Body
Not since the Battle of Waterloo in 18151 has the French-speaking region of Belgium—Wallonia—commanded so much notice as it has in recent weeks. That attention came after Wallonia blocked the EU-Canada Free Trade Agreement, known as the Comprehensive Economic and Trade Agreement (CETA). Wallonia’s veto lasted only a few days and CETA is progressing. But the debacle shines an ominous light on the European Union’s ability to implement modern free trade and economic agreements in the future, especially with other advanced countries.
Wallonia’s complaints about CETA centered on Wallonia’s fear that a proposed new court system to address investment disputes would allow multinational companies to sue EU governments. But these concerns reflected short-term political opportunism rather than an interest in transparency. After all, according to a database of bilateral investment treaties (BITs) from the United Nations Conference on Trade and Development, Belgium has already signed 72 BITs that include traditional nontransparent provisions known as investor-state dispute settlement, or ISDS, far worse than what is contained in CETA. If Wallonia truly cared about these issues, why not start by demanding that Belgium renegotiate its many existing old-school BITs?
In reality, the ruling Walloon Socialist Party (PS) exploited the veto opportunity provided by Belgium’s decentralized federalism system. (Ironically that system was forced upon the Socialists by the independence-seeking and strongly pro-CETA Flemish region of Belgium.) The system requires each region to support an international deal, enabling the Socialists to stand up against the rest of Europe under pressure from a surging far left within Wallonia.
But the Socialist political gamble had limits. Wallonia remains the poorest part of Belgium, dependent on fiscal transfers from richer Flanders and the European Union. No surprise that the Walloon prime minister Paul Magnette ultimately caved for economic and realpolitik reasons.
But more serious problems are at hand for EU trade policy.
A main reason is that free trade agreements (FTAs), especially among advanced economies, are become less about tariffs and explicit border restrictions and more about internal regulatory issues that voters care about. Just as investment dispute resolution arose with CETA, the expansion of FTAs into similar regulations pose a challenge to the European Union’s multilayered sovereignty sharing. FTAs increasingly include provisions over which the European Commission may no longer—as with traditional trade issues—have full jurisdiction under the EU Treaty. Consequently, EU member states have a direct say—and potential veto—over these so-called “mixed agreements” containing both items governed by EU and national law.
EU law is not settled on the issue of when an FTA is a traditional trade agreement subject only to the approval of the European Commission, however. Also unclear is when a deal should be considered a “mixed agreement” requiring member states’ approval. On top of these considerations, France and Germany (both of which support CETA) wanted the agreement ratified by national parliaments to avoid renewed accusations of “faraway Brussels” again striking deals over the heads of voters, and to generally check the Commission’s powers to strike trade deals infringing on member states’ sovereignty. They pressured the European Commission into declaring CETA a “mixed agreement,” causing its delay in approval. Fortunately the European Court of Justice (ECJ), at the Commission’s request, will soon adjudicate whether the recent EU-Singapore FTA falls outside the European Union’s exclusive competence—that is, whether it is also a “mixed agreement.”2
The issue is rooted in the Lisbon Treaty’s article 207, which in describing the European Union's common commercial policy significantly expanded the exclusive right of the European Union to strike trade deals going beyond goods into services, foreign direct investment (FDI), and intellectual property rights (IPR). Article 207 moreover stipulates that the EU Council votes by qualified majority (e.g., no member has a veto) on external trade laws and treaties, except in instances like tax issues, where EU law elsewhere stipulates that a right of a national veto exists.
The ECJ has already expanded the Commission’s common commercial policy to include IPR and service trade issues. Accordingly, the EU-Singapore ruling will likely concern itself mostly with FDI issues, which are controversial because of ISDS matters, and because many member states continue to want to control the host of national BITs they have entered into over the years.
The ECJ generally supports broader European Commission powers over those of member states, and the court seems likely to look askance at making the EU-Singapore FTA (and future EU FTAs) “mixed agreements.”3 Such a decision would likely restrict the ability of member states to declare an FTA a “mixed agreement,” as was the case with CETA. The ECJ could hence make EU approval of such future deals easier than CETA.
As a result, a future Transatlantic Trade and Investment Partnership (TTIP) deal with the United States, or a potential deal with Japan, may be less likely to be declared “mixed agreements” that require member state approval.
Still, the TTIP remains controversial in many EU member states wary of ceding authority over investment and other types of regulations. Faced with an inability to exercise a veto over a “mixed agreement,” they might refuse to allow the European Commission to begin negotiating such trade deals in the first place. Or, as was recently demanded by the German Constitutional Court, member states might insist on the right to withdraw from any “mixed agreement” FTA lacking national parliamentary ratification.
The European Union thus has few options to avoid the increasingly controversial politics of modern trade agreements. Following the Walloon debacle, the European Union will most likely have to reform its trade agreement process if it wants to undertake new and significant trade deals with other large advanced economies. Buying off intransigent opponents like Wallonia in a TTIP or EU-Japan deal will not be as easy as it was with CETA.
Trade processes in Europe are looking more like the process in the United States, in which the president first secures fast track Trade Promotion Authority (TPA) before starting negotiations, laying the groundwork to involve Congress directly throughout the negotiations, if ultimate passage of the new agreement is to be assured.
In the European Union going forward, where only very few new FTAs can likely be declared mixed agreements, member states—like Congress with TPA—will be far more cautious with granting the European Commission the opening mandate to begin new trade negotiations. And they will demand a process through which they retain the ability to directly influence ongoing negotiations. They will want to avoid being politically cornered with a potentially controversial fait accompli in the form of a completed FTA that—if not ultimately approved by the European Union—would undermine the overall credibility of the “European project.”
Notes
1. Until the defeat of Napoleon, the region of Wallonia was part of the first French empire, having been taken from the Habsburgs by the first French republic shortly after 1789.
2. See EU Law Analysis Blog, "Opinion 2/15 on the scope of EU external trade policy: Some background information before next week’s hearing," September 6, 2016, for details on the case.
3. As part of the domestic Belgian agreement with Wallonia to get approval of CETA, the Belgium government has also promised to ask the ECJ about the legality of the new ISDS provisions in CETA. It seems highly unlikely, though, that the ECJ will strike down these provisions.
