Easter has seen a lull in the Brexit negotiations. The principals were all taking an Easter break and behind the scenes officials started internal preparations ahead of the future relationship talks. Although much of the withdrawal agreement and transition period arrangements have been agreed, much remains open, and Ireland in particular will continue to take up much discussion in the coming months.
There is now less than seven months until the planned finalisation date for the withdrawal and transition agreement and the expected annex to it covering the future relationship post-2020. Both sides have aimed at an October finish to talks to allow time for the agreement to be ratified by the 27 remaining EU member states, the UK and the European Parliament.
Given the lack of any significant Brexit developments over Easter this week's Briefing will focus on the Brexit-related issues effecting the UK and European car industry. The automotive industry, which is a major employer in the West Midlands, is one of the most integrated markets in the whole European economy and therefore faces unique challenges around non-tariff barriers to trade, mutual recognition and international trade rules on country of origin.
Next week the European Parliament votes on new rules for vehicle 'type approval' and market surveillance. The EU single market in cars works this way: a car is tested for safety and emissions requirements by an approved testing service, and if it passes the tests it receives a type approval certificate. Once a vehicle is given a type approval certificate it is valid for sale in all other EU countries, this saves on the significant cost and bureaucracy of testing a vehicle 28 times and also helps prevent say an Italian car being blocked for sale in Germany for protectionist reasons. All countries are then supposed to check vehicles (‘market surveillance’) on their roads for non-conformities with their original approved test results.
Previously on-road checks were lax and the testing procedures were not rigorous enough, and some manufacturers, notably Volkswagen, installed devices which led to inaccurate emissions readings from their laboratory tests. The new rules will address that, and ensure more rigorous tests with the commission playing an arbiter role ensuring that all countries meet the rules.
Mutual recognition of type approvals is a key principle of the EU internal market in cars, however Brexit threatens the system in a number of ways which could affect European manufacturers as badly, if not worse, than British ones.
This is because the UK type approval authority, the VCA, issues type approvals not just for UK manufacturers, but also for many European car manufacturers. When the UK leaves the EU, these approvals will no longer be recognised by the EU, meaning that a car with a UK type approval can’t be sold in Germany for example, even if it is built in Germany, by a German manufacturer.
The situation is acute and troublesome for all manufacturers. All face the expense and delay of having to get separate type approvals for the EU and the UK where currently only one would suffice.
Even before the issue of tariffs or other non-tariff barriers are discussed, the mutual recognition of type approvals will be a key issue in the future trade relationship between the EU and the UK.
60% of UK car exports to go the EU market, yet type approval and market surveillance are just one set of a raft of rules and regulations which ensure the integrated “just in time” supply and sales chains function within the European market, i.e. due to cost and space constraints, parts arrive only when they are needed at plants. The lack of tariffs, customs or immigration checks within the single market allow the car industry to be truly pan-European. The parts in a typical car assembled in Solihull cross EU national borders many times before the final car is shipped back to be sold somewhere in Europe. Brexit therefore represents a significant challenge to the way the market currently functions.
Many car standards are now global, reducing the scope for countries to impose non-tariff barriers, yet they still exist, such as different sized crash test dummies in the US or EU, which means that crash tests need to be duplicated on both sides of the Atlantic, or different coloured brake wires, which require separate assembly lines. Yet despite global standards most manufacturers build cars within the market they are sold in, primarily to avoid tariffs which are around 10% for cars and around 8% for most car parts.
The Brexit trade deal is likely to ensure that no tariffs will be placed on cars or car parts, both sides have already signalled their support for a tariff free deal. However it is standards where the biggest problems are likely to emerge, especially if they diverge over time. The UK would like to see full mutual recognition of standards and qualifications. The EU reaction to that is muted, as it would prefer to create harmonised pan-European rules rather than relying on national mutual recognition.
Another area of importance is that regulations on emissions remain consistent between the EU & UK. This will make UK access to the European market much easier.
In the past, the UK has managed to ensure exemptions for small manufacturers from environmental legislation, particularly with regards to fleet emissions limits. This has greatly helped some of the UK’s better known high end manufacturers to compete in the European market.
International trade also represents a significant problem post-Brexit for both the UK and the EU automobile sectors, as it will create two customs entities for the purposes of international trade rules. The foremost concern is country of origin rules, which are the criteria used to determine the economic nationality of a product, which is essential for knowing which trade rules a good needs to follow, on tariffs, quotas etc. There is no global agreement on how to determine which country a product originates from, but there are two common types of rules of origin, preferential and non-preferential, i.e. those for where trade agreements or customs unions are in place and those for where they are not. Whilst the UK is a member of the EU Customs Union goods exported outside the EU are deemed ‘EU content’ for the purposes of trade rules.
As the UK is leaving the Customs Union new rules of origin will have to be developed to identify goods that have come to the UK from the EU and vice versa. This will create problems for the sector, even if the new EU-UK agreement means the 60% of cars made in the UK exported to the EU do not face hurdles.
For the other 40% of UK exports to third countries things are more complicated, with both the UK and EU needing to reach agreements with third countries. For the EU this problem is critical, as many cars currently built in the EU with UK parts will not count as “EU” products under current rules when they are exported to countries such as South Korea, leaving the EU scrambling to negotiate updated rules with countries it already has a trade deal with.
To keep the current European supply chain intact, one approach is for the UK to seek the ‘diagonal cumulation of origin principle’. This would allow goods originating both in the UK and EU to be considered as originating content, which is important given the integrated nature of the EU-UK supply chain. Currently most UK built vehicles contain under 50% UK content, whereas existing EU agreements with third countries require a minimum of 55% EU content for the vehicle to benefit from preferential trade agreements. So without the ‘diagonal cumulation of origin principle’ UK goods would face significant export hurdles. If UK trade negotiators can pull this off it would be a big success, especially considering third countries such as Korea and Canada would have to agree to this, without getting much, if anything, in return.
Two other significant Brexit issues affecting the car industry are the current EU funding regime, which sees a lot of R&D money going into UK industry, and labour mobility, as the car industry requires highly skilled workers, often currently sourced from abroad.
On research funding there is a willingness from both sides to continue collaboration, and other non-EU countries, including Israel participate in EU research programmes.
Labour mobility is more challenging. Both the EU and UK have agreed in the draft withdrawal agreement on the intention to continue mutual recognition of professional qualifications, but future immigration rules remain under consideration. A reasonable case can be made that UK companies have spent years not sufficiently investing in training skilled workers in the UK, and have relied on easily picking up skilled foreign labour. Despite that, the fact remains that in the Brexit process there is too small a window for foreign expert labour needs to be met by UK workers, so a continued preferential and low-bureaucracy scheme for skilled EU workers is likely to be a priority for the UK government.
The automobile sector is unique. It is possibly the most complex and challenging sector in the Brexit talks. It is also one of the most important, given its scale in the UK and symbolic importance as a national industry in many EU member states. Its challenges touch on all areas of Brexit. Some areas, like a tariff free deal, should be easy to agree. Others, such as mutual recognition, customs procedures and rules of origin, are likely to provide many more challenges.