Issue Number 13: 1st July 2016

Mixed feelings about ‘mixed agreements’: European Commission declares CETA an ‘EU-only’ agreement
The trade law consequences of ‘Brexit’
Germany prompts the European Commission to define food suitable for vegetarians and vegans
Recently Adopted EU Legislation

**Mixed feelings about ‘mixed agreements’: European Commission declares CETA an ‘EU-only’ agreement**

On 28 June 2016, the EU Commission’s President Jean-Claude Juncker declared that the EU Commission (hereinafter, Commission) regards the recently concluded EU-Canada Comprehensive Economic and Trade Agreement (hereinafter, CETA) as an ‘EU-only’ agreement and not a ‘mixed’ agreement. The debate looks poised to heat up when the Commission will officially propose this approach concerning CETA on 5 July 2016. Positions of EU Member States are currently diverging while the Court of Justice of the EU (hereinafter, CJEU) has yet to render an advisory opinion on the ‘mixed’ or ‘EU-only’ nature of the EU-Singapore Free Trade Agreement.

Competences in the EU are divided between the EU and its Member States, some policy areas falling under the exclusive competence of the EU, some being shared competences, and some being of exclusive competence of the Member States. The debate about the ‘mixed’ or ‘EU-only’ nature of international agreements has existed for a while, but recent public debate, in particular concerning the negotiations between the EU and the US for a Transatlantic Trade and Investment Partnership (hereinafter, TTIP), have turned this fundamentally legal issue into a very political question. The key provision of EU law is Article 207 of the Treaty of the Functioning of the EU (hereinafter, TFEU), which gives the EU exclusive competence regarding trade agreements. Article 207(1) of the TFEU covers a broad range of trade issues, enumerating a comprehensive list of trade issues. These are, namely, changes in tariff rates, the conclusion of tariff and trade agreements relating to trade in goods and services, and the commercial aspects of intellectual property, foreign direct investment, the achievement of uniformity in measures of liberalisation, export policies, and measures to protect trade, such as those to be taken in the event of dumping or subsidies. Recently concluded comprehensive FTAs, however, often go beyond pure trade issues and extend into the realm of Member States’ competences.

In 2014, the German Ministry of Economics and Energy commissioned an advisory opinion (hereinafter, the German advisory opinion) by a renowned German trade scholar on the ‘mixed’ nature of the CETA. The German advisory opinion points out that, although through the implied powers of the EU (i.e., Article 216(1) and 3(2) of the TFEU), certain matters may be of EU competence even though they do not fall under Article 207 of the TFEU, this may not be the case for the CETA. According to the German advisory opinion, some investment protection provisions (i.e., Chapter 10 of the CETA on Investment, as well as Chapter 15 on Financial Services) extend into the scope of Member States’ competences. This is attributed to the fact that Article 207(1) of the TFEU expressly only covers foreign direct investment (FDI). Conversely, other forms of investment, most notably portfolio investments, are not covered by Article 207 of the TFEU. Portfolio investments are passive investments, because they do not involve any active management or control of the issuing company. Instead, the aim of the investment is purely a financial benefit. This is contrasted by foreign direct investments (FDI), which allow an investor to retain a certain degree of control over a company. Supporting this assessment, the 2011 modification of the negotiating directives for the CETA make reference to the nature of the agreement, noting that the “aim is to include into the investment protection chapter of the agreement areas of mixed competence, such as portfolio investment, dispute settlement, property and expropriation aspects.” International maritime transport services (Chapter 14 of the CETA), mutual recognition of professional qualifications (Chapter 11 of the CETA), work place safety (Chapter 24 of the CETA on Trade and Labour) and the issue of good manufacturing practices (GMPs) for pharmaceuticals (detailed in a dedicated protocol to the CETA) allegedly also require a ‘mixed’ agreement, as they fall within the scope of EU Member States’ competences. If an agreement does not fall under Article 207 of the TFEU, and is not covered by the EU’s implied powers, the EU is legally not entitled to conclude the agreement by itself and EU Member States must take part in all steps of the process. A small aspect of an FTA falling under Member State competence would “infect” the agreement as a whole.

