Written evidence submitted by Honda Motor Europe (FRE0002)

Introduction

1. Honda Motor Europe is pleased to contribute to the Committee on the Future Relationship with the European Union’s inquiry into on progress on negotiations on the UK’s Future Relationship with the EU. This submission is based on a position paper shared with Government and Members of Parliament, as well as EU stakeholders, in January 2020, prior to the publication of the UK Government’s mandate.

2. As a highly integrated, pan-European business with a significant footprint in both the EU27 and the UK, Honda Motor Europe has consistently called for a future EU-UK relationship that maintains frictionless and tariff free trade, supports access to talent and the movement of personnel, avoids regulatory divergence and allows for the flow of data and services between the EU and UK.

3. The future EU-UK agreement must be more than a “simple” Free Trade Agreement and will need to be complemented by domestic legislation on both sides of the channel. Reaching, ratifying and implementing such a comprehensive agreement may take more than just one year, and thus the possibility of extending the transitional period should not be ruled out.

4. We look forward to engaging constructively with the UK Government and European Commission in developing their negotiating mandates and begin trade talks. As Honda works towards achieving our goal of 100% electrified car sales by 2022, we call on the EU and UK to reach an agreement that provides the regulatory and trading certainty needed to hit this ambitious target.

About Honda Motor Europe

5. Honda is the largest engine manufacturer worldwide and is a leading global producer of cars, motorcycles and power products. Through our dealer and distributor network, we offer our products and services to customers across the EU. Our highly integrated European operations currently include:

• Manufacturing sites in the UK, France, Spain, Belgium and Italy
• R&D operations in the UK, Germany and Italy
• Logistics, parts and accessories functions in Belgium
• Formula 1 operation in the UK
• European Head Office in the UK

6. Honda is committed to playing a significant role in tackling the Climate Emergency and has pledged that 100% of European car sales will feature an electrified power train by 2022, alongside making significant investments in Electric Vehicle (EV) charging and energy management. However, achieving this goal requires a stable and predictable regulatory and trading environment across the EU. We thus call on the EU and UK to conclude a deep and comprehensive future relationship after Brexit that will support the competitiveness of highly integrated pan-European businesses.

Key Principles for Future EU-UK Relationship

7. The UK government has made clear that it will seek to base the future EU-UK relationship on a Free Trade Agreement with limited regulatory alignment and has ruled out continuing membership of the EU Single Market and Customs Union. This means that of necessity, the future EU-UK trading relationship will be shallower than at present, and there will be disruption to highly integrated businesses such as Honda. The future relationship agreement should, therefore, aim to minimise this disruption as much as possible by:

1. Ensuring that there are no tariffs on EU-UK trade in goods, including Rules of Origin provisions set at a level that allow manufacturers to benefit from tariff free trade;
2. Enable the continued smooth movement of employees across our European organisation, including for cross border commuters;
3. Minimise the degree of regulatory divergence between the EU and UK and to ensure that products can be placed on the EU or UK markets without additional testing or bureaucracy;
4. Ensure the continued flow of data between the EU and UK, and to ensure that rules on connected vehicles and smart infrastructure are harmonised across both jurisdictions;
5. Ensure that environmental standards remain aligned, particularly in relation to the EU new car C02 framework. EU and UK new emissions reporting, for example, must be consolidated across both jurisdictions;
6. Mitigate friction both at and away from the EU/UK border due to the need to implement new customs checks and formalities;
7. Replication of the EU – Japan EPA to ensure UK consumers continue to accrue the benefits customers elsewhere in the EU will receive;
8. Take the time necessary to deliver a fit for purpose agreement and keep the option of extending the transitional period on the table to avoid “no deal” if no agreement is in force by the end of 2020.

Regulatory Alignment and Type Approval

8. Honda benefits from the simplicity of complying with a single regulatory regime across Europe, for the manufacture and sale of cars, as well as motorcycles and power products. The ability to place goods on the market across the EU on the basis of a single Type Approval is a particularly important benefit.

9. Our global strategy involves reducing complexity and improve efficiency by streamlining the number of variants and models we build. Regulatory divergence to the extent that separate models or variants would have to be built for the UK market could lead to increased costs or reduced choice for consumers, while impacting our ability to achieve our ambitions around delivering electrified vehicles in the UK.

