Im­pact Se­ries: 02–20

EU Trade Agreements
Past, present, and future developments

Michael Blanga-Gubbay
Senior Research Fellow at the Kühne Center for Sustainable Trade and Logistics at the University of Zurich

Outline

There has been a sharp increase in regional trade agreements (RTAs) in recent decades, most of which take the form of free trade agreements (FTAs). Not only have RTAs risen in number but they have also become “deeper” over time, encompassing provisions that go beyond tariff reductions and traditional trade policies. These “new generations” FTAs pose a challenge for EU trade policy, since the EU’s ability of covering trade and investment policies in one single comprehensive economic agreement has been crippled in the aftermath of the chaos surrounding the CETA agreement. In addition, Europe is experiencing an increasing opposition towards globalization, with protests all around the continent against “deep” trade agreements, and the influence of powerful multinational corporations in determining their content. In view of these new challenges of globalization, this article analyzes the European Union’s ability to ratify deep and comprehensive free trade agreements.

Full Article

Re­cent decades have seen a pro­lif­er­a­tion of re­gion­al trade agree­ments (RTAs). There are cur­rent­ly more than 300 RTAs in force, with many more be­ing ne­go­ti­at­ed, most of which take the form of free trade agree­ments (FTAs). RTAs have not only risen in num­ber but have also be­come “deep­er” over time, en­com­pass­ing pro­vi­sions that go be­yond tar­iff re­duc­tions and tra­di­tion­al trade poli­cies, such as rules on in­vest­ment and in­tel­lec­tu­al prop­er­ty rights (IPR) or In­vestor-State dis­pute set­tle­ment (ISDS) mech­a­nism. A promi­nent ar­gu­ment is that these rules are need­ed to pro­mote and fa­cil­i­tate the op­er­a­tion of glob­al sup­ply chains. As point­ed out by Bald­win (2011), when firms set up pro­duc­tion fa­cil­i­ties abroad – or form longterm ties with for­eign sup­pli­ers – they can gain from trade agree­ments not only through the elim­i­na­tion of tar­iffs, but also through the in­clu­sion of pro­vi­sions that help to pro­tect their tan­gi­ble and in­tan­gi­ble as­sets in for­eign mar­kets. This ar­gu­ment is for­mal­ized by Antràs and Staiger (2012), who de­vel­op a the­o­ret­i­cal mod­el show­ing that in the pres­ence of off­shoring of in­ter­me­di­ate in­puts, deep in­te­gra­tion is nec­es­sary to achieve in­ter­na­tion­al­ly ef­fi­cient­poli­cies.

In view of these new chal­lenges of glob­al­iza­tion, it is in­ter­est­ing to an­a­lyze the Eu­ro­pean Union’s abil­i­ty to rat­i­fy deep and com­pre­hen­sive free trade agree­ments. Trade in goods has al­ways been an ex­clu­sive com­pe­tence of the Eu­ro­pean Union (since the Treaty of Rome of 1957), while is­sues re­lat­ed to ser­vices, in­tel­lec­tu­al prop­er­ty rights (TRIPs) or For­eign Di­rect In­vest­ments (FDI) fell un­der the mixed com­pe­tences of the EU and the mem­ber states. As a con­se­quence, deep FTAs that en­com­passed pro­vi­sions on in­vest­ments, gov­ern­ment pro­cure­ment, or IPR had to be rat­i­fied by the Com­mis­sion, the Eu­ro­pean Par­lia­ment (EP), as well as Eu­ro­pean Mem­bers States fol­low­ing their leg­isla­tive pro­ce­dure. The EU-South Ko­rea FTA was the first of these deep FTAs. The agree­ment was signed on Oc­to­ber 2010 and rat­i­fied by the EP in Feb­ru­ary 2011. Due to its mix­i­ty, it was pro­vi­sion­al­ly ap­plied since July 2011 (only for the is­sues that were of ex­clu­sive com­pe­tence of the EU) and it was for­mal­ly rat­i­fied in De­cem­ber 2015, when the ap­proval pro­ce­dures in all 28 mem­ber states were con­clud­ed. The rat­i­fi­ca­tion mech­a­nism gave al­most un­lim­it­ed veto pow­er to EU sov­er­eign gov­ern­ments. Italy, for ex­am­ple, had deep con­cerns about the po­ten­tial reper­cus­sions of the FTA to its au­to­mo­tive sec­tor, and was the last coun­try to con­clude its rat­i­fi­ca­tion pro­ce­dure, de­lay­ing the fi­nal and full adop­tion of the FTA by more than 3 years.

