On 19 March 2018, the House of Commons Business, Energy and Industrial Strategy Committee published a report on the issues it sees the UK aerospace sector facing as a result of Brexit, as well as its suggestions to the Government as to the most beneficial type of withdrawal.
Recognising that the sector is highly trade-orientated and globalised, with major firms benefiting from economies of scale and deeply integrated cross-border supply chains, the Committee's prevailing conclusion was that growth opportunities for this sector following Brexit should be founded on a harmonised global regulatory system, rather than divergence from EU rules.
1. Trading with the EU and outside the EU after Brexit
The Committee strongly recommended that the Government seek "as near frictionless trade as possible between the EU for the aerospace sector after Brexit, with the minimum amount of customs and procedures".
The report notes that the EU accounts for around half of the UK's exports of aircraft and spacecraft1. Whilst the UK's membership of the WTO Agreement on Trade in Civil Aircraft ("WTO Agreement") eliminates tariffs on aircraft and most aircraft components2, there are significant industry concerns about the impact that increased UK-EU border security checks could have on the industry's standard just-in-time supply chain processes and on UK businesses in an industry where they compete not just on price but on speed of delivery. ADS, the UK aerospace trade organisation, have suggested that increased checks could add £1.5 billion a year of costs to the sector and tempt businesses to move facilities to mainland Europe.
Outside of Europe, the WTO Agreement means the UK aerospace sector has little to gain from making free trade deals on tariff reduction. It was argued that the industry's "route to market is very much facilitated by regulatory regimes. Without that … [it does] not have a route into global markets, whether Europe, US or China, because of the mutual recognition arrangement"3. The Committee believes the Government's main priority here should therefore be to remain part of the European Aviation Safety Agency ("EASA", see further below), secure the roll-over of the EASA's existing Bilateral Aviation Safety Agreements4, which enable recognition of one another's certification, and participate in the corresponding arrangements currently being negotiated in China and Japan.
2. Regulatory Alignment
The Committee quotes the UK Trade Policy Observatory's view that diverging from EASA's regulatory regime would be "utterly self-defeating". It is a global industry that will want to avoid multiple certification regimes. The Prime Minister has commented she wishes to explore the terms on which the UK can stay within EASA5, and the Committee calls for the UK and the EU27 to confirm the UK's continued involvement as soon as possible.
The Committee notes that non-EU countries are already allowed to participate in EASA and broadly have the same privileges and obligations, save for voting rights on the EASA management board. The Committee recommends that the UK seek a deal to retain its EASA voting rights, but notes that even without such rights, the UK will still have the ability to influence EASA due to its expertise. For example, the UK provides a quarter of all safety data and around two-thirds of all of EASA's safety rule making6.
The political issue of the European Court of Justice's ("ECJ") jurisdiction also comes into play here, with the ECJ having ultimate jurisdiction over EASA. Despite this jurisdiction, the court is yet to issue a ruling on an EASA decision and the Committee endorses the Prime Minister's position that if "the UK should continue to participate in an EU agency the UK would have to respect the remit of the ECJ in that regard"7, concluding that maintaining ECJ jurisdiction here is preferable to losing all influence on EASA.
3. Skills and R&D
Mirroring the comments made across numerous sectors, the aerospace sector is concerned to ensure that skilled workers can move between jurisdictions flexibly, quickly and with a minimum level of administration, and the Committee advises that the Government ensure this remains the case. Airbus informed the Committee that its employees conduct around 80,000 business trips per year between the UK and the rest of Europe, it has around 1,300 UK employees working elsewhere in the EU, and around 600 EU27 employees in the UK. The Aerospace Technology Institute added that "EU nationals working and studying in the UK… play a large role in UK aerospace R&D. Losing or restricting access to skills would be detrimental to the UK's position as a technology leader". The ONS reported that the UK aerospace sector spent £1.9bn in this area in 2016.
Staying with R&D, the UK aerospace sector is a significant beneficiary of EU funding in this area (through participation in the Horizon 2020 programme and in the Clean Sky Joint Understanding). Notwithstanding this, the Committee encourages the Government to prioritise influence over funding. It argues that the UK aerospace sector's influence can best be asserted by remaining involved in these projects, and thereby maintain the key cross border opportunities they allow for collaboration and specialisation between industry and academia across EU countries.
4. Certainty and Clarity
Last but not least, the report touches on the significant issues arising from the lack of certainty and clarity around Brexit and pleads for firm agreement on the transition or implementation period after March 2019, to be followed by clarity on the future EU-UK relationship to allow investment with confidence.
The Committee received evidence that long lead times and the life span of aerospace investments means that lack of certainty and clarity is already affecting decisions on investments and the location of capacity and supply chains. This has resulted in the UK being excluded from bidding on certain projects, including the Galileo satellite project8 and may harm the UK's ability to secure work under the Horizon 2020 Work Programme for 20189.
We would imagine that the Committee would have been heartened by the news, announced on the same day as the release of their report, that the UK and the EU have substantively agreed to the transitional arrangements within the draft Withdrawal Agreement. In doing so, the parties have agreed that EU law will continue to apply to the UK from Brexit day (29 March 2019) up until 31 December 2020. However, as with pretty much all things Brexit, nothing is yet formally confirmed because this agreement is subject to the entirety of the Withdrawal Agreement being agreed in due course.
The Committee's full report can be accessed here.
For further information, articles and briefings on the effect of Brexit on the aerospace sector and beyond please visit out Brexit hub.
1 HMRC, UK Trade Info, 28 February 2018
2 the report does recommend that the UK integrates the relevant articles of the EU's Inward Processing Regime to eliminate tariffs on the raw materials and unfinished components not covered by the WTO Agreement.
3 General Aviation Manufacturers' Association
4 with United States, Canada and Brazil
5 Mansion House speech on 2 March 2018
7 Mansion House speech on 2 March 2018
8 Simon Henley, Royal Aeronautical Society
9 Aerospace Technology Institute