CETA after Opinion 2/15: Legal Clarity or Confusion?

CETA after Opinion 2/15: Legal Clarity or Confusion?
Photo by Christian Lue on Unsplash

By Jens Ladefoged Mortensen

Department of Political Science, University of Copenhagen

The EU’s trading partners must wonder what goes on inside Europe. What does it take to get a trade deal done? True, trade negotiations are notoriously complex. The CETA agreement took over seven years to negotiate. The controversial investment chapter was unilaterally revised by the Europeans and resubmitted to the Canadians with no real option for revisions. The Germans then insisted that all aspects of CETA must be ratified at all levels, including each state and regional parliament. Only two EU members — Spain and Denmark — have ratified CETA so far. Last minute cliff-hangers can be expected, especially the German, French, Austrian, Dutch, and Belgian ratifications. On top of everything else, the Europeans now have Brexit to deal with. CETA has hit the perfect storm — constitutional fuzziness, existential uncertainty, and post-crisis politics.

Will Europe have “a single voice” on 21st century trade issues? The much awaited ruling (Opinion 2/15) from the European Court of Justice (ECJ) on the scope of Common European Commercial Policy (article 207) clarified what the EU can do as a unitary actor in global trade. The ECJ found that the Singapore agreement (and presumably all future EU agreements, including a post-Brexit trade agreement) fall within the exclusive competence of the European Union, with three exceptions: 1) non-direct investment provisions, 2) investor–state dispute settlement mechanisms, and 3) horizontal provisions related to investment, such as transparency, mediation mechanisms, and other institutional and general provisions.

This was a surprise. It deviated from the more restrictive opinion of the General Advocate issued on 21 December 2016. In addition to those three exceptions, that decision excluded air transport, maritime transport, public procurement related to transport, sustainable trade, non-commercial aspects of intellectual property rights, and labour and environmental standards falling within the scope of EU social policy or environmental policy.

The ECJ ruling normally follows that of the General Advocate. To simplify the rather extensive legal analysis, the ECJ determined the scope of the exclusive powers by examining what the “implied powers” of internal EU regulations (following article 203) meant for common commercial policy. The EU cannot strike agreements on non-direct investment issues nor can it agree to any institutional provisions on non-investment matters. As a constitutional flaw in the new generation of EU trade agreements, the only acceptable remedy is a constitutional reform of the relevant treaty provisions. This is anything but a clarification.

First, it may well prove to be completely impractical in a transnationalized economy. The suggested legal solution to the political problem rests on a fundamental confusion about “direct investments” in a global economy. What is “foreign direct investment”? The widely accepted definition sees “direct foreign ownership” of a corporation, involving day-to-day management of owners in the operation of the “investment.” In most instances, this boils down to 10% foreign ownership and the subsequent membership of the board of the corporation. It is a statistical simplification of a complex issue as national accounting practices on ownership registration differ. Foreign investments often rely on mixed sources of capital. Some investments are easily observable as direct foreign engagements in management. Other investments, perhaps the majority, are complex mixtures of investment capital from various sources. Even “national” investments draw on “transnational” capital sources. The separation of national and transnational, direct and non-direct investment capital is a legal and statistical fiction.

Second, it represents the nationalization of a vital area of the 21st century economy. Investments are — for better or worse — essential for economic growth, job creation, and market stability. The designers of the Lisbon treaty were correct to include investment in the exclusive competence of the EU on trade since their fundamental objective was to provide growth and jobs to Europe. However, the ill-prepared, hasty insertion of “foreign direct investment” in article 207 in 2009 has only worsened the situation. Europe must have an integrated, coherent, common EU policy on investment before this area can be included in the exclusive competence domain.

The ECJ is correct to point out that no implied powers can exist in policy areas with no internal powers delegated to the EU in the first place. There are many reasons why the EU should develop an internal investment policy despite the pitfalls. But the ECJ then accepted the arguably fictional separation of “direct” and “non-direct” investment as a legal basis for carving out a new “shared” policy area of “non-direct” investment. This only adds to the confusion of what the EU can and cannot do in global trade.

On the plus side, the ECJ actually provided more clarity on what the EU can do in future on a comprehensive trade agenda. The General Advocate recommended the separation of “commercial” and “non-commercial” trade issues, such as sustainability. Here, the ECJ relied on the logic of implied powers, reaffirming that the EU can strike agreements on trade-related social rights or on the external promotion of environmental protection. It also reaffirmed that maritime transport services can be included in new EU trade agreements, which surprised certain member states.

The ruling, reaffirming that EU trade is effectively a “shared” policy area, received a mixed reception in Europe. Critics lamented the reaffirmation of exclusive EU powers on trade issues but welcomed the de facto exclusion of investments. The British reacted positively, as it paved the way for a comprehensive EU–UK trade deal, as the number of national veto-points are minimal, whereas others warned that prospects for a future EU–UK investment agreement is worsened. Most trade commentators see a need for Europe to carve out investment issues from the trading policy as soon as possible. There is an urgent need for Europe to re-engage as a coherent trade power in the world economy after the sudden American retreat. CETA is a good starting point, for Europe, for Canada, and for the world. However, the Europeans will likely ask for more patience from its trading partners.

This article is part of a six-blog series that follows from a workshop on International Relations in a Post-Liberal Era. The workshop was hosted by CIPS and marks the start of the Copenhagen–Ottawa Research Exchange (CORE). For other blogs in this series, click here:

After Abdication by Peter Marcus Kristensen

NATO: A Liberal Alliance in an Increasingly Illiberal World? by Alexandra Gheciu

Liberal Interventionism: The Crisis Within by Katja Lindskov Jacobsen

Trump’s Genius by Michael C. Williams

In Africa, “America First” means “Development Last” by Rita Abrahamsen

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