Volkswagen Scandal: The US Is a Stickler for Rules

von Nicole Raz / 24.09.2015

The US appears at times to be tougher on foreign companies than domestic ones, but it’s a matter of values rather than a matter of discrimination. American Economics Reporter Nicole RazDie US-amerikanische Radio- und Multimediajournalistin Nicole Raz ist im September und Oktober als US-Austrian Journalism Exchange Fellow bei NZZ.at und wird insbesondere die Wirtschaftsberichterstattung bereichern. reports that the US takes its rulebook seriously, with the possible effect of fining companies – foreign and domestic – too much.

At first glance, it may seem suspicious that German automaker Volkswagen’s faces a potential $ 18 billion fine concerning environmental standards which would be 20 times higher than the $ 900 million fine American automaker General Motors earned last year in connection with faulty ignition switches, linked to 124 deaths and 275 injuries.

“It’s important not to compare apples to oranges,” says Emily Blanchard, an associate professor at the Tuck School of Business at Dartmouth College. “The GM fine was the result of a criminal investigation by the Department of Justice. VW faces sanction by a different part of government—the Environmental Protection Agency—in what is effectively a case of fraud.”

While foreign companies – and banks – have grumbled about being an easier target than domestic companies when it comes to US punitive actions, the issue isn’t about discrimination but rather cultural differences and a disjointed regulatory system.

Sure, Money Always Counts

There has not been a clear pattern of US regulators fining a company more or less based on ownership—though there is an argument to be made that lobbying carries heavy weight in the US.

“There’s no question that some firms seem to curry more favor in government than others,” Blanchard said, adding that globalization has also made it harder to define companies as “domestic” or “foreign” in the first place.

“Multinational companies are officially headquartered in a given country, sure, but what does that really mean when the boundaries of a firm’s employment, supply chain relationships, innovation, and customer base bear little resemblance to national borders?”

Rather than US regulators discriminating against foreign companies, perhaps the grumblings are part of a realization that the US places great value on enforcing its rules.

Is the US Fine-Happy, or Is the EU Too Lax?

In general, EU regulators tend to fine companies less often than American regulators.

“Clearly, the financial and legal cultures differ across the Atlantic,” says Thomas Gehrig via e-mail, a professor of finance at the University of Vienna. “The European view tends to be a bit more balanced with an eye on employees and other stakeholders. Hence fines are measured also in terms of not endangering the long-term survival of the company.” The EU’s softened fining culture may have something to do with the structure of checks and balances within the auto industry.

“In the EU, the legal requirements concerning motor vehicle pollutant emissions currently use a test cycle performed under common laboratory conditions witnessed by an independent technical service that act as the technical agent for a member state approval authority,” said a spokesperson for the European Automobile Manufacturers Association.

In some EU member states, the automobile industry is partly government owned, which many have cited as a conflict of interest when it comes to inflicting penalties, such as fines in cases of wrongdoing.

Even though EU law also calls for fines and other penal actions for cheating on emissions tests, it is not necessarily regularly implemented. However, now that the issue of Volkswagen’s software-cheating scheme has been brought to the forefront, investigations into fraud have already started in Germany and the EU.

Fines are largely considered one of the costs of doing business in the US, Gehrig added, though to what avail is disputed. Fines tend to punish shareholders more than the wrongdoers within a company.

While Volkswagen’s fine could be very substantial—Volkswagen reported a net profit of $ 14.25 billion in 2014—only time will tell if it will impact industry conduct after the dust settles.

Looking at a track record of fines in the US, Gehrig told NZZ.at, fines don’t do much to bolster accountability. Plenty of companies and banks have had to shell out without admitting guilt. The impact on sales and investors, though, might do the trick to deter other possible emissions-cheaters.

“The stock market reaction has been far more drastic than any fine would be,” he said.

Barriers to Entry

Aside from fraud and deceit, standards are also at the crux of the Volkswagen scandal. There must have been some sort of payoff for Volkswagen to have cheated, or they wouldn’t have done it. Perhaps it was cheaper not to install whatever parts were necessary to meet US’ emissions standards. The fact that an automaker would risk their reputation, profits, etc. to get around regulatory hurdles at some level shows that differing standards is a burden to exporters.

The car manufacturer wouldn’t have been “caught” doing anything wrong if European and US regulators shared the same enforcement practices, and if Volkswagen didn’t have to comply with two different emissions standards. The US holds one of the strictest standards in the world for nitrogen oxides, which cause smog and health problems and are produced by diesel.

If governments want to remove incentives for manufacturers to take shortcuts, then the Volkswagen scandal can be seen as a reason to support an idea like the converging regulatory standards between the EU and the US. Converging standards are part of the negotiations of TTIP – though the possible deal faces overwhelming consumer skepticism in Austria and Germany.