Commission President Juncker, on 28 June 2016, noted that the Commission remained of the opinion that, for “legal reasons”, the CETA should be considered an ‘EU-only’ agreement. He noted, at the same time, that the majority of Member States in the Council consider the CETA to be a ‘mixed’ agreement. The Commission President said that the Commission will reflect on this issue and elaborate on the Commission’s position shortly, as the Commission is expected to officially put forth its proposal on 5 July 2015. The EU Council may still overrule this proposal by consensus of the 28 Member States. However, Italy has, by way of a letter to EU Trade Commissioner Malmström, on 27 May 2016, already indicated that it would support the ‘EU-only’ approach concerning the legal nature of the CETA and thereby prevent a consensus to the contrary within the EU Council.

An important factor in the debate is the political dimension, including the indication that the CETA ratification and its nature may provide in view of the future ratification of the TTIP, which follows a similar structure as the CETA. While the arguments are based on legal matters, the objective is mostly a political one. Recent FTA negotiations are heavily debated in EU Member States. A core argument by certain Member States, echoed by various NGOs, has been that the final agreement would have to be ratified by the national parliaments of the EU Member States, thereby giving the people a final say over the respective agreements. In fact, this appears to be the main argument that is being put forth when EU Member States publicly call for the qualification of trade and investment agreements as ‘mixed’ agreements. However, while the political implications and public acceptance of such agreements are of great importance, such decisions and determinations should not be based on political opportunism, but on facts and a solid legal basis.

The possible processes of national ratification by all EU Member States would considerably prolong the period of time until the entry into force of the CETA and other future agreements. Additionally, there exists a risk of non-ratification by individual EU Member States, and, depending on domestic constitutional provisions, even by individual sub-entities of EU Member States. Recent votes in Belgian regions already indicate potential problems in view of the CETA ratification. Most notably, on 27 April 2016, the parliament of the Belgian Walloon region voted in favour of a resolution requesting that the regional government not grant full powers to the Belgian Federal Government to sign the CETA. The Dutch Government still struggles with the implications of a 6 April 2016 referendum against the approval act of the Dutch Parliament regarding the EU-Ukraine Association Agreement.

After ratification by the EU and until the completion of ratification in all EU Member States, the parts of ‘mixed’ agreements that are deemed to be of EU-competence are usually provisionally applied. However, even this approach appears now to being put into question. On 28 April 2016, the Parliament of the Netherlands appears to have rejected ‘automatic’ provisional application and requested that the Dutch Government presents a proposal to the Dutch Parliament before it would take any position on the CETA, should the Commission put forth a proposal on the provisional application of the CETA. Reportedly, some EU Member States now consider that even the provisional application of the agreement should depend on prior approval by national parliaments. Provisional application, a tool that allows for the application of parts of an agreement, while EU Member States ratify said agreement, could therefore be considerably delayed, adding another step to the already cumbersome process.

Independently from the debate on the CETA, the CJEU has been tasked to determine if such provisions do indeed lead to a ‘mixed’ agreement. On 10 July 2015, the Commission lodged an application initiating proceedings within the CJEU for a Court opinion on the EU competence to sign and ratify the FTA in order to legally determine the legal nature of the EU-Singapore FTA, concluded on 17 October 2014. The request included one general and three specific questions. From a general point of view, the Commission asked if the Union has “the requisite competence to sign and conclude alone the Free Trade Agreement with Singapore.” From a specific point of view, the Commission asked three questions about the various degrees of the division of competences between the EU and its Member States, namely: 1) which provisions of the agreement fall within the Union’s exclusive competence; 2) which provisions of the agreement fall within the Union’s shared competence; and 3) if there are any provisions of the agreement that fall within the exclusive competence of the EU Member States. The first and the last question are of prime importance for the EU and its Member States.

The waiting period for the advisory opinion by the CJEU on the EU-Singapore FTA has already considerably prolonged the period between the conclusion of the agreement and its subsequent entry into force. The debate on the CETA ratification is only beginning, but may also prolong this process. Trading partners must be assured of a clear and swift path to ratification and implementation once negotiations are concluded. This situation of legal and political uncertainty must be resolved and should not be a cause for concern for each and every agreement anew. Current and future negotiations by the EU should not be endangered by continuous controversies concerning their ratification, leading to a situation of legal uncertainty that has negative effects on the EU and on its important trading partners, as well as on the businesses anticipating the application of the agreements. Interested parties should closely monitor these developments and take necessary action. The debate about ‘mixed’ and ‘EU-only’ agreements looks poised to significantly prolong the ratification process of the trade deals already concluded (i.e., EU-Singapore, EU-Viet Nam and the CETA) and of those currently being negotiated. The debate is far from over, but despite the important political considerations, sound legal interpretation must prevail and inform all negotiations and processes of ratification and implementation.

