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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Copyright: anything left of Member States’ external competence?

Lorna Woods and Steve Peers

The extent of broadcasters’ rights is near the top of a long list of controversial issues arising from the law of copyright. Equally controversial is the extent of the EU’s exclusive external competence, which (where it exists) prevents Member States from signing treaties and (usually) means that they do not have a veto in the Council over the treaty concerned. These two issues came together in the recent CJEU judgment in Case C-114/12 Commission v Council, which concerned the EU’s competence to negotiate the Council of Europe’s draft treaty on the rights of broadcasting organisations.

Background

The regime covering mass electronic distribution of audiovisual works is complex, reflecting the traditionally national nature of broadcasting markets and the layered nature of intellectual property rights in audiovisual works.  In addition to the content-based rights, which are often assigned or licensed to the broadcaster, the broadcaster has rights in the signal itself (broadcasters’ neighbouring rights). These rights are found in a number of international treaties, including TRIPS. Similar rights relating to control over the fixation of the signal, as well as the making available of the signal to the public were contained in a number of directives variously implemented in the Member States, in particular Directive 2006/115/EC on Rental and Lending Rights (codifying  Directive 92/100) and Directive 93/83/EEC Satellite and Cable Directive, now codified  as Directive 2006/116). These rules have tended to be technologically specific and while Directive 2001/29 (the InfoSoc Directive) confirmed broadcasters’ rights whether wireless or cable technology was used, questions remained, notably the issue of identifying where the activity of ‘making available’ or ‘communicating to the public’ is taking place, especially in an Internet age.

There has been considerable litigation on these directives and how they operate in a new technical environment. Clearly something needed to be done and broadcasters have for some time been lobbying for change. Against this background, the Council of Europe agreed to start work on a Convention that protected broadcasters’ neighbouring rights.  According to a 2010 report, the aim of the Convention was to agree on a set of exclusive rights of broadcasting organisations, such as the right of fixation the right of reproduction, the right of retransmission, the right of making available to the public, the right of communication to the public and the right of distribution, in technologically neutral terms. Other issues were also to be discussed: the protection of pre-broadcast programme-carrying signals, the term of protection, the need for a non-exhaustive list of limitations and exceptions, the enforcement of rights and obligations concerning technological measures and rights-management information.

As for the EU’s role in these talks, the Council and Member States’ representatives adopted a single joint Decision authorising the joint participation of the EU and its Member States in the negotiations for a Convention. While the EU position would be represented by the Commission, the Member States’ collective position (if they could reach one) would be represented by the Council Presidency. If Member States could not reach a collective position on matters falling within their competence, they would negotiate individually.

The Commission disagreed with the Council’s decision on both substantive and procedural grounds, and so brought an annulment action before the Court of Justice.

Judgment

First of all, the Court quickly dismissed any doubt that the action was admissible. Even though the act in question had been adopted by the Member States alongside the Council, the Council was ‘involved’ in the entire Decision because it was both conferring and receiving power pursuant to it.

As to the substance, the Court agreed with the Commission that the envisaged treaty fell within the scope of the EU’s exclusive external competence. This was the first case in which the Court interpreted Article 3(2) TFEU (added by the Treaty of Lisbon), which provides that the EU has exclusive competence to conclude an international agreement where ‘its conclusion is provided for in a legislative act of the Union or is necessary to enable the Union to exercise its internal competence, or in so far as its conclusion may affect common rules or alter their scope’

.  

The last of the three categories mentioned in Article 3(2) is similar to the classic exposition of the EU’s exclusive external competence in the ERTA judgment, although some academic opinion has suggested that the Treaty drafters have not adequately synthesized the judgment. On the other hand, some Member States intervening in support of the Council in this case suggested that the TFEU provision narrows the EU’s exclusive external competence, in particular in light of the Protocol to the Treaties on shared competences, which was also added by the Treaty of Lisbon.

However, the Court stated simply that the Treaty provision meant the same thing as the ERTAjudgment, as elaborated in the subsequent case law of the CJEU. The Protocol on shared competences was irrelevant, since it only referred to Article 2(2) TFEU, which defines the EU’s shared internalcompetences.

