Ceta failure will undermine basis of EU trade policy

If Canadians hadn’t previously heard of Wallonia, they have now. The decision by the parliament of the French-speaking region of Belgium to reject the proposed Ceta trade deal with Canada has thrown into confusion not just the agreement itself but the whole basis of EU trade policy.

Traditionally, because trade deals affect the EU as a bloc, they were regarded as the preserve of the EU collectively. This means that after being negotiated by the European Commission, the EU’s executive arm, they can then be passed in the Council of Ministers, representing the member states, under a majority rather than unanimously. If the deal covers certain issues such as cultural affairs, the vote in the Council needs to be unanimous, though in practice trade deals tend to command unanimity in any case.

As the scope of trade deals broadened beyond goods tariffs to address “behind-the-border” issues such as services regulation, EU member states clamoured for the power to ratify such pacts country-by-country rather than collectively.

The Lisbon treaty, which came into operation in 2009 and amended the workings of the EU, aimed to clarify which parts of trade deals were EU-only and which required individual member state approval. Those that combine both elements are known as “mixed agreements”. In theory, if every member state decides to put them through their legislatures, there are now 38 parliaments that have a veto over mixed deals, including the Walloons.

However, designating a deal as mixed is a confused process. First, the legal situation is unclear: the European Court of Justice is considering whether a EU-Singapore deal is a mixed agreement, but has yet to rule.

In practice, the decision has a strongly political element. With the Comprehensive Economic and Trade Agreement member states and parliamentarians argued that the inclusion of investment and certain services provisions meant it should be a mixed agreement.

In July Cecilia Malmstrom, the EU’s trade commissioner, and Jean-Claude Juncker, the commission president, gave in to this pressure. Some trade policy veterans have argued that decision was a terrible mistake that ceded control over one of the most important collective functions of the EU to the member states, making it subject to populist posturing at a national and subnational level.

One particularly contentious element in Ceta is the investor-state dispute settlement (ISDS) mechanism that allows foreign corporations to sue governments for unfair treatment. These have existed at national level for decades — the UK has more than a hundred in place. In the Lisbon treaty, the commission executed a tactically cunning but strategically risky manoeuvre to make them an EU-wide competency.

Unfortunately for the fate of trade deals, this created a high-profile target for self-styled anti-corporate campaigners, who have made ISDS a central part of their lobbying against Ceta and the Transatlantic Trade and Investment Partnership (TTIP) with the US. It was notable that an EU deal with South Korea sailed through ratification in 2011 without ISDS provisions, admittedly at a time when the whole issue of bilateral trade deals had a lower profile.

Unless Ceta can be renegotiated to make it palatable to the Walloons — yet another effort to break the deadlock was underway on Tuesday afternoon — none of the options for the EU in this or future deals looks very appealing. The commission could restrict the scope of agreements to make it easier to designate them as EU-only pacts. Dropping ISDS would be an obvious concession. But going beyond that and scaling down the services elements of trade deals would undermine the entire point of negotiating such pacts in a modern economy.

In any case, given the high profile of the Ceta bust-up, it may be impossible to put the mixed-agreement toothpaste back in the tube. Having blocked one deal, the Walloons — along with other national parliaments and campaigners against trade pacts — may well have the taste for blood.

Another possibility, canvassed by some members of the European Parliament, would be to cut deals such as Ceta into two parts, an EU-only and a member-state section, and pass them separately. This is superficially attractive but may limit Brussels’ ability to sign deep and broad agreements in future.

A negotiating partner that has to make concessions on agricultural policy in order to make gains on services, for example, will be reluctant to agree the former without a guarantee that the latter will be passed. A post-Brexit UK negotiating a bilateral trade deal with the EU is unlikely to want to agree cuts in manufacturing tariffs without reassurances that services, in which Britain has a comparative advantage, will also be liberalised.

Even if Ceta is eventually passed, the implications of this episode are grim for the future of EU trade policy. First, trade deals, and particularly the ISDS issue, are a lot more contentious than they used to be, and in consequence the demand for extra layers of legitimacy has increased. Second, a relatively weak commission is being pushed around by the member states and finding it difficult to assert itself on trade policy. Third, unless those two problems are sorted out, trading partners are likely to be much more reluctant to put time and effort into negotiations with the EU.

That would mean those who have little choice, such as the UK, will face a very difficult challenge.