The impact of Brexit on the automotive sector Contents

4Regulatory alignment

22.The key question yet to be resolved by Government on our future relations with the EU is how far the UK wishes to maintain regulatory alignment with the EU. In explaining the term “regulatory alignment”, the Prime Minister has referred to different categories of regulations to be discussed in the negotiations:

There will be some areas where we have the same goals—the same objectives in terms of regulation—but wish to achieve them by different means. There will be other areas where we have the same goals and accept that they should be achieved by the same means.64

In this context, we sought to examine the respective advantages for the automotive sector of regulatory alignment with EU regulations and the alternatives of divergence, or the freedom to diverge.

The Type Approval system

23.At a global level, regulatory standards for the sector are primarily established at both the United Nations and European Union level. The UN Economic Commission for Europe (UNECE) provides the foundation for the harmonisation of global standards, particularly relating to safety.65 There is no single EU body governing the regulation of the automotive industry, but regulations governing the sector are negotiated through internal Commission working groups before being approved by the Council of Ministers. The EU tends to adopt UN safety regulations for the most part, but also takes the lead in setting some standards, for example relating to environmental matters, which other countries, including China, largely follow.66

24.In the EU, access to the market is gained through the Whole Vehicle Type-Approval System, under which an approval body, once authorised by the EU, can test compliance of vehicles with applicable internationals standards before approving them for sale anywhere in the EU. In the UK, the authorised approval body is the Vehicle Certification Agency (VCA). The certification process for a new model normally takes between 6–18 months but discussions between manufacturer and VCA can begin between 3 and 10 years before this formal certification process.67

25.Industry representatives identified potential regulatory barriers as a key concern. The ability to maintain access to the EU market through securing type approvals by the VCA in the UK was vital for some manufacturers.68 The removal of this option was described by Aston Martin, which manufactures only in the UK, as “semi-catastrophic”, as they would have to cease production until they obtained the requisite approvals.69 It is not possible to hold a certification from two authorities, so manufacturers would have to go through the lengthy process of seeking type approval from an authority in an EU country in order to retain access to the single market, at “significant cost” and adverse impact on planning timetables.70 The SMMT also raised concerns over whether existing EU approval authorities would have the capacity to validate all the vehicles previously approved by the VCA and that, without the ability to grant approvals for the single market, the viability of the VCA itself might be at risk.71

26.The European Commission’s negotiating position is that, during the transition period, existing VCA approvals will continue to be valid if granted before March 29 2019 but once outside the EU, UK bodies will not be able to act as “leading authority” for the purposes of authorisations and approvals.72 This implies that the UK VCA will no longer be able to issue type approvals from the date of departure. The European Commission has issued a notice to stakeholders to this effect, subject to any transitional agreement.73 The wording of the Commission’s position paper seems to allow some scope for negotiation and the Government is rightly seeking greater clarity on this vital point.74 We note that the EU has agreed mutual recognition of conformity assessment bodies with third countries such as Switzerland, Canada and the US.75 Ministers have indicated a desire to retain similar arrangements for type approvals, even after the UK has left the EU and to be free to conduct a “race to the top” in terms of standards.76 Companies considering where to manufacture new models in the next 2–5 years will need to decide imminently whether or not to risk staying in the UK and trusting that the Government will secure an outcome which allows future type approvals in the UK to be accepted in the single market.77 We understand that Honda are actively looking at moving type approvals to another EU country; other companies will no doubt be doing the same if current uncertainty continues.

27.Outside the EU, the VCA will be free to set its owns standards for UK-manufactured vehicles. In theory, the UK could seek to negotiate trade deals based on conformity to new UK or alternative standards, which could diverge from those of the EU or UNECE. However, Mike Hawes, Chief Executive Officer of the SMMT, told us firmly that there are “no opportunities from deregulation or divergence”.78 We heard no contrary view. Stephen Booth from the think tank Open Europe recognised the case for staying “very much aligned” in certain sectors, including automotives79 and the Special Trade Commission of the Legatum Institute has suggested maintaining product standard alignment until mutual recognition of conformity assessments have been secured as part of a free trade agreement.80 There is no argument for a separate set of UK standards: the UK market is not big enough to warrant the additional costs to manufacturers of meeting another set of standards, nor does it make sense for the UK to require vehicles manufactured in the single market to require an additional approval by the VCA in the UK.