The Court then summarised the key aspects of the ERTA case law: it is not necessary for the international treaty and the EU legislation concerned to overlap fully; it may be sufficient that the area concerned is ‘largely covered’ by EU rules; and it is irrelevant that there is no contradiction between the treaty concerned and the internal EU rules. To show whether external competence was exclusive on this basis, there had to be a ’specific analysis of the relationship between’ the relevant international treaty and EU legislation. The Court added that the party alleging that competence was exclusive had the burden of proving it.

Applying these principles to the facts of the case, the Court summarised the relevant EU legislation (the five Directives referred to above), stating that the intellectual property rights concerned ‘are the subject, in EU law, of a harmonised legal framework which seeks, in particular, to ensure the proper functioning of the internal market’, which integrated technological, digital and information society developments, and which had ‘established a regime with high and homogeneous protection’ for broadcasters as regards their broadcasts.  It was irrelevant that this harmonisation appeared in different EU measures, which also regulated other intellectual property rights.

So the area of law to be compared as between EU law and the planned treaty was the neighbouring rights of broadcasters. On this point, while there were some differences between the existing EU rules and the planned treaty, any new rules on the planned treaty were liable to have a significant impact upon the EU acquis. In particular, the Court distinguished its prior case law which had held that external competence was shared when the EU set minimum standards, on the grounds that in this area EU legislation simply limited its scope instead. Since the new treaty might extend the scope of the EU rules, its subject-matter fell within the scope of the EU’s external competence. And on several points, the Court did not believe there was enough evidence to support the claims of the Council and some Member States that issues not covered by the EU acquis at all would be inserted into the future treaty.

For example, one particular issue relates to the protection of signals prior to their broadcast to the public – usually this occurs when one broadcaster transmits a signal to another. This issue is not currently covered by the EU rules. If the decision was taken to protect these signals, this protection could be provided in a number of ways.  The Court highlighted one option – the extension of the term ‘broadcasts’ to cover pre-broadcast signals would have horizontal effects through the regulatory system, and therefore impact on the EU acquis.  The other possible mechanisms noted (the introduction of sui generis legal protection of pre-broadcast signals or the application of the provisions dealing with ‘technical measures’ to the pre broadcast signals) would not have such an effect. The Court emphasized that in the absence of any reference to these approaches in the Council of Europe preparatory documents ‘those approaches seem, at this stage, to be hypothetical and cannot therefore be relevant to determining the exclusive or shared nature of the competence of the European Union in the present case’ (para 99).

Having ruled in favour of the Commission on its substantive argument, the Court ruled that it was not necessary to decide on the three alternative procedural arguments which the Commission had made: such a ‘hybrid’ decision of the Council and Member States was not permitted by EU law; the Council had wrongly voted by unanimity, not qualified majority; and the Council had breached the principle of sincere cooperation. The first two of these arguments had been accepted by Advocate General Sharpston in her Opinion (she thought the final argument was superfluous). However, unlike the Court, she had ruled against the Commission on the substantive point, on the basis that the Commission had argued that all of the provisions of the draft Convention were closely linked to EU law, but had failed to prove this on the facts.

Comments

First of all, as regards the admissibility of this action, the Court’s ruling is convincing as regards the Council conferring power on Commission, but arguably not as regards Member States conferring power on the Council (since it would be operating outside the EU framework in that context), and certainly not as regards Member States conferring power on Member States. The better argument for the admissibility of this action is that if the Council and Member States adopt a hybrid decision like this one, their action is indissociable. Put another way, if the Council and Member States act together in this way, there’s joint and several admissibility.

Secondly, as for the procedural points not addressed by the judgment, the Advocate-General’s opinion is not convincing. Since mixed agreements, ie agreements ratified by both the EU and its Member States, are a common feature of EU law, then there should no problem with the idea that a decision relating to negotiations on those agreements could in principle be a hybrid decision. Conceptually, that’s no different from the nature of the final mixed agreement.

