Competence to conclude free trade agreements

It is sometimes said that you can tell a good compromise because it leaves both parties unhappy. If so, the CJEU’s decision in Opinion 2/15 can certainly be regarded as a good compromise. It is a hugely important decision in a field that is about to become of even more direct interest to the UK: competence to conclude free trade agreements.

If an agreement falls within the exclusive competence of the EU, then it is for the EU to conclude it, which normally means that individual member states have no veto. But agreements with elements that lie within the EU’s power and elements that lie within the member states’ retained power are known as ‘mixed’ agreements. They need to be concluded jointly by the member states, which effectively gives every member state a veto over the agreement.

‘Mixity’ is likely to be a particular problem because the modern practice in free trade agreements is towards increasingly complex and comprehensive agreements, covering not just trade but investment, and including provisions for investor-state dispute settlement (ISDS). And, as the EU’s own history shows, rules about trade, investment, and non-discrimination can easily trickle into many policy areas. So it was that in Opinion 2/15 the CJEU was asked to consider various provisions of a detailed and comprehensive free trade agreement between the EU and Singapore – the first time it has been asked to consider a so-called ‘new style’ free trade agreement.

As usual, the Commission (supported by the Parliament) argued that the Treaty’s provisions fell within exclusive EU competence; the Council and the member states identified various provisions that they argued fell outside it.

The first issue was the breadth of the common commercial policy (CCP). The CJEU generally took a broad approach. For instance, the court reasoned that restrictions which imposed limits on expropriation and nationalisation decisions were compatible with the preservation of the member states’ exclusive competence over property. Presumably there must be some point at which the limitations are sufficiently serious that the exclusive competence is affected, but the court’s opinion does not explain where that point lies. In other respects – for instance in relation to sustainable development – the CJEU found that the Lisbon Treaty had extended the scope of the CCP.

Nevertheless, the court did find limits. The first lay in the field of ‘non-direct investment’ (portfolio-type investments where the intention is to acquire a financial interest but without management control). The court found that, as EU law stands, these are not within the EU’s exclusive competence.

Far more important, though, was the court’s conclusion regarding ISDS. The Treaty enabled investors to opt to arbitrate disputes concerning member state action. The court found that the removal, at the investor’s option, of jurisdiction from the courts of member states in this way affected a fundamental reserved competence of the member states, and therefore fell outside the EU’s exclusive competence. Such a provision was not, in the court’s view, merely ancillary to the substantive provisions of the Treaty.

This conclusion, more than any other in Opinion 2/15, is likely to be of great moment. ISDS provisions are common in new style trade agreements, so that although it may look like a point of detail, it is of great practical significance. What is not clear is how it will be addressed. One option – legally simple, but politically complex – is to conclude agreements which contain ISDS provisions as a matter of shared competence. The reason that is difficult is that as soon as member states have a veto right over one aspect of the Treaty, they effectively have a lever that can be used to put pressure in respect of other aspects, even those that are subject to the EU’s exclusive competence.

A second possibility is to retreat from the recent preference for comprehensive agreements, separating in effect the more traditional ‘trade’ agreements (which the EU has sufficient exclusive power to conclude) from those dealing with investment, and in particular indirect investment and ISDS. That may in practical terms be the easier option.

How might this relate to the UK’s current position? It seems clear from article 50 that negotiation of the withdrawal arrangements is a matter of exclusive competence for which only a qualified majority is required. But there may be room for debate about how far such a treaty can extend, and whether there may be some matters relating to future trade and investment arrangements, especially if they raise institutional questions, which require separate negotiation.

As a member state that is shortly to become a non-member state, the UK must have a keen interest in the law and practice governing the conclusion of the EU’s free trade agreements.

Paul Stanley QC is a barrister at Essex Court Chambers

@EssexCourtLaw essexcourt.com