REUTERS | Edgar Su

EU-Singapore Free Trade Agreement: did the European Court of Justice put the final nail in the coffin of ISDS?

The European Union (EU) and Singapore concluded negotiations for a free trade agreement (FTA) in June 2015. This agreement is one of the first “new-generation” FTAs, that is to say, a trade agreement which contains, in addition to the classical provisions on the reduction of customs duties and non-tariff barriers to trade in goods and services, provisions on various matters related to trade. These can include intellectual property protection, investment, public procurement, competition and sustainable development.

It was the view of the European Commission and the European Parliament that the envisaged agreement could be ratified by the EU only, without the lengthy delays that would be likely to arise if it needed to be ratified by each of the 28 member states as well. The ratification process in the EU’s member states can be a major stumbling block: for example, in some member states, ratification can include a referendum, whereas in others, it would require approval from all federal states. Conversely, the European Council and the member states were of the opinion that certain provisions of the Singapore-EU FTA did not fall within the exclusive competence of the EU, making the trade agreement a “mixed agreement” (that is, an agreement that must be entered into by the EU and by each member state in accordance with their own domestic ratification procedures).

The European Commission asked the Court of Justice of the European Union (ECJ), the EU’s highest court, to render an opinion on that matter, determining which areas of the EU-Singapore FTA would fall under the EU’s exclusive competence, shared competence, and whether any terms would lie solely within member states’ remit.

Notably, it is the first time that the ECJ was requested to consider competence-related issues since the entry into force of the Lisbon Treaty on 1 December 2009. For the record, Article 207 of the Treaty on the Functioning of the European Union (TFEU, resulting from the Lisbon Treaty) extends the exclusive powers of the EU to conclude FTAs so as to include all services, foreign direct investment and trade-related aspects of intellectual property rights.

The opinion of the ECJ

On 16 May 2017, the ECJ found that the EU did not have exclusive competence over matters relating to investor-state dispute settlement (ISDS) and non-direct foreign investment (that is, “portfolio investments”). Accordingly, the court held that the FTA signed by the EU and Singapore was a “mixed” agreement requiring ratification not only by the EU Council and Parliament, but also by the EU member states individually.

Put differently, the ECJ recognised that the EU has the exclusive competence to sign and ratify FTAs alone, so long as those agreements do not contain any provisions on ISDS or non-direct foreign investment, in which case member states would need to sign off on those specific provisions.

Is the ECJ’s opinion a victory for the opponents of FTAs?

Yes and no. It is (much) more a victory for anti-ISDS groups than for the critics of global free trade. That is because the immediate consequence of the ECJ’s opinion is that any FTA, which includes ISDS provisions (“new-generation” agreements), would require ratification by the 28 EU member states’ national and regional parliaments. In that context, we all remember that Paul Magnette, the Minister-President of the francophone region of Belgium (Wallonia), declined to give his government’s consent to sign the Comprehensive Free Trade Agreement between the EU and Canada (CETA), one of the reasons being the ISDS regime contemplated in that agreement (even though the CETA had introduced a new (far more restrictive) model of ISDS by creating a permanent multilateral investment court).

Despite those initial observations, the ECJ’s ruling is not as detrimental to the European Commission’s position and its appetite for negotiating and concluding ambitious FTAs, as appears at first sight.

First, contradicting parts of a (non-binding) previous opinion by the court’s Advocate General Sharpston, the court held that areas covered by EU exclusive competence included “all transport services”, government procurement provisions that apply to transport services, as well as labour and environmental standards. In other words, the ECJ went (much) further than the Advocate General in recognising the exclusive competence of the EU to enter into most of the commitments in the EU-Singapore FTA.

Secondly, and most importantly, the ECJ did not rule on the compatibility with EU law of the ISDS mechanisms contemplated in the EU-Singapore FTA. The extent to which ISDS mechanisms are compatible with EU law will be considered in another case currently pending before the ECJ (Case C-284/16 Slovak Republic v Achmea (formerly Eureko)).

Where does this leave the EU?

It is not unreasonable to anticipate that the ECJ’s ruling will make it considerably more difficult for the EU to conclude FTAs with investment protection components. On any view, ISDS has recently attracted considerable public attention. Much debate and criticism has arisen concerning the impact of ISDS, which is said to empower corporations to the detriment of sovereign states’ parliaments. Regardless of whether those criticisms are valid, one thing is for sure: with its ruling, the ECJ has now ensured 28 (possible) vetoes on new-generation FTAs.

The ECJ’s opinion is also likely to have negative consequences on the permanent Multilateral Investment Court’s system championed by the European Commission. The Commission has sought to sell its own proposal for a devoted international investment court system to replace the more traditional arbitral tribunals favoured in many bilateral investments treaties (BITs). Whether the European Commission will be in a position to build a consensus in Europe to include such provisions in any future treaties is now far from a foregone conclusion.

 

Schellenberg Wittmer Sebastiano Nessi

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