure a level-playing field. Preserving the integrity of the Single Market excludes participation based on a sector-by-sector approach. A non-member of the Union, that does not live up to the same obligations as a member, cannot have the same rights and enjoy the same benefits as a member. In this context, the European Council welcomes the recognition by the British Government that the four freedoms of the Single Market are indivisible and that there can be no "cherry picking".

The June 2016 statement can be found here. The second sentence matches the UK government’s objective of a future close partnership. Any ‘sectoral’ deals are excluded; this contradicts the UK government position, which had the objective of obtaining such deals. In any event sectoral deals would be potentially vulnerable to challenge under WTO rules, which require any free trade agreement to cover ‘substantially’ all trade in goods (Article XXIV GATT) or services (Article V GATS). It would however be possible for mutual recognition agreements to cover certain sectors of trade. There is no reference in the guidelines to the UK government’s objective to achieve some form of special customs agreement, except implicitly as regards Northern Ireland.

2. Negotiations under Article 50 TEU will be conducted as a single package. In accordance with the principle that nothing is agreed until everything is agreed, individual items cannot be settled separately. The Union will approach the negotiations with unified positions, and will engage with the United Kingdom exclusively through the channels set out in these guidelines and in the negotiating directives. So as not to undercut the position of the Union, there will be no separate negotiations between individual Member States and the United Kingdom on matters pertaining to the withdrawal of the United Kingdom from the Union.

It’s not clear whether the ‘single package’ refers more narrowly to the specific issues which the EU wants to negotiate first, or the talks on later status of UK/EU relations. This is important because there is a strong case for concluding a first treaty on withdrawal issues, including in particular the status of UK and EU citizens who have moved between Member States, separately from any subsequent treaties.

This paragraph reconfirms the ‘no separate negotiations’ point already made in the guidelines. As noted above, this does not prevent some informal bilateral discussions on specific issues. For instance, UK/Ireland discussions on border issues could be significant, and the guidelines in effect require separate talks between the UK and Spain regarding Gibraltar. They also refer to bilateral UK/Cyprus issues.

Article 50 refers to the EU acting by qualified majority vote (without the UK voting), so the common assumption that any Article 50 deal must be agreed unanimously and ratified by all national parliaments is incorrect. However, some aspects of the overall Brexit deal (ie on future relationship) might entail unanimous voting and national ratification; and the EU might be unwilling to proceed with the Article 50 deal against the opposition of one or more Member States.

II. A phased approach to negotiations

3. On the date of withdrawal, the Treaties will cease to apply to the United Kingdom, to those of its overseas countries and territories currently associated to the Union, and to territories for whose external relations the United Kingdom is responsible. The main purpose of the negotiations will be to ensure the United Kingdom's orderly withdrawal so as to reduce uncertainty and, to the extent possible, minimise disruption caused by this abrupt change.

This refers to the entities referred to in Article 353 TFEU, ie Gibraltar, the Channel Islands, the Isle of Man, and some small remaining semi-colonies. For a discussion of their status, see this House of Lords report. The reference to minimising disruption is important, although qualified (‘to the extent possible’).

To that effect, the first phase of negotiations will aim to:

settle the disentanglement of the United Kingdom from the Union and from all the rights and obligations the United Kingdom derives from commitments undertaken as Member State;

provide as much clarity and legal certainty as possible to citizens, businesses, stakeholders and international partners on the immediate effects of the United Kingdom's withdrawal from the Union.

The European Council will monitor progress closely and determine when sufficient progress has been achieved to allow negotiations to proceed to the next phase.

This asserts the EU’s determination to discuss withdrawal issues before trade issues, whereas the UK has wanted to discuss them in tandem. However, the EU guidelines do not require the withdrawal issues to be fully agreed before talks on post-Brexit issues get underway. The ‘sufficient progress’ test is deliberately flexible; it can be argued that agreement in principle on the main issues will be sufficient, even if some details have to be worked out.  Para 14 of the EP draft resolution largely matches this, although the EP will not have any formal role in determining whether ‘substantial progress’ (the slightly stricter test which the EP proposes) has been met.

