The European Court of Justice (ECJ) has finally issued a ruling on the vexing issue of what to do about a pending trade agreement between the European Union (EU) and Singapore. Nearly all of the agreement will now start coming into force after an exchange of signatures and companies can prepare for the benefits of this FTA.
The specific issue before the Court dealt with an internal EU matter over whether trade and investment could be negotiated strictly by the European Union on behalf of all member states or needed direct approval—in whole or in part—by individual member states.
Clearly, this matters to the EU and its member states. But it also affects others in Asia and beyond because whatever the Court decided could empower or constrain the EU to negotiate better or worse trade agreements with partners across the globe.
If the Court had said that the EU could not negotiate on behalf of member states large swathes of issues that are now included in modern trade agreements, this would be problematic.
If the EU were allowed to talk about trade in goods and services but not investment, not intellectual property (IP) rights, not digital trade or not future topics, this would be deeply problematic from the perspective from the view of companies. After all, firms generally do not split out their trade in goods from their investment decisions, or their IP or digital strategies from their services.
Fortunately, in the EU-Singapore FTA ruling, the Court took a relatively narrow perspective. It said that the EU had the authority (or “competence”) to negotiate and approve trade agreements on all topics except a very limited slice of investment (basically portfolio investment) and investor protection. These two issues will need to be approved by the member states.
While this approval is being sought for EU-Singapore, nearly all of the FTA can begin. The agreement always had imagined a lengthy approval process, so negotiators planned for a provisional entry into force clause that can now be activated for all aspects of the agreement that fall under EU competence. In practice, this means that 95% or more of the deal will start.
Again—for firms, this means the entire EU-Singapore FTA agreement except for commitments on portfolio investment promises and the elements of Chapter 9 on investment called the investor-state dispute settlement (ISDS) will be starting shortly.
It’s been so long since this agreement was first negotiated it is worth reminding readers what is actually included in the deal. The EU-Singapore FTA was meant to serve as a model for a future EU-ASEAN agreement. The talks started in 2010 and wrapped up in 2014, with the investment chapter done in 2015.
The agreement covers most goods, including a few new provisions on electronics and a consultation process for agricultural trade regulations. Several important sectors have specific coverage under the agreement. Services trade was also opened and liberalized with a clear eye towards crafting an ASEAN-wide deal on services for the future.
The agreement also included provisions on government procurement, new rules on intellectual property rights including a greatly expanded set of covered geographical indications, a chapter on competition, development objectives, labor standards and dispute settlement procedures (beyond those for just investors).
To get a bit more flavor of the agreement quality, consider the market access provisions for goods. Singapore already has duty-free access. The EU agreed to reduce its own tariffs to match the levels found in the 2011 EU-Korean free trade agreement within five years of entry into force. This includes dropping tariffs to 0 on entry into force for approximately 75% of tariff lines. Most of the remaining lines are scheduled to go to 0 across a time period of 3-5 years, with reductions taking place in annual installments.
The EUSFTA contains mostly product-specific rules of origin (ROOs). The agreement is effectively a bilateral agreement between the EU (counting EU members as if they were one) and Singapore. Hence, the agreement does not allow content from across ASEAN to count towards content. This can be a problem for Singapore, since the country has very few indigenous items to add to a product’s content. With raw materials, parts and components usually coming from overseas, it is not always possible to reach high levels of locally added content, absent the ability to add up, or cumulate, content from elsewhere.
Nevertheless, as the EU moves towards incorporating all the bilateral trade agreements into one region-wide ASEAN agreement, it is likely that ASEAN cumulation rules will be built in the future.
In short, the application of the EU-Singapore FTA will be quite helpful for firms. Now other pending agreements, like EU-Vietnam, can also move forward. The aggregation of these deals into a broader ASEAN-wide framework will really unleash new opportunities for firms.
But the Court’s ruling is not all good news. Splitting out investor protections is going to be problematic. As Talking Trade has noted in the past, investor-state dispute settlement (ISDS) is a very important insurance policy for firms—even if companies will never actually use it. While Singapore and the EU are unlikely to seize investor assets without adequate compensation, the same cannot be said for some of the other countries in the region.
Tying up the ISDS provisions with individual member state approvals means that the EU is unlikely to negotiate these rules. Or, should it opt to do so, this element of future FTAs will be significantly delayed in entering into force as ratification now involves 38 different national- and sub-national level parliaments.
However, in the meantime, the decision of the ECJ on May 16, 2017, finally unlocks the EU-Singapore FTA and makes it possible for the EU to move ahead once more with confidence in negotiating trade agreements. This is excellent news. Companies should start planning to use the agreement now.
***Talking Trade is written by Dr. Deborah Elms, Executive Director, Asian Trade Centre, Singapore***