As for the substantive competence issues, first of all it’s important that the Court clarified the point that ERTAand the case law elaborating upon it are still applicable to Article 3(2) TFEU, in light of the doubt which some had expressed on this point. The judgment is presumably relevant by analogy to the first two grounds for exclusive competence listed in Article 3(2) TFEU (where competence is provided for in a legislative act of the Union or is necessary to enable the Union to exercise its internal competence). At the very least, it must follow that the Protocol on shared competence is also irrelevant to those two other grounds, since as the Court rightly said, that Protocol only refers to Article 2(2) TFEU.

Despite this important clarification, the application of the ERTA judgment itself remains complex and seems highly fact dependent in each case, arguably making the prediction of outcome difficult. Here, it is notable that the Court and the Advocate General came to different conclusions in determining the key question of whether the conclusion of the Convention affects common rules or alters their scope (Article 3(2) TFEU).  The Advocate General and the Court both stated that the burden of proof was on the Commission to show that exclusive competence had been established. As a corollary it seems the default position is shared competence. To quote the Advocate General:

if the analysis of the Convention and EU rules on the basis of the information presently available shows that in at least one respect Member States retain competence, the Commission’s plea must be rejected. [para 143]

While the Court accepted this allocation of the burden of proof, it is when we get to the specifics that differences emerge as can be seen in a couple of examples. Article 8(3) of Directive 2006/115 states:

Member States shall provide for broadcasting organisations the exclusive right to authorise or prohibit the rebroadcasting of their broadcasts by wireless means, as well as the communication to the public of their broadcasts if such communication is made in places accessible to the public against payment of an entrance fee.

The Advocate General analyses the matter as follows: ‘Thus, EU law does not yet regulate ‘at least’ the right of retransmission by wire or cable, whereas the Convention might do so and the Member States are currently authorised to provide for it in their own jurisdiction’ [para AG 150].  The Court accepts the same point but draws a very different conclusion from it – that the proposed Convention, by regulating areas currently outside EU competence, in itself might have an impact on EU law. The Court does not explain how, merely adopting the Commission’s position [92]. The fact that broadcasters are already partially covered by EU law does not seem to address the point.  So, the Opinion seems more logical on this point.

In a number of the aspects of the Convention under consideration, the question of whether there was impact would be affected by the approach finally taken by the negotiators. For example, the scope of the Convention would depend on its definition. While EU law does not have a definition of the term ‘broadcasting organisations’ there would be some confluence with the rights-holders under the various directives. The impact on EU law is therefore uncertain.  The Advocate General concluded cautiously:

If the definition in the Convention creates an absolute category that is wider than broadcasting organisations that are rightholders under the said directives, the creation of that category might possibly limit the European Union’s freedom to decide on its own definition. That may not be the case if the definition in the Convention were non-exhaustive and did not offer protection to entities other than existing rightholders under EU law. [AG 156]

While in this case it was necessary to finally determine the point as to whether there is impact on EU law or not, this then begs the question of what to do in such a circumstance – do we assume that if there is a possible interpretation that could affect EU law then the text is satisfied, or is a higher standard of proof required?

The difference on this point can be seen in the respective approaches of the Advocate General and the Court to pre-broadcast signals. It is clear that currently EU law does not require the protection of such signals and that the Convention proposed to afford protection to such signals. Given the early stages of negotiations, it is unclear what sort of mechanism was likely. Some possibilities might utilise techniques found in the existing legal framework (for example extending the definitions, or applying the technical measures rules to pre-broadcast signals). Since such an approach would have an impact on EU law, then that would bring the issue within the exclusive competence of the EU – appoint on which the Advocate General and the Court agreed.

Another mechanism exists – the development of a sui generis right – which would not have this effect. Here the Advocate General suggested that in such a situation there would be no exclusive competence. In stark contrast, the Court dismissed other approaches (including the sui generisright) as hypothetical, and therefore focussed only on the approach that would trigger exclusive EU competence [para 99].  No reason was given as to why the other approaches were more hypothetical than the approach the Court selected.  So while the Court and the Advocate General agree on the principles, they differ in the application of those principles, and it seems that the Court has tended to favour assessments that point towards exclusive competence.

