Ninth Special Report

On 1 March 2018, the Business, Energy and Industrial Strategy Committee published its Fifth Report of Session 2017–19, on the impact of Brexit on the automotive sector. The response from the Government was received on 30 April 2018. The response is appended below.

In the Government response, the Committee’s recommendations appear in bold text and the Government’s responses are in plain text.

Appendix: Government Response

Introduction

1.The Government welcomes the Committee’s report: ‘the impact of Brexit on the automotive sector’. The report and its recommendations are a valuable contribution to the overall programme of work that the Government is delivering to support the UK automotive sector and to prepare for the UK’s withdrawal from the European Union (EU).

2.Automotive manufacturing is a key industry for the UK economy and a real success story of recent decades. The UK has grown to become the third largest European car producer; in 2017, we produced 1.67 million cars and 2.72 million engines.1 Industrial Strategy is key to the Government’s long-standing programme of support to maintain and grow the industry’s competitiveness. This includes the Automotive Sector Deal, published in January, which is the first in a rolling series of intended deals with the sector.

3.The Deal sets out a joint strategic vision of how government and industry will continue to work together to shape our response to the Grand Challenges articulated in the Industrial Strategy, such as Clean Growth and the Future of Mobility. It secures joint investment and long-term commitments to develop world leading battery technologies, position the UK as the location of choice for the development and deployment of connected and autonomous vehicle technologies, and strengthen the supply chain to make it internationally competitive.

4.Since the UK’s vote to leave the EU, government has engaged with key stakeholders across the automotive sector. This has included Ministerial engagement with key business leaders and working level discussions on particular technical issues. All of this has informed and continues to inform government thinking. The written evidence submitted by the Government to the Committee’s inquiry drew on this programme of engagement. Our response to this report builds on that submission.

5.Since the Committee’s report was published there have been two key developments in the UK’s progress towards EU exit. First, the Prime Minister set out the Government’s vision2 for the future economic partnership between the United Kingdom and the EU. Second, the UK and EU negotiating teams reached agreement on the terms of an implementation period. This period will start on 30 March 2019 and last until 31 December 2020 and be based on the existing structure of EU rules and regulations. Market access will continue on current terms. We are pleased that both of these developments have helped to provide certainty and clarity for businesses. They are also relevant to the recommendations made in the Committee’s report, which we address below.

Impact of tariff barriers

Whilst a “no deal” scenario would certainly be damaging to the automotive sector in many EU countries, especially Germany, the impact on the UK automotive sector would be far greater than that on each of the remaining EU Member States. We recommend that the Government should not contemplate this outcome in its approach to negotiations and that it should prioritise securing a customs arrangement which removes the risks of tariffs being imposed on vehicles produced in the UK. (Paragraph 14)

6.The Government has always been confident that the UK will get a good deal. Agreement reached at the December European Council opened a new phase in the negotiations. Since then, we have made rapid progress on the wider Withdrawal Agreement. Following the agreement of an implementation period at the March European Council, that good deal is clearer and closer than ever.

7.We recognise that the UK automotive industry is concerned about the imposition of tariffs on vehicles produced in the UK. The Government is seeking a bold and ambitious economic partnership with the EU that is of greater scope and ambition than any such existing agreement. We want to have the greatest possible tariff- and barrier-free trade with our European neighbours, as well as to negotiate our own trade agreements around the world.

8.However, as a responsible Government we continue to plan for all scenarios, but with increased confidence that we will leave with a deal and that a ‘no deal’ scenario in March 2019 is significantly less likely.

Non-tariff barriers

Longer journey times, with added risk of delay, plus extra customs bureaucracy would make the UK automotive sector less efficient and act as a disincentive to international companies looking for a base to manufacture cars for the European market. In a highly competitive market, small margins can make a significant impact on investment decisions. If the Government wishes to uphold the UK’s reputation as a good location for volume vehicle manufacturing, consistent with its Industrial Strategy, we recommend that it should in its negotiations on withdrawal place a high premium on securing frictionless trade for the automotive sector. (Paragraph 21)

9.As the Committee notes, the Industrial Strategy will be key to maintaining and growing the automotive industry in this country. The first Automotive Sector Deal will help ensure that the UK industry is well placed to tackle the transformative challenges that will take place over the next 10-years.

10.The Government has been clear that we want to ensure UK companies have the maximum freedom to trade with and operate within European markets. The Government’s ‘Future customs arrangements - future partnership paper’3 sets out our aspirations for the UK’s customs relationship with the EU. In assessing the options, the government will be guided by what delivers the greatest economic advantage to the UK and by our strategic objectives:

• To keep trade with the EU as frictionless as possible;
• To avoid a ‘hard border’ between Ireland and Northern Ireland;
• To establish an independent international trade policy.

