Gains from Harmonizing US

and EU Auto Regulations

Under TTIP

Caroline Freund and Sarah Oliver

Peterson Institute for International Economics

July 1, 2015

What Do the EU and US Say?

• EU objective: “Greater regulatory compatibility between the EU and the US, and paving the way for setting global standards” European Commission.

• US objective: “T-TIP can set high standards and pioneer new rules for the global trading system” USTR.

• Agreement is about market integration and first-mover advantage.

• 80% of estimated gains come from adjustment in NTBs.

2

Why Autos?

• Different regulatory regimes in US and EU

• A top trade category

• Jobs & job multiplier

• Big R&D sector

• US and EU are major producers

• Better regulatory coherence is feasible &

has big benefits

3

Differences in Regulations

The 2014 Ford Fusion’s global parts commonality is 80 percent (above industry average)

Sources: Car and Driver, August 2013

Gains from Regulatory Coherence

• Allows inventory redeployment

• Variety

• Efficiency—returns to scale

• Reduces price discrimination

• No loss in tariff revenue, no loss in terms

of trade diversion.

5

Love of Variety (Paul Krugman’s Nobel Prize)

6

Returns to Scale

• RTS estimate 1.07 (Basu and Fernald 2004) 7

Average Output per Plant

Price Discrimination

8

Source: Radois (2015)

Is One Regulation Safer?

9

Which Regulations are Safer?

10 Source: WHO and USDT, 2013

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US fatalities per 100,000 motor vehicles

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20

30

40

50

60

EU fatalities per 100,000 motor vehicles

Fatalities vary mainly with

stage of development

11

0

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20

30

40

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9.5 10 10.5 11 11.5

ln GDP per capita

EU members US states lowess smoother

Fatalities per 100,000 motor vehicles

A one percent increase in GDP reduces fatality rate by more than one percentage point.

How Big a Barrier? Use 1958 Agreement as Event Study

12

1958 Agreement

"Agreement concerning the adoption of uniform technical prescriptions for wheeled vehicles, equipment and parts which can be fitted and/or be used on wheeled vehicles and the conditions for reciprocal recognition of approvals granted on the basis of these prescriptions"

UN Economic Commission for Europe

• Since1995 has accepted non-UNECE members, such as Japan (1998) and South Korea (2004)

• Individual governments verify automobiles meet safety regulations

• From 1978-2013, 41 countries signed onto agreement

13

Members of the 1958 Agreement

14

Country Date of

accession

Country Date of

accession

Country Date of

accession

Country Date of

accession

Belgium 1959 Finland 1976 Estonia 1995 New Zealand 2002

France 1959 Denmark 1976 Belarus 1995 Lithuania 2002

Sweden 1959 Romania 1977 Turkey 1996 Cyprus 2004

Hungary 1960 Poland 1979 Ireland 1998 Malta 2004

Netherlands 1960 Portugal 1980 European

Union

1998 Republic of

Korea

2004

Spain 1961 Russian Federation 1987 Japan 1998 Thailand 2006

United Kingdom 1963 Croatia 1991 Latvia 1999 Montenegro 2006

Italy 1963 The Former

Yugoslav Republic

of Macedonia

1991 Bulgaria 2000 Malaysia 2006

Germany 1966 Slovenia 1991 Australia 2000 Tunisia 2008

Austria 1971 Greece 1992 Ukraine 2000 Albania 2011

Luxembourg 1971 Bosnia and

Herzegovina

1992 Serbia 2001 Kazakhstan 2011

Switzerland 1973 Czech Republic 1993 South Africa 2001 Egypt 2013

Norway 1975 Slovakia 1993 Azerbaijan 2002

Source: UN Economic Commission for Europe

Trade with other 1958 members

after joining the agreement

15

8

9

10

11

12

-5 -4 -3 -2 -1 0 1 2 3 4 5joined 1958 agreement

Non-Members mean Members mean

Non-Members median Member median

log (real exports)

30

40

50

60

70

-5 -4 -3 -2 -1 0 1 2 3 4 5joined 1958 agreement

mean median

share of auto exports to other 1958 members

Evaluating the Agreement

Does the 1958 pill work?

Ideally, assign some countries same regulatory standards and observe.

Difference in differences -- A near experimental research design.

Use data and remove average export growth, average import growth, and average bilateral growth. What happens to a “treated” country-pair.

Compares the average change over time in exports for the 1958-agreement group to the average change over time for the control group.

Signing the 1958 agreement increases trade by 20 percent or more in the long run.

16

Evaluating the Agreement

Exportsijt= exports from country i to country j in year t.

Estimation controls for:

• Country-pair fixed effects capture time-invariant bilateral trade determinants—eg. distance, language, historical linkages.

