One of the provisions of the Comprehensive Economic and Trade Agreement between Canada and the European Union, known as CETA, was a mechanism to handle disputes between governments and investors. The International Court System (ICS), a new EU-Canadian permanent court, was created to help resolve such disputes.
The ICS will hear claims from Canadian investors against the EU or one of its member states, and from EU investors against Canada, on any alleged violations of CETA.
The establishment of the ICS is significant in and of itself. It was created to provide transparency on disputes regarding CETA between Canada and the EU. Its procedures and decisions will be public and subject to appeal.
As such, although not perfect, the ICS is a profound improvement upon the traditional, opaque and much-criticized investment dispute-settlement system that involves arbitral tribunals nominated for each dispute by the parties, and whose decisions are not public.
Nonetheless, activist groups and politicians have opposed the ICS, arguing that it would be less independent from the private sector than national courts. As a last bump in the road, the EU Court of Justice — basically the Supreme Court of the EU — was asked to judge the compatibility of the ICS with what are known as the EU Treaties, essentially the EU’s constitution, before CETA fully takes effect.
The findings are highly relevant politically and economically for Canada, the EU and the system of multilateral global trade.
While Canada has fulfilled the legal steps required for CETA to come into force, the EU has not. That’s because some free-trade agreements need to be approved by the EU and its member states. More specifically, under EU law, the EU needs to validate all chapters of CETA, while the member states only need to validate Chapter 8 pertaining to investment protection and the establishment of the ICS.
Approval by the EU member states requires yes votes from their parliaments at the national and sometimes regional level, which has not yet been completed.
CETA was indeed first blocked by the parliament of the Belgian region of Wallonia.
When Wallonia finally agreed to CETA, the Belgian national government announced it would ask the EU Court of Justice for an opinion on whether the ICS respects the EU Treaties before Belgium would finally validate CETA.
The case is currently pending and will be decided in the next few months.
While the EU has made most of CETA provisionally applicable, member states like Austria have suspended the ratification process until the final ruling from the EU court. Consequently, Chapter 8 of CETA on investment protections and the ICS cannot go into force just yet.
The legal issue
As discussed at a recent hearing, a key issue is that the ICS will need to interpret European Union law in order to decide on any alleged violations of CETA. For example, if a Canadian investor claims that a new EU regulation violates its rights under CETA, the ICS will give its own view of the content of the regulation before assessing whether it actually violates CETA.
In the past, the EU Court stopped the drafting of any EU international agreements that allowed another court to have a say on how to interpret EU law. In the EU Court’s view, loosening the autonomy of the EU legal order in favour of an external court threatens the European Union’s commitment to the rule of law, a fundamental guarantee for its citizens.
It’s therefore quite possible that the EU Court will reject the ICS.
What’s at stake
A negative ruling by the EU Court will require a renegotiation of CETA and the ICS.
Canada and the EU see the ICS as a first step towards a new world court for investment disputes. But if the ICS is rejected by the EU, such a worldwide court seems improbable.
Finalizing the nine-year negotiation of CETA may be highly relevant in the current international climate. Multilateralism in trade relations seems under attack. The U.S. is challenging NAFTA and imposing tariffs on key imports from Canada and EU countries. This has triggered retaliation, but also raised opportunities for new leadership.
Canada and the European Union are openly trying to position themselves as the leaders of free world trade. Such an endeavour requires making CETA a success, starting by making it entirely legally binding for both parties.
Democratic reviews of free-trade agreements
The road to CETA has become long and winding, and the main reason appears to be the possibility for parliaments and courts to review the ICS.
Some academics have pointed out that free-trade agreements are structurally unfit to bear too much democratic review. In addition, national governments tend to twist their power of review for internal political gain. Just recently, Italy threatened to reject CETA on grounds that pertain to the exclusive competence of the EU, not related to the member states possibility to vote on Chapter 8 of CETA.
Avoiding renegotiation of CETA is still possible. Canada and the EU could drop Chapter 8 on investment protection and the ICS. Then the EU could make the rest of CETA legally binding under EU law, without the member states’ approval.
That would mean the pending question about the ICS’s compatibility with the EU Treaties, currently before the EU Court, would become moot. The freshly signed EU-Japan trade agreement, in fact, followed this alternative path.
In addition, in a world where strongman politics are ascendant behind a façade of democracy, the process of subjecting the ICS to public scrutiny in court is incredibly valuable.
We can also reasonably expect the EU court to be mindful of the political implications of a negative decision.
If the ICS is judged incompatible with EU law, the legal arguments will be framed as to allow the court to be restructured in a way that better upholds the rule of law.