Putting the cart before the horse: a doomed constitutional strategy for negotiating the T-TIP

Emanuela Matei*

* Associate Researcher at the Centre of European Legal Studies, Bucharest. Juris Master in European Business Law (Lund University, June 2012), Magister legum (Lund University, June 2010), BSc in Economics & Business Administration (Lund University, June 2009).

Introduction

On 18 June 2015 the European Commission requested the termination of the intra-EU bilateral investment treaties (BITs) concluded by Austria, Romania, Slovakia, Netherlands and Sweden. The Commission argued that due to their accession to the EU, Member States accepted that relations between them as to matters within the scope of conferred powers are, as the CJEU said in Opinion 2/13 (on EU accession to the ECHR) “governed by EU law to the exclusion, if EU law so requires, of any other law”.

A common feature of the European BITs and free trade agreements (FTAs) is the presence of a clause on investor-state dispute settlement (ISDS), which may involve concerns of inequality before the law in the context of a limited access of individuals to the judicial system of the EU. Moreover, issues of substantive discrimination are prompted by a frequently reaffirmed superior level of protection of investment under the BIT compared with EU law.

In 2003, the Commission, the U.S. government and the acceding states from Central and Eastern Europe – apart from Hungary and Slovenia – signed a memorandum of understanding, which aimed to eliminate the possibility that American investors would use the BITs in order to challenge regulatory or administrative measures adopted by the Member States with the aim of complying with EU law. By doing that the Commission has shown awareness concerning the imminent clash displayed by cases like Micula, Eureko or Eastern Sugar.

In Micula v Romania, ICSID Case No. ARB/05/20, the relevant law is the Romania-Sweden BIT ratified in 2003, four years before the accession of Romania to the EU. The award issued in this case ordered Romania to pay damages of approx. EUR 83 million (RON 367.4 million). The facts of the case depict the pre-accession situation and the promotion of investments in specific disfavoured regions. Together with several other cases – Electrabel, AES, and EDF – Micula reflects a specific type of incompatibility: the clash between the state aid prohibition in EU law and the maintenance of a preferential regime ordered by the international investment law regime instituted by the BIT network. (For more on Electrabel, see the analysis of Matei and Ciurtin here).

The incompatibility with EU law of the fiscal advantages offered to investors was established first by the Romanian Competition Council and later by the Commission and the fiscal regime was abolished before the accession. This act of abolition triggered the dispute before ICSID (the International Centre for the Settlement of Investment Disputes).

The European Commission participated as amicus curiae in the ICSID-proceedings, though the arguments brought by it were not admitted. A different conceptual understanding of the principle of legitimate expectations is the main source of conflict. In EU law, a state aid measure must be notified and approved and only afterwards the beneficiary may enjoy the protection derived from the principle of legitimate expectations.

In the interpretation of the arbitral tribunal, on the other hand, no matter that a state measure is implemented in breach of EU law, the investor is entitled to protection. In March 2015 a Commission Decision ordered the recovery of state aid. Romania had already paid a part of the damages awarded by the arbitral tribunal. The payment constitutes illegal state aid and it must be recovered. By complying with the ICSID-award, Romania would fail to defer to the Commission Decision.

In Eastern Sugar Netherlands v CzechRepublic, SCC Case No. 088/2004, the relevant law was the Agreement on encouragement and reciprocal protection of investments between Kingdom of the Netherlands and the Czech and Slovak Federal Republic, which was ratified in 1992. This case presents a typical example of incompatibility: the clash between quotas imposed by EU on agriculture products and the requirement to maintain a preferential regime for the foreign investor.

The arbitral tribunal interpreted the Vienna Convention on the Law of Treaties (VCLT) finding that the subject matters treated by the BIT and the EU law were dissimilar, the parties did not mean to terminate the BIT and the BIT and the EU Treaties were compatible. It awarded damages of EUR 25.4 million for loss of sugar quota attributable to the Czech Third Sugar Decree of March 19, 2003.

The defendant argued inter alia that post-accession damages should not be made subject to arbitration, since they fell within the exclusive jurisdiction of the CJEU according to Article 344 TFEU. The tribunal noticed that the European Commission did not start infringement proceedings against the Netherlands and the Czech Republic for failing to terminate their BITs as it would have been expected, if the BIT had been incompatible with Article 344 TFEU. The argument of the defendant that the BIT had been implicitly superseded by the acquis communautaire when the Czech Republic acceded to the European Union was rejected. It must be retained that the inaction of the Commission and the parties has been interpreted by the arbitral tribunals as a tacit endorsement of compatibility.

In Eureko Netherlands v Slovak Republic, UNCITRAL, PCA Case No. 2008-13, the applicable law is the same as in Eastern Sugar. Achmea, previously Eureko, is a Dutch insurer and the facts of the case refer to the liberalisation of the Health Insurance Sector in 2004. In late 2006, the newly elected Slovak government sought to reverse the liberalisation of 2004. Slovakia claimed that the arbitration clause was incompatible with EU law, while the arbitral tribunal reasoned that no provision of EU law actually prohibited investor-state arbitration. The arbitral tribunal awarded EUR 22.1 million damages.