**The trade law consequences of ‘Brexit’**

On 23 June 2016, the United Kingdom (hereinafter, UK) held a referendum posing the question on whether the UK should ‘remain’ or ‘leave’ the European Union (hereinafter, EU). The results were published on 24 June 2016. 48.1% of the votes cast were in favour of ‘remain’ and 51.9% chose to ‘leave’ the EU. The results call for the UK to exit from the EU (hereinafter, Brexit), which will require complex and protracted negotiations between the UK Government and the 27 remaining Members of the EU. From a trade perspective, the full impact of Brexit on the UK, on the EU and on their bilateral, plurilateral, regional and multilateral trade relations will take months, if not years, to assess and manage.

On 24 June 2016, David Cameron, British Prime Minister, announced his resignation. The formation of a new British Government is expected for the Autumn of 2016. The new Government will then need to trigger Article 50 of the Treaty on the European Union (hereinafter, TEU) by notifying to the EU Council the British decision to withdraw from the EU. Subsequently, the EU will negotiate, by taking into consideration the guidelines to be provided by the EU Council, a withdrawal agreement with the UK. That agreement will enact provisions on the future relationship between the EU and the UK. Such an agreement can be adopted only if the EU Council votes positively by qualified majority, after obtaining the consent of the European Parliament. During that period of negotiation, the UK remains an EU Member with all the rights and obligations set under the EU legal framework (i.e., primary and secondary law). Furthermore, the 36 trade agreements to which the EU is party, outside of the scope of the WTO, will continue to apply to the UK. If both actors were to fail to conclude a withdrawal agreement two years after the notification, the UK will nonetheless exit the EU unless the EU Council, in agreement with the UK, decides unanimously to extend the period of negotiation.

As soon as Article 50 of the TEU is formally triggered, the UK needs to negotiate its trade relationship with the EU. There are four possible scenarios with varying degrees of integration. First, the UK could become a member of the European Free Trade Association (hereinafter, EFTA) and rejoin Iceland, Liechtenstein, Norway and Switzerland. On the one hand, the EFTA Convention enacts provisions on free trade with the EU covering all non-agricultural goods. Under that regime, British goods would be guaranteed tariff-free access to the EU and vice-versa. On the other hand, the European Economic Area Agreement (hereinafter, EEA Agreement), which excludes Switzerland, allows the contracting parties to benefit from the four freedoms (i.e., goods, persons, services and capital), the setting up of a common competition system, as well as horizontal provisions relevant to the four freedoms (e.g., social policy, environment and consumer protection). However, the EEA Agreement does not cover, for example, the customs union, the common trade policy and the common agricultural and fisheries policies (although the EEA Agreement contains provisions on various aspects of trade in agricultural and fish products). The UK would keep its own external tariffs towards third countries. It is interesting to point out that the case law of the Court of Justice of the European Union (hereinafter, CJEU) in the fields covered by the EEA Agreement applies to its parties. If the UK decided not to be subject to the EEA Agreement, the UK could follow the example of Switzerland by concluding a wide range of agreements, including a free trade agreement similar to the EU-Switzerland Free Trade Agreement (hereinafter, FTA). Second, the UK could opt for a customs union for the trade of goods, as it is the case between the EU and Turkey. The external tariffs of the UK would be aligned with EU tariffs. Third, the UK could negotiate a comprehensive FTA with the EU covering trade in goods, services and investment protection. Fourth, the trade relationship between the UK and the EU could be governed only by WTO rules. In this case, there would not be a single market. The GATT and the GATS would govern the trade of goods and services. The UK would not be subject to the EU’s common external tariff and there would be no preferential market access unless a separate FTA is concluded between the UK and the EU.