4. While an agreement on a future relationship between the Union and the United Kingdom as such can only be concluded once the United Kingdom has become a third country, Article 50 TEU requires to take account of the framework for its future relationship with the Union in the arrangements for withdrawal. To this end, an overall understanding on the framework for the future relationship could be identified during a second phase of the negotiations under Article 50. The Union and its Member States stand ready to engage in preliminary and preparatory discussions to this end in the context of negotiations under Article 50 TEU, as soon as sufficient progress has been made in the first phase towards reaching a satisfactory agreement on the arrangements for an orderly withdrawal.

The EP draft resolution (point 15) also rules out conclusion of a ‘future relationship’ treaty before Brexit, so it seems unlikely to happen.

This discussion of a ‘future relationship’ between the UK and the EU (concerning trade and other issues) is separate from a possible ‘transitional arrangement’ referred to in the next paragraph (‘may also’). So it is unclear whether a transitional deal could also only be concluded after the UK leaves.

In any event, it is arguable that a longer-term deal could be concluded (or at least signed and applied provisionally) on the date of withdrawal, or failing that, it could be backdated to that date. Such an approach would be consistent with the EU’s objectives of an orderly withdrawal and minimising disruption. However, the references to ‘preliminary and preparatory’ and ‘overall understanding’ seem to rule that out.

In any event, it would be hard in practical terms to negotiate all the details of the long-term framework within the time available, even though this is Theresa May’s objective. This is particularly true given that some of the available time will be taken up negotiating withdrawal issues before moving on to the ‘future relationship’ talks.

5. To the extent necessary and legally possible, the negotiations may also seek to determine transitional arrangements which are in the interest of the Union and, as appropriate, to provide for bridges towards the foreseeable framework for the future relationship. Any such transitional arrangements must be clearly defined, limited in time, and subject to effective enforcement mechanisms. Should a time-limited prolongation of Union acquis be considered, this would require existing Union regulatory, budgetary, supervisory and enforcement instruments and structures to apply.

It is certainly in the EU’s interest to maintain trade flows and other relationships with the UK, and as noted above this would be consistent with the EU’s objectives of an orderly withdrawal and minimising disruption. They would obviously be ‘necessary’ to the end of avoiding a switch to a WTO-only framework for trade between the UK and the EU. Again as noted already, this paragraph is unclear about when a transitional deal might be concluded, although as compared to the previous paragraph it does not explicitly state that talks could not be completed or that an agreement could not be concluded before Brexit Day. It is also vague about the relevant legal base: is it Article 50 (qualified majority vote) or other Treaty provisions (more likely to entail unanimity and national ratification)? The exact scope of Article 50 is unclear legally; the wording here suggests some uncertainty about what is ‘legally possible’, which it may be necessary to ask the ECJ to clarify (see Annex II).

The transitional deal would have to be limited in time, which could reassure those who do not want the UK to remain in such an arrangement indefinitely. It is not expressly clear that all aspects of EU membership would be carried over. In particular, it is not clear that the only transition which the EU would consider would be continuing in force the EU acquis. The distinction is important because a) flexibility on this issue could involve ending the free movement of people, or continuing it with an ‘emergency brake’, from Brexit Day; and b) an ‘enforcement mechanism’ might fall short of continuing EU ‘existing regulatory, budgetary, supervisory and enforcement’ measures. The latter phrase would logically entail keeping in force the ECJ’s current jurisdiction, while a mere ‘enforcement mechanism’ could entail a more limited role for the ECJ (no references from UK courts or direct impact on UK law) or a different dispute mechanism system entirely, such as using the EFTA Court which already exists and rules on certain EU law issues as regards Norway, Iceland and Liechtenstein. However, the more different a transitional system would be from current EU membership, the longer it would take to negotiate, and the bigger the risk of running out of time.

The UK government’s position seems to contemplate some form of interim transitional period, without calling it such. The Chatham House speech refers instead to ‘phased implementation’, during which aspects of EU law will still apply. But despite the difference in wording, fundamentally there are strong similarities between the UK and EU positions here.

The EP draft resolution is similar (para 28). It sets a maximum time limit of three years for the transitional deal, although otherwise it is as vague as the European Council draft guidelines.

6. The core principles set out above should apply equally to the negotiations on an orderly withdrawal, to any preliminary and preparatory discussions on the framework for a future relationship, and to any form of transitional arrangements.

7. The two year timeframe set out in Article 50 TEU ends on 29 March 2019.

It should be noted that Article 50(3) provides that the withdrawal agreement may set a different date (which could implicitly be later or earlier), and that the UK and the remaining EU, voting unanimously, may postpone the overall deadline.

