In a landmark ruling, the European Court of Justice (ECJ) has ruled that the European Union’s free trade agreement (FTA) with Singapore, which was initialed in 2013, cannot be ratified at EU level and needs individual member state approval.
The judgement has ruled that the consent of all EU-27 governments and parliaments is required for the bloc’s international trade deals, a move which is likely to create further stumbling blocks for other trade deals that are already struggling to be pushed through.
The court ruled that the EU does not have exclusive competence in two areas: non-direct foreign investment, and the regime governing dispute settlement between investors and states.
“It follows that the free trade agreement can, as it stands, only be concluded by the EU and the member states jointly,” said the court in its ruling.
On the plus side, the court ruled that EU officials have exclusive powers to negotiate in all other areas of the agreement.
The Singapore deal is a ‘new generation’ bilateral trade agreement that, in addition to reducing customs duties and tariffs, also touches on matters relating to intellectual property, protection, investment, public procurement, competition and sustainable development.
“The entire FTA needs to be ratified although refusal to ratify for reasons other than those elements, ISDS and portfolio investment, that the court found to be mixed competence, could in principle amount to a violation of EU law by that country,” Iain MacVay, partner at King and Spalding’s international trade practice, tells GTR.
“Despite that technical legal point, the political process is likely to result in any and all issues of political impact, especially ISDS, being raised by parliamentarians in member states. Singapore has already called for consideration of splitting the FTA to take the investment provisions out into a separate agreement and proceed with ratification of the rest of the agreement. I don’t think it will be so easy to do that but it is bound to be an attractive idea.”
Sticking point: dispute settlements
As trade deals have become more complicated, national governments have become more concerned the agreements encroach into areas of national law. Opposition to trade deals like the Comprehensive Economic and Trade Agreement (CETA) with Canada, and the Transatlantic Trade and Investment Partnership (TTIP) with the US, has been growing among public and professional bodies too. They argue that the deals will hinder standards on products and markets as well as on climate and environmental policies adopted in the EU.
A major sticking point to the CETA deal has in fact been the inclusion of the investor-state dispute settlement (ISDS) mechanism, which allows companies to sue countries over any new law or policy that they consider to be discriminatory towards their investments. Critics argue this will undermine national governments and public interest in favour of investment strategies of big multinational corporations.
On the back of these concerns, the ISDS system has now been replaced with a new investment court system (ICS). The new mechanism will be a public one, with professional and independent judges and transparent procedures, including open hearings and the publication of documents submitted during cases. A similar alternative could be applied to the EU-Singapore deal.
The ruling and Brexit
In the UK, the ruling has led to much speculation as to what the judgement means for the UK’s post-Brexit trade relations with the EU. While some analysts argue that the move is positive, since the ECJ affirmed the European Commission’s (EC) role in negotiating deals in most areas, others argue that the two areas requiring national level agreement are unlikely to be left out of any future trade pacts.
“This is the most significant ECJ case on EU trade policy for 20 years and has huge ramifications for any UK-EU free trade agreement (FTA). The ECJ has gone wider than advocate general Sharpston and confirmed exclusive competence over all the issues in the EU-Singapore FTA except for investment,” says Nicole Kar, head of international trade at law firm Linklaters.
“In policy terms, now the UK government will want to consider whether it moderates its ambition for the UK-EU FTA to those matters where there is exclusive competence in order to secure an agreement through EU member state governments by qualified majority voting or whether it still seeks the widest, most comprehensive agreement and risks this becoming hostage to the member states arguing that their parliaments have to ratify an FTA, as they did with CETA.”