The Growing “Informalisation” of EU Trade and Investment Law: The End of a Rules-Based Order?

I. Introduction

Since approximately 2017, EU trade and investment law has not only taken a “unilateral turn”[i] but has also experienced a “softening”. The EU appears to be adopting an increasingly informal approach to pursuing its policy objectives, alongside other major players such as the United States, the United Kingdom, and several developed Asian economies. The shift towards the use of soft law arrangements in the form of partnerships, alliances, and clubs, rather than formal international agreements appears to be yet another policy implication of the doctrine of “open strategic autonomy” (“OSA”) and a piece in the puzzle of a “multifaceted trade and investment framework”[ii] aimed at achieving greater resilience and “economic security”. For example, the formation of new bilateral partnerships and fora that define a common space for cooperation rather than concrete trade terms appears to be a cornerstone of the EU’s Critical Raw Materials (“CRM”) strategy.

This blog post first examines the EU’s use of soft law in its external action. It then looks at the growing use of soft law in the policy area of trade and investment. Subsequently, it examines the risks and opportunities associated with the growing use of soft law arrangements. The next section considers whether, following its unilateralisation, EU trade and investment law may now be entering a new era of “informalisation”.[iii] The final section concludes.

II. “Informalisation” in EU Law

A. What are Soft Law Instruments?

Soft law instruments have their origins in international law and have been the subject of considerable controversy. Soft law is often characterised as the opposite of hard law. In other words, it is considered to be devoid of legally binding obligations and therefore unenforceable. However, the reality is much more complex than this. In fact, there may be cases where some kind of enforcement mechanism is attached to a non-binding legal obligation. Conversely, there may be cases where a legally binding obligation is unenforceable in the absence of a corresponding enforcement mechanism. Moreover, despite the absence of a legal obligation, soft law instruments may entail far-reaching political commitments and still shape the behaviour of individuals and sovereigns.[iv] This blogpost adopts the working definition of Hahn, who describes “soft law” as texts that “establish norms in the broadest possible sense (encompassing, e.g., principles, rules, benchmarks or thresholds) that, pursuant to the norm in question, are expected to shape or influence state behaviour, despite lacking legally binding force”.[v]

The list of what is considered to be “soft law” in the EU sphere is diverse. In the context of EU external action, “soft law” includes instruments such as Joint Communications and Statements, Strategies, Arrangements, and Memoranda of Understanding (MOUs). The content and purpose of these instruments can vary considerably. As one commentator has noted, soft law instruments may contain political and/or technical/administrative commitments. They often precede the formation of binding customary rules or the conclusion of a formal international treaty. Soft law instruments may also complement, add to, or replace binding international agreements, or serve as interpretative aids. The legal implications of soft law instruments need to be assessed on a case-by-case basis. Where soft law is found to be normative in nature, in that it replaces or implements binding international agreements, it will be subject to legal principles such as good faith or estoppel. 

B. Soft Law Instruments in EU External Action

The utilisation of non-binding instruments, including “partnerships” and soft law frameworks instead of binding international agreements in the broader context of the EU’s external action is not a novel phenomenon. It is noteworthy that the EU has increasingly resorted to the use of soft law instruments in its external action in times of crisis, such as the financial and migration crises. The EU has concluded several bilateral arrangements with third countries concerning the protection of its borders and migration management. Furthermore, soft law instruments are employed in other domains, including the European Neighbourhood Policy (e.g., action plans and association agendas) and policy areas such as the environment and energy.

C. Soft Law Instruments in EU Trade and Investment Law

The use of soft law arrangements in the field of foreign trade and investment is not novel either. The EU has already occasionally made use of non-legally binding MOUs or, alternatively “action plans” and “compacts” as regards trade and trade-related issues in the past (e.g., Revised MOU with the United States of America regarding the importation of beef from animals not treated with certain growth-promoting hormones and increased duties applied by the United States to Certain Products of the EU).