III. Agreement on arrangements for an orderly withdrawal

8. The right for every EU citizen, and of his or her family members, to live, to work or to study in any EU Member State is a fundamental aspect of the European Union. Along with other rights provided under EU law, it has shaped the lives and choices of millions of people. Agreeing reciprocal guarantees to settle the status and situations at the date of withdrawal of EU and UK citizens, and their families, affected by the United Kingdom's withdrawal from the Union will be a matter of priority for the negotiations. Such guarantees must be enforceable and non-discriminatory.

The EU, like the UK, places priority on an early deal on the rights of each other’s citizens. While some had claimed that the EU could not or would not address this issue in the Article 50 talks, it clearly intends to do so. The reference to ‘non-discriminatory’ arrangements confirms that there will not be bilateral talks on this issue, as some people had expected. While some have claimed that the EU lacks legal power to regulate the position of non-EU citizens, Articles 77-79 TFEU confer such powers and the EU has adopted a number of laws in this area. In any event, it is strongly arguable that Article 50 confers power upon the EU to negotiate any issue which arose pursuant to the withdrawing Member State’s membership of the European Union, and the status of UK and EU citizens is one obvious example of such an issue.

The reference to an ‘enforceable’ guarantee does not necessarily entail using the ECJ. There could be some other form of dispute settlement, or a commitment to make the agreement binding in national law and to hold discussions about any issues which arise might suffice.

It should be noted that the guidelines make no reference to the idea, promoted by some in the EP, of an optional right for UK citizens to retain EU citizenship. The EP draft resolution does refer to this issue, but states that such arrangements should be reciprocal (para 27). It is hard to imagine the UK government agreeing to such a deal.

9. Also, the United Kingdom leaving the Union will impact EU businesses trading with and operating in the United Kingdom and UK businesses trading with and operating in the Union. Similarly, it may affect those who have entered into contracts and business arrangements or take part in EU-funded programmes based on the assumption of continued British EU membership. Negotiations should seek to prevent a legal vacuum once the Treaties cease to apply to the United Kingdom and, to the extent possible, address uncertainties.

This indicates a general intention to retain contracts and legal arrangements in force, if they have been concluded before Brexit Day. This could be relevant to research funding, regional funding or farm subsidies, for instance. It could also be the basis for arguing that UK banks who already have a licence to sell financial services to the EU market can retain it.

10. A single financial settlement should ensure that the Union and the United Kingdom both respect the obligations undertaken before the date of withdrawal. The settlement should cover all legal and budgetary commitments as well as liabilities, including contingent liabilities.

This is likely to be one of the most difficult issues to negotiate. The draft guidelines do not put a specific figure on the ‘bill’, although press reports note amounts such as €50 billion. There is no reason why the amount of any bill should be paid upfront, as some of it relates to funding over the next few years and to pensions payable over the longer term. For detailed discussions of this issue see this House of Lords report and this Brueghel report.

11. The Union has consistently supported the goal of peace and reconciliation enshrined in the Good Friday Agreement, and continuing to support and protect the achievements, benefits and commitments of the Peace Process will remain of paramount importance. In view of the unique circumstances on the island of Ireland, flexible and imaginative solutions will be required, including with the aim of avoiding a hard border, while respecting the integrity of the Union legal order. In this context, the Union should also recognise existing bilateral agreements and arrangements between the United Kingdom and Ireland which are compatible with EU law.

The EU and UK both make a priority of addressing the border issue between Ireland and Northern Ireland. (It should be noted that there is no specific reference to Scotland in the EU guidelines; the EP resolution merely notes that Scotland voted to Remain). There are indications of great willingness to compromise here (‘flexible and imaginative solutions’) and it should be noted that Protocols to the Treaties require the EU to facilitate the operation of the Common Travel Area between the UK and Ireland (the words ‘should also recognise’ these arrangements do not adequately take account of this legal obligation). However, the Protocols do not lay down in detail what happens in the event of UK withdrawal, which therefore has to be the subject of negotiations. Equally, arguments about the history of the UK and Ireland are irrelevant, as there has never been a previous situation when one of those countries was in the EEC/EC/EU and the other was not.