10. Regulatory alignment also provides value for consumers. Convergence on environmental and safety standards ensure that there is a level playing field between both parties, while ensuring that customers can be confident that high health, safety and environmental standards continue to be maintained.

11. The duplication of paperwork, certification process or a requirement for separate or additional testing in the UK will place additional costs on our UK business, reducing competitiveness vis a vis other parts of our European operations. Requiring UK specific models, whether of cars, motorcycles or other products, would lead to higher development costs, which would not be spread across the European region. Factories would pass on the costs of building an additional model to the UK business, with the inability to share automobile, bike and power equipment stock across the region would reduce the flexibility of the business and increase stock risks.

12. Regulatory alignment will become increasingly important as the industry continues to undergo a significant transformation with the advent of electrification, shared mobility and connectivity – and new products such as energy management and smart charging are brought to market. Diverging approaches between the EU and UK will hamper the ability to roll out new vehicles and technologies to support decarbonisation.

13. The future EU-UK agreement should therefore prioritise maintaining alignment on automotive regulation, standards and testing in order to guarantee that a product approved for sale by UK or EU authorities can continue to be placed on each other’s markets. Dynamic alignment on future regulation will ensure that innovative new products can be brought to market across the region as a whole.

Data and Services

14. The automotive industry is undergoing a period of radical transformation, as electrification, automation and connectivity change the way cars are designed, made, sold and used. Automotive products therefore are increasingly offered in conjunction with a range of financial and data services, meaning that they rely on trade agreements going further than simply liberalising the trade in goods – barriers to the provision of services and the flow of must also be avoided.

15. Regulatory divergence in the area of movement of data in particular could lead to further legal ‘red tape’ for customers providing data, or risk of Inconsistent user experiences for end users of products where service requires data to work effectively. Regulatory divergence and the imposition of different conditions or constraints could create additional risks in relation to the protection of data and legal risks for companies.

16. For instance, the development of connected cars will change the relationship between OEMs such as Honda and individual customers. Whereas previously, the contractual relationship was purely between customer and dealer, the provision of connected and data services will create a direct relationship between customer and OEM, which could lead to the transfer of data across borders or offshore where OEM data centres are in a different country. The lack of adequate provisions around data adequacy and protection could thus hamper innovations in connected mobility and reduce benefits to customers.

17. We call on the EU and UK to work urgently towards a Data Equivalency Agreement to allow the transfer of data across the Channel, while ensuring continued alignment and cooperation on regulation around emerging technologies and services such as connected vehicles, smart charging and energy management.

Environment and Climate Change

18. As the UK leaves the EU, it will also fall out of the New Car C02 Regulation (also referred to as CAFÉ). This means that vehicles sold in the UK will no longer count towards pan-European C02 targets, while the UK will operate a stand along system in isolation.

19. This divergence, particularly if the UK chooses to implement a different C02 target from the EU, could cause serious disruption to our planning and ability to achieve C02 reduction targets, as well as increasing costs and complexity if different powertrain mixes are required in the EU and UK.

20. Continued alignment to 2021 and beyond would maintain a level playing field between EU and UK manufacturers and support continued market access, ensure that Honda has large as possible a market within which to deliver lower CO2 emitting products in line with the targets and ensure consumer choice remains as broad as possible and avoid having to develop different powertrains for the EU and UK markets.

Movement of People

21. Honda’s highly integrated manufacturing, research & development (R&D), sales, racing and business support activities across the EU require a workforce that is diverse, skilled, flexible, mobile and internationally experienced.

22. While we are actively working to develop local talent, the needs of running an integrated global business, with a regional HQ based in the UK, means the ability to transfer and move people between the UK and Japan, and across the EU, is crucial. Japanese colleagues on expat contracts or short-term assignments play a vital role in our operations in both the UK and EU.

23. The nature of the automotive industry globally is changing rapidly with the advent of electrification, automation and connectivity. In order to be competitive in this environment, Honda will require access to a diverse range of new skills, both from a R&D, assembly and manufacturing perspective. These will include digital and coding skills and the ability to work with electrical rather than mechanical processes and equipment.

