20 December 2016

This blog has been updated following the ECJ opinion that EUSFTA cannot be concluded without the participation of all of the Member States, published 21 December

The EU is in the process of approving a comprehensive free trade agreement with Singapore [EUSFTA]. EUSFTA, not quite as comprehensive as the EU-Canada deal (CETA), is expected to phase out most tariffs and duties in goods trade, and provide some integration of services. However, although negotiations were completed in October 2014, progress towards its conclusion has stalled while the European Court of Justice [ECJ] rules on the legal classification of the deal. The ECJ is due to publish its opinion on the case tomorrow.

The Court is deciding whether EUSFTA classifies as an “EU-only” or “mixed” agreement: EU-only agreements only require ratification by the European Commission, the Council of the EU, and the European Parliament, who act on behalf of the member states. By contrast, “mixed” agreements require ratification both by EU institutions and by individual member states, creating a lengthy and potentially unstable approval process, as we have seen under the CETA deal.

The method of establishing trade deal “mixity” is a balancing act between the formal division of competences between the supranational and national levels, and the political context of the agreement. For example, while the Commission believed the recent EU-Canada agreement only related to areas of EU-exclusive competence and therefore qualified as “EU-only”, it recognised the political motivation in the Council to allow national parliaments to have a say, and therefore agreed to propose a “mixed” agreement. Yet, where the Commission and Council do not come to an easy compromise, they can refer to the ECJ for an independent decision.

This is the approach they have chosen for the Singapore deal. In fact, the matter has provoked a rare sitting of the Full Court of ECJ judges – a sign that the result of the hearing is expected to set the tone for the EU’s right of action in concluding FTAs in the future. This could prove important for Britain in determining the ease of setting the parameters of a long-term trade relationship with the EU. Indeed, the legal ruling may indicate what can be achieved in an UK-EU FTA – in particular, what level of services integration can be agreed – without requiring the lengthy process of domestic ratification under a “mixed” agreement.

 

The Commission’s Argument

While very little has been published on the details of the September EUSFTA court case, academics have made suggestions as to the arguments the Commission would have used to defend an “EU-only” proposal. Firstly, it would likely have presented the broadest legal interpretation of its exclusive right of action under the Common Commercial Policy [CCP]. In particular, the 2009 expansion of CCP to include Foreign Direct Investment may have incentivised the Commission to argue extensive right of action in investment, including investment protection and potentially portfolio investment.

Secondly, the Commission would likely argue the ‘centre of gravity’ principle established in case law, which maintains that if a provision has more than one objective, the legal basis for the provision should be in accordance with its primary objective. In the case of EUSFTA, the Commission may have argued that, despite disagreements over the division of competences in specific areas, the deal’s principle objective is the promotion and facilitation of trade, an EU-exclusive competence.

Finally, it may have claimed implied exclusivity in areas “where it is necessary to enable the Union to exercise its internal competence, or in so far as its conclusion may affect common rules or alter their scope” (Art 3(2) TFEU). This argument may have been used in relation to provisions on transport, investment and environmental policy.

 

What would a ruling in favour of the Commission mean for a future UK-EU agreement?

It is fair to say that a post-Brexit deal for the UK is likely to be a slightly different beast. EUSFTA signals “a stepping stone to greater engagement between the EU and Southeast Asia.” By contrast, in leaving the EU, Britain is disentangling itself from deep European integration.

The aim of this post is not to assess the strength of the legal arguments or to predict the Court’s decision, but to assess what impact the ruling would have on Brexit Britain and the conclusion of a future UK-EU agreement. A decision to propose EUSFTA as “EU-only” could adjust the UK’s understanding of the trade-off it faces between ambition and deliverability in securing a swift post-Brexit agreement with the EU. For instance, agreements covering integration of services, which are currently understood to require domestic ratification (and the potential unpredictability that comes with it), could potentially form part of a fast-track, “EU-only” agreement following the ECJ ruling.

Meanwhile, one could make the argument that the fact that the UK is withdrawing from the EU, rather than integrating with it, should affect the position from which the EU member states approach a UK-EU agreement, and in particular their claim to exercising national competences. At present, no EU member state has national competence over relations with the UK: movement of goods, services, capital and people between the UK and EU nations are agreed at the EU level and enshrined in the treaties. Therefore, a future deal could in of itself see the EU effectively hand back powers to member states over their relations with the UK, rather than transfer it away from them. If the EU-27 acknowledges this, there might be limited political pressure for a post-Brexit deal to be agreed as “mixed” and go through the process of national ratification. However, this does not take into account the dynamic of domestic politics and the feasibility of 27 national parliaments agreeing to have no direct hand in approving a long-term UK-EU relationship.

The importance of this case shouldn’t be overstated but it will give a sense of the legal gymnastics that are involved in EU trade policy, and which may also need to be deployed in UK-EU talks.

 

ECJ opinion finds EUSFTA requires the participation of Member States

The opinion of ECJ Advocate General (AG) Sharpston, published 21 December, finds that “the EU-Singapore Free Trade Agreement (EUSFTA) can only be concluded by the European Union and the Member States acting jointly.” The opinion of the Advocate General is not binding, and will be followed in due course by the ruling of the ECJ. It is true that the judges usually follow the AG’s opinion in non-sensitive matters, but we must await the final ruling to see if this is the case for EUSFTA.

The AG’s opinion is focused on the particular provisions of the EU-Singapore deal, indicating, for example, that it would not be possible to conclude EUSFTA without the participation of the Member States, as this new agreement necessarily forces certain EU countries to terminate their existing bilateral agreements with Singapore.

While there is likely to be increased interest around what this development means for Brexit, it does not really alter our de-facto understanding of how comprehensive trade deals progress within the EU (see the recent Canada deal, for example). As noted above, this opinion would have been most interesting if it had found in favour of an “EU only” deal as this might have opened a new route to a simplified process. But, even if the opinion had found EUSFTA to be an “EU-only” agreement, this would not necessarily have functioned as a perfect precedent for the UK – Britain might well be aiming for a more wide-ranging agreement than Singapore, raising even further questions about divisions of competence.