New US-EU Trade Framework May Impact Safety, Benefit Automakers On Both Sides

By Sam Abuelsamid

The United States and the European Union have announced a new framework trade agreement designed to limit the damage from the Trump administration’s global trade war. At a high level, the EU has agreed to eliminate tariffs on a wide range of American products, while the U.S. gets to maintain a 15% tariff rate on most European goods, including automobiles. However, another important and interesting section of the framework agreement relates to mutual recognition of automotive regulations, which could have some very interesting side effects. 

Section 8 of the framework agreement reads:

The United States and the European Union commit to work together to reduce or eliminate non-tariff barriers. With respect to automobiles, the United States and the European Union intend to accept and provide mutual recognition to each other’s standards. Cooperation on standards plays a crucial role in enhancing the transatlantic marketplace. The European Union and United States commit to enhance opportunities for technical cooperation between EU- and US-domiciled standards development organisations with the objective of identifying and developing standards for the transatlantic marketplace in key sectors of mutual interest. The United States and the European Union commit to facilitate conformity assessments to cover additional industrial sectors.

For decades, there have been efforts to harmonize regulations covering automotive safety, emissions, and efficiency between major markets, nearly all of which have failed. Most recently, there was the development of the World Light-Duty Test Protocol (WLTP). In the 2000s, Europe, the U.S., and others agreed to develop a standardized test procedure for evaluating vehicle emissions and energy consumption. The U.S. Environmental Protection Agency developed driving test cycles for emissions beginning in the 1970s, and the same tests were later used to measure fuel consumption by the National Highway Traffic Safety Administration to verify compliance with Corporate Average Fuel Economy standards. 

The New European Driving Cycle (NEDC), as well as other standards in Japan, China, and other markets, had the same purpose, but all yielded different results, none of which aligned particularly well with real-world performance. Over the years, each region updated its tests, but they were never harmonized. In the early 2000s, development of the WLTP began with a United Nations technical working group. By 2011, the U.S. had withdrawn from the effort and decided to carry on with homegrown standards. Europe moved forward, and by 2019, all new vehicles sold in the region had to comply with the WLTP for testing and certification. Many other harmonization efforts have met a similar fate. 

What About the New Agreement?

Under the new agreement, both sides have effectively given up on harmonization. Instead, based on the language of the statement, each will recognize vehicles produced in the other region that comply with the rules of that region as legal. Different regulatory standards are often seen as non-tariff barriers to trade. If an automaker has to substantially re-engineer a vehicle in order to comply with local regulations, it doesn’t have to pay a direct import tax, but its costs have increased, making it less competitive. 

Mutual recognition of standards would mean that an American automaker could export vehicles that are legal in the U.S. and offer them for sale in Europe without modification. Conversely, the same is true for European vehicles, although they would still be subject to a 15% tariff. 

For automakers on both sides of the Atlantic, this offers potential advantages, but not necessarily the benefits the Trump administration foresees. In fact, the results of the deal could run directly counter to the stated desires of the administration. 

F-150s in Paris? I Don’t Think So

The president has long complained that consumers in the primary regions that export vehicles to the U.S. don’t buy a similar number of American vehicles. While there have been tariff barriers to imports, especially in Japan and South Korea, the real reason most other countries don’t buy our vehicles is that they are simply the wrong products for the market. 

The U.S. has long been home to some of the lowest gasoline prices in the world (even accounting for occasional spikes), along with big, broad highways and a lifestyle that has people driving long distances and towing big boats and campers. The U.S. also ranks 180th out of 242 countries and dependencies in the world for population density at 96 people per square mile. Germany, on the other hand, has 630 people per square mile, France has 320, Japan has 880, and South Korea has 1,400. 

As a result, apart from some large cities like New York and Chicago, we have room to park and drive these behemoths, but other countries don’t. It wouldn’t matter if there were no tariffs; Japanese, Korean, and most European drivers simply wouldn’t choose a Ford F-150 over a Toyota Hi-Lux because it doesn’t fit, and that’s before you account for much higher fuel prices.

It’s Not All Bad News For Detroit

Those big trucks and SUVs are the current cash cows for Detroit automakers, but they recognize that those vehicles just won’t be viable in most overseas markets. The places where the Ford F-Series sells in any notable numbers are the U.S., Canada, Mexico, and the Middle East. 

However, the profits generated by truck sales have been crucial to enabling American manufacturers to invest in electrification. Despite the fact that EV sales growth has fallen far short of earlier expectations in the U.S., it's been growing much more rapidly in Europe and Asia, and sales are expected to eventually pick up momentum in the U.S. as well. 

American automakers have developed some EVs that have definite potential in overseas markets. GM has the Equinox EV, the upcoming Bolt from Chevrolet, and the Optiq and Lyriq from Cadillac. Ford’s next-generation universal EV platform could be very competitive outside North America, and even Stellantis could find a market for electric Jeeps like the Wagoneer S and Recon. Being able to offer these and other future models without having to make major modifications would make them much more cost-effective and allow the Detroit Three to develop scale based on global growth even before the domestic market is ready to consume those vehicles. 

For GM in particular, this is very important. Cadillac executives, including brand global vice president John Roth, have been talking recently about expansion outside the U.S. and with China increasingly turning to domestic brands, Europe is clearly going to be a key market. That means Cadillac will need those EVs, but if they can’t get enough scale from the rest of GM, they will be at a cost disadvantage. If Chevrolet, GMC, and even Buick can sell EVs in Europe and elsewhere, that would help GM’s overall cost picture. The same is true for Ford. This isn’t exactly the outcome Trump and his supporters want, but it may be the only way the U.S. industry survives. 

American car buyers could also get the opportunity to purchase some European vehicles they can’t currently get because there aren’t enough sales to justify the re-engineering required to comply with American regulations. This could open the market to smaller and sportier vehicles and add more competition. 

What’s the Safety Downside?

Almost immediately after the framework deal was announced, the European Transport Safety Council put out a statement that this deal would harm safety on European roads and cost lives. Europe mandates technologies like automatic emergency braking, lane-keeping assistance, and pedestrian protection. While the driver-assist features have become largely universal, pedestrian protection is probably one of the most notable differences between U.S. and European standards. 

Europe has had requirements to protect pedestrians when struck by vehicles for more than 15 years, while the U.S. does not. Here in the U.S., almost all of the increase in traffic fatalities in the last decade has been pedestrians and cyclists, and much of that is likely due to our vehicles getting larger with degraded visibility, especially trucks and SUVs. 

This is absolutely a legitimate concern for Europeans. However, the reality may be less of an issue. The same vehicles that are the most dangerous to pedestrians are also the ones least likely to sell in any significant volume in Europe. The smaller to midsize vehicles that have some market potential actually offer similar levels of protection for both those inside and outside of the vehicle. As long as programs like EuroNCAP, which evaluate safety, remain, any automakers that try to sell less safe vehicles in Europe will probably lose out based on consumer rather than regulatory pressure. 

Despite the U.S. still having an unfair tariff advantage in this deal, it could help maintain progress on electrification and potentially even boost safety in the long run.