The arbitral tribunal found in its decision of 7 December 2012 that the BIT was valid and compatible with EU law and the dispute was arbitrable despite the relevance of EU law. Investors were granted more extensive rights under the BIT compared with EU law and the arbitral tribunal found that this inequality stayed in line with law. Hence, the unequal treatment of EU investors seems to be contingent to the special character of protection, which a foreign investor is habitually entitled to claim in conformity with the BIT definitions.

As to the interpretative monopoly of the CJEU, the Frankfurt Court of Appeals (Oberlandesgericht) rulingon the matter of validity of the ISDS-clause in the Netherlands-Slovakia BIT found that the exclusivity enshrined by Article 344 TFEU did not cover investor-to-state disputes (see also my comments here). The German court did not refer the question for a preliminary ruling, even if the interpretation of Article 344 TFEU should reasonably have been submitted to an examination under Article 267 TFEU.

Intra-EU BITs

Firstly, the intra-EU BITs came into existence mostly as the result of the EU accessions of 2004, 2007 and 2013, only two intra-EU BITs being concluded between old (pre-2004) Member States. Even if the incompatibility manifests itself later – at the level of litigation – thus the conflict becomes more dramatic after the accession, in substance, the incompatibility between the EU conceptual framework and the BIT philosophy precedes these accessions. Hence, it would be reasonable to ask the question why the legal status of the intra-EU BITs has not been discussed during the pre-accession period in a more transparent and well-founded manner.

Moreover, most BITs contain sunset clauses that instruct an undisrupted protection in relation to investments already in effect. The termination would only have force for the future investments, since the investors may rely on the provisions of a BIT for periods of usually 15-20 years from the date of termination (see further my comments on Romania's termination of its BITs). The accession of the post-2004 Member States was not an unprepared sudden decision, but a process with a duration of 9-12 years. The incompatibility with EU law has been hanging over the heads of the new Member States as a veritable Sword of Damocles. Thus, the intra-EU BIT disputes should not be depicted as anomalies. They could have been prevented by a more pre-emptive approach.

External BITs

The Acts of Accession – for all thirteen newer Member States – provide that “with effect from the date of accession, [the state] shall withdraw from any free trade agreements with third countries”. According to Article 6(9) and Article 6(10) of the corresponding protocols, if an agreement signed previously cannot be brought in line with EU law, the Member State in question shall withdraw from it (see the Protocol on Romanian and Bulgarian accession). The Acts  concerning the conditions and arrangements for admission from 2003, 2005, and 2012 speak a clear language. The acceding states had to denounce any trade agreement they might have concluded and become part of the free trade agreements concluded by the EU. Would it not have been more appropriate to provide a similar obligation with regard to the extra-EU BITs?

Having in mind the sunset clause, mentioned above, the effect of termination cannot be direct and immediate, so an earlier handling of the incompatibility issue would have reduced the time horizon for potential disputes. It must be reminded that the previous wave of accession, when Sweden, Finland and Austria joined the EU, also generated an obligation to align the BITs signed by these countries with the obligations imposed by Article 351 TFEU and Article 4(3) TEU[11] (see the judgments in Commissionv Austria, Commission v Sweden and Commission v Finland). The potential conflict is no novelty.

The general incompatibility of the BITs with Union law – discussed below – poses moreover the question whether Regulation 1219/2012, which concerns the investment treaties between EU Member States and non-Member States, actually did clarify their legal status. My criticism refers to the fact that instead of giving highest priority to the problem of general incompatibility, the Commission dealt first with specific examples of incompatibility. Such concrete examples relate for instance to the exclusive prerogatives of the Council to regulate capital movements under Article 64(2) TFEU or Article 75 TFEU. The Commission’s diplomatic strategy has placed the cart before the horse i.e. the specific prerogatives of EU institutions before the protection of the foundation of the EU law.

Moreover, the incompatibility can damage the effort of establishing a level playing field for the outbound investments. The investors from the Member States having no BITs with countries like Chile, Japan, Korea, Canada or most recently, the U.S.A. will not enjoy the same level of protection not being able to escape certain restrictions imposed by the relevant FTA. The general incompatibility entails a high level of complexity, therefore it cannot be surprising that such intricate consequences have occurred.

The reversed logic of the relation between intra- and extra EU BITs

Investment protection was the main tool for economic reconstruction during the post-WWII era, which constituted the dominant function of the Friendship, Commerce and Navigation treaties (see the Vandevelde paper in the notes). The next big event was the signing of the GATT in 1947, which marked the shift from bilateral to multilateral negotiations and an expanded scope of talks beyond tariffs. The GATT and the EEC (now-a-days, the EU) – founded in 1957 – contributed to deeper economic integration among Western countries, thus substituting and surpassing the Friendship, Commerce and Navigation treaties subsequently seen as less than ideal vehicles for trade promotion. The network of BITs emerged as means to ensure investment protection outside the ambit of the GATT and the EU. The overlapping between BIT protection and EU law has not been intentional.