The UK, as an EU Member, became a WTO Member in 1995. Even if it is an individual WTO Member, it is the EU that concludes in its name various WTO commitments on market access (e.g., bound tariff rates and access to services markets), goods (e.g., agricultural subsidies and domestic support) and services (e.g., bindings on national treatment). This means that the UK will need to renegotiate its WTO Schedules of Concessions (i.e., the list of bound tariff rates) when it leaves the EU. The WTO Director-General, Mr. Roberto Azevêdo, confirmed that the UK would continue being a WTO Member after Brexit, but that there will need to be trade negotiations. It will be the first time that a WTO Member will renegotiate all of its WTO commitments and most favoured nation tariff lines on imports from scratch. Normally, a country that wants to become a WTO Member needs to negotiate its accession and enter into commitments with the WTO Membership. Article XII of the Marrakesh Agreement establishing the WTO and Article XXXIII of GATT 1947 deal with the accession of a country to the WTO.

At a glance, the UK will need to renegotiate its own terms of WTO Membership with the other (current) 161 WTO Members. During the renegotiation period, WTO Members could treat the UK as a non-WTO Member and raise significant trade barriers to British goods and services. The UK will need to describe all aspects of its trade and economic policies related to WTO Agreements in a Memorandum that will be submitted to the other WTO Members. After analysis of this Memorandum, the UK and the WTO Members will begin talks covering tariff rates and specific market access commitments, and other policies in goods and services. Once the British trade regime is evaluated by WTO Members and the bilateral market access negotiations completed, a report and list of commitments will be drafted. A Membership Treaty will not be necessary in this case. The WTO Ministerial Conference will need to confirm the texts with a two-thirds majority. In case of a positive vote, the British Parliament would need to ratify the texts adopted at the WTO.

It is important to underline that this situation may also result in consequences vis-à-vis the WTO commitments of the EU, because its previous (EU28) concessions may be seen by its trading partners as diminished in value by the fact that the UK is no longer part of the EU market. Because of this decrease in value, WTO Members could request the EU to renegotiate its WTO concessions as contained in its GATT and GATS schedules. Indeed, WTO Members could argue that the EU is modifying its level of concessions as initially agreed upon and included in its Schedules of Concessions. The EU would need to offer adequate compensation such as duty-free quotas or lowered tariffs to the affected WTO Members. If certain WTO Members were not satisfied with the EU’s offer for compensation, they could require from the EU to withdraw concessions for an equivalent amount. This can have a direct impact on companies exporting goods to the UK based on beneficial concessions within the WTO. The UK will also need to establish its own national customs tariff.

The UK, as an EU Member, currently benefits from the legal regime of EU-third countries FTAs that entered into force (e.g., EU-South Korea FTA) and, soon, of those that have already been concluded (e.g., Singapore, Vietnam and Canada). These FTAs regulate, on the one hand, rather general issues (e.g., general provisions establishing a free trade zone, settlement of disputes, customs, trade defence, market access for goods and services, investment) and, on the other hand, more sector-specific issues (e.g., telecommunications, intellectual property, agriculture, technical barriers to trade and sanitary and phytosanitary measures, financial services, payments and capital movement). Due to Brexit, the UK would need to renegotiate all these FTAs and will not participate as an EU Member State in the negotiation of future FTAs such as the Transatlantic Trade and Investment Partnership (hereinafter, TTIP). The UK could argue that it was an original contracting party to previous trade agreements, such as the EU-South Korea FTA. However, this argument appears legally weak, if not untenable, because the UK will no longer be covered by the territorial application of this FTA. As an alternative, the UK could negotiate membership as a third party to the FTAs between the EU and third countries at the condition that all parties to the FTA agree. Indeed, Article 15.5 of the EU-South Korea FTA provides that the parties may agree, in writing, to amend the Agreement. Otherwise, the UK could negotiate separate bilateral FTAs with third countries. Here again, it is important to note that the trading partners of the EU could consider that the EU concessions are less valuable after Brexit. This could force the EU to renegotiate some of its concessions. Brexit arguably also constitutes a “fundamental change in circumstances” as provided under Article 62 of the Vienna Convention on the Law of Treaties. This could potentially offer a valid legal ground for a party to seek termination of the FTA between the EU and the third country.

