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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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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