However, since approximately 2021, there has been a notable increase in the number of bilateral arrangements between the EU and third countries. These arrangements are mostly focused on trade, investment, and technology-related matters. The first example is the EU’s framework of “strategic partnerships” on CRMs, including cobalt, copper, lithium, nickel, and rare earths. These CRMs are essential inputs for several strategic sectors. They are indispensable for the transition to a low-carbon economy, notably to produce clean energy technologies, such as wind turbines and batteries for electric vehicles. Moreover, they are vital for the construction of a digitalised economy and the aerospace and defence industries. Given the high demand for and the unequal geographical distribution of these CRMs, supply chains experience increasing pressure. It is also important to note that CRMs are subject to conflicting interests: developed economies, which mostly have limited reserves and are reluctant to mine due to the associated environmental risks, seek market access and/or aim to challenge trade-restrictive measures. In contrast, resource-rich economies, which are often developing markets, seek to prevent the exportation of these CRMs to facilitate domestic processing and thus to promote economic development and growth (i.e., industrialisation by means of moving up the value chain).

As observed by one commentator, the existing multilateral framework is, in effect, skewed in favour of resource-hungry countries. More precisely, the WTO legal framework espouses the principle of market access and prohibits WTO Members from adopting certain restrictive measures, such as export bans and quantitative restrictions. One aspect of the EU’s evolving CRM strategy is the practice of contesting export limitations imposed by countries with abundant natural resources before the WTO dispute settlement bodies. One illustrative instance of a successful challenge is the EU’s 2014 case against Chinese export restrictions on specific rare earths.

At the same time, commentators have observed that the WTO legal framework still offers considerable policy flexibility for WTO Members to erect barriers to the exportation of CRMs. For example, the WTO legal framework does not address the issue of export taxes in a comprehensive manner. Furthermore, commentators have identified two significant shortcomings in one aspect of the conventional approach to implementing trade policy, namely the conclusion of free trade agreements (“FTAs”): Firstly, the EU has already nearly fully exhausted the existing global diversification potential due to its extensive network of FTAs. Secondly, the EU’s bilateral trade agenda has experienced notable setbacks, with the failure of the Transatlantic Trade and Investment Partnership (“TTIP”) negotiations marking an important low point.

In light of the limitations of the multilateral framework and in alignment with the Action Plan on Critical Raw Materials and the European Critical Raw Materials Act, the European Commission has adopted a more informal bilateral approach, namely “partnership arrangements”, with the objective of guaranteeing access to CRMs while simultaneously promoting security and sustainable development. Such partnership arrangements, which frequently take the form of MOUs, are often characterised by the (asymmetric[vi]) absence of legally binding obligations. The objectives of these partnerships are to enhance collaboration and investment in extraction facilities in the country with significant mineral wealth. Furthermore, they lay the groundwork for negotiations to dismantle restrictions on investment, enable the resource-rich party’s integration into the value chains of EU companies, and seek to promote regulatory harmonisation.

The recent series of arrangements was initiated by the signing of MOUs on CRMs with Canada and Ukraine in 2021. Subsequently, similar arrangements were concluded with Kazakhstan and Namibia in 2022, and with Argentina, Chile, Zambia and the Democratic Republic of Congo and Greenland in 2023. The most recent MOUs, signed in 2024, establish partnerships with Rwanda, Norway, Uzbekistan, and Australia.

The soft law frameworks established by the EU-US Trade and Technology Council (“TTC”) and the EU-India TTC are additional examples of a more informal approach. These forums are designed to facilitate collaboration on trade- and technology-related matters. Following the 2019 demise of the TTIP, the EU and the US opted for a more “light-touch” approach. The primary objective of the EU-US TTC is to foster deeper trade and investment ties and to prevent the emergence of new technical barriers to trade by coordinating key policies on technology, digital, and supply chains. The outcome of the ministerial meetings is not the establishment of final or binding agreements, but rather the formulation of political commitments.

