Brexit and the Car Industry

Matthew Humphreys, Doug Munro

• Publisher: Routledge
• Year: 2019
• ISBN:
  9780429657054
• Edition: 1
• Topic: Negocios y empresa
• Subtopic: Industria automotriz

One of the principal arguments put forth by Brexit supporters is that by freeing the UK from the stranglehold of EU law, the country will be able to expand its markets through increased bilateral trade and enhance economic growth. This book tests this proposition by reference to the car industry.

Brexit and the Car Industry explores the international position of the car market to argue that the hope of Brexit bringing regulatory freedom is illusory. The book starts by examining the structure of the vehicle industry, how its regulatory framework evolved and how the environment in which it operates is constrained by international standards and the practicalities associated with trading across different regulatory systems. By examining the evolution of vehicle regulations, particularly related to the environment, it argues that a UK independent path is not only impractical but self-defeating. The private car market is structured in such a way that is global, and meeting the various international regulatory requirements is a price of entry requirement which no bilateral trade agreements are likely to alter. The book also considers changing environment affecting the car industry in the context of an aspiration for regulatory freedom. The response to climate change and the impact of technological change – specifically driverless vehicles – are big questions for the industry and both are examined in this book. The book also considers the emergence of large metropolitan areas imposing their own use and environmental requirements operating separately to national standards. The future of electric and autonomous vehicles combined with the complexity of the regulatory environment with both international and localised pollution measures make the UK navigating a safe independent path through with a viable car industry highly questionable.

Providing a comprehensive review of the relationship between regulatory frameworks and free trading models, this book is aimed at industry and legal professionals. It will also be of interest to students studying market behaviour, free trade law and the free movement of goods, and environmental protection.

1    Introduction

Industry and nations, or national identities, have a range of associations but it is clear that for some industries the association of brand and nation is close. Perhaps the classic example is the national airline which typifies an industry, even if these carriers struggle with low-cost hauliers in an intensively competitive environment. The airline business is still populated by players including Air France, British Airways, Finnair and Austrian Airways (now in reality a subsidiary of the German Lufthansa). Raguraman noted how the separation of Singapore from the federation of Malaysia inexorably led to the splitting of Malaysian and Singapore Airways into two new national carriers, with different underpinning objectives reflecting the different political priorities of the new states (Raguraman, 1997). Each new state felt it was important to have a national airline. For the car industry, the branding of Jaguar, Mercedes-Benz, Citroen, Fiat and perhaps slightly differently, Lada and Trabant as national icons is difficult to disentangle from assessments of quality or real differences between the products. There was something particularly ‘British’ both in aspiration and in markers of quality about Jaguar products, whereas the Trabant has about as many advocates today as its long defunct DDR – East German – home.

The campaign to separate the UK from the EU and/or the European market, which culminated in the referendum in 2016 and the subsequent decisions to leave, had many drivers but there was an underpinning aspiration for the rebirth of national industries. As the progress with the leavers’ dream fulfilment has proven more tortuous than expected, or suggested at the time of the campaign, the sense of missed opportunity is perhaps one thing that genuinely unites those in both leave and remain camps.

While the campaign to leave the EU was not necessarily much to do with the car industry, it is also entirely to do with it. The motor industry experience of Brexit well expresses both the complex arguments for national identity and the expectation that separateness is needed to express that identity. It also addresses the complex question of what defines a British industry in a global market with all its supply chain dynamics. Perhaps most clearly unresolved throughout this protracted debate is the question of how an industry can flourish and is expressed as well by the motor industry in the time of Brexit as any other industry. How the UK car industry will fare with Brexit is the focus of this book.

At this point in time, it is perilous to forecast the outcome of Brexit; there are simply too many unknowns. The European Union (Notification of Withdrawal) Act 2017 triggered notification under the EU treaties for the UK to leave the EU on 29 March 2019. This has subsequently, by agreement with the European Council, been extended twice and the new envisaged day for the UK’s departure is 31 October 2019 although an earlier date is possible if the withdrawal agreement passes through the UK Parliament. At the same time, after two reschedules, further rescheduling is clearly possible. So there is a deadline but there are certain to be many twists and turns both before and after that date. Fortunately (or not) for the motor vehicle industry in the UK, many of the outcomes are likely to occur whether there is Brexit or not. Any plausible Brexit scenario will only exacerbate and accelerate those outcomes. The main reason for this is that the motor vehicle industry globally is entering, or perhaps already in, its greatest transition since the invention of the “horseless carriage”. A combination of factors including battery innovations for electric cars and increasing enhancements to vehicle automation combined with greater concern for congestion and municipal environmental conditions are leading to much rethinking of the role of vehicles in society.

