Leiden Law Blog

CETA versus European status quo - Part I: Barriers to regulation

Posted on by Lennart van Laake in Public Law
CETA versus European status quo - Part I: Barriers to regulation

Recently, TTIP’s “little brother” CETA has claimed its share of the spotlight. The Walloon refusal to accept the trade agreement with Canada has been a major news story, since without the Walloon approval the deal could not be signed by Belgium, and without Belgium the deal could not be signed by the entire EU. After agreeing on a four-page declaration to remedy the Walloon concerns all parties, including Belgium, were able to sign CETA.

This does not mean that CETA is now in safe waters. After the Dutch “no” in a referendum against the Ukraine-EU Association Agreement, the opposition of the Walloons has encouraged those opposed to CETA in their efforts to organize another referendum in the Netherlands.  Moreover, an inadmissible attempt to launch a European Citizens Initiative against CETA and TTIP has attracted 3.5 million signatures.

Besides complaints about the secrecy of the negotiations surrounding treaties like TTIP and CETA, most opponents’ objections can be divided into three subjects: 1. CETA prohibits the protection of public interest in areas such as the environment, health or labour standards by requiring liberalisation. 2. CETA allows companies to unjustly sue for exorbitant amounts of money which costs taxpayers and limits the potential to regulate 3. Regulatory cooperation between the EU and Canada allows companies to influence legislation.

These issues are not new for the EU. The internal market has limited the ability to set standards that unjustifiably harm trade for decades, companies are able to sue Member States for damages for violating EU law and multinationals already try to influence EU legislation on a daily basis. Asking whether CETA would lead to the introduction of these issues is therefore not the right question. Rather, the question should be whether CETA would significantly worsen these issues. In three blog posts I will try to answer this question. In this first blog I will examine whether CETA will introduce additional obstacles for regulating public interests beyond the restrictions under EU law.

CETA and trade barriers

Most rules in CETA with regard to trade liberalisation and trade barriers are specific and technical. For instance, article 20.19 prohibits Canadian dairy farms from selling their own cheese as Gouda, Feta or Gorgonzola. There is no rule of mutual recognition in CETA with regard to goods. Canadian hair dryers, Canadian maple syrup and Canadian cars will have to fully comply with the standards of EU Member States. This contrasts with the current limitations on the rights to regulate goods from other EU countries. If the Netherlands were to reject Swedish hair dryers, it  would need to show why they believe Swedish hair dryers to be unsafe. Under CETA, a Canadian hair dryer that does not live up to the Dutch standards can be rejected without a need for justification.

However, the main source of fear has been the open-ended clause which requires the EU and Canada to grant investors ‘fair and equitable treatment’. In contrast to the more technical and detailed chapters of CETA, a breach of this clause can entitle investors to claim damages directly under CETA’s Investment Court System. Article 8.10 provides a closed list of examples of violations of this clause. Most relevant to general regulation are the prohibition of manifest arbitrariness and the protection of legitimate expectations.

One could fear that a Canadian producer of maple syrup might claim that warnings against sugar in syrup are arbitrarily restrictive if insufficient evidence is available to prove the effectiveness of this campaign. However, under EU law Member States are not only obliged to abstain from limiting trade by arbitrary regulation; they must also justify that such regulation is warranted by a legitimate goal, it is suitable for achieving that goal and that it is the least restrictive way of achieving that goal. For instance, Germany is prohibited from banning additives like maize and rice from beer, since the public can just as well be alerted to the existence of these additives with a label. If a Canadian firm is  trading on the European market, it can also invoke the EU provisions against unjustified trade barriers on the same basis as it would be able to invoke any other national legal provision. Concretely, this means that a Canadian maple syrup producer would be able to challenge sugar warnings on the basis of EU law, and have a significantly stronger case in doing so compared to challenging the same warnings under CETA.

The concept of legitimate expectations can also seem daunting. The Canadian firm Hudson Bay decided to invest in Dutch real estate and might expect that Dutch labour laws will not change to its detriment. Does that therefore mean that the Netherlands loses the ability to alter those laws? According to subsection 4 of article 8.10 this protection only applies when a specific representation of facts was given to an investor to induce investment, upon which the investor relied in his choice to invest, which was then frustrated by the State Party. The fact that the simple loss of profit due to a change in regulation is excluded is reaffirmed in article 8.9. This clause is therefore not a limit to regulatory competence, but a prohibition of attracting investors by presenting false securities. As long as the Dutch authorities do not explicitly promise a standstill of their regulations, Hudson Bay is therefore not be able to limit the content of Dutch labour laws.

For the purposes of this argument it does not matter if you believe EU law holds the regulation of our economy up to high standards or that EU rules violate the sovereign right of states to protect their citizens from all perceived harms in any way they see fit. Regardless of your opinion on that subject, the constraints EU law places on national regulation are more comprehensive compared to those in CETA. The constraints that CETA places on the regulatory competence of EU Member States are therefore largely redundant. 

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