As mentioned above, the Commission took the initiative of signing a MoU with the U.S. government being aware of the existence of incompatibilities between the European BITs and EU law. Areas of law, which have been specifically named in the MoU are: the economic freedoms, state aid rules and the obligations imposed by the EU treaties in relation to third countries.

Article 351 TFEU, which governs the relationship between EU law and the pre-existing treaties between Member States and non-EU States, gives expression to the obligation of the Member States to eliminate all incompatibilities with EU law resulting from extra-EU BITs. Then again, the Treaty of Lisbon does not overtly consider the status of the intra-EU BITs. Article 4(3) TEU may be nonetheless useful for this purpose. Some arbitral tribunals interpreted Article 351 TFEU as inferring paradoxically a more lenient regime for the intra-EU BITs.

By not opening earlier infringement proceedings or not explicitly placing the intra-EU network of BITs outside the law, the EU institutions did – according to the arbitral tribunals – tacitly endorse the intact validity of these BITs and the jurisdiction of the arbitral tribunals for that matter. The contrast between alter- and outer legality is of the essence, since the ISDS exists as an alternative to, not a substitute for, the domestic judicial system.

General incompatibility with EU law

From a purely legal perspective the situation of double standards covering areas of law defining the very foundation of the Union – the economic freedoms and the transjudicial dialogue based on sincere cooperation and mutual trust – are direct threats to its political integrity and the autonomy of the EU legal order. The risk of jeopardising the autonomy of the Union legal order is the consequence of an extant parallel international order that does not have to bring its rulings in line with the interpretation of EU law adopted by the CJEU.

It must be mentioned as well that usually the conceptual conflict between international law and EU law relates to the contradiction between reciprocity and the EU federal principles of autonomy, conferral and subsidiarity. However, the legal regime represented by the European BITs has been characterised by asymmetry being designed to protect the interests of investors from the capital exporting countries against the whims of the unstable governments in the capital importing countries. This is why, there are not many BITs signed between pre-2004 member states and the focus of the Commission has been initially set on the BITs signed by an acceding state with third countries.

The transition from the pure intergovernmental set of rules to a more federal agenda engendered legal discrepancies, negative interlegality and significant costs for the parties directly involved in these disputes. However, on the state-to-state level, it is obvious that the EU accession of the capital importing countries to the CEE provided a more substantial and comprehensive safeguard for the capital exporting countries in the North-western Europe than a BIT would ever be prone to afford. It is difficult to support the argument of practical significance of BITs in the constitutional framework of the European Union by using legal terms.

The only persuasive argument is the protection of legal certainty of the investment regime within the EU, though the strength of it has only been tested by the arbitral tribunals against the VCLT (Articles 59 and 30 of that Convention). The conflict of laws assessment has constantly reached the conclusion that each BIT has not been displaced by the EU treaties. The Vienna Convention does neither bind the Union nor all its Member States. It has relevance only as a reflection of the rules of customary international law, which are binding upon the Union institutions and form part of the Union legal order (see CJEU judgments in Racke, El-Yassini and Jany). From this point forward the matter becomes one of harmonious interpretation, a method which requires a deferential attitude towards the legal identity of the challenger. The ECtHR for instance follows the jurisprudence of the CJEU and the opposite is true, even if no binding agreement has been signed and no hierarchic structure has been crystallised between them.

In its Opinion 2/13, the CJEU did not agree to assign the power to interpret EU law provisions to the final adjudicator in matters of human rights – the ECtHR – affirming once again that the interpretation of EU law must remain the exclusive prerogative of the Union supranational judicial authority (see the discussions on this blog by Peers and Barnard). So, how could someone expect the CJEU to agree with a transfer of powers to a non-judicial and temporarily constituted entity, which is ineligible to refer to the CJEU for a preliminary ruling under EU law? (see the judgments in Pretore di Salo, Pardini and Corbiau) How could it be possible to do that without contradicting itself in the assessment of a fundamental matter?

As van Harten says: “The powers shifted to arbitrators are among the highest that any adjudicator can exercise. They involve the final determination of the legal boundaries of sovereign authority, as exercised by any legislative, executive, or judicial body, based on broad standards of foreign investor protection. They can lead to the assignment of potentially vast amounts of public funds to private actors, usually large companies. They are backed by an international enforcement system that is more powerful than that of domestic or international courts. They are subject to very limited judicial review or no judicial review at all, depending on the arbitration rules under which the foreign investor chooses to bring its claim”.

The possibility to obtain damages for state or supra-state non-contractual liability within the EU is narrowly defined, thus in a similar situation of (for example) expropriation without compensation, an investor under a BIT agreement would enjoy a higher degree of protection being able to obtain substantial damages as underlined by van Harten above. So should the same enhanced level of protection be granted to all investors no matter if their situation is covered by a BIT or not? In Eurekothe claimant declared explicitly that it preferred to use the arbitration solution offered by the BIT instead of the judicial path offered by the EU system and the arbitral tribunal recognised that a higher level of protection is guaranteed under BIT-regime.

T-TIP: Will the cart be placed on the spot?

