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19 May, 2017
Recently, the European Court of Justice has rendered its Opinion on the competence of the European Union to conclude the Free Trade Agreement (FTA) with Singapore. The Opinion recognises exclusive EU competence over most of the agreement and largely settles a long-standing dispute between the Commission and the Member States on the division of competences under the Lisbon Treaty. It will have a major impact on the negotiation of future trade agreements, whether pending or anticipated (including the potential FTA between the United Kingdom and the European Union following Brexit).
1. Background
The EU-Singapore FTA was negotiated by the European Commission between 2010 and 2013. The Commission designed it as an agreement that could be ratified by the EU only without the lengthy delays and complications that would arise if it needed to be ratified by each of the 28 Member States as well (and potentially the regional assemblies such as Wallonia).
It is in fact the first FTA to be considered by the Court of Justice since the entry into force of the Lisbon Treaty. Article 207 of the Treaty on the Functioning of the European Union (TFEU) resulting from the Lisbon Treaty extended the exclusive powers of the Union to conclude trade agreements so as to include all services, foreign direct investment (FDI) and trade related aspects of intellectual property rights (IPR). Article 3(2) of the TFEU also formally recognises the exclusive competence of the Union to conclude agreements in other areas, in particular where the agreement would affect common EU rules or alter their scope.
However, the Member States disagreed that the envisaged EU-Singapore FTA fell within exclusive EU competence and insisted on becoming parties to the agreement. To resolve the matter the Commission referred the issue to the Court of Justice using the procedure provided for in Article 218(11) TFEU.
2. The AG Opinion
Advocate General Sharpston gave her non-binding opinion to the Court on 21 December 2016 and concluded that while the Union had non-exclusive competence to conclude all parts of the agreement except those on the termination of the bilateral investment treaties with certain Member States, it did not have exclusive competence to conclude those aspects that concerned maritime and air transport, non-FDI investment (e.g. portfolio investment), non-commercial IPR aspects or labour/social policy and environmental standards and that therefore that the Member States were entitled to become parties (making the FTA a so-called mixed agreement).
3. The Opinion of the Court
The Court of Justice went further than the Advocate General in recognising the exclusive competence of the Union to enter into most of the commitments in the agreement. In particular it found that the Union did have exclusive competence to conclude the agreement in respect of all aspects of transport on the basis that these could affect common rules or alter their scope to a sufficient degree. The Court of Justice also found that the Union had exclusive competence to enter into the commitments on all aspects of intellectual property included in the agreement and also those concerning sustainable development and environmental protection since they were sufficiently linked to the objective of liberalising trade. It agreed however with the Advocate General that there was no exclusive competence to undertake commitments in respect of non-direct foreign investment in the absence of rules in Union legislation that would be affected.
The surprising element of the Opinion is the finding that Investor-State Dispute Settlement provisions cannot be agreed by the Union alone, apparently because they are "liable to remove disputes from the jurisdiction of the courts of the Member States or of the European Union".
4. Consequences
The Opinion clarifies the law and will facilitate the conclusion of FTAs by the Union alone in the future and help avoid the inordinate delays that currently occur in the conclusion of mixed agreements. This may in particular assist the United Kingdom in achieving its objective of a "new, comprehensive, bold and ambitious" FTA with the European Union following Brexit. There is a certain irony in this consequence since the United Kingdom has, as a Member State, been one of the most vigorous opponents of EU exclusive competence.
It will also, no doubt, be welcomed by those parts of civil society that have militated so vigorously against the inclusion of Investor-State Dispute Settlement provisions in the proposed Transatlantic Trade and Investment Partnership with the United States and the Comprehensive Economic and Trade Agreement with Canada if it leads to the abandonment of such provisions.
As discussed in a recent article published in the Global Trade and Customs Journal such provisions also give rise to a number of legal problems under Union law quite apart from the issue of competence (although the Court made clear that it was not opining on the substantive compatibility of any aspect of the agreement with Union law).
For further information, please contact:
Alastair Henderson, Partner, Herbert Smith Freehills
alastair.henderson@hsf.com