28.Given that the EU will remain the UK’s main market for the short to medium term at least, and that what is widely regarded as our fastest growth market, China,81 generally aligns itself to many EU regulations, it would be self-defeating to depart from the EU regulatory framework. Alignment is also likely to require compliance with other regulatory regimes relevant to the content of vehicle components, such as the EU chemicals regulatory framework, REACH, end of vehicle life and also intellectual property regulations.82 Such alignment will in any case happen naturally: UK based manufacturers seeking to export to the single market will have to align with EU standards, regardless of any domestic regulatory changes, unless a trade deal allows for a degree of divergence.83

29.On a visit to Honda, we explored the Prime Minister’s suggestion of securing the same regulatory objective by different means: “outcome alignment” rather than “harmonisation”. We did not hear complaints about existing EU regulations, nor any suggestions as to how the UK could benefit from meeting existing EU standards in another way. We have not seen what this might mean for the automotive sector, nor has industry requested any changes, certainly none that may affect access to the market.84 In a global automotive market dominated by large multinationals, regulatory convergence is a desirable trend. It brings down costs, promotes consistent, high standards and therefore benefits consumers. No company wants to make cars to different sets of standards. It makes commercial sense for the UK to remain aligned with standards in the single market, which provides the majority of our trade. The establishment of a new regime for the approval of UK-manufactured vehicles would increase costs and bureaucracy for UK-based companies, and make the UK less attractive as a development and manufacturing base for vehicles. It is not a viable option and we recommend that the Government rule it out.

30.Any regulatory divergence sought by the UK would inevitably have costs in terms of access to the single market.85 The EU is not likely to be prepared to negotiate a deal which allowed the UK to diverge, potentially to gain a competitive advantage, whilst continuing to allow UK manufactured vehicles easy access to the single market.86 We support the Government’s commitment to maintaining existing employment protections and high standards of environmental protection, for example by pursuing low carbon options for vehicles. We also welcome its preference for seeking similar arrangements on type approvals to those currently in place.87 Given this, and the continued need of UK-based manufacturers to have access to European markets, we have not identified any potential benefits from regulatory divergence from the EU, whether in terms of competitiveness or improved access to new overseas markets. There are only costs. We recommend that the Government, in negotiations, prioritise the continuation of existing arrangements for the Vehicle Certification Agency to authorise type approvals for the European single market, whether as part of a Mutual Recognition Agreement or some alternative arrangement. As a negotiating objective, the Government should seek to ensure that it is able to retain regulatory alignment with the EU regulatory framework for the short to medium term.

European Court of Justice jurisdiction

31.It is possible that, in the negotiations, the EU may ask that any such arrangement must include recognition of some involvement of the European Court of Justice (ECJ) in any dispute resolution procedure. The Government has identified only three cases involving automotives that have been lost by the UK in 38 years, none of which resulted in a fine.88 It is acknowledged that ECJ judgements will continue to have some influence. UK companies seeking access to the single market will need to comply with single market rules, and any agencies monitoring compliance with EU standards would need to have regard to European law, but that is not the same as the ECJ determining whether or not there is regulatory divergence for the purposes of a trade deal.89

32.The automotive sector is liable to be subject to a broader arrangement on dispute resolution or divergence management mechanisms, which we have not explored in this inquiry. The Government took a pragmatic approach in the phase 1 negotiations to the continuing involvement, for a limited period, of the ECJ in cases involving citizens’ rights. Given the low risks of adverse impact on the UK in the automotive sector, and the huge benefits of continued market access, we recommend that the Government should adopt a pragmatic approach in relation to any potential continuing ECJ role in the automotive sector.

Maximising influence

33.If the UK is to remain broadly in line with the EU automotive regulatory regime in order to retain full access to the market, it is in our interests for the Government to try to retain as much influence as possible in the development of standards, through the UNECE and the EU. Outside the EU, the UK will still continue to retain a voice at the UNECE, where, according to the Government, the UK is a respected member.90 Similarly, at the EU level, the UK has had a strong voice: it participates in the Working Group on Motor Vehicles, which brings together government, industry and consumer representatives to develop legislative proposals,91 and is one of 12 Member States serving on a group92 that aims to co-ordinate a European approach to addressing technological challenges such as autonomous vehicles.93 Witnesses told us that the UK has been a “rule maker”:94 the Government has, for example, been able to secure reliefs from some environmental and emissions requirements for UK small, luxury car manufacturers,95 and has pushed hard to cut down harmful emissions from vehicles in pursuit of climate change targets.96

34.Outside the EU, it will inevitably be more difficult to secure measures which are primarily aimed at meeting the concerns of UK manufacturers and reduce our capacity to be a leader on evolving technologies, such as electric and autonomous vehicles.97 However, there are a range of options regarding our future relationship which the Government can pursue. These may include some form of observer status or other form of close association, as is being pursued in relation to our relationship with Euratom.98 The CBI has argued that “a close future relationship between UK and EU rules is key to the success of Brexit”.99 In our view, this holds true for the automotive sector, because of the high levels of integration and because the UK, as a research leader, plays an influential role in developing new technologies, which need acceptance in the international regulatory regime.

