ORIGINAL PUBLISHED ON EUROPEAN LAW BLOG
By Laurens Ankersmit
To say that the EU’s new generation of trade agreements (such as CETA and TTIP) is politically controversial is becoming somewhat of an understatement. These free trade agreements (FTA), going beyond mere tariff reduction and facilitating hyperglobalization, have faced widespread criticism from civil society, trade unions, and academics. It may come as no surprise therefore that the legal issue over who is competent to conclude such agreements (the EU alone, or the EU together with the Member States) has received considerable public attention, ensuring that the Advocate General Sharpston’s response to the Commission’s request for an Opinion (Opinion 2/15) on the conclusion of the EU-Singapore FTA (EUSFTA) has made the headlines of several European newspapers.
The Opinion of Advocate General Sharpston in Opinion 2/15, delivered on 21 December, is partly sympathetic to the Commission’s arguments on EU powers, but ultimately refutes the most outlandish of the Commission’s claims to EU power vis-à-vis that of its constituent Member States. The Opinion is of exceptional length (570 paragraphs, to my knowledge the longest Opinion ever written), and contains an elaborate discussion on the nature of the division of powers between the EU and the Member States and detailed reasoning on specific aspects of the EUSFTA such as transport services, investment protection, procurement, sustainable development, and dispute settlement.
Given the breadth of the AG’s conclusions, the aim of this post is to discuss the Opinion only in relation to investment protection and to reflect upon some of the consequences for the Commission’s investment policy, perhaps the most controversial aspect of this new generation of trade agreements.
A short history of the EU’s powers in the field of investment protection
The EU’s powers in the field of investment are relatively new. Only with the Treaty of Lisbon did the scope of the common commercial policy (CCP) extend to cover ‘foreign direct investment’ (FDI), thereby putting at least part of current international investment policies within EU exclusive competence. The history of the inclusion and decades long push by the Commission to extend the EU’s trade policy to cover investment is quite interesting (see this excellent and informative contribution by Robert Basedow).
From the 1970s onwards, the Commission’s push for extending the EU’s trade powers to cover investment met with resistance from the Member States. However, in the context of the Iraq war and the constitutional momentum of the Laeken convention, delegates of the convention focussed on the reform of EU foreign policy and ignored the proposed addition of FDI to the CCP by Irish liberal-conservative MP John Bruton (Bruton was shortly thereafter appointed EU ambassador to the United States). During the subsequent Intergovernmental Conference (IGC), Member States chose not to spend their political capital on the ‘technical issue’ of FDI.
As a result, the Commission was able to claim a major victory with the entry into force of the Lisbon Treaty with the extension of EU trade powers to foreign direct investment. A direct consequence of this addition was that the EU now needed to be formally involved in the negotiation and conclusion of investment agreements covering foreign direct investment. This triggered the Commission’s investment policy which resulted in the inclusion of investment protection chapters in agreements such as the EUSFTA and CETA.
Leading up to the conclusion of the first new generation of trade agreements, the Commission decided it did not get enough with its extensive foot in the door in international investment policy and claimed the entirety of these investment chapters as EU-only in its request for an Opinion. As a result, the ECJ will now be required to interpret the term ‘foreign direct investment’ for the first time and clarify whether the EU’s powers in the area of portfolio investment (as opposed to foreign direct investment) also fall within the EU’s (implied) exclusive powers.
The AG’s Opinion
The nuanced Opinion of the Advocate General is certainly sympathetic to some of the Commission’s arguments, but rejects the Commission’s proposition that the EU has exclusive competence over all matters related to investment protection in the EUSFTA. I will discuss the three main issues discussed, namely:
- The meaning and scope of ‘foreign direct investment’ in Article 207 TFEU;
- The issue of portfolio investments as an implied exclusive power;
- Termination of prior bilateral investment agreements by the EU.
