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Brexit Complicates U.S.-EU Trade-Deal Negotiations

Thursday&rsquo;s referendum vote has created deep uncertainty about market access, particularly exports, for automakers operating in the U.K. The same would apply to EU legislation affecting car companies, such as emissions and safety standards.

The European Commission’s trade directorate general and the U.S. Trade Representative are assessing the impact of Britain’s anticipated exit from the European Union on the Transatlantic Trade & Investment Partnership under negotiation between the EU and U.S.

“All these questions will be looked into,” EC trade spokesman Daniel Rosario says as the U.S. and EU prepare for a 14th round of TTIP talks to be held in July in Brussels.

Other EU officials have said they want to agree on consolidated texts highlighting the final sticking points regarding regulatory cooperation at that meeting. The goal is to give negotiators a chance to strike a final deal before President Obama leaves office in January, but it is not known whether Thursday’s U.K. referendum in favor of leaving the European economic bloc will slow that progress.

Obama already has said Britain would be at the back of the queue for a trade deal with America, perhaps long after TTIP is concluded with the rest of the EU.

An agreement by the EU to prioritize free-trade talks with the U.S. and other countries, made within the European Council’s February offer of special treatment for the U.K. – a deal secured by Prime Minister David Cameron, who resigned after Friday’s so-called Brexit vote – no longer stands.

That agreement said EU heads of government accepted the “importance of…the need to conclude ambitious bilateral trade and investment agreements with third countries, in a spirit of reciprocity and mutual benefit.

“Work must be advanced in negotiations with the U.S., Japan and key partners in Latin America, notably Mercosur (the 5-nation South American trade bloc) and in the Asia-Pacific region.”

A joint statement released Saturday by senior EU officials, including EC President Jean-Claude Juncker, says this deal “will now not take effect and ceases to exist.”

U.S. Trade Rep Still Supports TTIP But 'Evaluating' Brexit Vote

U.S. Trade Representative Michael Froman says while “the economic and strategic rationale for TTIP remains strong…we are evaluating the impact of the United Kingdom’s decision on TTIP.”

Should the U.K. go ahead with its plans to leave the EU, any TTIP deal struck with the EU would cease to apply to Britain within two years of the region invoking Article 50 of the Treaty on European Union, the formal procedure for quitting the bloc.

The referendum vote has created deep uncertainty about market access, particularly exports, for automakers operating in the U.K. The same would apply to a wide range of EU legislation affecting car companies, such as emissions and safety standards.

Short of the U.K. government collapsing in a no-confidence vote, triggering a general election, it is unlikely the referendum decision would be ignored. And once Article 50 is invoked, the U.K. would have the 2-year period to renegotiate its relationship with the EU, during which time existing EU legislation would stay in force.

This ranges from the EU chemical-control system REACH; U.K. access to EU research programs such as the €80 billion ($87.9 billion) Horizon 2020 scheme; EU carbon and other emissions regulations such as Euro 6 legislation; vehicle-sales-information rules; licensing legislation; and more.

Once the U.K. left the EU, this legislation would cease to apply and the region might choose to enact laws inconsistent with those of its former EU partners. Basic technical market approval laws probably would not change, however, as EU laws are based on rules developed by the United Nations’ Economic Commission for Europe World Forum for Harmonization of Vehicle Regulations, which the U.K. can be expected to follow.

As for when these laws might change, it is up to the U.K. to decide when to request withdrawal, so the 2-year clock has yet to start clicking, and it may be some months before the region makes its formal Brexit application.

Once it has, the U.K. must choose what kind of relationship it wants with its former EU trading partners. One option would be for the U.K. to apply to join the European Economic Area that currently includes non-EU members Norway, Iceland and Liechtenstein. This organization, in effect an EU halfway house, could limit Brexit’s economic impact on the U.K.

But the U.K. may balk at this choice as non-EU EEA members must pay into the EU budget to get access to non-food elements of the EU single market (including trade in autos); have no votes on the EU Council of Ministers; and other EEA countries would have to accept the U.K. as a member.

U.S. Not Alone in Facing Questions About Future U.K. Trade

Another option would be following Switzerland and negotiating bilateral trade deals with the EU. But the Swiss usually are required to implement EU rules as the price of such deals. And they are struck only where the EU wants to grant the Swiss market access, so duties on U.K. auto exports to the remaining EU could well be imposed.

Another quandary would be the fate of EU trade deals to which the U.K. already belongs, including the free-trade agreement with South Korea, and those that are pending ratification, such as the deal with Canada.

The Canadian pact, called the Comprehensive Economic and Trade Agreement, would have to be renegotiated as regards the U.K., a process that may be slower than with the rest of the EU – giving continental manufacturers better access to the Canada market.

And previously approved deals such as with South Korea would cease to apply after the U.K.’s 2-year cooling off period, unless the South Koreans agreed to maintain market access. They may want to renegotiate with the U.K. and could wait until Britain loses its Korean market access through the EU trade deal.

Another uncertainty is over whether the U.K. will implement EU auto-related legislation EU institutions already have approved, but the deadline for following those laws has not yet been established. 

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