While the Council believes that the new legal framework should contain the pre-existing investor guarantees in BITs, and the Commission also supports ISDS, the EP has moved towards opposing it in its present form, asserting in 2013 that future EU investment agreements should include an ISDS-clause, only if it were justifiable in the light of a case-by-case assessment. At the most recent EP consultations, Bernd Lange – rapporteur on TTIP for the EP’s international trade committee (INTA) – affirmed exultantly: “We have placed the extrajudicial arbitration in the dustbin of history. It is clear that private tribunals have no future in trade agreements. And we will work on a new system, which corresponds to a public court”.

Kleinheisterkamp and Poulsen proposed in their turn three distinct patterns for investor protection in the T-TIP. The first choice – no greater rights – corresponds to the American trade policy adopted by the 2012 US Model BIT.

The secondpattern – the Australian ISDS model – matches the proposal of most Committees of the European Parliament being characterised by default reliance on domestic courts supplemented by state-to-state dispute settlement and institutionalised consultations concerning the domestic regimes of investor protection.

The thirdpattern would be in tune with the European Union constitutional structure as to the choice to allow primarily the domestic courts to decide on the legality of public acts, then it reflects the American philosophy with regard to binding state interpretations and filter of frivolous and obviously unmeritorious claims (see Tietje and Baetens, in the notes; compare to the Bipartisan Congressional Trade Priorities and Accountability Act 2015, p 14). The possibility to review the legality of state measures at the level of domestic courts would enable them to refer for preliminary ruling, which is key for the constitutional autonomy of the EU.

In this sphere, flexibility and consistency must go hand in hand and perhaps the Europeans could extract some relevant knowledge from the developments accumulated by the United States during the past three centuries. A comparative historical study could be a beneficial groundwork for achieving an improved insight into the matter of trade agreements authority. As the EU-BITs array of contradictions perfectly shows, despite its apparent political cleverness, the strategic move of putting the cart before the horse would be an unfortunate decision as regards the T-TIP negotiations.

Barnard & Peers: chapter 24

Art credit: www.euractiv.com

Notes 

Kenneth J. Vandevelde, ‘A Brief History of International Investment Agreements’ UC Davis Journal of International Law & Policy 12, no. 1 (2005): 157, 165-166.

Christian Tietje and Freya Baetens, ‘The Impact of Investor-State-Dispute Settlement (ISDS) in the Transatlantic Trade and Investment Partnership’, 26 June 2014, p. 127. Compare with the Bipartisan Congressional Trade Priorities and Accountability Act of 2015 (TPA-2015), p. 14.

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The Missing Link: Direct Effect, CETA/TTIP and Investor-State Dispute Settlement

 

 

By Daniel Thym, Chair of Public, European and International Law, University of Konstanz

International treaties have rarely received more attention than the proposed free trade deals between the EU and the US and Canada. This entails that many law students and practitioners are confronted with a theme that does not feature prominently in legal education. In debates with students, I realise that preconceptions about the functioning of domestic legal systems are regularly projected upon the international sphere. One example is a demand that companies should challenge state action before domestic courts instead of dispute settlement bodies under the planned EU/US agreement (TTIP) and the proposed EU/Canada trade agreement (CETA). These claims often assume that national courts hold the competence to enforce corresponding rules. For lawyers working on domestic issues it seems self-evident that courts can apply the law.

Against this background, this blogpost focuses on a provision in the Draft CETA with Canada (Article 14.14: see the text below), whose relevance has not been acknowledged so far, including by the stimulating contributions to the Verfassungsblog Symposium on Investment Protection. On page 470 of the roughly 1600 pages of the consolidated CETA Draft Agreement, which the Commission regards as a template for free trade negotiations with the United States, we come across a final provision of seemingly minor relevance on ‘private rights’, which rejects the applicability of the agreement en passant. This reaffirms that the implications of the free trade deals would be less dramatic than some suggest.

Background: CETA and TTIP as International EU Agreements

In order to understand the relevance of Article 14.14 on private rights, we should apprehend that most segments of the free trade agreements would be binding upon Member States as an integral part of EU law. Axel Flessner may try to argue that the arrangements would constitute an ultra-vires-act (thereby initiating more tweets than any other contribution to the said symposium), but the plain Treaty text demonstrates that the legal picture is fairly evident. Article 207 TFEU declares that the EU’s Common Commercial Policy (CCP) allows for the conclusion of trade agreements on goods and services and embraces, among others, ‘foreign direct investment’, while Article 3 TFEU maintains that the conclusion of agreements in this area shall be an exclusive Union competence.

These provisions were a deliberate policy choice after decades of wrangles about the precise scope of the CCP. The Treaty of Lisbon was meant to replace earlier and ambiguous formulations with an overarching competence for the European Union. In its Lisbon Judgment, the German Federal Constitutional Court recognised the pertinence of this change: ‘With the exclusive competence as set out above, the Union acquires the sole power of disposition over international trade agreements which may result in an essential reorganisation of the internal order of the Member States.’ Judges in Karlsruhe gave the green light to the changes nonetheless, albeit with a minor caveat that ‘much argues in favour of assuming that the term “foreign direct investment” only encompasses investment which serves to obtain a controlling interest in an enterprise’ and excluded so-called portfolio investments (ie, non-controlling interests in companies) as a result.

