Even if we manage to overcome COVID-19, a no-deal Brexit might be the next threat to the auto sector
May 5, 2020
While Europe still grapples with the health, social and economic impacts of the coronavirus, and EU automobile manufacturers battle for survival, the second round of negotiations on the future relationship between the United Kingdom and the European Union took place last week. This is not something we can overlook, because a no-deal Brexit at the end of 2020 risks undoing efforts to get the auto industry back on track.
As soon as the immediate crisis is over, it is in Europe’s interest that the auto sector – which is of great strategic value to our industrial base – not only recovers, but also is revitalised in order for it to make a strong contribution to the EU’s economic recovery, our continent’s global leadership in innovation, as well as the European Green Deal. That is why we at ACEA have developed four guiding principles to re-launch the auto industry in a successful way.
First of all, ACEA believes that we need to define a coordinated strategy to safely re-start vehicle production and the wider supply chain. It is vital that both manufacturers and their suppliers can rapidly and simultaneously get plants up and running again in all countries, otherwise it will be impossible to return to full-scale production. The EU should therefore support a synchronized re-launch of activities and investments right along the supply chain.
Secondly, today’s standstill within the industry, technical services and national authorities is disrupting the approval of new vehicle types, meaning they cannot be sold either. Similarly, now that vehicle registration authorities are closed, customers cannot use their new vehicles. ACEA urges EU member states to unblock the approval and registration of latest-technology vehicles as much as possible within the current constraints.
Thirdly, an EU-wide network of charging and re-fuelling infrastructure will be key to ensuring that the fleet can be renewed in an environmentally-friendly way once the health situation improves. Both national governments and the EU have a key role to play in accelerating investment in this network, which will be instrumental to achieving carbon neutrality by 2050.
And finally, to reach this goal it is also important that fleet renewal schemes are launched to support families and companies that cannot afford a modern clean vehicle due to the economic fallout of COVID-19. In March alone passenger car sales fell by more than 55% across the EU. And with April drawing to a close, we know that EU-wide factory shutdowns have resulted in lost production of at least 2.2 million motor vehicles to date. So, a rapid re-start of the European auto industry will largely rely on fleet renewal programmes to stimulate market demand across all vehicle categories.
Last week, Frans Timmermans, the Commission’s Executive Vice President in charge of the Green Deal, spoke to members of the European Parliament about the idea of helping households to buy a new car. “Why don’t we do this with ecological scrappage schemes, replacing an old and dirty car with a cleaner, or even zero-emission one?” Timmermans said. Indeed, it does look like industry calls for fleet renewal are increasingly echoed in EU circles. Still, these ideas need to be translated into concrete support measures, that in turn also must be implemented by all 27 member states.
I would like to underline that ACEA and its member companies remain firmly committed to the long-term targets and objectives that have been set for climate change mitigation, protection of the environment and, let’s not forget, for road safety. In fact, when it comes to Europe’s ambitions in the long run, I would say that we are on the same page as many of those often critical of our industry, contrary to some of their recent claims. I now feel that support for the environmentally-friendly renewal of Europe’s fleet – including demand stimuli – is growing, also among NGOs.
It is just that we are now fighting to make sure that Europe’s auto industry survives the next few months and is still around in the future to contribute to those long-term ambitions. In the short run, this might require some limited regulatory flexibility to take account of the simple fact that all operations (within the industry but also authorities) have been totally frozen for the past weeks.
However, even if we succeed to turn things around and find a sustainable path to recovery, the next threat to this fragile economic situation is already looming around the corner. The post-Brexit transitional arrangement that has been in place since the UK’s departure from the European Union in January will come to an end on 31 December, this means that there are only eight months left to reach a final deal on the future EU-UK relationship.
So, what does the EU auto industry need from a free trade agreement (FTA) with the United Kingdom?
Well, it is important to understand that EU manufacturers will not have tariff-free access to the UK market (and the other way around) under an FTA if they do not meet the so-called ‘rules of origin’ requirements. Simply put, these conditions specify a minimum threshold of locally-made content in a product (among other things). If the requirements are not met, manufacturers will have to trade under WTO rules, adding import duties of around €6 billion to the annual cost of doing cross-Channel automotive trade.
The reality is that historically automotive supply chains have evolved based on the European single market over the last half century. As a result, manufacturers currently do not distinguish between EU, UK or third-country content in their vehicles. Small and medium-sized suppliers, on the other hand, often just do not have the resources to deal with the complex customs procedures related to this. And finally, our supply chains have also become increasingly more global in recent years, as imports from third countries (not originating from the EU nor the UK) have become more common practice, especially for batteries.
Hence, it is essential to have more liberal rules of origin requirements under the future EU-UK agreement than those seen in standard EU trade deals. Simply because the nature of the relationship between the EU and UK is unique and unprecedented, especially when it comes to the automotive sector. Think, for example, of our highly-integrated supply chains, just-in-time manufacturing, the sheer volume of trade and the geographical proximity of both markets.
Likewise, divergent legislation could become a significant hurdle to trade, requiring manufacturers to adapt or develop new technologies for each market in order to comply with different local requirements. In their common interest, the EU and the UK should thus commit to maintaining alignment across all key automotive legislation, now and in the future.
Any future trade agreement must therefore guarantee zero tariffs, introduce simplified customs requirements, ensure the absence of technical barriers to trade, and provide rules of origin that reflect manufacturing realities. If not, this would not only severely damage the auto industry and Europe’s wider economy, but it could also hamper the roll-out of electric vehicles.
Because the capacity of the EU and the UK to produce batteries for electrified vehicles remains extremely limited, vehicles are mainly being fitted with batteries imported from third countries for the time being. If the battery is not of local origin, and given the high value of the battery in the overall cost of a vehicle, it effectively becomes impossible for a UK- or EU-built vehicle to be eligible for tariff preferences based on the restrictive origin requirements in recent EU FTAs.
Negotiators need to make sure that the future EU-UK trade deal does not limit automobile manufacturers’ ability to bring low- and zero-emission vehicles to the market. Similarly, ACEA encourages the European Union and the UK government to be realistic about the time needed to negotiate a deal and – in order to avoid more uncertainty on top of COVID-19 – to consider extending the transitional arrangement if necessary.
As ACEA we are concerned that the time remaining for a deal is insufficient. The clock is ticking for these complex negotiations, and the UK government insists that there will be no extension of the transition period. Indeed, a no-deal Brexit scenario is still on the table.
Director General of ACEA