Almost everyone has a skeleton in the closet. Governments of sovereign states can go to extreme lengths in order to protect their most strategic assets and industries, and this inevitably means they have a fuller closet than you do. A government with a proven track record of spying on other states, like the US, can use this as leverage over them. In this article, we will analyze a prominent example of what it means to know a secret concerning a “friendly” state, and to reveal it only at the time when the friend becomes an “enemy”.
In the summer of 2015, in a study commissioned by the International Council on Clean Transportation (ICCT), three young researchers at West Virginia University identified differences in the emissions between some Volkswagen vehicles circulating in the US and others on European roads.
Following this disclosure, the US Environmental Protection Agency (EPA) announced that Volkswagen (from now on, also VW) could be liable for multibillion-dollar penalties for illegally installing a system that would allow their cars to cheat on emission tests, in order to circumvent existing regulations. According to the EPA, this device could be found on almost half a million of the 11 million vehicles sold between 2009 and 2015.
The EPA also stated that the apparatus installed on those cars made use of complex algorithms to detect whether the car was being subjected to regulatory emissions testing, so that it could force onto it a functioning mode of both lower engine performance and emissions. How they achieved it is something worthy of a fully nerd-compliant explanation. I promise it will not be too long.
The “Defeat Mechanism”
In a modern automobile you can find a high number of sensors and dedicated CPUs. Almost any parameter that needs to be kept under observation to attain engine efficiency and the overall wellbeing of the vehicle, will have some form of controller or computer in order to achieve that goal. In a diesel engine car, one quantity that never goes overlooked is the fraction of used fuel that ends up in the exhaust, unburned. This is relevant to the inner functioning of the NOx adsorber, also called the NOx trap. This is a device able to chemically bind and thus ensnare very polluting nitrogen oxides, which would otherwise be released into the environment. Now, the NOx trap works better when supplied with a quantity of unburned fuel, since it reaches saturation fast and needs to be cleared by fuel instillation. Obviously, a higher fraction of fuel not being burned means, on the one hand, poor performance, and it is something you would want to avoid on the streets. On the other hand, it also means a better trapping of nitrogen oxides, and hence the possibility of declaring cleaner emissions.
So, the whole détournement was achieved through a so-called Defeat Mechanism, a complex software system able to discern the moment when a car was undergoing emissions testing, by monitoring multiple parameters such as steering wheel position and how long the engine had been running. This way, the engine would trade performance for cleanliness of emissions based on the situation it was being used in, and would therefore behave “greener” under testing conditions than on the road.
While the reader begins to envision the consequences of the above, I need to provide a quick definition. In the context of atmospheric emissions, the generic symbol NOx is used as a placeholder for the weighted sum of produced NO and NO2.
Of those two, Nitrogen Oxide has a more limited toxicity, and constitutes only a fraction of overall emitted NOx. The bad news, however, is that it gets oxidized by atmospheric oxygen, producing NO2; nitrogen dioxide. This is a hazardous corrosive gas, with a primary role in the development of photochemical smog, and is the basis for a series of poisonous byproducts responsible for air pollution and the formation of acid rain.
Carbon dioxide might be the most famous out of the much-publicized variables involved in climate change, but NO and NO2 emissions are a serious threat not only in that area, but also when speaking of the pollution of the cities we live in.
Back to the 2015 study: soon after news regarding the study leading to the discovery of the Defeat Mechanism started circulating, the American government started taking action. It provided for the recall of about 500,000 vehicles produced by Volkswagen between the year 2009 and the time of the pronouncement.
As can be imagined, this led to immediate consequences in the stock markets for the German group, and prompted CEO Martin Winterkorn to resign. Following the uproar, statements about a planned refitting of all affected cars were issued by VW. Nevertheless it was many months later, through issue of an agreed Statement of Facts, that the company finally admitted their Defeat Mechanism was intentional (at first only behind closed doors) and not, as assumed by the mainstream media until that point, caused by errors in manufacturing.
It was however in the US, right where everything had started, that consequences began to unfold for the company. In 2017, soon after a federal judge had ordered the car manufacturer to pay a fine of 2.8 million dollars, things got worse. According to an investigation by the California Air Resource Board, another thing the Volkswagen group was forced to eventually admit, a somewhat different yet similarly mischievous mechanism had been installed on some gasoline engine models in order to elude norms on polluting emissions. The future was starting to look not so bright for Volkswagen – and possibly not just in regard to their US market share.
In that time, compensation claims started to multiply in Germany too. The German state made an agreement commanding the company to apply a software change that would disable the Defeat Mechanism in the recalled cars. Keeping in mind what we said above, this would lead to lower nominal efficiency – think about tens of thousands of vehicles losing their environmental compliance certifications! Clearly, many newer VW and Audi models would not meet the required standards either, such as the standards limiting the PM2.5 particle output filter-less. Or the quite strict update on the regulations that was made in September 2018 with the advent of EURO6 in many European countries.
