Brexit Implications of Opinion 2/15

The Court of Justice has delivered its long-awaited Opinion 2/15 on the scope of the EU’s trade powers under the so-called ‘Common Commercial Policy’ (’CCP’) of the EU (Article 207 TFEU) as well as the EU’s ‘implied’ trade policy powers. It is a ruling of interest to trade lawyers, but it will also be pored over by the UK Government and its lawyers when they consider the scope of the EU’s powers to negotiate and conclude a post-Brexit trade deal with the UK.

Exclusive EU Trade Powers

At the heart of the ruling is the question of the extent to which the EU’s trade powers are exclusive to the EU, and in what respects trade agreements engage powers that are retained by, or shared with, the Member States albeit that the Member States’ powers are exercised in a coordinated fashion and in conjunction with the EU. This issue has been a long-running saga of EU trade law and policy and was dramatized most clearly in the context of the EU’s recent trade deal with Canada. Despite the European Commission’s belief that the deal fell within the scope of the EU’s exclusive powers – and so could be negotiated by the Commission on behalf of the EU and concluded by the EU without the need for national approval – it decided to proceed on the basis that the deal was a ‘mixed agreement’ – involving issues of exclusive and shared competence – and so required domestic approval. When the Walloon parliament held up Belgian approval of the deal, there were fears that the EU’s trade policy was unravelling just at the moment that the UK was preparing to leave the EU and seek a new deal with the EU. As EU Trade Commissioner Malmström quipped at the time, ‘If we cannot make it with Canada, I’m not sure we can make it with the UK. But jokes aside …’ In the end, a solution was found to manage the concerns of the regional parliament but the saga highlighted the role of national – and even sub-national – parliaments as veto players in future Brexit negotiations.

It ought then to be clear that the more that can be done by way of a trade agreement falling within the scope of the exclusive trade powers of the EU then the risks from domestic vetoes or delays might be mitigated. Which is why all eyes were on what the Court of Justice would produce in its opinion on the EU-Singapore trade deal and the scope of the Union’s express trade powers under the CCP as well as any implied trade powers (which could also give rise to exclusive EU competence).

The Importance of the Legal Basis for EU Acts

Before turning to the ruling, there is a simple point worth repeating not least because it is a point that UK ministers continually fail to grasp. The more cavalier Brexiteers in the UK government take the view that everything is possible in the negotiations which lie ahead. Moreover, there is still an apparent difficulty in accepting that the negotiations will be phased not just in terms of the Article 50 withdrawal process itself, but also the negotiations that will continue and follow when the UK leaves the EU and becomes a non-Member State. From the EU’s perspective, what is possible – legally and politically – is framed by the treaties and the powers it confers on EU institutions to negotiate, agree and conclude deals. Different provisions of the treaty – the ‘legal bases’ which give legal authority to EU institutions – apply to different parts of these negotiations and have their own procedural rules. It is the irony of Brexit that the EU is not sovereign but a Union based on attributed competences and the rule of law such that what the EU negotiates and concludes can be legally reviewed before the EU courts.

So the immediate question that the Court’s opinion raises is whether it pushes Brexit negotiators on both sides towards concluding a trade deal within the confines of the EU’s exclusive competence in the hope that this will avoid vetoes from either national governments – much of the CCP can also be agreed by a qualified majority vote rather than unanimity – or their national parliaments. But it also sheds a light more widely on the relationship between, on the one hand, the bundle of agreements that will be needed to manage the Brexit process, and on the other hand, what the treaties substantively allow and procedurally require in order for negotiations to be lawful as a matter of EU law.

Article 207 TFEU

On the first point, the main take away from the Court’s opinion on the EU-Singapore deal is how much can be done within the scope of Article 207 TFEU. The point is of crucial importance to Brexit given that the Singapore deal – like the Canada agreement – is broad and ambitious and goes beyond the usual suspects of international trade agreements, namely the removal of tariff and non-tariff barriers to the market access of goods and services. Indeed, the EU-Singapore agreement contains seventeen chapters extending to issues of intellectual property, procurement, competition, investment, sustainable development and renewable energy generation. In principle, a very ambitious and comprehensive trade agreement can fall within the scope of Article 207 TFEU. Indeed, chapters of an agreement that deal with issues of social and environmental protection – matters where the EU has a limited and shared internal competence – can, nonetheless, fall within the scope of the CCP because they seek to ensure that free trade is also fair trade.

Indeed, the Court finds that ‘sustainable development’ is an integral part of EU trade policy.