In or­der to ad­dress this is­sue, the Eu­ro­pean Union sought to in­crease its com­pe­tences in the area of ex­ter­nal trade pol­i­cy, for­mal­ly known as Com­mon Com­mer­cial Pol­i­cy (CCP). The adop­tion of the Lis­bon Treaty (De­cem­ber 1, 2009), clar­i­fied and ex­tend­ed the EU com­pe­tences over the CCP¹. As a re­sult, all key as­pects of ex­ter­nal trade – in goods and ser­vices, FDI, and com­mer­cial as­pects of in­tel­lec­tu­al prop­er­ty – were un­der the ex­clu­sive com­pe­tence of the EU². The ob­jec­tive of this cen­tral­iza­tion of com­pe­tences was to sim­pli­fy the pro­ce­dure for the adop­tion of deep far­reach­ing FTAs. More­over, the EU be­came the only rel­e­vant ne­go­tia­tor in the field of in­ter­na­tion­al in­vest­ments, in­creas­ing its bar­gain­ing pow­er when mak­ing trade and in­vest­ment deals with its part­ners.

After the 2009 adoption of the Lisbon Treaty, the EU became the only relevant negotiator in the field of international investments.

Fol­low­ing the adop­tion of the Lis­bon Treaty, the EU start­ed ne­go­ti­at­ing new and deep­er FTAs with its trade part­ners, the so-called “new gen­er­a­tion” trade agree­ments. These FTAs con­tain, in ad­di­tion to the clas­si­cal pro­vi­sions on the re­duc­tion of cus­toms du­ties and non-tar­iff bar­ri­ers to trade in goods and ser­vices, pro­vi­sions on in­vest­ments and in­vest­ment pro­tec­tion, in­clud­ing the es­tab­lish­ment of the In­vestor-State dis­pute set­tle­ment (ISDS) mech­a­nism. The first agree­ment of this kind was the EU-Sin­ga­pore FTA (EUSF­TA). It was to be­come the pro­to­type of all fu­ture bi­lat­er­al trade ne­go­ti­a­tions, for ex­am­ple with the oth­er ASEAN coun­tries (Malaysia, Viet­nam, Thai­land, In­done­sia, Philip­pines, Myan­mar/Bur­ma), and with Japan. The trade agree­ment with Sin­ga­pore opened new con­tro­ver­sies be­tween Eu­ro­pean Mem­ber States and the Com­mis­sion, with the for­mer claim­ing that the lat­ter over­stepped its pow­er. The sig­nif­i­cant le­gal quar­rels re­gard­ing EU com­pe­tences to ex­clu­sive­ly con­clude the EUSF­TA came at a high rep­u­ta­tion­al cost for the Union, cast­ing doubt on its abil­i­ty to rat­i­fy the agree­ment. Aim­ing to re­in­state clar­i­ty in this mat­ter, in 2015 the Com­mis­sion sought an opin­ion from the Court of Jus­tice of the EU (CJEU).

The Court was asked which pro­vi­sions of the EUSF­TA - and sub­se­quent­ly of all fu­ture “new gen­er­a­tion” FTAs - fell with­in the EU’s ex­clu­sive com­pe­tence, and which re­mained with­in shared or ex­clu­sive com­pe­tences of the Mem­ber States. On 16 May 2017, the CJEU is­sued its re­sponse in Opin­ion 2/15³. On the one hand, the Court ex­tend­ed EU com­pe­tences in the Com­mon Com­mer­cial Pol­i­cy far be­yond what was stat­ed in Ar­ti­cle 207(1) of the TFEU (for the ar­ti­cle see foot­note 2), rul­ing that pro­vi­sions on non-com­mer­cial as­pects of in­tel­lec­tu­al prop­er­ty rights, air and mar­itime trans­port ser­vices as well as fun­da­men­tal la­bor and en­vi­ron­men­tal stan­dards also fell with­in the scope of the EU’s ex­clu­sive com­pe­tence. At the same time, the CJEU stat­ed that the EUSF­TA could not be con­clud­ed by the EU alone, as the Agree­ment was not cov­ered by the ex­clu­sive com­pe­tence of the EU in its en­tire­ty: pro­vi­sions on non-di­rect in­vest­ments and the ISDS mech­a­nism fell with­in a com­pe­tence shared be­tween the Eu­ro­pean Union and its Mem­ber States. As a con­se­quence, the in­vest­ment chap­ter of the FTA have to be rat­i­fied by all EU na­tion­al par­lia­ments to en­ter into force.

The legal quarrels around EUSFTA came at a high reputational cost for the EU, casting doubt on its ability to ratify the agreement.