2018 also saw the incarceration of AUDI Chairman Rupert Stadtler (released soon after) for implications in the scandal, the fulfillment of the first integral reimbursements of private citizens following legal action, and even an investigation regarding competitor group Daimler, owner of the Mercedes brand, under scrutiny for what might yet become a comparably big scandal that is still to be proved.
Public lawsuits are still happening as we publish this piece, and the group might begin to suffer serious financial trouble. Big, state-issued fines though, are what could make the situation really critical. The reader is invited to reflect on the numbers involved here. If one takes into account the related industrial sectors, sending either of the big manufacturing groups bankrupt would lead without a doubt to a near-collapse of the whole German economy.
Now, let us be clear here: could the German government really have been unaware of such a big ongoing misbehavior, before the scandal exploded into the public eye? The answer is a clear no. Think of the complex intertwined relationships every major company entertains with the state it is headquartered in and pays its taxes in. There is absolutely no way some of the biggest companies from one of the main industries of a nation could set up such a large-scale project (i.e. scam) under a state completely unaware of it. This sounds illogical, given the ever-lingering massive turmoil waiting to happen with all its bargaining of consequences in terms of both economic and image loss, with repercussions, as said, for the whole national economy.
Indeed, according to multiple sources, the chances the government was unaware are extremely low: there is a certain control that a government must exert on the national strategic industries, in order to safeguard them and itself. Even if the state inaction was highly unethical, thinking of the consequences on the health of millions of people inside Germany and worldwide, the reason why the state would have hesitated in taking action is – though not in any way commendable – at least partially understandable.
At the same time, it is highly likely that the US government was also owning this piece of information from early on. The reports of decade-long spying of the American government on the German ministries might ring a bell here. Nobel prize laureate President Barack Obama and his administration would have been well aware of Germany’s big problem waiting to explode, but for a while the US state simply decided to not weigh in, until the release of the previously mentioned 2015 ICCT commissioned study which sparked the US EPA to act. Asking ourselves the reason why the unearthing of such a big secret took place in that year is of paramount importance, and is a question that sends us knee-deep into geopolitics.
Germany’s big problem
The graph below illustrates the last ten years of German trade imbalance expressed in millions of euros, that is, the quantity you get when you consider the overall value of the exports and subtract the value of the total imports from that. I will keep matters as simple as possible here, as I don’t want to induce lethargy in the reader.
The reasons and consequences for this ever-growing, massive positive value would deserve a full article on their own. Let us just say that, as for all macro-economical asymmetries that do not come to an end, this trend has long become a pathological one, such that no reform of any sort was able to curb it during recent years. In the words of renowned economist Francesco Saraceno:
“Norms exist in Europe, requiring external rebalancing. And Germany has been breaching them since the crisis started.”
What follows might not come as a surprise: the data for the US bilateral imbalance with Germany show an analogous situation and trend to the above graph, at its own scale. This set of tables shows that the deficit in trade between the two countries rose almost steadily throughout the late 90s and up until the 2008 Great Financial Crisis, and recovered again later on, picking up again from 2009 until the 2015 scandal.
The role of the European common market and currency is well understood among the many reasons that created this economic asymmetry. It might not be obvious when you go to the car dealer, but whenever somebody buys an imported car from another country (or any other good, for that matter), either they or a reseller before them pay for the car in that country’s currency. Not too long ago, a high demand for German goods would have been matched by a high demand for German currency (the Deutsche Mark) needed to buy those goods. This would have been followed by an almost inevitable re-evaluation of the Mark, that would have rendered the goods themselves more expensive, and the excess surplus would have been taking care of itself this way. In this example hides all the power of one of the true “primitives” in economics, the theory of supply and demand.
Not so in single-currency Europe, where such a phenomenon is counter-balanced by an opposite tendency in other EU countries (mostly the peripheral ones) where a trade deficit is found in place of a trade surplus. This is why, at the time Donald Trump was elected, a number of pundits feared his more nationalistic policies could pose a serious threat to the survival of the European single currency: if the situation above has strong consequences for industrial production of say, Greece and Finland, this is also the case for the US, though less intensely so.
Surely then, this matter is far from trivial. However, there evidently exist situations where a country is in surplus with another and in deficit towards a third one, for example, and many simplifications have been carried out in my article. I would therefore suggest reading the whole previously quoted article by Saraceno as a starting point to dive deeper into this topic.
It is the mid-2010s, and an upset America is not selling enough cars to European countries, while simply too many imported German cars are roaming around its roads. This has long been affecting US production. Unemployment is high. In such a situation, all weapons are allowed. Protectionism is one of them, though perhaps not the most effective – it has lots of side effects, and can often be perceived as a sort of declaration of war by other countries.
If you are in government, what would you do to turn the tables? Maybe you could just have a look inside that drawer, the one with a label on it saying “Secrets about…” and take out just one document – perhaps a freshly commissioned study ready to be passed on to the press. It is that easy.