The debate around Brexit is happening at the same time as, but with remarkably little consideration of, intensified debate about climate change and environmental protection. The global threat of environmental degradation is generally accepted but there are maverick outliers who believe the threat is limited. There is widespread agreement that the response to climate change must be both international and coordinated, even if the specifics of what needs to be done to minimise environmental harm are difficult to agree (McGrath, 2018; UNFCCC, 2015). Depending then on the extent to which it is agreed that environmental threats are urgent, there is something quite jarring and inconsistent about both seeking international collaboration and national separation. It makes sense to back remaining in the EU and seeing the urgency of collective international responses to climate change, and it makes sense to reject both the need for the EU on Brexit terms and the need for international collaboration for environmental reasons. But a middle ground of supporting international collaboration at the same time as promoting an independent UK trade policy, or whatever other motivation for Brexit, seeking to promote national distinctiveness and the problems with such distinctiveness simultaneously appears problematic.

Environmental standards and their interface with trading rules present an interesting motor industry-related issue. In Chapter 6, we examine the varying environmental requirements that are imposed on vehicle manufacturers. The regulations in each market are fundamentally price of entry requirements. The requirements essentially fall into two groups – one set determined by the US and the second through the UN, although largely driven by the EU. Today the UK has a voice in those requirements through its membership in the EU. Post-Brexit, the UK will be required to follow whatever rules are determined by the larger players yet will have no role in shaping the outcome. This will become increasingly important as the rules evolve for electric vehicles. As a specific example, in 2020 the EU has stringent CO₂ targets coming into force. To assist manufacturers in their transition to electric vehicles a system of “super credits” will allow EU manufacturers to offset production of vehicles that fail to meet the targets. Unless something evolves in the Brexit negotiations that is not presently in place, UK vehicles will not count towards the targets, thus meaning that manufacturers will have an incentive to shift production out of the UK (Campbell, 2018).

States are not homogenous entities within which the motor industry can operate independently. Increasingly complex regulatory environments affect the manufacture and use of vehicles: the ability to drive a car of a certain product standard does not necessarily apply uniformly across a whole state with areas applying emissions standards or other licensing rules such as a congestion charge. Diesel vehicles are perfectly legal in all parts of the UK (at least as of today), but they cannot necessarily be parked everywhere, and manufacturers seek to adjust their product standards to meet both broad market standards and localised ones.

The invention of the electric vehicle preceded the internal combustion engine, and automated vehicles have been promised for the last half century with neither concept gaining major traction, but in the words of the late MIT economist Rudiger Dornbusch “…things take longer to happen than you think they will, and then they happen faster than you thought they could” (Summers, 2011). The vehicle industry may be at that tipping point. It just happens that this is transpiring as the Brexit process is unfolding.

One of the principal arguments put forth by Brexit supporters is that by freeing the UK from the stranglehold of EU law, the country will be able to expand its markets through increased bilateral trade and enhance economic growth. This manuscript tests this proposition by reference to the vehicle industry. We examine the UK car market in its legal and global market context and argue that the promise of regulatory freedom may be real but will have little practical effect. To make the argument we:

• Summarise what the UK seems to want to achieve in Brexit;
• Survey the global vehicle industry and the UK’s role in it;
• Examine the legal environment in which the vehicle industry operates;
• Address the ability of the UK vehicle industry to disentangle itself from the EU environmental regulatory framework;
• Review the relationship between regulatory frameworks and free trading models;
• Examine upcoming disruptors to the vehicle industry that will impact the UK regardless of Brexit;
• Explore the emergence of regulations such as congestion charges and air quality restrictions, operating at a localised or city-specific level that affect the use of cars independent of national controls; and
• Consider the possible outcome if Brexit proves to be a disaster for the UK car industry.

Through examining these issues we conclude that a UK independent path is not only impractical but self-defeating. We will review the composition of the global light vehicle market and demonstrate that meeting the various international regulatory requirements is indeed a price of entry requirement which bilateral trade agreements are unlikely to alter. We address the UK role in the global vehicle industry and argue that the role it plays in the economy pales in comparison to other industries that seem to be receiving less attention in the Brexit discussions. The book will also consider large metropolitan areas beginning to impose their own use and environmental requirements, which foreshadows the future of electric and autonomous vehicles, and is unlikely to benefit independent UK manufacturing. Finally, we take a look at what the impact on the UK economy would be if it were to lose its vehicle manufacturing base.