This reference to the limits of the CCP is relevant, since it indicates, in general terms, that there remain uncertainties about the precise delimitation of competences for corollary aspects of international trade. For that reason, most national governments maintain that CETA and TTIP should be concluded as so-called ‘mixed agreements’, with the EU and all 28 EU Member States as signatories. If that view prevailed, national parliaments would have to give their consent as well. However, this would not modify the internal allocation of powers; the EU institutions are in the driving seat in the vast field of Union competence – both during the negotiations and with regard to legal effects. It is established case law that the legal effects of mixed agreements follow the rules of Union law for all matters that are covered by the Common Commercial Policy.

Domestic Application of Agreements concluded by the EU

The predominance of Union law in legal practice can obscure our awareness of the specificities of the international legal system. Law students across Europe learn in their undergraduate courses about the direct and supreme effect of supranational rules, but are not always familiar with public international law. Domestic courts have to apply Union law in pretty much the same was as national law, but this assumption cannot be extended to public international law without modification, including in situations in which the EU concludes international agreements with third states.

It is true that the ECJ maintains that international agreements can have direct effect as an integral part of the Union legal order – and an example demonstrates that this can have critical implications: for example, judges in Luxembourg decided in July that Member States cannot automatically require the spouses of Turkish nationals to acquire basic language skills of the host country. Legally, this conclusion rests upon an interpretation of the so-called standstill provision for the self-employed in the Additional Protocol of 1970 to the Association Agreement between Turkey and today’s European Union. In the terminology of international trade law, the case concerned a so-called non-tariff barrier to the freedom of establishment. It is these non-tariff barriers that take centre stage in both CETA and TTIP negotiations (neither of the latter treaties will affect migration, though).

If the underlying legal arguments about direct effect and court jurisdiction extended to free trade deals with Canada and the United States, the implications could be dramatic indeed. Both the ECJ and domestic courts would hold the power to correct domestic or supranational legislation, whenever it falls foul of CETA or TTIP. Yet, this outcome is no foregone conclusion, since the ECJ opts for a direct applicability of international agreements ‘only where the nature and the broad logic of the latter do not preclude this.’ In deciding whether this is the case, the Court considers, among other things, the purpose of the agreement, the will of the parties and the question of reciprocity, i.e. whether the Union would be alone in recognising direct effect. Luxembourg may have largely ignored the question of reciprocity with regard to Turkey and other neighbours of the EU, but it traditionally takes centre stage in the evaluation of trade liberalisation agreements.

Article 14.14 of the CETA Draft Treaty

Once we have understood the far-reaching implications of direct applicability, we may appreciate the bearing of the clause on private rights in the final provisions of the consolidated Draft CETA Agreement, which states: ‘Nothing in this Agreement shall be construed as conferring rights or imposing obligations on persons other than those created between the Parties under public international law, nor as permitting this Agreement to be directly invoked in the domestic legal systems of the Parties.’

That is nothing less than the official denial of direct effect in the operative treaty text; neither the ECJ nor domestic courts would hold the power to apply CETA rules in domestic proceedings or to annul legislation which contradicts trade law. CETA and TTIP would get the same treatment that the ECJ accords to WTO law, which also does not have direct effect in the EU legal order and the domestic legal systems of the Member States – not even in situations, in which the appellate body of the WTO Dispute Settlement Mechanism confirmed that EU legislation falls foul of WTO standards.

Denial of direct effect is an important stumbling block for the long-term success of any free trade agreement, especially when it comes to the elimination of non-tariff barriers to trade, since corresponding rules are often formulated in an open manner. The real-life implications of such vaguely formulated provisions depends decisively upon the continued will of the parties and the availability of control and enforcement mechanisms – as the experience with non-tariff barriers to trade in the EU single market and the example of language requirements for spouses of Turkish nationals demonstrate. Without institutional control mechanism, vague treaty formulations are often ineffective.

Implications for the Debate about Investor-State-Dispute Settlement

In the light of Article 14.14 of the CETA Draft Agreement, we may have to re-consider our perspective on the proposed investor-state-dispute settlement rules in both CETA and TTIP. Critics will use the absence of direct application as an argument to decry the special treatment for investors; supporters, by contrast, will argue with the Commission that the dispute settlement bodies are a compensation for domestic legal remedies, which would not be available for the substantive rules of CETA and TTIP. I personally share the opinion of Christian Tams that the debate should focus on the desirability of special rules for investors (and not the question of procedure). The latter may be superfluous in relations with the US and Canada, but to abandon them would render it difficult to insist upon similar provisions in negotiations with China, Russia or other states we trust less.

In any case, the absence of direct effect in domestic proceedings shows that the legal implications of CETA and TIIP would be less dramatic than some commentators in the public debate suggest. Courts in Europe would not hold the power to annul domestic or supranational legislation, which violates the agreements – a power that also the dispute settlement bodies would be denied explicitly, together with the option for the state parties to force their reading of the agreements upon the arbiters by means of an authoritative interpretation. This would orientate the dispute settlement rules in CETA and TTIP towards inter-state bargaining, pretty much like in the WTO context.