The meaning and scope of ‘foreign direct investment’ in Article 207 TFEU
On the first issue, the Advocate General had to give meaning to the term ‘foreign direct investment’ in article 207 TFEU that has not yet been interpreted by the ECJ. The Advocate General took a contextual approach to the meaning of FDI, using the concept of ‘direct investment’ in the case-law of the ECJ in interpreting the free movement of capital provisions and OECD, IMF, and UNCTAD definitions. Accordingly, foreign direct investment is to be understood as a foreign investment ‘which serve[s] to establish or maintain lasting and direct links, in the form of effective participation in the company’s management and control, between the person providing the investment and the company to which that investment is made available in order to carry out an economic activity.’ (para. 322) The Advocate General subsequently suggested a threshold of at least 10% of the voting power as ‘evidentiary guidance’ of effective participation in the company’s management and control.
In relation to the scope of Article 207 TFEU and ‘foreign direct investment’, the AG, siding with the Commission, found that the term also covered issues that regulated the ‘post[-]establishment’ phase of investment and not merely market access of foreign direct investment. Applying the Daichi Sankyo-test, the AG concluded that the CCP ‘covers the regulation of the protection of foreign direct investment in so far as the availability of that protection has a direct and immediate effect on whether to carry out the foreign direct investment and on the enjoyment of the benefits of that investment.’ (paras 323-336) The regulation of the post-establishment phase could not be excluded because the effectiveness of rules permitting market access of investment could be subsequently undermined if there was regulation of the post-establishment phase.
The issue of portfolio investments as an implied (exclusive) power
After having sided with the Commission, the Advocate General nonetheless rejected the Commission’s arguments in relation to portfolio investments. The Commission did not argue that portfolio investments came within the scope of Article 207 TFEU, but came up with a rather adventurous interpretation of Article 3 (2) TFEU. That article codifies the ECJ’s case-law on implied exclusive treaty-making powers, and in particular the AETR doctrine which establishes such competence if the conclusion of the agreement in question ‘may affect common rules or alter their scope’. It is commonly understood that the reference to ‘common rules’ refers to EU secondary legislation, but in the absence of any common rules in the area of portfolio investment, the Commission argued that the Treaty rules on the free movement of capital themselves could also be considered ‘common rules’ in the sense of Article 3 (2) TFEU.
The Advocate General rejected this interpretation, inter alia, because this would risk leading to exclusive competences of the EU merely because of the existence of Treaty provisions. For the AG, Article 3 (2) TFEU lays down additional grounds for EU exclusive competence other than the express exclusive powers in Article 3 (1) TFEU and therefore that ‘competence must […] stem from some other basis than the Treaties themselves’ (para. 353). Indeed, one may wonder why the Treaty drafters would have not explicitly granted the EU exclusive treaty-making powers in the field of free movement of capital if the Commission’s reasoning would be followed.
Moreover, as the AG pointed out, this would amount to allowing the EU to change the Treaties via the conclusion of an international agreement. For the AG, the purpose of Article 3 (2) cannot be to entitle the EU ‘to “affect” rules of primary EU law or to ”alter their scope” by concluding an international agreement. […] Primary law can be changed only by amending the Treaties in accordance with Article 48 TEU.’ (para. 354).
Lastly, however, the Advocate General accepted the existence of implied shared powers between the EU and the Member States in the field of portfolio investment on the basis of the free movement of capital provisions (paras. 363-370, again siding with the Commission). She based her finding on the fact that this was necessary to achieve one of the objectives of the Treaties (second ground in article 216 (1) TFEU). For the AG, it was not necessary that the EU was competent to adopt secondary legislation, but it was sufficient that the issue fell within the scope of EU law (which according to the AG it did because of Article 63 TFEU).
I am personally a bit puzzled by this finding. In my opinion, the competence to adopt secondary legislation is a prerequisite, not least in order to determine the appropriate procedure to be followed for the adoption of an international agreement (see article 218 (6-8) TFEU). After all, the doctrine of implied powers rests on the proposition that the implied powers derive from a legal basis permitting the adoption of rules without explicitly mentioning international agreements. In that sense, only article 352 TFEU would potentially be a conceivable legal basis. Article 64 (2) TFEU, for instance, provides that the EU may adopt measures ‘on the movement of capital to or from third countries involving direct investment – including investment in real estate – establishment, the provision of financial services or the admission of securities to capital markets.’ Article 64 (2) TFEU therefore relates to direct investment, not portfolio investment. While article 64 (2) TFEU covers financial services and securities to capital markets and thus may relate to portfolio investment, it does not cover all portfolio investments.