• Importer-year fixed effects, country-year specific demand shocks

• Exporter-year fixed effects, country-year productivity schocks

How much does signing the 1958 agreement affect trade?

𝑙𝑛𝑒𝑥𝑝𝑜𝑟𝑡𝑠𝑖𝑗𝑡 = 𝛾𝑖𝑡 + 𝛾𝑗𝑡 + 𝛾𝑖𝑗 + 𝐴58𝑖𝑗𝑡 + 𝜀𝑖𝑗𝑡

Signing the 1958 agreement increases trade by 20 percent or more in the long run.

17

Controls/Robustness Checks

1. European Union membership

2. Left vs. Right hand side drivers & 1958 Agreement

– Positive increase in exports dampened for countries that drive on opposite side of road

3. Voluntary Export Restraints (Japan)-results unchanged

4. Placebo-rail cars – Part of the transportation sector, but not the safety

agreement

– No effect of signing 1958 agreement on rail car exports

18

Trade Effect by Average Auto

Market Share

• Smaller auto markets have larger gains to signing onto the 1958 agreement

• With an 8 percent market share, US exports would likely increase by 35%

• Germany and Japan still see a 7% increase from membership

19

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0.01 0.03 0.05 0.07 0.09 0.11 0.13 0.15 0.17 0.19 0.21 0.23 0.25

Average Share

Trade Effect

Trade effect by average market share

Comparison with Other Work

• Measures regulatory differences using surveys or indicator variable.

• Put variable in gravity equation and generate ad valorem tariff equivalent.

• For Autos, Ecorys (2009) gets tariff of 25 percent.

• Using CGE, they generate a trade effect of about 10 percent and total income of $17.7 billion.

• Effect is bigger because regulatory barriers are more than iceberg costs.

20

What About FDI and Supply

Chains?

US companies produce in Europe and

European companies produce in US.

21

BMW Spartanburg, SC Ford of Europe, Cologne Germany

Foreign Direct Investment Position

in Transportation Equipment

22

0

10,000

20,000

30,000

40,000

50,000

60,000

1980 1985 1990 1995 2000 2005 2010 2015

FDI stock (millions of US dollars)

US FDI in the EuropeanUnionEU FDI in the United States

Source: US Bureau of Economic Analysis, International Data, Direct Investment and MNE, www.bea.gov

Top Selling Cars in US by Country of

Origin, 2014

23

Source: AALA, Bloomberg

United States Models

Sold

Percent

US/Canadian

Content

Final Assembly

Location(s)

Ford F-Series 753,851 75 USA

Chevrolet Silverado 529,755 40 USA, Mexico

Dodge Ram 1500-3500 439,789 66 USA, Mexico

Europe

Volkswagen Jetta 141,354 6-12 Mexico

BMW 3 Series 100,902 5 Germany

Volkswagen Passat 96,649 40-45 USA

Japan

Toyota Camry 428,606 75 USA

Honda Accord 388,374 70 USA

Toyota Corolla 339,498 60 China, USA

TTIP and Potential for

Regulatory Convergence

24

Options for Integrating the US

and EU Auto Sectors in TTIP

• 1958 Agreement harmonizes regulations:

contracting parties follow the same

technical regulations and administration.

• Alternative approach is mutual

recognition, where each country accepts

both regulatory standards as valid in their

home markets.

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Barriers to Harmonization of US

and EU Safety Regulations

• EU and US have different regulations that are similarly safe, but technically different (i.e. different colored lights)

• Certification procedures also differ

• EU: Type-approval- Governments certify vehicles are safe by approving a sample of each model.

• US: Self Certification-Automakers certify that vehicles are safe and accept liability for faulty automobiles.

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Policy Proposal

• Full harmonization has high logistic and

legal costs

• Mutual Recognition

– Regulation by regulation basis (Canada-EU

agreement)

– Accept full set of regulations as equally valid

(KORUS)

• Extend recognition to third parties

27

Looking Forward

28

Why Now?

• EU and US together are 38 percent of

global exports 47 percent of global

imports.

• They are 59 percent of global auto

exports and 55 percent of global auto

imports.

• Setting standards first gives others

incentives to follow.

29

US and EU are Primary Markets

30

Source: European Vehicle Market Statistics 2013.

Market Growth Outside US and EU

31

Source: European Vehicle Market Statistics 2013.

Growing US Industry

32

Conclusions

• TTIP is about regulatory convergence and first mover advantage

• No evidence one standard is safer

• Gains are productivity, prices and variety, no diversion and no tariff revenue loss

• US-EU manufacturing resurgence • Location of production based on demand not

regulations

• Mutual recognition presents a feasible solution to the problem of competing regulatory regimes

• Timing is important: Gains magnified if rest of the world follows

33