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Andrés Delgado Casteleiro – Four Cases for 2015 (IV) – Opinion 1/15 concerning the scope of the new exclusive competence on Foreign Direct Investment

  1. Background

On October the 30th, the Barroso Commission took its last decisions before the end of its term in office. Among those, it decided to request the Court to deliver an opinion pursuant to article 218 (11) TFEU on the competence to conclude the EU-Singapore Free Trade Agreement. According to former Trade Commissioner De Gucht, the opinion will solve the on-going difference of opinion between the Commission and the Council on the interpretation of the Lisbon Treaty, clarify which procedures to follow; and increase EU predictability towards its trade partners. While in principle the opinion will be restricted to the competence to conclude the EU-Singapore FTA, it will determine the overall division of horizontal and vertical competences in relation to other FTAs currently being negotiated (TTIP) or concluded but not yet in force (CETA).

The Commission wants the Court to clarify whether the Union has competence to conclude alone the EU-Singapore FTA. More specifically, the Commission is asking about the EU’s competences to conclude an FTA:

Does the Union have the requisite competence to sign and conclude alone the Free Trade Agreement with Singapore?

More specifically, which provisions of the agreement fall within the Union’s exclusive competence?

Which provisions of the agreement fall within the Union’s shared competence?

And is there any provision of the agreement that falls within the exclusive competence of the Member States?”

Moreover, the recitals of the Commission decision mentions that doubts have been raised with regard to the extent and the nature of the Union’s competence in respect of some elements of the chapters of the agreement on the protection of foreign investment, transport services, intellectual property, transparency and sustainable development. Among these many competence issues, the scope and competence of the EU in relation to foreign investment will be the most debated and novel issue that the Court will decide on. The main reason for that is that so far the Court has not delineated the scope of these new competence, and in the legal literature there is a lively debate about how that delimitation should be carried out.

  1. The EU’s competence on the field of Foreign Direct Investment (FDI)

Lisbon Treaty gave new powers to the EU in the field of international investment policy. Article 207 TFEU included FDI within the scope of the CCP, which is exclusive in nature. The inclusion of FDI in the CCP entails that in principle the EU is solely competent to negotiate and conclude international agreements relating to the FDI. Logically, due to it exclusive nature, the Commission and the Council have different views on the exact scope of the FDI competence. The Commission adopts a broad reading of FDI as to include as many aspects of international investment policy as possible and bring them within the realm of exclusivity. By contrast, the Council (and the EU Member States) takes a restrictive view of the FDI competence, which would leave many issues concerning investment protection in the hands of the EU Member States.

Consequently, it could be expected that the debate in the Court will be based on two sets of arguments. The first set of arguments will revolve around the scope of the FDI competence and the extent to which it covers all the different aspects of included in the EU-Singapore FTA Investment Chapter. The second set of arguments will focus, alternatively, on whether there are any other implied powers that could cover the aspects of the Investment chapter not covered by the FDI competence.

  1. The definition of FDI in the EU Treaties.

Why do the Treaties speak of FDI? What does the FDI competence entail? The inclusion of FDI under the umbrella of the CCP was first introduced in the failed Constitutional Treaty, and then kept in the Lisbon Treaty. However, a closer look at the works of the Constitutional Convention does not shed any light on what were the reasons for using the term FDI in the new CCP. The Working Group on External Action did not discuss the issue. It was only raised by the Praesidium and was a controversial inclusion (see Markus Krajewski, ‘External trade law and the Constitution Treaty: Towards a federal and more democratic common commercial policy?’ (2005) 42 Common Market Law Review, Issue 1, pp. 91–127). Furthermore, the exact scope of the competence was not defined. Therefore, there are three possible ways to understand what the framers meant by FDI.

A first possible way to approach the concept of FDI as enshrined in the Treaties is to understand, that the framers have coined a new and autonomous concept of Foreign Direct Investment. This new definition of FDI would cover all aspects linked to investment protection as enshrined in the EU-Singapore FTA, covering FDI stricto sensu as well as portfolio investment, dispute settlement and even expropriation. This position would render the investment protection provisions of the EU-Singapore FTA exclusive competence of the EU since they would fall within the scope of the CCP. The main problem with this expansive view of the scope of the EU’s FDI concept would contradict both the international and EU (internal) definitions of FDI. Therefore, it seems rather unlikely that the Court would coin a new understanding of FDI completely detached from the international concept and irrespective of the Court’s case law on direct investment.