12. The Union should agree with the United Kingdom on arrangements as regards the Sovereign Base Areas of the United Kingdom in Cyprus and recognise in that respect bilateral agreements and arrangements between the Republic of Cyprus and the United Kingdom which are compatible with EU law, in particular as regards the situation of those EU citizens resident or working in the Sovereign Base Areas.

There is a specific Protocol to the 2003 Accession Treaty on the position of the UK sovereign base in Cyprus, which will presumably have to be amended in order to take account of any such agreement. Here, despite the overall EU-wide approach to talks, there is recognition that there will be a bilateral agreement between the UK and Cyprus alongside an EU-UK agreement.

13. Following the withdrawal, the Union with 27 Member States will continue to have the rights and obligations of the Union with 28 Member States in relation to international agreements. The United Kingdom will no longer be covered by agreements concluded by the Union or by Member States acting on its behalf or by both acting jointly. The European Council expects the United Kingdom to honour its share of international commitments contracted in the context of its EU membership. In such instances, a constructive dialogue with the United Kingdom on a possible common approach towards third country partners and international organisations concerned should be engaged.

The EU position is that the UK ceases to be part of any treaty with non-EU countries within the scope of EU law – whether concluded by the EU alone, by the Member States alone (but affecting EU law) or by both together. This is particularly relevant to trade agreements (see discussion by Markus Gehring here) but affects other agreements as well (for example, environmental deals).

The UK will likely seek to secure replacement agreements with the countries concerned. This is even encouraged by the EU, which seeks a ‘constructive dialogue’ on these issues. The reference to ‘international organisations’ most obviously refers to the WTO.

In practical terms, the issue which particularly arises is ‘tariff rate quotas’, ie allowing in a certain amount of products at a low tariff. Say the EU allows 100,000 tons of olives imported from Morocco at a low tariff: the obvious solution is to split that between the UK and the remaining EU based on recent trade flows (ie how much of those olives were imported into the UK in the last three years, as compared to the rest of the EU?).

Non-EU countries will obviously have to agree to this process, and the UK might want to focus particularly on replicating those agreements with a major impact on UK exports: for instance, the EU agreements on the protection of the name ‘Scotch Whisky’.

14. While the future location of the seats of EU agencies and facilities located in the United Kingdom is a matter for the 27 Member States, arrangements should be found to facilitate their transfer.

The intention is obviously to move these bodies as soon as possible after Brexit Day, if not before. The UK will not be involved in decisions on where they move to, but will be involved in the logistics of moving them.

15. Arrangements ensuring legal certainty and equal treatment should be found for all court procedures pending before the Court of Justice of the European Union upon the date of withdrawal that involve the United Kingdom or natural or legal persons in the United Kingdom. The Court of Justice of the European Union should remain competent to adjudicate in these procedures. Similarly, arrangements should be found for administrative procedures pending before the European Commission and Union agencies upon the date of the withdrawal that involve the United Kingdom or natural or legal persons in the United Kingdom. In addition, arrangements should be foreseen for the possibility of administrative or court proceedings to be initiated post-exit for facts that have occurred before the withdrawal date.

The EU assumes that EU court cases pending on Brexit Day should remain within the competence of the Court to decide. This is a classic transitional issue and the EU suggestion makes sense, since the cases concern the pre-Brexit legal position. (Compare to the planned Great Repeal Bill, which will provide that pre-Brexit ECJ case law will still be binding). It is slightly more ambiguous as regards pending administrative procedures like competition law and state aid (‘arrangements should be found’). The same applies to cases with EU law issues pending in the UK courts on Brexit Day, or which are brought in the UK courts in summer 2019 relating to a 2018 tax bill, for instance.

This paragraph is too limited, as the transitional deal needs to take explicit account of all legal proceedings pending on Brexit Day pursuant to EU law, not just those which involve or may involve the EU institutions: for instance a pending claim to recognise a German court judgment in the UK, or the French authorities’ obligation to execute a European Arrest Warrant issued by the UK before that date. Most implementation of EU law is carried out by national courts and administrations, not EU bodies, and the transitional rules should take account of this.

16. The withdrawal agreement should include appropriate dispute settlement mechanisms regarding the application and interpretation of the withdrawal agreement, as well as duly circumscribed institutional arrangements allowing for the adoption of measures necessary to deal with situations not foreseen in the withdrawal agreement. This should be done bearing in mind the Union's interest to effectively protect its autonomy and its legal order, including the role of the Court of Justice of the European Union.