Limits to Article 207 TFEU

Some things do not fall within the CCP and the issue arises whether, despite this, the fact that the EU has internal (intra-EU) rules in a field creates a parallel implied and exclusive external EU competence. In terms of international transport services, the express wording of Article 207(5) TFEU excludes this from the scope of the CCP. However, the EU does have an external competence to conclude international agreements under Article 216 TFEU and where the EU has common internal rules on transport services, the conclusion of an international agreement under Article 216 TFEU which would impact upon those rules, also gives the EU exclusive competence.

Foreign ‘direct’ investment is covered by Article 207 TFEU but not other indirect forms of investment. And it is here that the Court’s Opinion finds that the EU does not have exclusive competence to adopt and conclude the chapter on investment insofar as it extends beyond direct investment. Equally the institutional provisions relating to exchanges of information and cooperation relating to non-direct foreign investment cannot be concluded by the EU acting alone. Moreover, the dispute resolution mechanism relating to investor-state disputes also cannot be adopted by the EU alone (although the dispute resolution mechanism applicable to the parties to the agreement itself is within the competence of the Union in the same way as the substantive provisions which the mechanism is designed to enforce).

Implications for Brexit

It is the non-direct investment and the investor-state dispute resolution mechanisms which are the problematic areas of the EU-Singapore deal. But the bulk of this comprehensive agreement does fall within the scope of EU exclusivity and could form the basis for an ambitious Brexit trade deal following the UK’s withdrawal from the EU. While the new generation of bilateral EU trade deals do involve chapters on investment and investor-state dispute resolution, it would not be inconceivable to negotiate a parallel bilateral investment treaty (‘BIT’) between the UK and the EU as well as its more substantive Brexit trade deal. In this way, any difficulties with ratification of the BIT would not produce contagion effects to threaten the agreement and conclusion of a trade deal.

Sequencing and Timing

It is important to keep in mind that the Court’s Opinion is relevant to the agreement that the UK will conclude with the EU when the UK ceases to be a Member State. It’s relevance assumes that the UK Government sticks to its apparent direction of travel, namely, not to conclude an ‘association agreement’ with the EU when it leaves. In terms of Article 217 TFEU, association agreements require the unanimous agreement of all national governments. Moreover, given their wide scope, they are mixed agreements and so require domestic approval. As the EU-Ukraine Association agreement highlighted, domestic approval processes can include a referendum as was the case when voters in the Netherlands voted to oppose approval. While an association agreement would be a softer Brexit, it may be that the Court’s Opinion on the CCP will harden the government’s approach to seek a trade agreement that avoids domestic approval processes in other EU states.

Either way, before any of this can occur, the negotiations need to get underway on the withdrawal agreement itself. That agreement is based on Article 50 TEU directly. Like Article 207 TFEU, it is a legal basis that empowers the EU to adopt an agreement with a withdrawing state under certain substantive and procedural conditions.  The process is now underway with the European Council establishing guidelines for the negotiations, and the Council preparing negotiation directives for the European Commission who will conduct the negotiations on behalf of the Union. The agreement will be concluded on behalf of the Union by the Council, with the consent of the EP. There is no requirement as a matter of EU law to seek domestic approval in the parliaments of the EU27: an Article 50 TEU agreement is not a mixed agreement but rather one concluded on behalf of the Union. That will limit its scope to managing the immediate consequences for the UK and the EU of withdrawal rather than setting out detailed future relations between the UK, on the one hand, and the EU and its Member States, on the other.

Transition

The complication, however, is in respect of any ‘transitional arrangements’. Such arrangements would act as a bridge between the UK’s status as a Member State, and its status as a ‘third country’. In terms of the EU’s preferred sequencing of negotiations, the discussion of transitional arrangements would form part of Phase II of the negotiations once sufficient progress has been made in Phase I dealing with citizenship rights, outstanding liabilities and border issues relating to the UK and Ireland. It would seem, then, that Article 50 provides a legal basis for such a transitional arrangements. But clearly that creates a potential tension if such arrangements proved to be a long-standing means of managing the UK’s relationship with the EU in that they would, over time, undermine the EU’s specific external trade policy powers. More likely, they will need to be time-limited in order to form part of a withdrawal agreement (or bundle of agreements) based on Article 50 TEU.

All of which serves to reinforce the point that even if the UK and the EU can agree on what they both want, they may profoundly disagree as to the legal route to getting there and the timing of the stages of the process.