If, ultimately, the aspiration for a reinvigorated national car industry is unlikely to be delivered by Brexit, the industry’s prospects can still be damaged by it. The argument is not just about Brexit but also considers the role of regulation in the car industry in a global market. The authors hope that this reference may prove to be of use to researchers in both legal and industry studies. Because of the limitless permutations of how Brexit may play out the specific outcomes may be modified and deferred, but the direction of the forces impacting change is almost certainly destined to occur.

References

1. Campbell. (2018). No-deal Brexit threatens electric car market. Financial Times. Retrieved from https://www.ft.com/content/c45cd3ae-b76a-11e8-bbc3-ccd7de085ffe
2. McGrath, M. (2018). Katowice: COP24 Climate change deal to bring pact to life [Press release]. Retrieved from https://www.bbc.com/news/science-environment-46582025
3. Raguraman, K. (1997). Airlines as instruments for nation building and national identity: case study of Malaysia and Singapore. Journal of Transport Geography, 5(4). Retrieved from https://www-sciencedirect-com.ezproxy01.rhul.ac.uk/science/article/pii/S0966692397000215.
4. Summers, L. (2011). The world must insist that Europe act. Financial Times. Retrieved from https://www.ft.com/content/5eaa83dc-dfca-11e0-b1db-00144feabdc0#axzz1YMpf3Yim
5. UNFCCC. (2015). Paris Agreement. United Nations. Retrieved from https://unfccc.int/files/essential_background/convention/application/pdf/english_paris_agreement.pdf

2 Draft Brexit agreement proposals

The UK government has interpreted the referendum result in 2016 as an instruction from the British people, to itself and to other state institutions, to organise the departure of the UK from the EU. It put through Parliament the European Union (Notification of Withdrawal) Act 2017, empowering the Prime Minister to start the departure process, and the government has treated the Brexit process as requiring first a formal withdrawal and subsequently agreements around future relationships between the UK and the EU. Previous expectations around being about to negotiate both the departure and the new relationship together and at the same time foundered (Carmona, Cîrlig, & Sgueo, 2018).

One of the challenges faced by the UK government in taking this interpretation of the referendum result has been that in seeking to fulfil this instruction from the people, the expectations about what is meant by departure and what future relationship between the UK and the EU is desired by the British people were not made clear in that referendum. The government sought to flesh out both its understanding of the popular will and its hopes for what can be realistically agreed in the July 2018 White Paper entitled The future relationship between the United Kingdom and the European Union (UK Parliament, 2018).

This chapter considers the White Paper and sets out the principles that the UK government is seeking to apply in the withdrawal agreement and in negotiations as to the future relationship. The White Paper specifically refers to the motor vehicle industry although the reference is restricted to an acceptance of EU testing procedures for vehicles to ensure consistency of standards. We then consider the EU response to the White Paper and note the uncertain situation as to whether the future relationship will be as envisaged here. It is argued that the White Paper focus does not address the issues faced by the vehicle industry and further that the great uncertainty about the future relationship between the UK and the EU is itself an additional problem for the industry in the UK.

The White Paper

The White Paper posits that the UK wishes to develop two core partnerships: an economic partnership and a security partnership. These will stand alongside a hodgepodge of other collaborations referred to as “cross-cutting” cooperation that covers data, science, culture, education, defence, fishing and other items. The essence of the economic partnership is establishment by the UK and the EU of a free trade area for goods (UK Parliament, 2018, p. 13). This free trade area based on a phased implementation of a new Facilitated Customs Arrangement (FCA) is intended to provide “the most frictionless trade possible in goods between the UK and the EU” (UK Parliament, 2018, p. 16). This concept is accompanied by extensive suggestions for simplifying customs processes. It is clear that the UK government understands the risks of losing this particular freedom it enjoyed as part of the EU:

Trade is essential for growth and prosperity. It stimulates greater business efficiency and higher productivity, sharing knowledge and innovation across the globe. Trade boosts jobs, raises living standards and provides a foundation for stronger and more prosperous communities. It ensures more people can access a wider choice of goods at lower cost, making household incomes go further.

(UK Parliament, 2018, p. 47)

The government also seeks arrangement for services and digital that are not referred to as an FCA, although the language describing the concept closely mirrors the desired outcome for trade in goods. The proposal states that “The Government wants to minimise new barriers to trade between the UK and the EU” even as it recognises that there will be more barriers than is the case today (UK Parliament, 2018, p. 8). The difference appears to be that the government is seeking no tariffs on any goods, but “wants to chart its own path” when it comes to movement of services and data.

In tandem with the desired free movement of goods and services, the government also seeks the ability to move at least some people freely between the UK and the EU. There is recognition that integrated supply chains are at risk unless bu...