Jean-Claude Juncker wants to style the EU as the undisputed champion of global trade when he steps up to deliver his State of the Union address in Strasbourg Wednesday.
The European Commission president’s pièce de résistance will be to propose a fast-track system to ensure Brussels can clock up quick trade deals while U.S. President Donald Trump lurches toward protectionism and Brexit tarnishes Britain’s international standing. He will announce that his first targets for streamlined agreements will be Australia and New Zealand, according to trade diplomats.
But those quick wins will come at a heavy price for the EU.
While Juncker may win kudos as a short-term savior of EU trade policy, his approach to securing fast deals will require slicing out contentious clauses on protecting foreign investors. In rescuing trade deals, Juncker has fallen into another legal and political quagmire over how to protect European businesses in far-flung corners of the world, should their factories be seized or nationalized.
Investment protection has been the Achilles’ heel of EU trade deals over the past few years. Across the Continent, but particularly in Germany, activists and left-wing politicians have repeatedly attacked Brussels’ trade accords as a platform for big corporates to sue governments and undermine standards in food safety, pollution and labor rights. At times, the ferocity of that opposition looked set to bring deal-making to a complete halt.
Kai Mykkänen, Finland’s trade minister, admitted the risks of carving up deals to remove the politically toxic investment clauses but defended Juncker’s proposal.
“Of course there are negative consequences to splitting trade deals … but this is a totally unbalanced situation if investment security questions hijack or make it impossible to get agreements in force, which has been the risk,” he told POLITICO.
Blocking the Walloons
Juncker’s objective in Strasbourg is clear. He is out to rebuild the credibility of the EU’s trade policy after the Belgian regional parliament of Wallonia last year came within a whisker of scuppering a major accord with Canada. The Commission president now wants to prove Brussels is still fully in control of concluding trade deals, and will not surrender this core competence to almost 40 national and regional assemblies that could veto any agreement.
To seize back the initiative, Juncker is expected to explain on Wednesday how he will roll out a new model of trade deal that the regional assemblies will be unable to block.
Slicing out investment protection will give him an immediate legal advantage. Under EU law, a trade deal without investment clauses could be ratified exclusively by the European Parliament and by the member countries as represented at the Council in Brussels. That effectively removes the direct veto powers of the Walloons.
The critical question, however, is whether Juncker has sacrificed too many of the EU’s powers on protecting foreign investment.
Passing the buck
Several analysts and lawyers accused the Commission president of seeking to pass the responsibility for protecting investors onto a body that will not exist for years.
Senior EU lawmakers briefed on Juncker’s plans said his proposal would shunt responsibility for handling investment disputes onto a multilateral investment court. This framework is being discussed by a U.N. body but trade officials estimate that it is at least a decade from being operational, if it ever comes into existence at all.
In July, the Commission presented the idea of a global investment court to representatives from 60 leading trading nations meeting at the United Nations Commission on International Trade Law in Vienna, where the U.S. and Japan flatly rejected Brussels’ plan.
In an internal briefing to EU trade diplomats, the Commission admitted that “many” countries “still need to be convinced of the multilateral investment court,” according to notes obtained by POLITICO shortly after the meeting. A working group of 60 countries to lead further discussions will only meet every four to six months.
Mykkänen, the Finnish minister, estimated that it would take “at least a decade” to get the multilateral court up and running.
Laurens Ankersmit from the nongovernmental organization Client Earth cautioned that unless the multilateral court came with a “drastic change in investment policy,” it was “nothing more than a procedural trick” to avoid the involvement of national parliaments in EU trade policy.
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Maria Demertzis, deputy director of the Bruegel think tank, agreed that the multilateral court was hardly practical.
“While it’s good to see Juncker supporting multilateralism, you have to be realistic,” she said. “Any multilateral system for dispute resolution requires the big guys to be on board. And it’s quite difficult for me to imagine the U.S. under Donald Trump supporting this concept.”
The Commission declined to give details on Juncker’s plans but one Brussels official said last week: “The idea is to strike a balance between an ambitious trade policy … and the need to devise our architecture of trade deals.”
Perilous precedent
One of the other key dangers is that the Commission will set a precedent with the Australian and New Zealand deals — but then be unwilling to follow it in riskier emerging markets. While Brussels is comfortable with the level of protection afforded to investors by Canberra and Wellington, potential trade partners such as India, Indonesia and Mexico are more problematic.
“The Commission needs to be quite sensitive to not give the impression it discriminates between countries,” said Isabelle Van Damme, a trade lawyer at Van Bael & Bellis.
India is an especially prickly country for the EU to handle as New Delhi last year unilaterally scrapped some 50 bilateral investment treaties with countries all over the world, including 23 EU nations such as Germany, France, the Netherlands, Sweden and the U.K. Foreign investors saw an EU-India deal as one way to try to re-establish some of those protections, but New Delhi would be liable to ask why it was not treated in the same way as Australia and New Zealand.
A final concern over slicing investment out of EU deals is that investment protection will revert to the turbid world of bilateral investment agreements that EU member countries have with other nations. Classic examples are Germany’s investment treaties with Mexico and Pakistan.
In 2015, there were more than 1,500 of these and Brussels has long wanted to end this model because the agreements are untransparent. European Commissioner for Trade Cecilia Malmström is a strong advocate of shifting away from bilateral protection to a transparent open court system on investment disputes for EU deals, just as she secured in the accord with Ottawa.
The risk with Juncker’s new approach is that, in trade deals with a country such as Indonesia, investment protection would be left to the old-style bilateral deals — which is exactly what Malmström wanted to avoid.
Pascal Kerneis, managing director at the European Services Forum, which advocates for trade liberalization, argued that the bilateral deals still provide an important safety net.
“The industry would be very much supportive of having some investor protection in trade deals with China, Indonesia and India but we already have some protection through the bilateral investment treaties of member states, which we do have in large number,” he said.
Giulia Paravicini contributed to this article.
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