Termination of prior bilateral investment agreements by the EU
The third and last issue the Advocate General addressed was the question whether the EU has the power to terminate prior Member State investment agreements with Singapore. At first glance, this question may seem a bit absurd, as the Member States and not the EU have concluded these agreements. However, the Commission had argued that such competence exists on the basis of the EU law theory of succession, according to which the EU assumes the responsibilities of the Member States for international agreements concluded by them that now fall entirely within the exclusive competence of the EU. Of course, the ECJ would only be faced with this question if it indeed follows the arguably stretched argumentation of the Commission on implied exclusive powers in the first place.
The Advocate General held that only the Member States had such powers to terminate prior BITs and that accordingly the EUSFTA should be a mixed agreement. Her argument is based on both EU and international law. In relation to EU law, Article 351 TFEU requires Member States to take all appropriate measures to eliminate any incompatibilities between pre-accession agreements (eg the Poland-Singapore 1993 BIT) and the Treaties. For the AG, Article 351 TFEU confirms that Member States remain party to such agreements and bear the responsibility for eliminating any incompatibilities. (paras. 378-389) In relation to international law, the AG could not find any legal argument that would suggest that the EU automatically succeeds to an international agreement concluded by the Member States. (paras. 391-398)
If the Advocate General’s Opinion is followed by the ECJ, the powers to conclude agreements covering investment are for all intents and purposes shared between the EU and the Member States. This may be to the dismay of proponents of agreements such as TTIP and CETA who would like to see a ‘swift’ ratification process, but one may wonder whether pushing through such controversial agreements at EU level is politically desirable for the EU in the first place. In any event, it seems plain that the issue of mixity should be guided by the constitutional principle of conferral and not by political expediency in the eyes of the proponents of such trade deals.
A final issue that is worth noting is the Advocate General’s comments on the compatibility of Investor-State Dispute Settlement (ISDS) in the EUSFTA with the Treaties. As I mentioned before, the Commission did not ask the ECJ to resolve this question in addition to the competence question, despite the fact that it requested this Opinion after the Court delivered its Opinion 2/13 on the draft accession agreement to the ECHR. This may suggest that the Commission’s request was borne out of political expediency seeking to expand its powers only and avoiding any legal issues that may constrain its powers. Astonishingly, however, the Commission seems to be turning the issue on its head. In his comments before the European Parliament, the Commission’s chief CETA negotiator Mauro Pettriccione’s suggests that if the ECJ does not object to ISDS in Opinion 2/15, we can assume that the ECJ considers the mechanism compatible with the Treaties (see at 12:30:30).
Advocate General Sharpston, however, was pretty clear on this issue (para. 85):
“It is also important to bear in mind that the Commission’s request does not concern the material compatibility of (any part of) the EUSFTA with the Treaties. Thus, the Court is not asked to consider, for example, the compatibility of an ISDS mechanism with the Treaties. That type of dispute resolution appears not only in the EUSFTA but also in other trade and investment agreements currently negotiated or in the course of negotiation by the European Union. In the present proceedings, the issue as regards the ISDS mechanism (and other forms of dispute resolution for which the EUSFTA provides) is only the question ‘who may decide’. My analysis in this Opinion is therefore without prejudice to such issues (if any) as there may be concerning the material compatibility of the EUSFTA, including the provisions regarding the ISDS mechanism, with the Treaties.”
The Commission seems all to willing to have its cake and eating it. Nonetheless, the Court’s views in this Opinion could have implications for a future request for an Opinion on the compatibility of ICS in CETA or any other FTA. If the Court takes an even wider view than the Advocate General on EU competence, this may facilitate the conclusion of agreements such as CETA as ‘EU-only’. This in turn will sideline Member States ability to make a request for an Opinion, not least because a swift ratification will ensure that the Court can no longer express itself on the issue.