III. Opportunities & Risks

There are several reasons why recourse to soft law instruments is becoming increasingly common. To begin with, the complexity and technical nature of the issues to be addressed through international treaties have been growing. This results in an increasingly onerous treaty-making process. The use of soft law instruments allows for greater flexibility and adaptability, as well as greater time efficiency, which is particularly beneficial in times of crisis. Furthermore, soft law also enables governments to circumvent the protracted internal ratification process. Moreover, it permits the formation of consensus in instances where the prospect of an international agreement is remote, often due to political, legal, or practical considerations.[vii]

However, the growing reliance on bilateral soft law arrangements presents several potential risks. Firstly, as observed by one commentator, the decentralised nature of bilateral arrangements largely removes the debate on access to CRMs from the multilateral agenda, thereby giving rise to fragmentation. The consequence of exclusive bilateral arrangements between resource-hungry and resource-abundant countries is the near-automatic marginalisation of developing economies with limited resources. Consequently, resource-hungry industrialised economies are advantaged in the transition towards a greener economy, whereas developing countries are left behind.

A second issue is the lack of transparency, which may give rise to concerns in terms of legal certainty and the rule of law. Some partnership agreements on CRMs concluded from 2020 onwards are recorded in a database managed by the International Energy Agency, while others remain unaccounted for. The decentralised approach and the absence of uniform and comprehensive information are likely to add layers of complexity to the already existing “spaghetti bowl”[viii]of FTAs.

Thirdly, as observed by one commentator, these soft law arrangements may give rise to deficiencies in legal protection. To begin with, the commitments to provide investments, to collaborate, and to transfer technology are, at their core, political in nature, with the prerequisites (e.g., funding conditionality) largely determined by the resource-hungry parties. Consequently, the latter may be inclined to renege on their pledge. At the same time, these “soft” commitments can de facto result in preferential treatment being given to certain trading partners and discriminatory treatment of others. The inherent difficulty in challenging soft law frameworks as such before the WTO stems from their ambiguous status, oscillating between the characteristics of FTAs and autonomous measures. It is also evident that there is a certain degree of asymmetry or selectivity in terms of enforceability. It is not feasible to hold the resource-hungry party accountable for its failure to fulfil the political commitments pertaining to the provision of funds and the transfer of technology. Conversely, the resource-abundant party’s restrictions on market access, which are typically not prohibited under the soft law framework, can still be challenged under WTO law.[ix]

Finally, the growing reliance on soft law arrangements presents a potential challenge to the constitutional framework of the EU. Potentially problematic issues may arise regarding the choice of legal basis, the conferral of powers, and the institutional balance. Generally, the purpose and nature of the soft law act in question will determine the specific legal basis that is required for its adoption. Furthermore, soft law arrangements may also have the potential to jeopardise the institutional balance enshrined in Art 13(2) TEU, with the risk of shifting power from the legislative to the executive. From a procedural standpoint, the procedure for concluding soft law arrangements is also shrouded in mystery. The conclusion of international agreements is subject to the rigorous procedure set forth in Art 218 TFEU. However, there is no analogous provision governing the formation of bilateral soft law.

IV. A New Evolutionary Stage?

The EU has traditionally employed a combination of bilateral, multilateral, and unilateral approaches to implementing its trade policy. Depending on the prevailing geoeconomic and geopolitical climate, the EU tends to prioritise one of the three approaches over the others. It can be argued that the EU’s preferences have undergone at least two significant changes in the recent past. In the second half of the 20th century, the EU had focused on multilateralism within the WTO framework. Following the collapse of the Doha Round of multilateral trade negotiations in November 2011, the first significant policy shift occurred. Several WTO Members, including the EU, started to rely more on bilateralism to offset the waning appetite for multilateralism.

Since approximately 2016 at the latest, there have been indications of yet another policy shift towards greater unilateralism. This is evidenced by the enactment of a variety of legal instruments that enable the adoption of unilateral trade measures. This policy shift has been precipitated by a confluence of internal and external factors. Firstly, the EU’s bilateral trade agenda has experienced significant setbacks (e.g., the failed TTIP negotiations). More recent frustrations include the breakdown of trade talks with Australia and Mercosur. Secondly, the EU’s 2021 Trade Policy Review identifies several contemporary challenges tied to economic transformations, including the Green Deal and the Digital Strategy, as well as geopolitical instability.

