The European Court of Justice issued a landmark ruling on the EU’s competency in trade agreements with direct implications for the Brexit negotiations, among other things. Essentially, the ECJ ruled that the EU has direct and exclusive competency over all aspects of modern trade agreements with two exceptions: non-direct (portfolio) investments, and investment dispute settlement provisions. Any agreement which includes those aspects of an investment chapter is subject to approval by both the EU and its 38 national and regional parliaments.
On Brexit, while this clearly complicates negotiating an investment agreement, it provides a large measure of certainty that both the Brexit deal itself and a future EU-UK trading arrangement, including one that covers financial services, transport, energy, etc., can be agreed to by the EU and UK governments alone. As Politico put it, “A Brexit deal just got harder. And easier.”
This ruling also has clear implications for other EU trade negotiations (including eventually with the United States).
- The EU’s FTA with Singapore will have to make its way through all of the national and regional parliaments in order to be fully ratified because it includes investment provisions.
- It is less likely that the EU will successfully include its Investor Court System in the deal currently under negotiation with Japan. At a minimum, it will lead to calls for an investment treaty to be negotiated separately from the FTA.
- It remains to be seen whether the EU can successfully maneuver its way through the many minefields to get CETA fully ratified. A more likely scenario is that the agreement is “provisionally applied” for the foreseeable future in all areas save investment protection, which encountered resistance in Wallonia.
Press reports have mostly made this out to be bad news for European trade negotiations. From our perspective, the EU and its trading partners should view this ruling as good news. It is now clear that the Commission has exclusive competency to negotiate in such areas as IPR, transportation, energy and services. Such agreements would only require approval of the European Council and the European Parliament. That gives certainty to the EU’s negotiating partners. The open question is how the Commission will choose to deal with investment protection measures going forward.
Lastly, and less controversially, on non-direct investments. The reasons for its exemption from EU competency seem to be two-fold. First, portfolio investments aren’t listed as EU prerogatives in the international treaties which form the basis of the EU. Secondly, there are some concerns over state-owned enterprises’ and sovereign wealth funds’ investments into the EU. Therefore, the ECJ elected to reserve the right to oversee non-direct investment to the member states exclusively. It seems that, in the future, the EU can revise its treaties to more fully define investment to prevent the (largely unnecessary) differentiation of direct and non-direct investment.