The institutional arrangements will presumably entail an EU/UK Joint Committee with the power to take decisions by joint agreement. There are similar bodies in other EU treaties with non-EU states. The first and third sentences, read together, do not explicitly insist that the ECJ have jurisdiction over the withdrawal agreement (although it will inevitably have jurisdiction as regards the EU side). The reference to ensuring EU autonomy reflects ECJ case law which states that treaties with non-EU countries cannot affect the separate development of EU law or the essential features of the Court’s powers: see Opinion 1/91 and Opinion 1/00. Compare with point 17 of the EP resolution, which explicitly calls for the ECJ to have jurisdiction over the withdrawal agreement.

IV. Preliminary and preparatory discussions on a framework for the Union - United Kingdom future relationship

17. The European Council welcomes and shares the United Kingdom's desire to establish a close partnership between the Union and the United Kingdom after its departure. While a relationship between the Union and a non Member State cannot offer the same benefits as Union membership, strong and constructive ties will remain in both sides' interest and should encompass more than just trade.

The EU accepts in general the UK position of having a close partnership, including but going beyond trade. There is no explicit reference to the form of the relationship, which is relevant given that it could affect whether the EU side has to vote unanimously and ask national parliaments to ratify any treaty. (EU treaties with non-EU states can be partly applied provisionally pending such ratification).Point 22 of the EP draft resolution hints at a possible association agreement: this entails unanimous voting and usually also national ratification.

18. The British government has indicated that it will not seek to remain in the single market, but would like to pursue an ambitious free trade agreement with the European Union. Based on the Union's interests, the European Council stands ready to initiate work towards such an agreement, to be finalised and concluded once the United Kingdom is no longer a Member State.

The EU accepts the UK position of seeking a far-reaching free trade deal, rather than continued single market participation. Note that there is no reference to continuing with the free movement of persons or contributions to the EU budget – two key objectives of the UK side. The timing is an issue, as noted already: no finalisation or conclusion until after Brexit Day, which means that a transitional deal will be important in the meantime. Although in theory this could be on or soon after Brexit Day, there is unlikely to be enough time for that.

19. Any free trade agreement should be balanced, ambitious and wide-ranging. It cannot, however, amount to participation in the Single Market or parts thereof, as this would undermine its integrity and proper functioning. It must ensure a level playing field in terms of competition and state aid, and must encompass safeguards against unfair competitive advantages through, inter alia, fiscal, social and environmental dumping.

It is common for EU trade agreements to make some reference to state aid and competition law, although only some of them require the non-EU state to apply EU competition and state aid law as such. The guidelines leave it open as to what exactly the EU side will aim for. In any event WTO rules also contain some restrictions on granting subsidies and set out the possibility for trading partners to retaliate if subsidies are granted, although these rules are less far-reaching and enforceable than those applying to EU Member States. (Note that the EU does not ban state aids entirely, but restricts them to certain cases).

The ‘safeguards against unfair competitive advantages’ the EU side wants refers to – among other things – ‘fiscal, social and environmental dumping’. This does not explicitly refer to the adoption of EU law by the UK, and in any event there is no EU law on minimum corporate tax rates. (Compare to para 24 of the EP resolution, which refers more explicitly to EU laws, although to ‘tax evasion and avoidance’ as distinct from tax rates). The UK might argue that it would be sufficient to remain party to international treaties on environmental law and social protection (in the ILO, the Council of Europe and the UN Covenant on Economic, Social and Cultural Rights), and to hold regular discussions on corporate tax rates – which could cut both ways. In any event, many in the UK would welcome safeguards against cuts in environmental and social standards, and would be concerned about how public services could be funded in the event of large cuts in corporate tax.

It remains to be seen what exactly the EU side would accept as safeguards, but the EU’s position should be seen in its overall context: as noted already, the EU is not insisting on free movement of people or financial contributions. It is striking that the EU side makes no explicit references to services, where the UK has a trade surplus. If the UK wants to maintain that strong surplus by having an advanced trade relationship that offers more free trade in services than the EU usually agrees (but still falling short of single market participation) this is the condition which the EU wants to set.

20. Beyond trade, the EU stands ready to consider establishing a partnership in other areas, in particular the fight against terrorism and international crime as well as security and defence.

This matches the UK’s position. Neither side sets out any real details here.

