The UK exits the EU on 31st January 2020. By virtue of the transition period in the Withdrawal Agreement, EU law will continue to apply in and in relation to the UK only until the 31st December 2020. The EU Treaties, EU free movement rights and the general principles of EU law will then cease to apply in relation to the UK, and prior EU regulations will only continue to apply in domestic law (by virtue of the European Union (Withdrawal) Act 2018) insofar as they are not modified or revoked by regulations under that 2018 Act.
A crucial provision of the Withdrawal Agreement prohibits any extension to the transition period beyond 31 December 2020 being sought after 30 June 2020, with only a single extension of a maximum of 2 years being permitted in any event before then. The passing of the Withdrawal Agreement into law will therefore start the clock running on the hard deadline for the UK to agree a trade deal with the EU.
The position under the transition period
The transition period will maintain the legal status quo until 31 December 2020 in order to prevent any legal 'black holes' arising following the UK's formal exit from the EU on 31 January 2020.
This will mean that key regulatory rules will continue to apply during the transition period. Of particular relevance to the automotive industry is the Whole Vehicle Type Approval process, under which a single approved body (in the UK's case, the Vehicle Certification Authority) tests a vehicle's compliance with international standards and, if compliant, approves it for sale throughout the EU. This means that vehicles manufactured in the UK throughout the transition period can continue to be granted EU wide approvals and be cleared for sale into the EU market.
The regulatory coherence imposed by this process allows for a more seamless manufacturing and trading experience, with only one set of standards to be complied with in order to allow access to the entirety of the EU market. A key part of the discussions with the EU will be whether the EU will accept the UK as a certifying agency and how hard the government is likely to push for this. There are precedents for this as the EU has mutual conformity arrangements with other non- EU countries including Switzerland, Canada and the US. If such a process is not approved this could result in manufacturers having to separately seek approval from an authority in an EU country which would result in significant extra cost and potential delay to planning and development of new vehicles.. At 2.3 million cars, the UK market is significant and may represent a commercial opportunity that is sizeable enough to warrant compliance with an additional set of standards . However, some manufacturers may choose to avoid the extra costs associated with an additional compliance regime and concentrate instead on the 15 million strong EU car market, possibly heralding the relocation of a number of key players from the UK to the EU.
There are a number of other key areas where alignment with European regulations will be beneficial to the UK automotive market. These include REACH which regulates the use of chemicals which are relevant to vehicle components and the General Product Safety directive as well as a number of more specific regulations relevant to individual components.
Pressure points for the automotive industry
With the transition period offering several months of 'business as usual' whilst all existing EU legislation is retained as part of UK domestic law, the focus will shift to the key points of the trade agreement to be negotiated.
The UK automotive industry has been near-unanimous in expressing the importance of a simplified customs regime, regulatory unification and tariff-free trade for the future of the industry. The political declaration published by the Government on 19 October 2019 follows a similar vein, stating that the UK and EU are keen to create 'a free trade area, combining deep regulatory and customs cooperation, underpinned by provisions ensuring a level playing field for open and fair competition' and that through a Free Trade Agreement, the parties will ensure 'no tariffs, fees, charges or quantitative restrictions across all sectors with appropriate and modern accompanying rules of origin' . However, this pledge of mutuality is juxtaposed against recent Government statements as to the importance of maintaining regulatory autonomy and the freedom to develop new trade agreements with other countries around the world. It remains to be seen how a balance between the two can be struck.
Of major importance to the automotive industry is the need to retain frictionless trade. A modern car may have in excess of 30,000 different components, sourced throughout the supply chain and across a number of markets, with approximately 1100 EU trucks delivering £35m worth of components from the EU on a daily basis . Evidently the introduction of import and export formalities would have an enormous impact on UK-based automotive manufacturers given both their reliance on non-UK suppliers and the fact that the EU is the UK's biggest export market. The SMMT estimates that the introduction of import and export tariffs under the WTO regime would cost £4.5 billion annually . With the industry's annual research and development budget totalling approximately £3.5 billion, this would create a £1 billion shortfall in an industry characterised by very tight profit margins. This is considered a worst-case scenario and the hope is that any negotiated deal would represent a significant improvement on this position, but it serves to highlight the vast impact of these details of the trade agreement on the sector.
Access to talent within the automotive industry is also an issue of great significance. The SMMT estimates that 10% of people employed in the UK automotive manufacturing sector are from elsewhere in the EU . With the rights of UK-resident EU citizens currently proving one of the more contentious aspects of the Withdrawal Bill, the possibility of this part of the workforce being impacted is noteworthy. It has been suggested that the combination of workforce restrictions, increased costs of manufacture and falling demand due to tariffs and regulatory inconsistency, and global firms shifting production elsewhere may result in the production of 1 million fewer cars a year, at a loss to the UK economy of over £40 billion .
As explored in our last look at this topic, there are nonetheless a number of areas of opportunity for UK automotive manufacturers and traders, such as the growth of the UK component market to replace EU suppliers, and the development of trade agreements with major global markets including China and the USA.
More recently, in light of the Department for Transport's announcement that it will pursue an approach to emissions reductions that is 'at least as ambitious as the current arrangements' under the EU, an area for focus may be the continued development and adoption of cleaner vehicles. The current regime means that the UK's average emission level is offset by those sold in other EU countries – however this will not continue to be the case after the end of the transition period. In order to reduce the present average emissions figure of 127.9g/km to the targeted 95g/km or less, the UK will need to move towards new technologies that represent an innovation opportunity for players in the sector. This may be an opportunity for the automotive sector.
In conclusion, it appears that whilst the pieces of the Brexit jigsaw puzzle are slowly falling together and although the risk of "no deal" has receded (although not totally gone away)much remains to be decided and the inherent uncertainty that has accompanied the negotiation process to date has not been alleviated. As we enter the transition period, the challenge will be to secure a trade deal that best acknowledges the positives of the single market whilst honouring the wish for greater autonomy.