The Court of Justice of the European Union (the Court) has issued a judgment which could affect how the UK and EU negotiate and shape their future trading relationship post-Brexit.
In September 2013 the EU and Singapore initialled the text of a bilateral free trade agreement (FTA). The agreement is considered to be one of the first “new generation” FTAs in that it does not just include traditional provisions reducing tariffs and other barriers to the trade in goods and services, but also includes provisions on competition, sustainable development, public procurement and the protection of intellectual property and foreign investment.
In response to a request from the European Commission, the Court has ruled that the FTA in its current form cannot be concluded by the EU alone, but must be concluded by the EU and Member States acting together. This is because a number of the “new generation” provisions fall within a competence shared between the EU and Member States, namely the provisions relating to non-direct foreign investment (i.e. portfolio investments made without any intention to influence the management and control of any undertaking) and the regime for settling disputes between investors and States.
The consequence of the ruling is that the conclusion of this FTA—and any other FTA incorporating similar provisions—will be subject to national approval processes within each Member State. In some cases, this will mean ratification by both national and regional parliaments, which and therefore opens up opportunities for delays and blocking manoeuvres such as the obstruction last year of the EU-Canada Comprehensive Economic and Trade Agreement by the regional parliament of Wallonia in Belgium.
What the Ruling means for Brexit
There is a danger of over-emphasising the importance of this decision by the Court. It is a technical judgment which clarifies some of the complexities of modern-day EU trade deals and the process by which they are approved. Non-direct foreign investment and investor-State dispute settlement are key issues in any trade and investment strategy, however, and it is likely that the EU and third countries (including the UK) will continue to seek to include them in FTAs.
In terms of Brexit, the UK Government has stated that it wants a “deep and special” partnership with the EU - in other words a comprehensive trade agreement of the type which, to date, has required approval by the EU and the national and regional parliaments of the Member States.
This judgment opens up the possibility of bypassing the need for national approval and trying to agree a quick trade deal focused on goods and services and excluding investment, which could be ratified by the UK and EU alone.
However, business interests on both sides of the Channel are likely to favour a comprehensive agreement which gives certainty and a long-term framework for both two-way trade and investment.
It remains to be seen how the UK Government will respond to the judgment.