22 May, 2017
The European Court of Justice (ECJ) has this week handed down its Opinion on the EU-Singapore Free Trade Agreement (Singapore FTA), the first "new generation" FTA going beyond trade in goods and services to include investments, public procurement and sustainable development.
Significance of the ECJ Opinion
The significance of the Opinion reaches far wider than the specifics of one particular FTA; it represents a timely "sign post" as to the parameters within which the UK will have to negotiate a trade relationship with the EU post-Brexit.
Key elements of the ECJ's Opinion are:
- the Singapore FTA cannot be concluded by the EU institutions alone because the following areas are shared with Member States:
- competence over non-direct foreign investment (i.e. ‘portfolio’ investments made without any intention to influence the management and control of an undertaking); and
- competence regarding the regime for dispute settlement between investors and states.
- The remaining elements of the Singapore FTA were concluded to be within the sole EU competence.
What does this mean for post-Brexit negotiations?
The good news is that if a FTA only contains matters that fall within the EU's exclusive competence, once it is agreed, the EU's signature is authorised by the Council of the EU, with the European Parliament's consent. This avoids the need for Member State ratification which is important because many separate national and regional parliaments may be involved.
The bad news is that most FTAs do need to address dispute resolution (otherwise they lack "teeth") and non-direct foreign investment is often a key area.
What options are available to the UK post-Brexit?
In order to avoid the need for Member State ratification, the UK could opt for an agreement which includes only basic trade provisions falling within the exclusive competence of the EU. Even where that would require a unanimous decision at the Council of the EU level, this eliminates the need for ratification by all Member States.
Alternatively, the UK could decide to pursue a more comprehensive deal which will need to be ratified by all Member States, a prospect that could easily derail the entire process and would certainly make it exceptionally slow.
A third option would be for the UK to push for a series of agreements, each covering different areas. This would present the advantage of at least some (in particular the pure trade ones) possibly entering into force relatively swiftly. The Swiss experience however dictates that the EU will only likely agree to this by including a "guillotine" clause: if one agreement falls, the others fall too. This means that if there is a deadlock in one area, such as freedom of movement, the EU could cut Switzerland out of all other aspects of the EU with far-reaching consequences.
What lies ahead for investment protection?
The EU is in a difficult position. It has exclusive competence on matters of foreign direct investment thanks to the Lisbon Treaty. However, now it is clear that this does not extend to non-direct foreign investment and the regime governing dispute settlement between investors and states. An investment treaty without dispute settlement provisions is of very little practical significance as it will not give investors a right to bring claims (relying instead on diplomatic protections).
The question looming large therefore is whether states seeking to negotiate future trade agreements with the EU will avoid provisions in relation to investment and dispute resolution, resulting in FTAs that could be practically "toothless".
An obvious solution would be to amend the Lisbon Treaty. French President Emmanuel Macron and German Chancellor Angela Merkel have both stated at their first meeting in Berlin that they would be prepared to look at changing the EU treaties. But controversy in Belgium and Germany especially as to the use of international arbitration (the long preferred dispute resolution process in investment protection) means that this may not be a politically easy solution.
For further information, please contact:
Angela Pearson, Partner, Ashurst
angela.pearson@ashurst.com