In July 2016, be­fore the rul­ing of the Court, the Eu­ro­pean Com­mis­sion con­clud­ed the ne­go­ti­a­tions of the Com­pre­hen­sive Eco­nom­ic and Trade Agree­ment (CETA) with Cana­da. To al­low for a swift sig­na­ture and pro­vi­sion­al ap­pli­ca­tion of the agree­ment at the EU-Cana­da Sum­mit of Oc­to­ber 2016, and still await­ing for the CJEU Opin­ion, the Com­mis­sion de­cid­ed to pro­pose CETA as “mixed” agree­ment, in­volv­ing na­tion­al par­lia­ments in the rat­i­fi­ca­tion process. This back­lashed when the Wal­lon­ian par­lia­ment, one of the three re­gion­al par­lia­ments of Bel­gium, re­ject­ed the CETA agree­ment. With a last-minute com­pro­mise, Wal­lo­nia de­cid­ed to drop tem­porar­i­ly its op­po­si­tion to the deal, al­low­ing for its fi­nal sig­na­ture, and on Sep­tem­ber 2017, the agree­ment has pro­vi­sion­al­ly en­tered into force. It will en­ter into force ful­ly and de­fin­i­tive­ly when all EU Mem­ber States par­lia­ments have rat­i­fied the agree­ment, so far only 14 out of 28 MS did it. At the same time, the CETA agree­ment can be scup­pered al­to­geth­er if only a sin­gle MS for­mal­ly re­jects it. Sev­er­al Eu­ro­pean coun­tries have threat­ened to re­ject and block the deal, among them Poland, the Wal­lon­ian fed­er­al re­gion of Bel­gium, and Italy.

As the chaos, and fu­ture un­cer­tain­ty, sur­round­ing the CETA agree­ment has shown, “mixed” FTAs are not a vi­able op­tion for the EU. At the same time, Opin­ion 2/15 lacked in de­liv­er­ing to the EU the full pow­er nec­es­sary to rat­i­fy deep and com­pre­hen­sive trade agree­ments on its own. This opin­ion has sub­stan­tial po­lit­i­cal and eco­nom­ic im­pli­ca­tions that ex­tend be­yond the spe­cif­ic EU-Sin­ga­pore re­la­tion­ship, and have reper­cus­sions on all fu­ture EU ex­ter­nal trade re­la­tions.

On one hand, it strength­ens the role of the EU in­sti­tu­tions – name­ly the Com­mis­sion, the Coun­cil and the Par­lia­ment – in set­ting the com­mon com­mer­cial pol­i­cy. It also broad­en the scope of these trade ne­go­ti­a­tions, by in­clud­ing sus­tain­able de­vel­op­ment (la­bor pro­tec­tion and en­vi­ron­men­tal is­sues) among the ex­clu­sive com­pe­tences of the EU. On the oth­er hand, it crip­ples EU’s abil­i­ty of cov­er­ing trade and in­vest­ment poli­cies in one sin­gle com­pre­hen­sive eco­nom­ic agree­ment, which would have been cru­cial to an­swer to the real chal­lenges of our con­tem­po­rary glob­al­ized world. In con­cl-usion, the best way to in­ter­pret Opin­ion 2/15 is by read­ing it as a roadmap to avoid mix­i­ty in FTAs.

All on­go­ing trade ne­go­ti­a­tions have been ad­just­ed to cre­ate two stand­alone agree­ments: a Free Trade Agree­ment and an In­vest­ment Pro­tec­tion Agree­ment (IPA). This split will al­low the EU to swift­ly ap­prove the FTA, while wait­ing for its Mem­ber States to ap­prove the IPA. This pro­ce­dure has not been ap­plied only to the on­go­ing ne­go­ti­a­tions with Sin­ga­pore, Japan and Viet­nam, but it has been adopt­ed by the Eu­ro­pean Coun­cil as a new ap­proach in ne­go­ti­at­ing and con­clud­ing FTAs⁴.

Split FTAs are the future of EU trade negotiations.

Be­ing un­able to op­er­ate with a sin­gle voice, the EU is less of a re­li­able part­ner for these “new gen­er­a­tions” FTAs. More­over, all of this dis­cus­sion made trade agree­ments po­lit­i­cal again. We are ex­pe­ri­enc­ing an in­creas­ing op­po­si­tion to­wards glob­al­iza­tion, with protests all around Eu­rope against “deep” trade agree­ments such as CETA and the TTIP (Transat­lantic Trade and In­vest­ment Part­ner­ship), and the in­flu­ence of pow­er­ful multi­na­tion­al cor­po­ra­tions in de­ter­min­ing their con­tent. This res­onates with Ro­drik (2018)’s ar­gu­ment that deep trade agree­ments are “the re­sult of rent-seek­ing, self-in­ter­est­ed be­hav­ior on the part of po­lit­i­cal­ly well-con­nect­ed firms — in­ter­na­tion­al banks, phar­ma­ceu­ti­cal com­pa­nies, multi­na­tion­al firms”. The ma­jor con­cerns are of­ten re­lat­ed to the in­vest­ment pro­tec­tion pro­vi­sions with­in these agree­ments. Giv­ing full veto pow­er to mem­ber states over these is­sues, lim­its ex­ten­sive­ly EU’s abil­i­ty to rat­i­fy deep and com­pre­hen­sive FTAs.

Being unable to operate with a single voice, the EU is less of a reliable partner for “new generations” FTAs.

Fi­nal­ly, the ques­tion that re­mains unan­swered is if EU trade part­ners will be will­ing to start two sep­a­rate ne­go­ti­a­tions for a FTA and an IPA, know­ing that the like­li­hood of the lat­ter be­ing ap­proved might be low, or at least take an ex­treme­ly long time.