35.Some have argued that the UK should not allow itself to become a “rule taker”, by sticking close to EU regulations whilst losing influence.100 However, in the automotive sector, where standards are international, every country is a rule taker; some have more influence than others in helping to develop those rules. The UK will certainly lose influence by leaving the formal standard setting processes of the EU, but need not be a silent recipient.

36.Stephen Booth from Open Europe agreed on the case for the UK to remain part of some agencies and groups, and stressed that this was in the interests of the EU as well as the UK.101 Given this, and the size of the UK marketplace, there should be mutual interest in maintaining a close dialogue with EU bodies, post-Brexit. If the UK wants to increase vehicle exports to China, for example, it makes sense to influence their vehicle specifications, which tend to follow those of the EU in many respects. The Government will, of course, continue to pursue UK interests at the UNECE level, where it is one voice among many, but the EU will also continue to be a leading influence on many international standards. The Government has indicated a desire for “our regulators [to] work together within European Agencies”, although without specifying which ones.102 We welcome the ambition of the Government to continue to work with existing European regulatory agencies, which for the automotive sector is the best way to exert influence at a global level. We recommend that, in the negotiations on the withdrawal agreement, the Government seeks to support the interests of the UK automotive industry by maintaining a close association with the EU expert groups that develop regulatory standards.

64 Prime Minister, evidence to the Liaison Committee, 19 December 2017, Q13

65 SMMT (BRA005) and the Automotive sector report, published on Exiting the European Union Committee website

66 SMMT (BRA0005), Q78 [Hawes]

67 SMMT (BRA0005)

68 Honda Motor Europe (BRA0008), Ford Motor Company (BRA0011)

69 Q6 [Wilson]

70 Q6 [Hawes], SMMT (BRA0005) The Automotive Council has estimated that it costs £300,000 - £500,000 to secure additional type approvals in the CETA trade deal with Canada.

71 SMMT (BRA0005)

72 European Commission, Transitional Arrangements in the Withdrawal Agreement, 7 February 2018; see also European Commission slides on regulatory issues.

73 European Commission, Notice to stakeholders, Withdrawal of the United Kingdom and EU rules in the field of type-approval of motor vehicles, 8 February 2018

74 HM Government, Draft Text for Discussion: Implementation Period, 21 February 2018

75 European Commission website, February 2018

76 Prime Minister, speech, Lancaster House, 17 January 2017, Rt Hon David Davis MP, speech in Berlin, 16 November 2017 and speech in Vienna, 20 February 2018

77 SMMT (BRA0005); Q4 [Keating]

79 Qs18 & 63 [Booth] (Oral evidence on Brexit: implications for UK business)

80 Special Trade Commission, Brexit, movement of goods and the supply chain, February 2017

81 See figure 2, para 38.

82 SMMT (BRA0005), Honda Motor Europe (BRA0008), Vauxhall Motors (BRA0016)

83 London Electric Vehicle Company (BRA0001), Ford Motor Company (BRA0010)

84 SMMT (BRA0005)

85 Honda Motors Europe (BRA0008)

86 The Legatum Institute, in The Brexit Inflection Point, has argued that supply chains will re-orientate to a better regulated UK environment, which would be recognised by the European Union for the purposes of trade.

87 Rt Hon David Davis MP, speech in Vienna, 20 February 2018

88 BEIS, Supplementary evidence, Court of Justice BEIS Cases

89 Q18 [Booth]

90 The Automotive sector report, published on Exiting the European Union Committee website

91 See Commission Register of Expert Groups website

92 The GEAR 2030 High Level Group

93 See Commission Register of Expert Groups website

94 SMMT (BRA0005), Enterprise Rent-A-Car (BRA0002), Honda Motor Europe (BRA0008)

95 Q78 [Hawes]. There are different emissions reduction targets for manufacturers selling fewer than 10,000 and between 10,000–300,000 units per annum for example. See also, KPMG, Brexit: the impact on sectors, February 2017

96 Professor David Bailey and Professor Lisa De Propris (BRA0003), SMMT (BRA0005), Construction Equipment Association (BRA0007), the Automotive sector report, published on Exiting the European Union Committee website

97 Enterprise Rent-A-Car (BRA0002), Honda Motor Europe (BRA0008). See speech by Rt Hon David Davis MP, Vienna, 20 February 2018 on an UK lead on autonomous vehicles regulation.

98 HC Deb, Written Statement, 11 January 2018

99 See CBI, The Room where it happens, December 2017

100 Special Trade Commission of the Legatum Institute, The Brexit Inflection Point, November 2017

102 Rt Hon David Davis MP, Berlin speech, 16 November 2017

28 February 2018