The aerospace sector includes the design, manufacture and in-service support (maintenance, repair, overhaul (MRO)) of civil aircraft – from original equipment manufacturers (OEMS or Primes) who design and assemble aircraft and key elements such as engines, to lower-tier component, sub-component and equipment suppliers.
Much of the regulation in this sector is either set globally or via mutual recognition agreements – for example, between the European Aviation Safety Agency (EASA) and Federal Aviation Administration (FAA) for airworthiness regulations.
Articles 28-37 of the Treaty on the Functioning of the European Union (TFEU) set out the Treaty provisions on the free movement of goods, including the establishment of the Customs Union. This has been achieved by establishing the Customs Union within the EU and by preventing Member States imposing customs duties or formalities on goods imported from other Member States. In addition, these rules prevent Member States imposing restrictions on the quantity of imports and exportsof a particular item (e.g. quotas or an import or export ban).
This legal framework also prevents non-tariff barriers that may restrict imports and exports in less direct ways, for example, by applying product standards and regulations that make it harder in practice for goods coming from one Member State to be sold within another. The exception is where those restrictions can be justified on certain grounds. The legal framework has been achieved by establishing a common set of product rules, underpinned in many cases by voluntary standards.
For goods not covered by those rules and standards, the principle of mutual recognition has been developed (whereby once goods have been lawfully manufactured and marketed in one Member State, another Member State cannot then require it to comply with additional product rules). Finally, goods imported from other Member States must be treated in the same way as goods produced nationally.
R&D and innovation funding
The EU uses funding mechanisms called Framework Programmes to provide research grants in all sectors across Europe. The seventh Framework Programme (FP7) awarded almost €50 billion of R&D grants between 2007 and 2013. Horizon 2020 (FP8) is investing around €75 billion from 2014 to 2020.17 60. Funding for competitiveness and innovation makes up nearly 18 per cent of the UK’s receipts from the EU. EU funding accounts for approximately 16 per cent of UK university research funding.
For FP7 (2007-2013), the UK agreed the second highest level of FP7 funding across all member states (behind Germany), totalling around €7 billion. UK projects were more likely than average to be granted funding. During the first three years of Horizon 2020, the UK agreed the second highest amount of EU funding (€3083 million). Germany agreed the highest (€3464 million) and France the third highest (€2097 million). The UK had the highest number of participants in projects backed by Horizon 2020 funding – 6,289, with a fifth serving as project coordinators.
The aerospace sector is a significant recipient of EU R&D funding, principally through Horizon 2020’s Smart, Green & Integrated Transport work programme (which has received approximately 8 per cent of the Horizon 2020 budget) and, within that, the Clean Sky 2 Joint Technology Initiative (JTI), a form of Public Private Partnership.
The Clean Sky 2 budget is €4 billion. The EU contributes €1.8 billion and industrial partners contribute €2.2 billion. The Clean Sky initiative was conceived to build and run large-scale integrated technology demonstrators.Typically, demonstrators run for 10+ years and are integral to the latter stages of R&D where commercial potential is tested. They are large, expensive and integrate products from different EU nations.
Developing new products and processes in collaborative research projects with European companies means that a common set of standards and processes are adopted and certified, providing competitive advantage.
The European Investment Bank (EIB) lends to the UK for investment in infrastructure and for support for R&D projects. For example, in 2015, EIB confirmed a £280 million long-term loan to Rolls-Royce to support the development of a higher thrust version of the Trent XWB aero-engine. This is one of the largest loans agreed between the EIB and a UK company.
The European Transonic Windtunnel (ETW) is an important asset for the UK. It is a world leading wind tunnel for testing aircraft at real flight conditions. The shareholder nations are Germany (where the site is located), UK and the Netherlands. ETW is not a part of the EU. Therefore, the UK can remain a partner following exit.
Sector-specific rules governing the provision of this activity in the EU
The international framework of air transport has developed from the 1944 Chicago Convention. This established the International Civil Aviation Organisation (ICAO), a UN special agency that establishes international aviation guidelines and standards.ICAO contains 191 state members. The UK is a permanent representative on ICAO’s Council (this membership is independent of the UK’s EU membership). ICAO has no ability to set regulation or enforce its rules – compliance is voluntary and drawn from domestic or European legislation.