11.The Government has considered two broad approaches to a future customs relationship with the EU that would facilitate the UK’s objectives:

• A highly streamlined customs arrangement between the UK and the EU, streamlining and simplifying requirements, leaving as few additional requirements on UK-EU trade as possible. This would aim to: continue some of the existing agreements between the UK and the EU; put in place new negotiated and unilateral facilitations to reduce and remove barriers to trade; and implement technology-based solutions to make it easier to comply with customs procedures;
• A new customs partnership with the EU, aligning our approach to the customs border in a way that removes the need for a UK-EU customs border. One potential approach would involve the UK mirroring the EU’s requirements for imports from the rest of the world where their final destination is the EU.

Regulatory alignment

In a global automotive market dominated by large multinationals, regulatory convergence is a desirable trend. It brings down costs, promotes consistent, high standards and therefore benefits consumers. No company wants to make cars to different sets of standards. It makes commercial sense for the UK to remain aligned with standards in the single market, which provides the majority of our trade. The establishment of a new regime for the approval of UK-manufactured vehicles would increase costs and bureaucracy for UK-based companies, and make the UK less attractive as a development and manufacturing base for vehicles. It is not a viable option and we recommend that the Government rule it out. (Paragraph 29)

We support the Government’s commitment to maintaining existing employment protections and high standards of environmental protection, for example by pursuing low carbon options for vehicles. We also welcome its preference for seeking similar arrangements on type approvals to those currently in place. Given this, and the continued need of UK-based manufacturers to have access to European markets, we have not identified any potential benefits from regulatory divergence from the EU, whether in terms of competitiveness or improved access to new overseas markets. There are only costs. We recommend that the Government, in negotiations, prioritise the continuation of existing arrangements for the Vehicle Certification Agency to authorise type approvals for the European single market, whether as part of a Mutual Recognition Agreement or some alternative arrangement. As a negotiating objective, the Government should seek to ensure that it is able to retain regulatory alignment with the EU regulatory framework for the short to medium term. (Paragraph 30)

12.During the implementation period, market access will continue on current terms. This means that businesses will be able to continue to undertake compliance activity in the UK or overseas, which is overseen by UK-based authorities, such as the Vehicle Certification Agency (VCA) in case of type approval. It also follows that VCA issued approvals will continue to be valid in the EU during the implementation period. The status of VCA issued EC approvals following the implementation period remains subject to future relationship negotiations; however, we continue to be confident of reaching a good deal, one that allows the automotive industry to continue to thrive.

13.Both the UK and the EU share a strong commercial interest in preserving integrated supply chains, including those that support just-in-time production across the automotive sector. A fundamental principle of the future economic partnership is that the UK-EU border should be as frictionless as possible. Part of achieving this will be through trusting each other’s rules after we leave the Single Market and after the implementation period. The Prime Minister has set out how we could do this through a comprehensive system of mutual recognition to ensure that, as now, products only need to undergo one series of approvals in one country. This will include vehicle standards. This can be achieved via a commitment to ensure that the relevant UK regulatory standards remain as high as the EU’s which, in practice, means that UK and EU regulatory standards will remain substantially similar in the future.

14.Our default is that UK law may not necessarily be identical to EU law but should achieve the same outcomes. In some cases, parliament might choose to pass an identical law. The Parliament of the day may decide not to achieve the same outcomes as EU law. But if it does so, it will be in the knowledge that if our regulatory standards are not substantially similar, there may be consequences for our market access.

We recommend that the Government should adopt a pragmatic approach in relation to any potential continuing ECJ role in the automotive sector. (Paragraph 32)

15.In leaving the EU, we will bring about an end to the direct jurisdiction of the Court of Justice of the European Union (CJEU) in the UK, but EU law and the decisions of the CJEU will continue to affect us. There are a number of existing precedents where the EU has reached agreements with third countries which provide for a close cooperative relationship, without the CJEU having direct jurisdiction over those countries.

16.The UK will engage constructively to negotiate an approach to enforcement and dispute resolution which meets the key objectives of the UK and the EU, underpinning the deep and special partnership we seek. During the implementation period, we have agreed that the existing EU mechanisms for supervision and enforcement will apply, including the role of the CJEU.

We welcome the ambition of the Government to continue to work with existing European regulatory agencies, which for the automotive sector is the best way to exert influence at a global level. We recommend that, in the negotiations on the withdrawal agreement, the Government seeks to support the interests of the UK automotive industry by maintaining a close association with the EU expert groups that develop regulatory standards. (Paragraph 36).

17.The Government’s ‘Continuity in the availability of goods - position paper’4 makes clear our belief that it makes sense to recognise our common regulatory systems and the technical expertise that the UK has contributed to EU vehicle standards, in continuing our relationship post-Exit. The UK will also continue to play a leading role in the UNECE World Forum for the harmonization of vehicle regulations, which underpins many of the EU regulatory standards.