24. While we recognise the good progress made by the UK and EU Member States to protect the rights of citizens via the Withdrawal Agreement, the lack of clarity around future arrangements creates uncertainty for both Honda and our associates.

25. We call on the EU and UK to prioritise the protection of Citizens’ Rights and the facilitation of mobility of workers and ability to attract talent in the future relationship negotiations. Measures should also be taken to minimise friction at the border for business travellers and cross border commuters.

Tariffs and Rules of Origin

26. Tariff liberalisation provides benefits to both manufacturers and customers. Reducing or eliminating tariffs on components and raw materials boosts the competitiveness of manufacturers that rely on international parts sourcing. Reducing the tariffs on imports of completed goods provides benefits to consumers through keener pricing and increased choice.

27. The future EU-UK Trade Agreement must ensure that no tariffs are imposed on the trade in goods between Great Britain and the EU.  It must be remembered that a Free Trade Agreement on its own does not guarantee tariff free trade. The provisions of the agreement must be such that businesses are able to efficiently access preferential tariff rates.

28. With certain Free Trade Agreements (FTA) in place between the EU and third countries, Honda and its customers can benefit from lower/zero duty rates when certain defined origin conditions are met. On average, most FTAs require 60% local content to benefit from preferential treatment.

29. Given that Honda sources parts and products through a regional and global supply chain, it is vital that the future EU-UK agreement takes a modern and flexible approach to Rules of Origin. At the very least, the  EU-UK deal should allow for the bilateral cumulation of content, and ideally cumulation should be extended to other third country trade partners such as Japan. The UK’s accession to the “Pan Euro Med” Rules of Origin Framework would also be helpful.

Customs and Border Friction

30. Honda has consistently argued that the future EU-UK relationship should be based on continued membership of the EU Customs Union, in order to avoid tariffs and rules of origin checks and minimise checks and paperwork at the border.

31. However, given that this outcome now seems unlikely, we call on the EU and UK authorities to ensure that the EU-UK future agreement -whether as part of the FTA or as a separate deal -  contains comprehensive provisions to eliminate or reduce customs checks and formalities at the GB/EU border. Examples of such agreements include Chapter Six of the Canada Europe Trade Agreement (CETA) or the 2008 EU Japan Agreement on Customs Cooperation.

32. These provisions should be accompanied by the implementation of unilateral facilitations and customs process streamlining by UK and other Member States customs authorities to reduce the administrative burden on economic operators and minimise friction on the cross channel movement of goods.

Process and Implementation

33. Honda has long argued that the worst possible outcome would be the failure to reach an agreement on the future relationship and to default to World Trade Organisation rules. Equally, a rushed or insufficiently ambitious deal would lead to serious disruption and have an impact on competitiveness.

34. Therefore, we call on the EU and UK to take the time necessary to deliver a comprehensive agreement that supports the continued productivity and competitiveness of European business and protects consumers. It is important to not rule out the possibility of extending the transitional period beyond the end of 2020, particularly as businesses may need additional time to adapt to the new trading conditions put in place by a new EU-UK agreement.

Summary

35. As a highly integrated European company, Honda Motor Europe’s competitiveness and productivity has been underpinned by the stable and predictable conditions and frictionless trade provided by the European Customs Union and Single Market.

36. Following the United Kingdom’s exit from the EU, we have consistently called for a future EU-UK agreement to minimise the impact of leaving the Single Market and Customs Union in order to support our competitiveness and avoid increased costs to customers in the UK or Europe. This is even more important as we look to contribute to tackling the climate challenge by accelerating our electrification plans in Europe and invest in innovative new technologies.

37. We therefore look for the future EU-UK agreement to deliver:

1. Tariff free, frictionless trade in goods;
2. Minimal regulatory divergence;
3. Ability to transfer data between EU and the UK;
4. No barriers to service provision;
5. Alignment on standards and avoid duplication of certification, testing and regulatory activity.
    

38. We urge the EU and UK to take the time needed to deliver a deep, comprehensive and fit for purpose agreement, and to not rule out the possibility of extending the transitional period to if more time is required to deliver an agreement that works for European and British business and consumers. 

March 2020