The Civil Aviation Authority (CAA) is the UK’s independent aviation regulator. It levies a charge on UK registered aircraft to fund its regulation.
Safety (and some operational and environmental) regulation is set by the European Aviation Safety Agency (EASA). Regulation (EC) No 216/2008 sets down commonsafety rules and objectives for civil aviation in Europe. It also reconfirmed the establishment of EASA. EASA’s remit covers safety in all aspects of the aviation system, including design, manufacturing, aircraft operations, personnel licensing, training organisations, maintenance, airports and air traffic management. Regulation (EC) No 300/2008 sets out common roles and basic standards on aviation security and procedures to monitor the implementation of the common rules and standards.
EASA prepares draft rules for consideration and adoption by the European Commission and the National Aviation Authorities (NAAs, in the UK’s case, the CAA) implement the adopted rules with monitoring from EASA.
EASA also has a number of executive functions, for example the initial airworthiness certification of new and modified products (e.g. specific models of aircraft and engines) and the certification of organisations based in third countries.
The system is underpinned by the set of common safety rules which are designed for uniform application across the EU. Those rules apply both to the air transport industry, individuals, organisations and products and to the NAAs themselves. As a member of the EU, the UK is represented at the EASA Committee and has a seat on the EASA Management Board.
Main cross-sector rules, technical requirements and frameworks
The aerospace sector is highly integrated globally and aerospace Prime and Tier 1 companies have operations in a number of countries with aerospace capability. For example, Airbus has major sites in the UK, Germany, France and Spain. RollsRoyce has major sites in the UK and Germany.
The state aid rules govern the way that member states can support economic activities. This is not limited to grants or subsidised loans and can include sale of land at undervalue or tax reductions. The main rules are set out in Articles 107 -109 of the Treaty along with various frameworks and guidelines. They lay down a fundamental prohibition on giving aid, with a series of exemptions for types of aid that can be judged compatible with the internal market. It is not the case that all aid is forbidden, as aid can be granted within bounds to enable the states to support activities that are not being delivered by the market.
Aid that is covered by a block exemption is “pre-approved” (although it requires a simple notification to the Commission, which can be ex-post). All aid must be notified to and approved by the Commission before it can be given as only the Commission can decide if aid is compatible.
Although the state aid rules are addressed to member states they also affect the aid beneficiaries. If aid is given which has not been duly notified and approved and which does not comply with the rules, the aid must be recovered from the beneficiary with interest.
The aerospace sector is R&D intensive. Due to the high cost of developing a new aircraft or engine, companies look to funding from the EU and for other public support. Therefore, the state aid rules are important for public support of R&D.
Much of the state aid that has been awarded to UK aerospace companies has been done within the General Block Exemption Regulation, but there are also a number of launch investment agreements with companies that had to be directly notified to the Commission as aid.
REACH chemicals legislation
Chemicals produced in or imported by the EU are subject to the EU REACH 1907/2006/EC (Registration, Evaluation, Authorisation of Chemicals) Regulation that primarily affects manufacturers and importers of chemicals and other substances covered by REACH with a focus on identifying risk and applying appropriate risk management measures. Further duties affect downstream sector users of chemicals. Companies exporting to the EU will still need to abide by REACH/CLP requirements. Rules identified, which are devolved areas of responsibility or issues relating to Gibraltar, the Crown Dependencies or overseas territories
Cape Town Convention
The Protocol to the Convention on International Interests in Mobile Equipment and matters Specific to Aircraft Equipment (Cape Town Convention) is an international treaty under the auspices of Unidroit which is of mixed competency. The EU andthe UK have ratified the Treaty in the areas where they have competence.
The Convention aims to reduce the cost of raising finance to buy and lease commercial aircraft by providing aircraft financiers with greater confidence in the remedies available to them if an airline defaults on an agreement in any country which has ratified the Treaty. Debtors are in turn protected from unwarranted seizure of the assets by creditors, provided they have maintained their obligations under the relevant documents. The Treaty is not mandatory and the commercial parties can decide whether or not to make use of its provisions.
The EU ratification of the Treaty extends to Gibraltar but not the other Overseas Territories or the Crown Dependencies. The UK has extended the treaty to the Bailiwick of Guernsey and is in the process of extending the treaty to the Isle of Man.