To summarize, the decision of the UK to leave the EU will have at least three trade law consequences that businesses must understand and assess. Firstly, the UK will need to build a new relationship with the EU by choosing between four different scenarios. Each of them offers different levels of EU integration. Secondly, the UK as a WTO Member will need to renegotiate its WTO commitments and Schedules of Concessions. The UK and WTO Members must find an agreement that is satisfactory to both sides. This renegotiation could also affect the EU commitments at the WTO, because third countries may seek renegotiation of their reciprocal commitments. Thirdly, the UK will lose the opportunity to benefit from the FTAs concluded and negotiated by the EU and will likely have to embark on a new wave of bilateral trade negotiations to achieve the necessary conditions of preferential market access on key export markets. Similarly, the EU may need to amend some of the existing FTAs with third countries, if those parties were to see the existing terms of market access diminished by virtue of Brexit. The Brexit process will be challenging and unpredictable. Further monitoring of the trade implications of Brexit is necessary and businesses must be ‘quick off the blocks’ in order to minimize the negative trade impacts or to take advantage of the negotiating opportunities that will arise.

Germany prompts the European Commission to define food suitable for vegetarians and vegans

On 22 April 2016, the Consumer Protection Ministers and Senators of the 16 German Federal States (i.e., Bundesländer) unanimously adopted at their meeting (i.e., Verbraucherschutzministerkonferenz) in Düsseldorf a decision on binding definitions of the terms ‘vegan’ and ‘vegetarian’. Prior to the meeting of the Consumer Protection Ministers and Senators, a working group of the German Federal States, the German Federation for Food Law and Food Science (i.e., Bund für Lebensmittelrecht und Lebensmittelkunde, BLL), and VEBU, the German branch of the European Vegetarian Union (which has been asking for definitions for years) jointly and consensually developed the wording of the definitions.

At the EU level, Article 36(3)(b) of Regulation (EU) No. 1169/2011 on the provision of food information to consumers (hereinafter, FIR) provides, that the European Commission (hereinafter, Commission) must adopt an implementing act regarding voluntary food information related to the suitability of foods for vegetarians or vegans. Such implementing act must ensure that voluntary food information on suitability of food for vegetarians or vegans must not mislead the consumer, must not be ambiguous or confusing for the consumer, and must, where appropriate, be based on the relevant scientific data. The FIR does not provide for a date by which the Commission must adopt such implementing act and the Commission has not done so yet.

Looking at the legislative history of the FIR, the European Parliament Legislative Resolution of 16 June 2010 on the proposal for a Regulation of the European Parliament and of the Council on the provision of food information to consumers included definitions of the terms ‘vegan’ and ‘vegetarian’. It stated that the term ‘vegetarian’ must not be applied to foods that are, or are made from or with the aid of, products derived from animals that have died, have been slaughtered, or animals that die as a result of being eaten. Furthermore, the term ‘vegan’ must not be applied to foods that are, or are made from or with the aid of, animals or animal products, including products from living animals. However, in finalising the FIR, no agreement on definitions of the terms ‘vegan’ and ‘vegetarian’ was ever reached.

Already in January 2014, the Federal German Government rejected a demand of the parliamentary Chamber of the Federal States (i.e., Bundesrat) to define the terms vegetarian and vegan. At that time, the competent Federal Ministry of Food and Agriculture justified its refusal with the argument, inter alia, that under applicable law, consumers would already have the opportunity to obtain information on the ingredients of a food based on the product’s name and on the list of ingredients, and thus information about ingredients of animal origin. The argument that many substances used in the production of foodstuffs must not be specified on the ingredient list, including, inter alia, processing aids such as gelatine, which may be used to clarify fruit juices like apple juice or wine, has now been accepted by the Federal Government. Another example is that of enzymes of animal origin, which are used as a flour treatment agent.

Considering the growing proportion of vegans, vegetarians and flexitarians (i.e., persons that have a primarily vegetarian diet, but occasionally eat meat or fish) in the population and the increasing market relevance of vegan and vegetarian products, a legally binding definition for the terms ‘vegan’ and ‘vegetarian’ appears essential for guaranteeing informed choices by consumers. The food industry has developed a range of products, which are offered as vegan, vegetarian or under similar terms, such as ‘plant-based’ or ‘animal products-free’. Differences in the interpretations on the conditions for the use of such product descriptions may impede the free movement of these products and result in a situation in which the same high level of information is not guaranteed in all EU Member States. It appears that, in order to provide clarity and to avoid confusion among consumers, conditions for the use of the designations ‘vegan’ and ‘vegetarian’ of products are indeed needed.