The denial of direct application demonstrates that both the CETA Draft Agreement and the TTIP negotiation position are far removed from resembling anything like EU-style integration through law – and I consider this to be a good thing given that any dynamic interpretation would lack much of the democratic legitimacy and procedural constraints, which we have, notwithstanding all the deficits, in the European context. It seems to me that it is the biggest benefit of the debate about CETA and TTIP to this date that the broader public has started discussing the governance of economic globalisation. That debate will stay with us, even if an seemingly unimpressive provision on page 470 of the CETA Draft Agreement excludes the domestic enforcement of the transatlantic trade rules.

This blogpost has been published previously on ‚Verfassungsblog – On Matters Constitutional‘

 

Barnard & Peers: chapter 25

Image credit: capreform.eu

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On really responsive rule-making? The EU-US transatlantic trade and partnership (TTIP) negotiations

Dr.Elaine Fahey, Senior Lecturer, The City Law School, City University London

The script

The EU and US have now completed 6 rounds of negotiations on the Transatlantic Trade and Investment Agreement (TTIP), the trade agreement under negotiation between the EU and US to cut trade barriers and ‘behind the borders’ barriers (technical regulations, standards, approvals) in a wide variety of sectors. It is touted as having the potential to become the global trade standard. Already, the epitaph is alleged to have been written on the Agreement. Yet while this misses the mark as to the theatre of global rule-making, on the other hand, skepticism is not unwarranted. It has at times appeared as an extraordinary experiment in rule-making.[1] TTIP harbours ambitions to grow as a living regulatory entity. It has become rife with controversy, for its secrecy, for its possible inclusion of the Investor Settlement Dispute Mechanism (ISDM) and its impact on EU regulatory standards. Some have even tried to stop the negotiations using EU law itself, in the form of a failed European Citizens Initiative.

The history of transatlantic relations is littered with many failed attempts to integrate EU and US legal order through mutual recognition, even in very limited fields. TTIP had been poised to shake up this dynamic. It has become an exercise in ‘really responsive rule-making’. However, many questions remain about international negotiations and the standard of what is and should be ‘really responsive EU rule-making’:- I reflect on its script, production process and the cast of actors.

The production process

Most EU-US rule-making processes in the past has been conducted firmly behind closed doors, in inscrutable so-called ‘Dialogues’, in a range of fields that many will never have heard of. They traditionally privileged industry. The TTIP negotiations have marked an enormous shift in EU-US rule-making.

The TTIP negotiations have been ostensiblyvery open as a process. There is a lively EU TTIP twitter account (@EU_TTIP), RSS feeds, video-streamed meetings, broad public consultations and prolific document dissemination- more ‘quantitatively’ than its harshest critics might care to admit. In fact, the EU often has appeared as a transparency ‘manna’ in contrast to the tight-fisted US provision of information, even tweeting about its own transparency or pictures of public consultations and meetings. However, the TTIP negotiation mandate and draft text have long been leaked alongside the official channels of information, posted in reputable German broadsheets like Die Zeit, as well as dedicated leaking forums: http://eu-secretdeals.info/ttip/).  This leaking has threatened to take the wind out of EU openness sails.

The Ombudsman late into the negotiations recently raised questions as to the true place of openness in the negotiations and launched a public consultation. Her actions appear inadequately searching, and even late in the game. A range of key CJEU decisions on transparency in 2014 (in’t Veld, Mastercard etc; see the previous blog posts on those cases here and here) have not done enough to dent the exception surrounding international relations as regards access to information. In fact, the leaking of the EU-Canada free trade agreement (CETA) in August this year by the German broadcaster ARD demonstrates the truly dented credibility of the state of openness, international negotiations and the EU.

The cast of actors

The response by the Commission to steep and sharp public scrutiny of TTIP have been to set up more civil society dialogue engagement points (eg civil society advisory bodies) and more floods of consultations. These processes have delivered only partially-scrutable results. For example, it received nearly 150,000 for the ISDM, over half which will we never know about. The involvement of civil society in the TTIP negotiations has arguably become quite unwieldy.

The responses of the would-be incumbent trade Commissioner Malmstrom to the ISDM saga have provoked scorn for her breath-taking flip-flopping on its inclusion or exclusion from TTIP. The ‘flexibility’ about the normative agenda through ‘really responsive rule-making’ is a serious concern.

There is still much scope for more truly responsive rule-making, for example, a more vibrant institutional dialogue and for parliamentary participation, at both national and EU level. The powers of the European Parliament to approve any agreement reached have been raised as both a shield and a sword to any would-be critics of its credentials as a rule-making project. Many explore its potential within a living regulatory entity.[2]However, the vastness of the rule-making exercise may warrant a pause for thought on this. For the newly elected Parliament to make an impact on the negotiations, it must surmount a significant information gap and grasp the mantle of data. The place of data transfer within TTIP has had endless twists and turns- first the NSA affair, then the Google decision, then the decision by Microsoft to shift cloud computing and comply with EU law. Yet it risks being swallowed up within the broad swathe of TTIP. The TTIP negotiators face the question of how to be really responsive to this- and whether the European Parliament and Congress- neither a homogenous entity- will accept it all.

