I penned a short piece for AICGS linked here. Space limitations meant I had to cut it down. The slightly longer version appears below.
It’s hard to believe,
but governance of the European Union just got even more complicated last week.
On May 16, the European Court of Justice (ECJ) issued its ruling over which European institutions had jurisdiction—“competence,” in the EU’s terminology—over the different provisions of the EU-Singapore Free Trade Agreement (Singapore FTA). European trade politics have been roiled by a series
of controversies over who has the authority to bargain over the terms of trade
agreements, the content of which increasingly reach deep into basic governance,
including the state’s power to regulate.
In the midst of
negotiating trade agreements with a number of different countries, the European
Commission in July 2015 asked the ECJ to have a look at the proposed Singapore
FTA and sort out which areas of the agreement were exclusively under the
Commission’s jurisdiction, and which were under the jurisdiction of member
states? According to the ECJ, it’s a “mixed” bag. In most areas-- tariffs and nontariff barriers for goods and services, intellectual
property protections, investment, public procurement, competition and
sustainable development—the Court ruled the Commission has exclusive
jurisdiction. Yet, the ECJ ruled that the Commission had to get the approval of
each Member State government for any agreement that included investor-state
dispute settlement (ISDS) mechanisms such as those in the Singapore FTA.
It wasn’t supposed to
be this way. Many Europeans hoped the 2009 Lisbon Treaty had finally brought to
fruition the long-held goal of a common front in Europe’s international
economic relations. Henceforth, the Commission would negotiate on all issues on behalf of all member states. Indeed, Articles 3 and 207 of the Treaty on the Functioning of the European Union (TFEU, which Lisbon amended) is relatively
explicit about the Union’s jurisdiction over external economic relations. Yet,
Article 4 of the TFEU also mandates that in areas of shared competence between
the EU and member states, negotiated treaties must be submitted to member
states to receive their consent. As controversy brewed over pending FTA
arrangements in 2015, the Commission decided to ask the ECJ for a ruling on all
of this.
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| Implications may not matter for a while. |
The ECJ’s ruling
seemingly presents the European Commission with a stark choice; negotiate
future agreements without ISDS as part of investment chapters, or submit
completed agreements to each member state government for ratification. The
first option would overturn decades of EU practice--Germany invented investment
protection agreements in the late 1950s—and probably renders proposed trade
negotiations with the United States a non-starter. Equally unpalatable,
however, is the notion of submitting completed agreements to each European
government for separate ratification.
How will states that
embark on years of negotiations with Brussels be assured member states won’t
reject a completed deal? How can the EU’s interlocutors be assured member
states won’t make new demands at the ratification stage? The EU is big. Most of
its potential trading partners are small. What country wants to pour resources
into negotiating with the EU if member states can move the goal posts after the
fact?
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| An unhappy Canadian trade minister |
In many ways, we’ve already seen this movie. The Commission’s legal position in the Singapore case
before the ECJ was that no post-agreement approval from member states was required;
the Lisbon Treaty had concentrated that authority in the Commission. Full stop.
Yet, in July 2016, the Commission nevertheless decided to propose the Canada-EU
Comprehensive Economic and Trade Agreement (CETA) as a “mixed agreement”
wherein member states would need to approve it after negotiations were
complete. In October 2016, the approval process in Belgium went awry when the enclave of Wallonia decided they didn’t like the CETA. Many were taken aback, not the least of which
were Canadians. If the EU couldn’t successfully complete an agreement with
Canada, with whom could they complete one with?
American “Fast Track”
The United States
confronts a similar, but arguably more difficult set of problems. The ECJ
ruling affirmed the jurisdiction of 28 (soon to be 27) member states to approve
of ISDS, but left remaining authority over trade in the hands of the
Commission. The U.S. Constitution, by contrast, assigns the legislative branch
exclusive jurisdiction over all aspects of foreign commercial relations (the
so-called enumerated powers of Article I, Section 8). The lure of enhanced U.S.
market access is great, but the prospect of negotiating with 435 Members of the
House of Representatives is daunting.
