The Brexit Odyssey: the next chapter unfolds

The UK’s epic journey to break away from the EU is contemplating somewhat smoother waters, thanks to a recent ruling from the European Court of Justice which should make concluding most EU trade agreements less politically fraught.   The finding may also have implications for a New Zealand-EU FTA.

The European Court of Justice (ECJ) released a ruling on Tuesday on the scope of European Commission authority to conclude trade agreements. The ruling relates to a test case brought over the Singapore-EU FTA (signed back in 2013, but not yet ratified), after internal European wrangling over the extent to which national and regional parliaments – of which the EU has 38 – needed to be consulted on the deal. The Singapore FTA is one of the first of the ‘next generation’ of EU trade agreements, incorporating not just traditional market access but also such issues as intellectual property, government procurement and investment rules. Such agreements have attracted populist criticism of Brussels’s intrusion into perceived areas of “national” policy, in particular in relation to investor-state dispute resolution. (Recall that the recently-concluded Canada-EU FTA, or CETA, was nearly derailed by grumpy Walloons worried about investment and the lowering of EU standards.)

The ECJ has now ruled that for most elements in trade deals (including next-generation issues relating to labour standards and the environment), European Member States can simply vote to approve agreements by “qualified majority”, meaning that neither EU unanimity, nor national parliamentary agreement, is required. Only in two narrow areas – portfolio investment and rules for investment disputes – will sub-federal ratification still be obligatory.

The ECJ ruling probably means that negotiators will seek to avoid including at least those elements of investment in EU trade deals from now on, particularly the highly contentious investor-state dispute settlement.   At the practical level, such an approach would certainly enable the Commission to continue with a greater degree of confidence on its ambitious negotiating slate (including with New Zealand). Weighed against that, of course, leaving out investment is at odds with the modern model of deep and comprehensive FTAs, which reflect the close integration of goods, services and capital flows in the global economy.

What does this mean for the UK?   Should the UK and EU agree to leave investment to one side of a post-Brexit deal, the ECJ decision should mean that negotiations for a bilateral FTA can be undertaken without potentially being held hostage to internal European politics quite as strongly as had otherwise been implied by the CETA experience (although given the sensitivities, the Commission may nevertheless decide to test any new EU-UK FTA through a more consultative process). Being able to agree quickly on a high-quality bilateral UK-EU FTA will be important to minimise future trade disruption for Britain.

Likewise for New Zealand, an EU agreement that excludes some or all aspects of investment would, on the plus side, not need to win over sub-federal parliaments such as Wallonia’s (which objected to Canadian dairy imports as well as investment rules). At the same time, however, the EU is one of our largest sources of, and destinations for, capital flows. Clearly, some challenging questions lie ahead for negotiators.

This post was prepared by Stephanie Honey, NZIBF Associate Director.