21. The future partnership must include appropriate enforcement and dispute settlement mechanisms that do not affect the Union's autonomy, in particular its decision-making procedures.

There is no specific mention of the ECJ here, and the autonomy issue was discussed above. It’s not usual for the Court to have jurisdiction as regards non-EU states, bar a few exceptions like the European Aviation Area treaty, which facilitates aviation between EU and other European countries. But it is common for the EU to agree dispute settlement similar to the WTO dispute settlement system in agreements with non-EU countries. Interestingly, the EU does not use such systems in its trade agreements in practice, although it does often use the WTO.

In short, the WTO system provides for panels of experts to decide on whether there is a breach of WTO law; their decisions can be appealed to an Appellate Body. If a WTO party which was found to have breached WTO law does not comply with these rulings, the victorious party which brought the complaint can be authorised to retaliate against it with proportionate trade sanctions. Dispute settlement bodies are not unique to the EU and WTO – there is an active system in the NAFTA agreement between the US, Canada and Mexico, for instance. Such systems fall short of the legal effect of EU law in national legal systems, but still place some constraints upon the parties to trade treaties.

22. After the United Kingdom leaves the Union, no agreement between the EU and the United Kingdom may apply to the territory of Gibraltar without the agreement between the Kingdom of Spain and the United Kingdom.

This clause has attracted much overreaction. It is not a claim to Gibraltar territory or joint sovereignty, so there is no need to respond to it with talk of military action. It merely acknowledges that the EU will not apply post-Brexit treaties to the UK unless the UK and Spain have separately agreed to this. It will be up to the UK and Spain to find agreement for each treaty, or failing that to accept that the treaty in question will either not be concluded or not apply to Gibraltar.

V. Principle of sincere cooperation

23. Until it leaves the Union, the United Kingdom remains a full Member of the European Union, subject to all rights and obligations set out in the Treaties and under EU law, including the principle of sincere cooperation.

This reflects the UK’s continued position that it will apply EU law until Brexit Day. Point 5 of the EP draft resolution matches it.

24. The European Council recognises the need, in the international context, to take into account the specificities of the United Kingdom as a withdrawing Member State, provided it remains loyal to the Union's interests while still a Member. Similarly the Union expects the United Kingdom to recognise the need of the 27 Member States to meet and discuss matters related to the situation after the withdrawal of the United Kingdom.

The first sentence is ambiguous about a key issue: can the UK already discuss trade deals with non-EU countries? It can’t conclude them without violating EU law (para 23); normally it could not negotiate them either, but does this sentence accept the argument that discussions on a post-Brexit deal would be acceptable, as a consequence of the UK’s position as a withdrawing Member State? The second sentence asserts the remaining EU’s right to meet without the UK, presumably going beyond the talks relating to Brexit without the UK present as referred to in Article 50. However, such meetings must remain informal, as the next paragraph confirms.  

Compare to point 6 of the draft EP resolution, which more explicitly argues that the UK cannot negotiate with non-EU countries before Brexit, and argues that the UK should be excluded from EU trade talks with non-EU countries if it does. Such an exclusion would not be legal; the remedy in such cases of alleged breach of EU law is for the Commission or another Member State to bring the UK to the ECJ.  

25. While the United Kingdom is still a member, all ongoing EU business must continue to proceed as smoothly as possible at 28. The European Council remains committed to drive forward with ambition the priorities the Union has set itself. Negotiations with the United Kingdom will be kept separate from ongoing Union business, and shall not interfere with its progress.

The UK retains its formal position as a Member State until Brexit Day, although obviously it will have declining influence as there will be little interest in addressing its concerns and the other Member States merely have to wait out any veto or participation in a blocking minority vote by the UK.

VI. Procedural arrangements for negotiations under Article 50

The European Council endorses the arrangements set out in the statement of 27 Heads of State or Government on 15 December 2016.

These procedural arrangements are discussed in the next annex.

Annex II – Procedural rules

Here are the December 2016 procedural rules, with annotations.

1. The first step following the notification by the United Kingdom will be the adoption by the European Council of guidelines that will define the framework for negotiations under Article 50 TEU and set out the overall positions and principles that the EU will pursue throughout the negotiation. The European Council will remain permanently seized of the matter, and will update these guidelines in the course of the negotiations as necessary.