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| Trade Policy Infamy: Rep. Hawley and Sen. Smoot |
Prior to 1934, the
U.S. Congress was much more directly involved in setting the terms of
commercial relations with foreigners. The results were often disastrous; anyone
remember the Smoot-Hawley Tariff Act of 1930? Since 1934, the U.S. Congress has
periodically delegated its constitutional authority over “commerce with foreign
nations” to the executive branch under specific, pre-negotiated terms and time
limits. That authority has been granted under different guises in the postwar
years, most notably under the terms of the Reciprocal Trade Agreements Act
(RTAA). In 1974, President Nixon sought renewed authority from Congress to
bargain in the Tokyo Round of the General Agreements on Tariffs and Trade (GATT).
What emerged was a mechanism popularly known as “Fast Track” in which Congress
set the general limitations under which the President could bargain in exchange
for an “up or down vote” once the completed agreement was brought back for
approval by Congress—no amendments would be permitted.
Linked here is shameless bit of self-promotion to a piece of mine on this topic.
It was a delegation of
power that worked for both branches of government; the President received a
credible set of trade tools for the foreign policy tool chest, Congress
absolved itself of collective action problems over a policy area in which
parochial interests prevailed, but still had plenty of opportunity to weigh in
legislatively on what the president had done. Importantly, Fast Track, known since 2002 as Trade Promotion Authority (TPA), has permitted the President to
credibly claim that Members of Congress unhappy with specific provisions will
not undermine hard-won negotiated agreements after the fact.
Europe isn’t the U.S., but….
The Lisbon Treaty was
to have resolved these issues, but the ECJ decision on ISDS has determined
otherwise. Governance in the European Union is obviously different than the
United States; 28 sovereign states are not the same as 435 legislators.
However, the reason a TPA-like process now makes sense for Europe is that the
principle of delegation to a single negotiator is the same. If 435 Members of
Congress can collectively agree to the terms over which they delegate broad
swaths of statutory authority to the President, why couldn’t 28 member states
do the same with the European Commission over the single issue of ISDS?
One major outcome of
the controversy over the CETA was affirmation by all member states that ISDS
should remain a part of the investment provisions of European trade agreements.
Indeed, the terms of the CETA as well as the Commission’s proposal for both an“investment court” and an appellate mechanism in future agreements are
important evolutions of the terms of ISDS. The ECJ’s ruling reflects concerns
that ISDS rulings not undermine or circumvent either EU or Member State law. Such
concerns about ISDS are widely held and why there have been important innovations
in the application of investment rules over the past decade, including to the
parameters of the U.S. Model Bilateral Investment Treaty (BIT).
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| Trade as a Trojan Horse? |
Finally, in the United
States, TPA also helps overcome some of the nasty contemporary politics of
trade and investment liberalization. Members of Congress are individually not
predisposed to liberalizing trade and investment, particularly when the adjustment
costs from liberalization are highly concentrated. The advent of TPA allows
individual Members to collectively agree on the general terms of negotiations
in advance, thereby allowing Congress to pursue a generally liberalizing
orientation to trade and investment. Both the pre-negotiation and the
post-negotiation “up or down vote” avoids the Wallonian situation with the CETA
by permitting complaints about process to be registered without having an
agreement held hostage to specific or unrelated concerns.
Wallonians were
ostensibly concerned about the CETA’s impact on agriculture, but the real target
of their ire was Brussels and longer-standing debates about both Belgian and EU
governance. A European version of TPA would permit those complaints to be heard
before the Commission embarked on negotiations, giving the Commission the same
added credibility and negotiating leverage a U.S. President enjoys with
potential trading partners when armed with TPA. Such a process need not be
complicated, and could be added to the process by which the Commission is empowered to negotiate through the Council of the EU and consults with the European Parliament. Alternatively, the Commission could embark upon the
formalization of a Model BIT with language and institutions acceptable to all member
states to be readily included as part of broader negotiations. Importantly, EU
TPA would give member states one last “up or down” bite at the apple-- albeit a
higher stakes bite since it would be a rejection of the entire deal rather than
components.
The point is to deal
with investment and ISDS up front, not after the fact. If the United States can
deal with the entire menu of issues that now make up the global trade and
investment agenda, certainly Europe could adopt a process of pre-delegated
authority from member states to the Commission that could do the same for
investment.
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