Finally, what are the broader implications of the judgment? The Court of Justice has already ruled (in the Daiichi Sankyo judgment) that the WTO's TRIPs agreement falls within the scope of the EU exclusive external competence over the common commercial (external trade) policy (CCP), which was extended to cover trade-related intellectual property fully by the Treaty of Lisbon. It has also ruled that a Council of Europe treaty relating to enforcement of audiovisual service providers’ rights falls within the scope of the same competence, in light of the full extension of the CCP to services by the same Treaty. Usually, the Member States have no veto as regards CCP matters.

Now it seems that treaties relating to many other aspects of intellectual property can fall within the scope of the EU’s exclusive external competence, due to the exercise of the EU’s powers to adopt internal market legislation. Again, this means that Member States usually lose their veto. This effect is not absolute, given that the recent Marrakesh treaty on copyright exceptions for the blind and the Beijing treaty on audiovisual performances are both mixed agreements (see the list of signatories for the former and latter treaties respectively). However, the power of the EU (and the Commission in particular) in this field is demonstrated by the Commission’s veto of a planned Council of Europe treaty on cross-border broadcasting, at a late stage of negotiations.

More broadly, the Court’s pro-EU application of the test for exclusive competence suggests that it would be easier to find such exclusivity in other areas which the EU has only partly regulated, such as consumer law or immigration law. The broadcasting rights judgment may, in time, prove to be nearly as important as the ERTA judgment which it reconfirms and elaborates upon.

Barnard & Peers: chapter 14, chapter 24 

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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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Is readmission linked to development?

Steve Peers

In recent years, the EU has been negotiating Partnership and Cooperation Agreements (PCAs) with a number of Asian countries. These agreements replace the previous development policy agreements which the EU had with the countries concerned. Compared to the previous agreements, the PCAs include go into greater detail about the EU's cooperation with the countries concerned, including the addition of further topics for cooperation.

Given the addition of these new topics, and the expansion of detail on other topics, the issue arises whether (like the previous generation of treaties) the legal base for the treaties concerned should be trade and development alone, or whether other legal bases must be included. Unsurprisingly, the Commission takes the former view, and the Council takes the latter. In fact, the same issue has arisen in respect of some recent association agreements, although they are not at issue in this case and are subject to a different legal base.

Who is correct about the legal base argument, the Commission or the Council? In today's opinion by Advocate-General in Case C-377/12 Commission v Council, Advocate-General Mengozzi argues that the Commission is correct. This particular case concerns the Council's decision to sign the PCA with the Philippines on behalf of the EU, and the Commission is challenging the Council's decision to add legal bases relating to the environment, transport and immigration policy to the trade and development legal bases which the Commission had proposed.

The starting point of the A-G's analysis is the CJEU's prior judgment of 1996 in Portugal v Council, in which the Court ruled that the EU's development policy legal base could apply to the conclusion of a treaty with India which included provisions on issues like energy and culture, along with a clause on suspension of the agreement on human rights grounds. The core of the Court's reasoning was that a development policy treaty could include general provisions on issues like energy and culture, as long as cooperation on these issues contributed to the development of the countries concerned, but if there were any detailed commitments on such issues in the treaty, other legal bases would have to be added. Furthermore, it was acceptable for such treaties to include a clause allowing for their suspension on human rights grounds.

Applying that prior case law to the PCA with the Philippines, while the provisions in that treaty on transport and the environment are more detailed than those in prior development policy agreements, the A-G argues that such clauses still set out only general obligations, and still contribute to the development of that country. The Council also raised arguments about the impact of the clause allowing the PCA to be suspended in the event of concerns about human rights, democracy and the rule of law, but the A-G does not believe that should affect the legal base for signing the agreement.

The provision in the PCA on immigration raises more difficult issues. The A-G draws a distinction between the more general paragraphs on immigration management, and the more specific paragraphs dealing with readmission. The former clauses do not set out precise legal obligations, while the latter do: the parties have agreed to take back their own nationals who stay on the territory of the other parties without authorisation, and have agreed to negotiate a readmission treaty. In the A-G's view, these clauses don't contribute to the development of the Philippines either. In fact, they only serve the EU's interest.

