17 May 2017

The European Court of Justice (ECJ) yesterday ruled that the EU-Singapore trade deal (EUSFTA) requires ratification by member states before it can take full effect. This follows broadly in line with the opinion by the ECJ’s Advocate General (AG) issued in December last year. Nevertheless, the ruling clarifies the division of competences in trade policy between the EU and national levels and, in doing so, provides the contours of how a broad UK-EU trade deal could avoid the drawn out process of approval by every EU national parliament.

ECJ ruling offers expansive definition of EU right of action in trade

The Court’s ruling provides a generous interpretation of EU competence in concluding trade agreements. This could be significant for Brexit because, where the EU has so-called “exclusive competence”, national governments and the European Parliament can approve a deal without the need for potentially drawn-out national ratification in every national, and in some cases regional, parliament across the EU. (Remember the Wallonian regional parliament was able to temporarily hold up the EU-Canada deal). Where competence is mixed or “shared” with member states, national parliaments must all approve the deal.

The recent ruling finds that areas covering transport services, intellectual property rights, and labour and environmental standards are now understood to be covered by EU exclusive competence. This goes significantly further than the Advocate General’s (AG’s) opinion of 21 December 2016, which recommended that aspects of all of the above would require approval by member states.

Overall, the ECJ considered only two provisions in the Singapore deal did not fall within EU exclusive competence: those relating to non-direct foreign investment and the investor-state dispute mechanism. Therefore, if the EU-Singapore agreement were to retain these aspects, then approval by member states will be necessary before the deal could take effect in its entirety.

Yet, despite the ECJ’s decision that national parliaments must be involved, its narrower interpretation of what constitutes “shared” competence is still an important success for the European Commission (who brought the case to the ECJ last year), and a boost to the power of the EU institutions at the expense of national parliaments – most notably on domestically sensitive provisions concerning labour and environmental rights.

Broad UK-EU trade deal possible without national ratification

This ruling has gained a lot of attention given it sets an important precedent for future trade agreements. In the UK, it has particular consequences for a future trade deal with the bloc.

Under the ECJ ruling, an UK-EU agreement that follows the Singapore model, but abandons any provision for non-direct foreign investment and investor-state arbitration, would legally qualify for EU-only ratification. This could be important in reducing the risk of a long-negotiated arrangement unravelling at the final hurdle, as was almost the case for the EU-Canada trade deal last year. Indeed, some have suggested that such a deal would not require a significant revision of the UK’s current objectives, given there is little evidence that the government hopes to include expansive clauses on investment policy. What’s more, a Singapore-style deal would retain a relatively broad scope in terms of trade in goods and services, including integration of financial and business services markets, which the UK would presumably want included.

It is important to note however the legal precedent set by yesterday’s judgement only addresses one side of the coin. The decision on how to propose and conclude a UK-EU agreement will also be a matter of politics. Given the high political stakes, national parliaments may be unwilling to delegate their power of approval to the EU. A report by the German Bundestag in April argued that even interim arrangements between the UK and the EU, as well as a longer-term agreement, could warrant ratification by national and regional parliaments. Indeed it was political sensitivities in the member states which persuaded the Commission to propose that the EU-Canada deal require national ratification (against its own legal advice). Whether one or other national parliament would try to resist the ECJ’s ruling is as yet unclear.

Future EU-UK relationship likely to extend further than trade

Unlike the Singapore agreement, the future relationship between the UK and the EU is likely to cover more than just trade. The Prime Minister has already stated her objective to achieve a ‘deep and special partnership’ with the EU, including cooperation in security and defence. Given these are areas of shared competence with member states, a deal of this style would be unlikely to qualify for an accelerated EU-only approval process.

However, if the UK and EU are keen to avoid significant delay before a trade deal is formally in place, there are two broad options to choose from. The first would be to establish the different aspects of the future relationship under separate bilateral arrangements. For instance, the UK could seek a narrower Singapore-style deal covering trade in goods and limited services in the first instance, which would be easier and quicker both to negotiate and approve. This could then relieve some of the time pressure as it went on to hash out more complicated (separate) cooperation agreements covering broader services integration, security cooperation and agriculture and fisheries policy, which might require national ratification.

Alternatively, the UK and the EU could opt to provisionally apply relevant areas of a fully-fledged ambitious agreement while national ratification was underway. In this scenario, the UK and EU would look to conclude a single comprehensive agreement, covering aspects of both EU and member state competence. This would require national ratification before the deal could be applied in its entirety. But areas relating purely to EU competence – under the ECJ’s generous interpretation yesterday – could enter into force after the deal has been approved by the EU institutions but before national parliaments decide. This procedure is in place for the EU-Canada deal, for example, which will see provisions on removing tariffs on trade in goods come into force immediately, but requires national ratification for investment protection clauses.

Overall, this generous interpretation of the EU’s right of action may well offer a simpler route to the UK concluding a broad trade deal with the EU. However, as should be clear to all by now, the main hurdles to overcome in order to secure a UK-EU deal are not legal or procedural, but political.