A battle is often bitter because the stakes are so small. EU-US trade relations have never been more liberalized or responsive to each other. It colours the context of what the stakes actually are. How ‘really responsive’ the negotiations can and should be has some legal and political distance to travel.

Editor's note: This blog post was previously published on the eutopia blog; thanks for permitting it to be reblogged here.

 

Barnard & Peers: chapter 3, chapter 24

 

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[1]See E. Fahey & M. Bartl ‘A Postnational Marketplace: Negotiating the Transatlantic Trade and Investment Partnership (TTIP)’ in E. Fahey & D. Curtin (Eds.), A Transatlantic Community of Law: Legal Perspectives on the Relationship between the EU and US legal orders (Cambridge: Cambridge University Press, 2014).

 

[2] Parker, Richard W. and Alemanno, Alberto, Towards Effective Regulatory Cooperation Under TTIP: A Comparative Overview of the EU and US Legislative and Regulatory Systems (May 15, 2014). European Commission, Brussels, May 2014. Available at SSRN: http://ssrn.com/abstract=2438242.

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The EU/Canada free trade deal and disputes over investor protection: a silver lining or a cloud?

Steve Peers

According to recent press reports, the planned EU/Canada free-trade agreement (CETA), which was due to be signed in September, is potentially now in difficulty because the German government now objects to the inclusion of rules on investor/state dispute settlement. This could have significant implications – for the EU/Canada trade deal, for the EU/USA agreement which is also under negotiation (TTIP), for the EU’s foreign trade and investment policy generally, and even for the possible UK withdrawal from the EU (‘Brexit’).

Background

The EU and Canada have been negotiating a free trade deal since 2009, and in October 2013 it was announced that a deal was agreed, subject to technical drafting issues which were meant to be agreed over the following months. No parts of the text of this agreement have been officially released so far, but according to the EU’s press release, the agreement includes: liberalisation of most trade in goods, bar a few sensitive items such as sweetcorn (on the EU side) and dairy products (on the Canadian side); liberalisation of services; intellectual property commitments (mainly entailing changes in Canada); and investment liberalisation.

What would the impact of the free trade deal be? First of all, a personal perspective. While all aspects of the EU’s external policies are fascinating, I have a particular personal interest (though no financial interest) in EU/Canada relations, as a dual citizen of the UK and Canada who has lived from many years in both countries. A detailed survey of frequent visitors to both countries (my children) concluded that an EU/Canada trade deal would benefit both sides, by increasing market access in Canada for European biscuits, chocolates, cheese, ‘Keep Calm’ posters and John Lewis department stores, and increasing market access in the EU for Canadian maple syrup, pancakes, bacon and Tim Horton’s donut shops.  For myself, my main hope for an EU/Canada free trade deal is that European supermarkets would be filled with Concord grapes every September.

From a broader perspective, of course there are critics, on both the EU and Canadian side, of all of these commitments made in the free trade deal, due (for instance) to concerns about liberalisation and privatisation of services and the impact of increased intellectual property protection. There are also supporters of the deal among exporters who would stand to benefit, but as usual they are not making their voices heard in the public debate as effectively as the critics are.

My personal perspective aside, I think it’s rather early to judge the merits of this trade agreement before the text is made available to the public. But the criticism of the secrecy of the process is clearly well founded: if the text was largely agreed last year, why not release those parts of the text which have been agreed? Even if there is a case for confidentiality during negotiations, there is surely no case for confidentiality afterthey are complete. Does it really take nearly a year to agree a few technical details? If the negotiations weren’t really complete last year, why not just admit that? The advocates of free trade don’t do themselves any favours with their lack of transparency and (apparently) candour. Such tactics are bound to make more members of the public suspicious of the content of the deal, and unwilling to believe what the negotiators of the treaty say about it.  

Investment issues

The most recent concerns from the German government (which are widely shared by other governments, the public and some Members of the European Parliament) have been about the investor/state foreign investment rules in the planned treaty. These rules might not have raised so many concerns, if the EU weren’t also negotiating a free trade treaty with similar foreign investment provisions with the United States. Generally, the concern is that these provisions will allow private arbitrators to issue binding rulings which will force the EU and its Member States (as well as the Canadian side) to give compensation for decisions which fall well short of seizing foreign investors’ assets without compensation, but which merely impact upon the value of their investment in some way.

There is a widespread (and understandable) view that this is unacceptable from a democratic point of view. Furthermore, there are problems from the judicial point of view. It should be noted that the Court of Justice of the European Union (CJEU) is generally wary of giving power to international courts to rule on EU law issues (see most recently its ruling on the planned EU patent court); it would surely be even less happy with the idea of giving such power to private arbitrators. Any EU Member State, the European Parliament, the Council or the Commission could ask the CJEU to rule on whether the draft provisions on this issue are compatible with EU law. If the investment provisions indeed give private arbitrators the power to give binding rulings on EU law, the only way that the CJEU would approve the deal would be if the current judges were all replaced by flying pigs.