Trade opportunities post-Brexit

The UK cannot expect an expansion of trade overseas to outweigh the loss of trade to Europe arising from a hard Brexit. As most volume manufacturers in the UK are global and foreign-owned, any new bilateral trade deals secured by the Government are unlikely to lead directly to a significant increase in investment and jobs in the UK automotive sector. In its negotiations, we recommend that the Government prioritises continued friction-free access to the single market in automotives over securing the freedom to secure new trade deals with third countries. (Paragraph 41)

We welcome the Government plans to improve the UK content of supply chains, but this is not going to deliver what is needed in the short to medium term. The Government should therefore prepare the ground to negotiate new trade deals which allow for a lower than usual threshold for domestic content in vehicles or ideally to be able to continue to include EU content for FTAs with other countries in the future. In negotiating the roll-over of existing EU FTAs to the UK, the Government should seek to secure the necessary amendments to allow UK content to count as EU content for rules of origin purposes in the automotive sector. Without such provisions, the business case for locating volume manufacturing of vehicles for export in the UK would be flimsy at best and non-existent at worst. (Paragraph 44)

18.The amount of value sourced by UK car manufacturers from UK first-tier suppliers has increased from 36% in 2011 to 44% in 2017.,5 6As part of the first Automotive Sector Deal, Government has committed £16 million to support development of the UK supply chain and industry’s ambition to increase the value of UK content in domestically produced vehicles to 50% by 2022. Government recognises that as part of implementing an independent trade policy, the UK will need to negotiate rules of origin when it enters into new preferential trade arrangements with partners that do not already have an EU FTA.

19.During the implementation period, we will be free to negotiate, ratify and sign trade deals with new partners, while continuing to benefit from the EU’s existing agreements. The EU has stated that the UK is also to be treated as a member state for the purposes of international agreements. This is a positive and significant step and will enable us to secure continuity in our relationships with third countries. We will be discussing with them how to take this forward.

Certainty and transition

Whatever choice the Government makes regarding the future UK-EU relationship, it should make it quickly. The wait-and-see approach to the future direction of regulation may be a convenient compromise for the short term, but it would not provide the certainty needed by the sector and would undoubtedly lead to a shift in jobs and investment from the UK to the rest of the EU in the period up to exit. We recommend that the Government clarifies its intention at the earliest opportunity to seek continued regulatory alignment with the EU in the automotive sector. (Paragraph 48)

20.The section of this response on ‘Regulatory alignment’ provides further details of the Government’s approach to this issue. The UK wants to move on to negotiations about our future partnership as soon as possible. Article 50 makes clear that the withdrawal agreement needs to take account of the future relationship so we will know the terms of our new partnership with the EU by the time of our exit.

Skills

In determining its negotiating objectives on freedom of movement and subsequent immigration policy, the Government should prioritise ensuring that our key manufacturing sectors such as automotive retain sufficient access to essential skills to ensure that gaps can be filled adequately with UK workers. (Paragraph 51)

21.The UK will remain an open and tolerant country; one that recognises the valuable contribution migrants make to our society and welcomes those with the skills and expertise to make our nation better still. At every step of the exit negotiations we will work to ensure the best possible outcome for the British people.

22.As the Prime Minister said in her Mansion House speech on our future economic partnership with the EU, we want to agree an appropriate labour mobility framework that enables UK businesses and self-employed professionals to travel to the EU to provide services to clients in person and over the phone or internet.

We welcome the investment the Government is making in Research and Development activities, particularly in low-carbon technologies, and we recommend that the Government reviews its investment strategy once our future relationship with the EU becomes clearer, with a view to enhancing existing incentives to locate automotive R&D in the UK. (Paragraph 54)

23.In 2016, businesses in the automotive sector invested £3.4bn in R&D,7 almost 15% of the UK total. As part of our automotive industrial approach, Government and industry has committed around £1 billion over 10 years to 2023 through the Advanced Propulsion Centre, to research, develop and commercialise the next generation of low carbon technologies and to keep the UK at the cutting edge of low carbon automotive innovations. In addition the government has committed £225 million to automotive R&D from 2023 to 2026. Government will continue to keep these policies under review as our future relationship with the EU becomes clearer and post exit.

Conclusion

There are no advantages to be gained from Brexit for the automotive industry for the foreseeable future. The negotiations are an exercise in damage limitation. The Government should acknowledge this and be pragmatic in seeking for the sector as close as possible a relationship with the existing EU regulatory and trading framework to provide for volume car making—one of our great manufacturing success stories—a hopeful future. (Paragraph 56)

24.The Government is determined to ensure that the UK continues to be one of the most competitive locations in the world for automotive and other advanced manufacturing. Alongside Brexit negotiations, we will continue our longstanding programme of support for the competitiveness of the UK automotive sector to support investment and jobs. Our decision to leave the EU does not mark an ending, but a new beginning for our relationship with our European allies. It is pragmatic common sense that we should work together to deliver the best outcome for both sides. We look forward to pursuing the best possible outcome for the automotive sector as we enter discussions on our future economic partnership.