Existing frameworks for how trade is facilitated between countries in this sector
Aerospace is a global, highly integrated and highly regulated industry. The industry is governed by detailed technical regulations required to satisfy aviation safety and environmental regulations. For example, EASA airworthiness certification is a prerequisite to market entry for civil aerospace goods and services, throughout the EU and much of the rest of the world.
Within the EU, the ‘Basic Regulation’ allows non-EU Member States to be full members of EASA including the Management Board, Committee and Technical Working Groups. Iceland, Liechtenstein, Norway and Switzerland are members and participate fully in EASA.
In addition, aerospace regulation is becoming increasingly harmonised at a global level. For example, the EU has concluded Bilateral Aviation Safety Agreements (BASAs) with the USA, Canada and Brazil. BASAs establish cooperation between the two contracting partners to achieve mutual recognition of airworthiness certificates.
The global approach is underpinned by the work of the ICAO, which agrees standards and recommended practices. Whilst these are not binding, they can be adopted as regulation at national or regional level. These global approaches support business in operating in a number of countries. The ICAO contains 191 state members and the UK is a permanent representative on its Council. The UK is a signatory to the ICAO in its own right, independent from its EU membership.
These same bilateral partners committed to moving towards closer regulatory collaboration by creating the Certification Management Team (CMT). The CMToversees and manages the development and implementation of regulatory and policy solutions in order to support greater harmonisation. The CMT has developed initiatives and risk-based validation principles with the aim of enabling its signatories to accept partner certification activities with limited or no technical involvement.
Trade in aerospace goods can be facilitated through the use of international standards, such as those developed by the International Standards Organisation (ISO) and the International Electrotechnical Commission (IEC). These are voluntary agreements on best practice for a given process or product. These standards are voluntary, and the majority are developed purely for commercial purposes, such as to support the interoperability of supply chains.
There are many customs facilitation arrangements in international agreements. These include the EU’s agreements with a number of third countries, such as Canada, Korea and Switzerland. These agreements differ in the depth and scope of customs facilitation offered. Examples of customs facilitations include: simplifying customs procedures, advance electronic submission and processing of information before physical arrival of goods, and mutual recognition of inspections and documents certifying compliance with the other parties’ rules.
In the absence of a preferential trade agreement, goods imported into the EU from non-EU countries must pay a tariff. Tariffs are custom duties levied on imported goods. Under the World Trade Organization (WTO) Most Favoured Nation (MFN) a country’s tariff schedule must be consistent for all countries it trades with, except those where a preferential trade agreement exists.
Highly integrated, global supply chains are underpinned by the WTO Agreement on Trade in Civil Aircraft.This plurilateral (meaning that not all WTO members have signed up) entered into force on 1 January 1980. There are 32 signatories, of which the EU is one. The UK is party to the agreement in its own right, as are the other biggest aerospace trading nations, including: Canada, China, France, Germany, Spain, Sweden, and the US, but not Brazil.
The agreement eliminates tariffs and preferential rules of origin requirements on civil aerospace imports, provided that the goods meet the relevant WTO (nonpreferential) rules of origin. Product coverage includes all civil aircraft; all civil aircraft engines and their parts and components; all other parts, components, and subassemblies of civil aircraft; and all ground flight simulators and their parts and components. The agreement does not cover certain part-finished and intermediary products, or raw materials and consumable goods.
Companies trading in goods that are not covered by the WTO Agreement on Trade in Civil Aircraft to the EU may make use of inward processing relief provisions,remaining goods do trigger tariffs and preferential rules of origin requirements. EU MFN tariff rates vary depending on the good.
Rules of Origin
The EU includes rules of origin in all of its FTAs, which are restrictions on the originating content of products that exporters must comply with to gain tariff preferences. These rules typically reflect both the supply chains of both the EU and its FTA partner. Many of the EU’s rules of origin arrangements are based on the Regional Convention on Pan-Euro-Mediterranean Preferential Rules of Origin, which includes provisions that allow producers to treat content from some third countries as if it comes from their own country. Several arrangements aim to reduce the administrative requirements associated with origin certification, including the EU’s Registered Exporter (REX) system, which lets businesses register for selfcertification of origin using an online system, avoiding paper certificates.