As second possible definition of FDI that the Court could give would follow the international definition of FDI that excludes portfolio investments from its scope. This definition of FDI can be found in multiple OECD and IMF instruments. Moreover, it would also be in consonance with the definition of direct investment that the CJEU has developed in its internal market case law (see Angelos Dimopoulos, EU Foreign Investment Law (OUP, 2011)). Given that the EU-Singapore FTA defines investment in a very broad way as to include: “every kind of asset which is owned, directly or indirectly or controlled, directly or indirectly by investors of one Party in the territory of the other Party, that has the characteristics of an investment, including such characteristics as the commitment of capital or other resources, the expectation of gain or profit, the assumption of risk, or a certain duration;” this reading of the FDI competence would entail that not everything in the Investment Protection chapter would be covered by the CCP. Therefore, those parts not covered by the CCP would be covered either by other EU implied powers, or by EU Member States competences.

The third possible understanding of the scope of the FDI as enshrined in the CCP is the most restrictive one of all three. Based on a literal reading of article 206 TFEU, it would argue that the EU’s exclusive competence does not cover all aspects related to FDI but instead it only covers the issue of admission of FDI. Article 206 TFEU provides that among the CCP objectives, the progressive abolition of restrictions on international trade and on foreign direct investment is the aspect of FDI which has been entrusted to the EU (Jan Asmus Bischoff, ‘Just a little bit of “mixity”? The EU’s role in the field of international investment protection law’ (2011) 48 Common Market Law Review, Issue 5, pp. 1527–1569). Consequently, post-admission measures would fall outside the scope of the CCP. This narrow reading of FDI under the CCP would very much restrict the EU’s powers in the field of FDI, and it seems rather unlikely that the Court, given its expansive view of the CCP, would adopt it.

  1. Implied powers and FDI

If the Court decided to choose either the second or third possible definition of the scope of the FDI competence, the Court would then have to establish whether there are any other implied powers that would cover those aspects of the investment chapter of the EU-Singapore FTA not covered by the FDI exclusive competence. The question is especially interesting as regard portfolio investment and whether there might be an implied power stemming from article 63 TFEU concerning the free movement of capital.

The Commission in its Communication “Towards a comprehensive European international investment policy” (COM (2010) 343 final) argues in this direction:The articulation of investment policy should be consistent with the Treaty’s Chapter on capital and payments (Articles 63-66 TFEU), which provides that, in principle, all restrictions on payments and capital movements, including those involving direct as well as portfolio investments, both between Member States and between Member States and third countries, are prohibited. That chapter does not expressly provide for the possibility to conclude international agreements on investment, including portfolio investment. However, to the extent that international agreements on investment affect the scope of the common rules set by the Treaty’s Chapter on capitals and payments, the exclusive Union competence to conclude agreements in this area would be implied.” This would mean that one way or another both FDI and portfolio investments would be covered by EU exclusive competence, so in principle there would no need for the participation of EU Member States in the EU-Singapore FTA based on the inclusion of an Investment Protection chapter in it.

However, it is not very clear how that competence would be exclusively implied since free movement of capitals is a shared competence, and the EU has not exercised its competences under article 64 (2) and 66 TFEU. Thus, it would be difficult to argue that the AETR principle would apply since there is no internal legislation to be affected (P Eeckhout. EU External Relations (Oxford, OUP, 2011)). Yet, it would not be impossible. The EU has established a harmonized regulatory framework for portfolio investments within the EU that makes references to relations with third countries. Therefore, it would appear that portfolio investments is an area largely covered by Union rules (Angelos Dimopoulos, EU Foreign Investment Law (OUP, 2011), p 105) to which the AETR principle could be applied.

  1. Conclusions

Opinion 1/15 has the potential of becoming one of those fundamental opinions of the Court like Opinion 1/94 or Opinion 2/13 which would set the debate on the upcoming years on the issue of the division of competences in the field of trade and investment. Moreover, the opinion will allow the Court to once again apply the different principles concerning the existence and nature of EU competence to a such a wide-ranging and ambitious agreement like the EU-Singapore FTA. In this regard, I would assume that the Court will most likely conduct its reasoning similarly to the way it did in Opinion 1/94: First, analysing the scope of the CCP and establishing how much of the agreement is covered by it; secondly, moving on to implied powers and thirdly, it will most likely examine issues concerning the dispute settlement established in the FTA

While the discussion on the scope of the EU FDI competence will be the most novel issue that the Court will decide on, there are other issues that, I assume, the Court will touch upon. Most notably it will be interesting to read the views of the Court in relation to the Investor-State Arbitration and how the autonomy of EU Law is preserved or not by the mechanisms put in place in the FTA. Specially, after Opinion 2/13, were the EU-Singapore FTA dispute settlement to be found compatible with EU Law, it could point towards a way forward from the current gridlock in the EU’s accession to the ECHR.

 

Andrés Delgado Casteleiro

Lecturer, Durham Law School

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