On May 16, 2017, the Court of Justice of the EU (“CJEU”) issued one of those rulings that may be considered “historical” insofar as it clarifies a controversial issue of “constitutional” dimensions within the EU: in the area of international trade, how much power did MS really lose in favor of the Commission with the approval of the Treaty of Lisbon? The CJEU has been called into this matter on the occasion of the EU-Singapore Free Trade Agreement (“EUSFTA”), using its clauses to fix and define what is and what is not “international trade” and, therefore, when the Commission can act alone and when it must act in accordance with MS.

The EU and Singapore concluded negotiations for a free trade agreement (“FTA”) in October 2014. The EUSFTA is, therefore, one of the first “new generation” free trade agreements: it goes beyond the regular reduction of tariffs and non-tariff barriers to trade in goods and services, to include several other matters related to trade, but simply not classified as such, such as protection of intellectual property, investment, procurement, competition and sustainable development. For that purpose, the Commission included all those matters in the category of “trade” and negotiated them accordingly as the sole voice of the EU. However, the Council of the EU (“Council”) and Governments of several MS held that certain parts of the EUSFTA fell within the shared competences between the EU and the MS, or even within the exclusive competences of the MS. The Commission hereupon asked the CJEU for an opinion on whether the EU has exclusive competence over the EUSFTA, or whether there were shared competences between the EU and the MS. In case of the latter, the agreement would need to be concluded by the EU and the MS together.

The Commission chose the EUSFTA to refer to the CJEU because of its similar structure to many other trade agreements the EU has in the pipeline. Including any future agreement on trade with the United Kingdom (“UK”) after Brexit.

The CJEU ruling

On May 16, 2017, the CJEU ruled that, in “its current form,” the EUSFTA is a mixed agreement, i.e., an agreement with competences shared between the EU and the MS and, thus, a few matters cannot be concluded by the EU alone. The decision follows an opinion issued in December 2016 by Advocate-General (“AG”) Sharpston, who had also decided that the EUSFTA was a mixed agreement, although the CJEU defined the exclusive competences of the EU more broadly than the AG had done in her advisory opinion.

The ruling sets an important precedent for future EU trade deals. While the CJEU ruled that the EUSFTA is a mixed agreement, it also confirmed that a large number of the matters that had been challenged by MS and by the Council fall under EU exclusive competence. According to the CJEU, the only provisions that do not fall within the EU exclusive competences are those relating to non-direct foreign investment and to dispute settlement between investors and MS. As such, key areas of the “new generation” FTAs (e.g., transport, intellectual property rights, labor and environmental standards) remain EU exclusive competences.

With this very clear and detailed division between what requires MS consent and what does not, it will become easier for the EU to conclude an FTA by merely splitting it up in two separate agreements, one “mixed” and one “exclusive.” With this method, the FTA will not need to be ratified by all national parliaments, which is a huge stumbling block, as illustrated by the ratification of the EU-Canada Comprehensive Economic Trade Agreement (“CETA”), which was blocked by the Belgian regional parliament of Wallonia and nearly caused the collapse of the trade deal. In other words: what happened with CETA will most probably never happen again.

What it means for Brexit

The CJEU’s ruling could be considered either good or bad news for the UK in light of the trade agreement it will have to negotiate with the EU following Brexit.

If an FTA between the UK and EU was formulated in a way that sought to avoid investments provisions and investor-state dispute mechanisms, which are shared competences, the EU would not have to seek ratification of the trade deal by the national and regional parliaments of the MS.

In regards to those investment provisions, Britain could instead rely on alternative arrangements such as bilateral investments treaties, World Trade Organization panels or enter into a separate FTA with the EU. This ruling has opened the way for an FTA being ratified by a qualified majority vote of the EU MS, rendering establishing an FTA after Brexit perhaps easier than predicted.

On the other hand, some MS might see investment provisions as vital in the FTA, thereby requiring national and (in some countries, also regional) parliaments to approve the outcome. Indeed, it is possible that parliaments across the EU will want to influence the Brexit deal and potentially oppose the ratification of an FTA because they do not seek the implementation of some provisions. This would weaken the UK’s negotiating position of a future trade agreement because it will have to take into account all 27 EU parliaments.

Therefore, it is now clearer that the timing (and the political risks) of the ratification process of any future trade deal between the UK and the EU will depend on whether Britain and the EU include investment-related clauses in it or not and, in that case, whether they can be agreed to separately or not.