EU Referendum

Brexit: more equals less


Yesterday, the European Parliament Internal Market Committee sought to strengthen EU car "type approval" laws in a bid to prevent a repeat of the VW emissions scandal. This measure, covered by Reuters but so far ignored by the UK legacy media, contrasts with an obsession with tariffs in the UK Brexit debate which is almost reaching epidemic proportions.

Even in the motor car industry, however, the worse case scenario is a ten percent levy on the finished product. By contrast, non-tariff barriers such as this new law could add over 20 percent to the post-Brexit cost of trading between the EU and UK.

That is the experience of the Ford Motor Company, which is already dealing with that level of cost when trying to sell US-built products into the EU, a consequence of the United States operating its own independent type-approval system.

The current system EU system is set out in the 160-page Directive 2007/46/EC, which makes national authorities solely responsible for certifying that a vehicle meets all requirements to be placed on the market and for policing manufacturers' ongoing compliance with EU law.

In the UK, the "approval authority" and a "technical service" for all type approvals to automotive EC Directives and most UN Regulations is the Bristol-based Vehicle Certification Agency. And once this £19 million regulatory business has issued an EC/EU type approval, it is accepted in all other Member States, allowing free trade of UK-built vehicles throughout the EU (and the EEA).

For the type approval arrangement to carry over after Brexit, though, it will take more than the Great Repeal Bill. This cannot replace the EU system or require other Member States to recognise UK approvals. In order to sell vehicles into the EU, we will need to conclude a formal agreement covering common standards, the mutual recognition of conformity assessment, market surveillance, and much else.

If the deal is embedded in a free trade agreement, it could look very similar to that in the EU-Korea Agreement (See Annex 2-C). In that instance, the agreement amounted to the Korean industry adopting, in toto, EU/UNECE standards. The Korean Government also undertook not to change any domestic regulations which might cause divergence, and committed to adopt new regulations whenever new EU/UNECE standards came into force. Additionally, disputes are settled by an arbitration panel, the findings of which are binding.

In effect, this type of agreement entails, as far as the motor industry goes, the UK maintaining the status quo - or something very similar. But, as long as we do this, and settle on a zero-tariff agreement, trade could continue much as it does at the moment.

On the other hand, should Mrs May's "walk away" option be exercised, everything would change. The VCA would no longer be able to issue type approval certificates valid in other Member States. And it would no longer be approved to carry out "conformity of production" checks. Without alternative arrangements being made, existing type approvals would also lapse, assuming that they don't automatically cease to apply on Brexit day.

This would be disastrous for the UK industry as it would be forced to take its products to Member State authorities for type approval, and seek complex and expensive arrangements for production supervision and compliance testing. Given the additional costs and lack of flexibility, this might prove a powerful incentive for our manufacturers to relocate.

This alone is enough to make the "walk away" option a non-starter. The automotive industry is a large part of the UK's manufacturing sector. It accounts for nearly £7 billion turnover and £15.5 billion value added. 160,000 people are employed directly in manufacturing and more than 799,000 across the wider automotive industry.

The industry accounts for nearly 12 percent of total UK export of goods and it invests £2.4 billion each year in automotive research and development. More than 30 manufacturers build more than 70 models of vehicle in the UK supported by around 2,500 component providers and some of the world's most skilled engineers. Damage to the industry could have a significant impact on the entire UK economy.

However, even if the UK Government agreed in principle that it needed to maintain regulatory convergence with the EU, and sought an agreement to that effect, we are not out of the woods. This is where yesterday's European Parliament move fits in.

Following the Volkswagen emissions testing scandal, the European Commission has recognised that its type approval system is deficient in some respects, with weaknesses in market surveillance and enforcement. In January 2016, it published a proposal to replace the current Directive with regulation. The proposal, with Annexes runs to 438 pages.

A crucial facet of the new regulation, as proposed by the Commission, is that it increases the degree of EU supervision, including giving power to the European Commission to carry out spot-checks on approved vehicles. Actual test requirements are to be strengthened as well.

When the Regulation is approved, the Commission will be able to levy fines on Member States if they fail to spot compliance failures. National authorities will also get the power to peer-review each other's decisions, so that approval is no longer the exclusive domain of the authorities in the Member States where the vehicles are built.

This runs totally contrary to the "Brexiteer" ambition to "take back control". The new Regulation strengthens still further EU powers and gives the Commission direct oversight of Member State functions. Any agreement between the EU and the UK could hardly rest on anything less severe.

Coincidentally, prior to the EU referendum, the House of Commons Transport Committee looked at this issue. When the report came out, shortly after the result, it expressed the belief that there was no prospect of the UK removing itself from the international automotive regulatory system as a result of the vote to leave the EU.

It considered that the UK would have to accept treaty obligations on vehicle standards, which would need to be given legislative force. It is desirable, the committee said, that a level playing field is maintained and the UK will have to find ways of influencing the development of UN and EU regulations.

But, it went on: "We cannot imagine a situation in which the UK will not wish to recognise type approvals granted by EU member states or in which approvals by the VCA are not recognised in other parts of the world", adding that: "It is important that the UK continues to play an influential role in the negotiations of vehicle standards at a global level, just as it did before it was a member of the EU and even before the EU existed".

As it stands, though, the UK is still in the EU and, as this Regulation goes through the legislative system, it will have some – albeit limited – influence on its new shape. But it is not going to be able to change the thrust of the law, which is aimed at giving the EU more power.

Ironically, therefore, Mrs May and her negotiating team will be in the position of having to agree a free trade agreement which, in relation to vehicle manufacturing, gives the Commission more power than it had when the UK was an EU Member State. The alternative "walk away" position would be so disastrous that it is scarcely an option.

Another, albeit theoretical, alternative is to align ourselves with the US and harmonise with the (different) system over the Atlantic. Although there is regulatory competition between the EU and the US, this is not a serious option. We are far too integrated into the EU system to be able to make the switch.

That apart, in the US, official tests are carried out by the manufacturer but not witnessed by an independent third-party as they are in the EU. The results are submitted to the Environmental Protection Agency (EPA), which decides whether to accept them or test the vehicle itself. As such, the EU/UNECE testing is regarded as more credible, giving EU vehicles a competitive edge.

In adopting EU law, we will, of course, we able to continue influencing standards through our membership of UNECE but, unless or until this UN agency takes control of the whole vehicle type approval system, the centre of gravity for vehicle regulation will still be Brussels.

With Brexit, therefore, in this case more equals less, with the European Parliament having a greater say than Westminster. But then, vehicle manufacture is a global industry and the UK is not in a position to go it alone. Brexit or not, "take back control" will have to be treated as a relative term if the illusion of sovereignty is to be preserved.