This refers to the guidelines of the European Council (the Member States’ Heads of State and Government), the draft of which is now available and was discussed above. Article 50 requires the guidelines to be adopted at the start of the process.

2. After the adoption of the guidelines, the European Council will invite the General Affairs Council to proceed swiftly with the adoption of the decision authorising the opening of the negotiations, following a recommendation by the European Commission, and to deal with the subsequent steps in the process. The Council will also adopt negotiating directives on substance as well as on the detailed arrangements governing the relationship between the Council and its preparatory bodies on the one hand and the Union negotiator on the other. These negotiating directives may be amended and supplemented as necessary throughout the negotiations, to reflect the European Council guidelines as they evolve.

This follows the normal process of EU treaty negotiation with non-EU countries, as set out in Article 218 TFEU: a Commission recommendation to start talks, and a Council mandate with detailed negotiation objectives, which may be amendment throughout the talks. That mandate will likely be more detailed than these guidelines. The General Affairs Council is made up of Member States’ foreign or Europe ministers, and meets monthly. The Council’s ‘preparatory bodies’ consist of working groups and Member States’ permanent representatives (the latter meets weekly, and is known as ‘Coreper’).

3. The Council will be invited to nominate the European Commission as the Union negotiator. The Commission's nomination of Michel Barnier as chief negotiator is welcome. To ensure transparency and build trust, the Union negotiator's team will be ready to integrate a representative of the rotating Presidency of the Council. Representatives of the President of the European Council will be present and participate, in a supporting role, in all negotiation sessions, alongside the European Commission representatives. The Union negotiator will systematically report to the European Council, the Council and its preparatory bodies.

Article 50 leaves open who the negotiators will be, and some had assumed it would be the Council. Nominating the Commission follows the usual approach under Article 218 TFEU. However, including a representative of the Council Presidency (which rotates every six months) and the European Council President (Donald Tusk) in the talks is an innovation, which reflects their importance. The obligation to report back to EU bodies reflects Article 218 TFEU.

4. Between the meetings of the European Council, the Council and Coreper, assisted by a dedicated Working Party with a permanent chair, will ensure that the negotiations are conducted in line with the European Council guidelines and the Council negotiating directives, and provide guidance to the Union negotiator.

Article 218 TFEU (and Article 207 TFEU, regarding trade) refer to Council working parties supervising Commission negotiators, so this is nothing new. As regards trade, the Commission refers to the committee which supervises it as the ‘mothers-in-law’ (don’t shoot the messenger!).

5. The members of the European Council, the Council and its preparatory bodies representing the United Kingdom will not participate in the discussions or in the decisions concerning it.

This simply respects the wording of Article 50, extended (logically enough) to the Council’s working parties, not just to the official meetings of ministers or heads of state.

6. Representatives of the 27 Heads of State or Government (Sherpas/Permanent Representatives) will be involved in the preparation of the European Council as necessary. Representatives of the European Parliament will be invited at such preparatory meetings.

This gives a slightly greater role than usual to the European Parliament.

7. The Union negotiator will be invited to keep the European Parliament closely and regularly informed throughout the negotiation. The Presidency of the Council will be prepared to inform and exchange views with the European Parliament before and after each meeting of the General Affairs Council. The President of the European Parliament will be invited to be heard at the beginning of meetings of the European Council.

The first sentence reflects Article 218 TFEU, which calls for the EP to be fully and immediately informed throughout negotiations. The second and third sentences go into more detail, and give a bigger role to the EP than usual during EU talks with non-EU countries. As noted already, however, the EP is not a negotiator as such, although its power to give its consent to the final deal (not referred to explicitly here) nevertheless means it is a significant actor. The additional meetings referred to here will be a forum for the EP to influence the negotiations.

There is no reference to the ECJ, which can rule on legal issues concerning draft treaties with non-EU countries pursuant to Article 218 TFEU, at the request of the Commission, Council, EP or a Member State. It is not clear whether the whole of Article 218 necessarily applies to the Brexit treaty process, since Article 50 only refers to some of it. There are also other ways that Brexit legal questions can reach the ECJ: national courts can ask the Court about them, the Commission can sue a Member State (or Member States can sue each other), or Member States or the EU institutions can sue the [other] EU institutions for various aspects of their conduct of the negotiation.

Barnard & Peers: chapter 27

Photo credit: the Register