But having said that, he still concludes that the Council should not have added a separate legal base for the readmission clauses, since (following other prior case-law) this issue is ancillary to the main thrust of the agreement. In particular, he reaches this conclusion because the EU only obtained the Philippines' consent to the readmission clauses in return for the Union's commitments as regards development in the rest of the PCA.

Comments

Why did the Commission bring this action? It is not contesting the nature of the PCA as a 'mixed agreement', ie concluded by the Member States as well as the EU. Also, the inclusion of the extra legal bases did not change the voting rules in the Council, as it will still vote by a qualified majority regardless. Anyway, as long as the Member States are party to the agreement, there is de facto unanimous voting, since they act by common accord.

The Commission may have an agenda to reduce the use of the transport legal bases in agreements which also relate to trade, given the 'transport services' exception in the Treaty rules relating to the common commercial (external trade) policy, which sullies the purity of a key EU external competence which would otherwise be purely exclusive. This makes sense, but the EU's free trade agreements usually include detailed commitments on trade in transport services, so the transport services exception is surely applicable. On this point, the better strategy for the Commission would be to propose internal EU legislation which more fully harmonises the regulation of transport services to and from third countries. If and when such legislation is adopted, the EU would gain exclusive external competence over this issue via the normal (ERTA) route. Of course, this is easier said than done.

Leaving aside the specific issue of transport services, perhaps the Commission wants to reduce the use of additional legal bases besides the common commercial policy in the EU's free trade agreements more generally (although the PCA with the Philippines is not itself a free trade agreement), given that such clauses are seemingly usually added in order to trigger mixed competence between the EU and the Member States (and therefore give Member States a veto). The most egregious example of this is the bizarre cultural protocol attached to the EU/Korea free trade agreement. If the Court follows the A-G's opinion in this case, the Council's ability to do this will be restrained a little, although the Member States can still get their way on this issue if they insist on attaching a protocol with sufficiently detailed obligations in the extraneous field.

This brings us to the key issue of external migration, in particular readmission. The effect of including legal bases on this issue is that the UK, Ireland and Denmark have an opt-out from legal rules concerned. In practice, the UK tends to opt in to EU readmission agreements anyway, so this is more a point of principle for that Member State.

Is the Opinion convincing? Certainly the PCA does not contain detailed rules on transport or the environment (compare it to the EU's aviation liberalisation treaties with third States, or international environmental treaties), and cooperation on such issues will surely aid the Philippines' development. Of course, increasing transport to and from the country and protecting the environment there may well be contradictory objectives, but the list of EU external objectives in Article 21 TEU is rife with such contradictions.

It could be added that including environmental provisions in the PCA is consistent with the obligation to integrate environmental protection into all EU polices. The A-G is also surely right to say that improving transport security and safety will aid the Philippines' development: no-one will want to fly there if their plane is liable to crash or be blown up.

As for the immigration clauses, the migration management rules are not only not very precise; it could be added that they are closely related to the development of the Philippines. However, the A-G's arguments relating to the readmission clauses are, with great respect, not convincing. It is true to say that they set out precise obligations and do not aid the Philippines' development, but then the A-G does not draw the obvious conclusion that a specific legal base concerning immigration is therefore necessary. While is certainly true that the readmission clauses and the development policy commitments are linked politically, it does not therefore follow that the legal base of the former clauses should change.

One final thought: the judgment in this case, whichever party is successful, could be an opportunity for the Commission to suggest a relaunch or review of the EU's policy on external migration management and/or readmission. For instance, why not adopt EU legislation setting out specific rules on coordination of Member States' external migration treaties? (Such legislation exists in a number of other EU policy fields). This can be justified as a necessary feature of the development of a common EU immigration policy, and would be an opportunity in particular to ensure that such treaties are consistent with the human rights obligations of the EU and its Member States.


Barnard & Peers: chapter 24, chapter 26

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