The recent shift towards unilateralism appears to be accompanied by an increasing informalisation of EU trade and investment law. Since approximately 2021, there has been a notable increase in non-binding cooperation through strategic partnerships and policy dialogues, which are intended to contribute to the pursuit of the EU’s objectives, particularly in the context of “raw materials diplomacy”. The use of soft law arrangements represents a further element of the EU’s policy approach that, in addition to the adoption of unilateral trade measures, gives rise to concerns regarding its compatibility with the rules-based system of the WTO framework.

V. Conclusion

The growing reliance on bilateral soft law arrangements can lead to the emergence of a parallel universe. This parallel universe is characterised by regulatory fragmentation, exclusivity, and complexity. It is also important to note that a greater use of soft law arrangements may work to the disadvantage of developing economies in general, thereby increasing inequality and creating distributional conflicts. There is also a significant challenge to the legitimacy of such arrangements. It is therefore essential that any bilateral or minilateral arrangements complement, rather than undermine, the multilateral regime. In order to ensure that the green transition becomes an equitable and inclusive process, it would be advisable to continue efforts to reform the WTO and to promote plurilateral or multilateral discussions, in particular on access to CRMs. While soft law regimes undoubtedly have some beneficial features, they are not a comprehensive solution in themselves. Rather, they serve as a valuable adjunct and potentially temporary component of, multilateral processes, facilitating, guiding, and complementing them.

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[i] Thomas Verellen and Alexandra Hofer, “The Unilateral Turn in EU Trade and Investment Policy” (2023) 28 European Foreign Affairs Review 1-14, 1.

[ii] Victor Crochet and Weihuan Zhou, “Critical insecurities? The European Union’s trade and investment strategy for a stable supply of minerals for the green transition” (EJIL: Talk! 23 February 2023) < https://www.ejiltalk.org/critical-insecurities-the-european-unions-trade-and-investment-strategy-for-a-stable-supply-of-minerals-for-the-green-transition/> accessed 10 July 2024.

[iii] Andrea Ott, “Informalization of EU Bilateral Instruments: Categorization, Contestation, and Challenges” (2020) 39 YEL 569-601, 569.

[iv] Michael Hahn, “Interesting times: Soft Law in International Economic Governance” in Manjiao Chi, Marc Bungenberg, and Andrea K. Bjorklund (eds), Asian Yearbook of International Economic Law (Springer 2022) 11 (16).

[v] Michael Hahn, “Interesting times: Soft Law in International Economic Governance” in Manjiao Chi, Marc Bungenberg, and Andrea K. Bjorklund (eds), Asian Yearbook of International Economic Law (Springer 2022) 11 (18).

[vi] Asymmetric in the sense that restrictions on market access may still be challenged under the WTO law.

[vii] Michael Hahn, “Interesting times: Soft Law in International Economic Governance” in Manjiao Chi, Marc Bungenberg, and Andrea K. Bjorklund (eds), Asian Yearbook of International Economic Law (Springer 2022) 11 (20 ff).

[viii] The term was coined by Jagdish Bhagwati in his paper “US Trade Policy: The Infatuation with FTAs” (1995) Columbia University Department of Economics Discussion Papers 726, 4 < https://academiccommons.columbia.edu/doi/10.7916/D8CN7BFM> accessed 10 July 2024.

[ix] See already, Michael Hahn, “Interesting times: Soft Law in International Economic Governance” in Manjiao Chi, Marc Bungenberg, and Andrea K. Bjorklund (eds), Asian Yearbook of International Economic Law (Springer 2022) 11 (29 ff) (observing that “soft law may be quite hard, especially for the weaker and smaller partners of an inter-state relationship” and that, in the case of the Chinese Belt-and-Road Initiative, “[t]he results are almost comically one-sided fully mirroring the power differential between the partners [….]”).