Paragraph 1 of the decision adopted by the Consumer Protection Ministers and Senators of the 16 German Federal States defines ‘vegan’ foods. Such foods may not be of animal origin and no (1) ingredients (including additives, carriers, flavourings and enzymes), or (2) processing aids or (3) substances, which are not food additives (but are used in the same way and with the same purpose as processing aids), of animal origin may be used or added, in either processed or unprocessed form, at any stage of their production and processing.

According to paragraph 2 of the decision, ‘vegetarian’ foods must meet the requirements of paragraph 1 with the difference that, in their production, the following may be added or used: milk, colostrum, eggs, honey, beeswax, propolis (i.e., a resinous mixture that honey bees collect from tree buds, or other botanical sources) and wool grease (including lanolin derived from the wool of living sheep) or their components or derivatives.

The definitions not only include the substances contained in the final product, but also those used at all production steps. In particular, the concept of ‘food’ of Regulation (EC) No. 178/2002 laying down the general principles and requirements of food law, the concept of ‘ingredient’ of Article 2(2)(f) of the FIR as well as the definitions of processing aids according to Article 3(2)(b) of Regulation (EC) No. 1333/2008 on food additives and so-called ‘quasi-processing aids’ according to Article 20(1)(d) of the FIR have been integrated. Therefore, as the use of processing aids cannot always be analytically detected in final products, monitoring depends on appropriate supporting documents.

Under paragraph 3 of the decision, the labelling as ‘vegan’ or ‘vegetarian’ does not preclude unintended labelling of products that do not comply with the relevant requirements of paragraph 1 or 2, if and to the extent that this is technically unavoidable at all stages of production, processing and distribution, in spite of appropriate arrangements under good manufacturing practices. Paragraph 4 states that paragraphs 1 to 3 shall apply accordingly, if food information is used, which is equivalent for consumers to ‘vegan’ or ‘vegetarian’.

Arguably, the adopted definition leaves some margin of interpretation. Plants before harvesting do not fall under the definition of food. Agricultural production methods would, therefore, fall outside the scope of the definition of ‘vegan’ foods. The question arises whether, for example, animal fertilisers should be regarded in a broader sense as processing aids because they are ‘used’ in the production process. If so, animal fertilised crops would not be ‘vegan’ according to this definition.

The decision of the German Federal States’ Ministers and Senators now prompts the Federal Government to urge the Commission to implement the FIR and to propose the adopted wording of the definitions. In the meeting of the Federal Consumer Protection Ministers and Senators, it was also decided that the food inspection authorities of the Federal States must use the adopted definitions from now on in their work. For the food industry, the definitions adopted have far-reaching consequences. Products must be checked for compliance with the specified criteria, which also applies to European and third country companies operating in the German market. It must be noted, however, that the Consumer Protection Ministers and Senators of the German Bundesländer did not agree on a formal food labelling law, which is in the competence of the Federal German State (i.e., Bund). However, they agreed on joint political positions of the 16 Federal States which, in this case, have an important effect as the ministers decided that the food control authorities within their jurisdictions will use the definitions whenever they have to decide whether a food may be labelled ‘vegan’ or ‘vegetarian’.

The Commission’s inaction leads, ultimately, to the fragmentation of the internal market and to possible obstacles to the free movement of foodstuffs within the EU. Products that are labelled as ‘vegan’ or ‘vegetarian’ (or with similar terms) in other EU Member States, and which do not comply with the definitions established in Germany, will likely be deemed misleading. To avoid this, changes to the labels are required and, in some cases, producers may be forced to reformulate their products to be able to enter the German market. The next steps taken in the EU and its Member States on the labelling of products as suitable for vegans and vegetarians (in particular an eventual legislative proposals put forward by the Commission) should be monitored and stakeholders should be prepared to participate in shaping upcoming EU legislation by interacting with relevant EU Institutions, trade associations and affected stakeholders.