According to press reports, the investment provisions are considered necessary in order to ensure that Canadians are willing to invest in the EU, and vice versa. But this argument is undercut by the facts: according to the expert joint study, a ‘scoping exercise’ on EU/Canada trade and investment relations, which was carried out before the negotiations began, the EU was already the second largest investor in Canada, and Canada was the fourth largest investor in the EU. This was in the absence not only of an EU/Canada investment agreement, but also in the absence of many bilateral investment agreements between individual EU Member States and Canada.

The EU’s press release on investment issues attempts to address these concerns, by listing a number of safeguards which the agreement will contain. It would be useful to see the text of the agreement in order to check these arguments. In any event, the press release undercuts its own authority, by asserting several times that this is the first EU investment agreement to contain such safeguards. Yes – but the EU’s authority over foreign investment only dates from 2009, and so this will be the first investment protection agreement which the EU signs. (The EU has signed treaties dealing with market access for investments before, but investment protection is a broader issue). It’s rather like trying to praise your current sexual partner by telling her that she’s giving you the best sex you’ve ever had – while glossing over the fact that she’s the only partner you’ve ever had.

What next for the EU/Canada trade deal?

Assuming that the press reports are correct, there are several possibilities. First of all, there could be amendments to the investor/state dispute provisions, to weaken their impact. Alternatively, the provisions on investor/state dispute settlement could be removed entirely from the treaty. More drastically still, the entire subject of investment could be dropped from the treaty. Finally, the treaty itself could be dropped. This last scenario does seem rather unlikely, given the significant market access for both sides that would result from the remaining text of the treaty.

If there are no provisions on foreign investment in the final CETA, the issue would still be addressed by the existing bilateral treaties between EU Member States and Canada, and the EU has also given its Member States authority to sign new treaties on this issue (subject to various conditions) in legislation adopted in 2012.

What next for EU other trade and investment negotiations?

As noted already, the EU/Canada trade negotiations are something of a proxy for the EU/USA ‘TTIP’ negotiations now underway. Whatever happens to the investment provisions in CETA will probably then set the template for the TTIP.

More broadly, the EU is negotiating trade and investment treaties with a number of countries in South America and South-East Asia, as well as India and Japan.  Any decision taken as regards investment rules in relation to Canada could well have a knock-on effect on those talks too, as well as the stand-alone investment negotiations underway between the EU and countries like China and Myanmar/Burma.

The impact on the UK’s relations with the EU

Any major developments in the EU’s trade relations in the next few years could impact significantly on the prospect of the UK’s potential withdrawal from the Union. The reason for this is that one complaint against the EU is that it ‘prevents Britain from exporting abroad’. Taken literally, this is clearly wrong: the EU does not impose significant export controls on any of its Member States (besides restraining some arms-related exports, which largely reflect other international commitments in any case).

But a more nuanced version of this critique is essentially accurate: since the ‘common commercial policy’ (ie trade policy with non-EU countries) is an exclusive power of the EU, it’s not possible for any Member States to have a more liberal (or indeed, a more protectionist) policy than the EU as a whole. If the UK weren’t in the EU, it would be free to have a more liberal trade policy, by signing free trade deals with more countries. (There must be some people who instead would like the UK to have a more protectionist trade policy, but their voices aren’t really being heard in this context).

Yet this argument is only valid if the EU’s common trade policy is much less liberal than the UK’s individual trade policy would be. (It also assumes that the UK would be successful in persuading third States to negotiate trade deals with it; we can only speculate on this issue for now). Already the EU has free trade agreements with many countries in Europe, Latin America, the Middle East, Africa and the Caribbean. (It should be noted that many of these treaties are called ‘association agreements’, but are in fact free trade agreements, and are notified to the World Trade Organisation as such). It also has a free trade agreement with South Korea, and is about to conclude a deal with Singapore. As noted above, besides Canada and the USA, it is negotiating such deals with Japan, India and other countries in Latin America and South-east Asia.  

However, on some occasions the EU is unable to reach trade deals with third countries (negotiations have been going on fruitlessly for many years with the Gulf States and Brazil and nearby countries, for instance). The key question is whether dropping or amending the investment protection provisions in ongoing negotiations will make it more or less likely for those negotiations to be concluded, and for the final deal to be approved. If it’s more likely to lead to agreed and approved deals, then one of the arguments against Britain’s EU membership is significantly weaker. But if it makes it harder to agree such deals, then the reverse would be true.

Finally, an interesting feature of EU/Canada trade relations, according to official Canadian statistics, is that Canada/UK trade makes up about 30-40% of Canada's total trade with the EU. But while Canada runs a persistent trade deficit with the rest of the EU, it runs a persistent trade surplus with the UK. Economists should investigate whether the future EU/Canada trade agreement would reduce the UK's trade deficit with Canada, perhaps as a trade-off for increasing the market access of Canadian goods and services to the rest of the EU. If so, this would be a very clear example of how British membership of the EU can give benefits to the UK which it would be very unlikely to achieve as a non-member.  

Barnard & Peers: chapter 3; chapter 24 

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