Client Alerts

CETA signed by Canada and the European Union

Volterra Fietta Client Alert
5 November 2016

On Sunday 30 October, after a week of questions about whether the deal would be derailed, Canadian Prime Minister Justin Trudeau and European Council President Donald Tusk met in Brussels to sign the final text of the Comprehensive Economic and Trade Agreement (“CETA” or the “Agreement”) between the European Union (“EU”) and Canada.   The Agreement is now poised to enter provisionally into force, at least for those aspects within the EU’s exclusive competency (as opposed to the competency of the individual EU Member States). The Agreement must now be confirmed by Canada’s national Parliament and by the European Parliament. Once that happens, those aspects of the Agreement within the EU’s recognised competency will enter into force provisionally. This covers about 90% of the Agreement and will, among other things, immediately eliminate 98% of goods tariffs between the EU and Canada, facilitate customs procedures and allow non-discriminatory access to public procurement opportunities.

Given these economic benefits, EU Member States likely will face strong pressure to ratify the Agreement in its current form following its provisional entry into force.

In a last-minute hitch, the signing ceremony planned for earlier in the week had to be postponed in the face of opposition to the Agreement from the Parliament of Wallonia (a province of Belgium). In July 2016, faced with political opposition on the part of certain Member States that were seeking a say in the approval process, the EU declared that CETA would be treated as a “mixed” Agreement (involving competency both of the EU and of the individual Member States). “Mixed” agreements require the consent both of the EU and of Member State national parliaments. In the Belgian context, this required obtaining the approval of all five of its regional parliaments. The Parliament of Wallonia at first rejected the Agreement, citing concerns about its potential effect on its agriculture industry and about the purported effect of CETA investment protections on State rights to regulate in the public interest.

The Commission and Belgium overcame Wallonia’s resistance by offering it additional safeguards addressing the Agreement’s potential impact on Walloon farmers. The Commission confirmed that entry into force of the Agreement’s investment protection provisions would await formal ratification by EU Member States. Belgium also committed to pursuing a reference to the European Court of Justice (the “ECJ”) on the compatibility of CETA’s investment tribunal system with EU law.

In fact, a reference to the ECJ on the question of third party dispute resolution mechanisms related to foreign investment protection is already pending. At issue in that case is the potential interference of the dispute resolution mechanism in an investment protection treaty with the ECJ’s exclusive interpretative authority over EU law. Similar third party dispute resolution mechanisms have already been accepted by the ECJ in other contexts. Thus, a negative ruling by the ECJ in relation to investment protection treaties presumably should only require reworking of the proposed CETA tribunal in order to ensure compatibility.

The final CETA text incorporates a dramatic innovation, in terms of third party dispute resolution between investors and States. The traditional process used in most investment treaties is to provide for investment arbitration tribunals set up on an ad hoc basis by the disputing parties. CETA contemplates the creation of a standing investment tribunal composed of members named jointly by the EU and Canada for fixed terms. Most EU Member States have already signalled their agreement to this. The core political issue now at play is whether any further refinements to CETA’s investment dispute resolution system will be required to ensure the eventual ratification of the Agreement by all Member States. Wallonia has signalled that it would not agree to CETA’s investor-State dispute settlement mechanism “in its present form”. The European Commission has already begun consultations that could lead to further refinement of the system, a process already contemplated in CETA.

Provisional entry into force of the Agreement will add pressure to the ratification decisions of the EU Member States. Commercial parties will already have seen the benefit of the Agreement’s trade provisions. This is likely to put pressure on Member States to confirm the deal.   Thus, opposition to the CETA’s investment provisions at the Member State level should not be presumed.   However, the ratification issue does raise questions about the fate of the Agreement as a whole, should one or more Member States fail to ratify based upon opposition to its investment chapter (or on other grounds).   It also raises questions about the challenges the EU may face going-forward in its pursuit of complex trade and investment agreements with other partners.