Setting New Rules – The Free Trade Agreements of the European Union

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The European Union is currently negotiating free trade agreements (FTAs) with numerous countries – with Australia and New Zealand, Vietnam and with the Mercosur states, among others. Apart from multilateral trade liberalization under the umbrella of the World Trade Organization (WTO), FTAs are a central pillar of the EU’s trade strategy.

According to the Trade Strategy of the European Commission, presented in 2015, the WTO remains the preferred way to liberalize and set rules for global trade. With the blockage of the Doha Round of the WTO, Free Trade Agreements (FTAs), however, have become an important complement to the WTO system for the EU. As an example, the agreement with Japan (JEUFTA), which entered into force in February 2019, can help EU exporters to save substantially on annual customs payments of around one billion euros previously incurred in Japan each year. The EU has already concluded modern free trade agreements with around a dozen partner countries; FTAs should be modernized or still concluded with many more. In the fall of 2017, European Commission President Jean-Claude Juncker reinforced that all current FTA negotiations within his mandate should be concluded by the end of 2019. However, on account of the substantial number of varying and sometimes controversial negotiating areas and limited resources (e.g. for negotiation and legal review of texts), this is only partially possible.

The EU’s modern FTAs, including but not limited to with Canada, Japan, and Vietnam, are intended to do more than simply dismantle tariffs. In addition, they are to improve market access by removing non-tariff trade barriers (for example, through regulatory cooperation), liberalizing trade in services, and opening markets for public procurement. These newer free trade agreements of the EU also go well beyond the regulatory scope of the WTO. They include competition rules, protection of foreign direct investment, and regulations to ensure sustainability (labor and environmental protection). The EU seeks to modernize older global agreements with Chile and Mexico, which contain only basic economic aspect.

European Case Law Clarifies Responsibilities and Ratification Process

Negotiations of FTAs, however, have been increasingly the subject of political showdowns in the EU. A case in point were the contentions over the Transatlantic Trade and Investment Partnership (TTIP), the FTA of the EU and the United States that has been put on ice since 2016. The negotiations of the EU with Canada, while successfully leading to the conclusion of an agreement (CETA), were likewise controversial. The months of tug-of-war by political actors seriously challenged the efficiency and reliability of European decision-making in trade policy, damaging the EU’s international credibility and effectiveness.

The European Court of Justice (ECJ) decision on the FTA with Singapore in May 2017 clarified which regulatory areas of a free trade agreement fall under the exclusive competency of the EU and which components require the ratification on Member State level. This important decision allows for more clarity in future FTA negotiations. Prior to the ruling, all FTAs were always ratified by both the EU and individual Member States. Since the ruling, however, the approval of Member States is only necessary when parts of the agreement fall within shared competence. When this is the case, in Germany the Bundestag and if applicable, the Federal Assembly vote in their entirety on the agreement. In April 2019, the ECJ also found that the newly designed Investment Court System included in CETA is compatible with European law. Thus, the creation of arbitration courts within the framework of international agreements for the settlement of investor-state disputes is fundamentally compatible with EU law. This question had been the subject of months-long ambiguity.

Policy Follows Judicial Decisions

The EU follows ECJ guidelines and now designs FTAs in a way that, as much as possible, they remain under exclusive EU competency. Thus, areas such as investor-state dispute settlement and portfolio investment need to be negotiated in separate agreements. This clear division of areas into different agreements enables the FTAs to be ratified and enforced swiftly and reliably by European legislators. The agreements with Japan, Singapore, and Vietnam have been designed in such a way – CETA remains a comprehensive agreement which falls into the shared competency. Such a separation is, however, not possible where trade agreements are an integral part of political association agreements (e.g. with Ukraine, Mexico, Mercosur, etc.). These treaties remain mixed, if only because of the foreign and security policy components (the EU negotiations with Mercosur are based on a 20-year-old mandate and do not include investor-state dispute settlement).

This clear division does not mean, of course, that the ratification of FTAs lacks democratic legitimacy. The competence for common trade policy rests with the EU; since the Lisbon Treaty, trade agreements must be ratified by the European Parliament. Nevertheless, Member State parliaments should be informed in a timely and comprehensive matter about FTA negotiations in order to provide for well-informed public debate. A transparent negotiation process includes moreover the publication of the negotiation mandates of the European Commission. The Commission seems to want to follow this rule in principle. However, the last word has the Council of the European Union, which has not yet decided on a clear line.

Free Trade Agreements of the EU

OVERVIEW: PROGRESS IN NEGOTIATIONS