Brexit uncertainty looms for the auto sector

author: FutureCar Staff    

David Bailey, Senior Fellow at UK in a Changing Europe and Professor of Business Economics at Birmingham Business School, discusses the potential impact of new 'rules of origin' requirements for Battery Electric Vehicles (BEVs) under the Brexit trade deal. He argues that imposing tariffs on UK-EU BEV trade would be counterproductive, especially when both the UK and the EU are trying to promote the transition to electric vehicles in order to achieve net zero emissions.

There is growing concern within the auto industry in both the UK and the EU that Brexit could complicate matters further. The looming 10% tariffs on BEVs traded between the two regions, coupled with government pressure to adopt electric vehicles, has raised fears about the future of the industry.

Starting next year, new 'rules of origin' requirements will come into effect, stating that car manufacturers on both sides of the Channel will only avoid tariffs if a certain percentage of the BEV's components and battery value comes from the UK or EU. An Annex to the Brexit Trade and Cooperation Agreement (TCA) allows for some flexibility until next year, with a lower value of parts required to qualify for zero tariffs.

The challenge lies in the fact that batteries are still expensive, and many BEV components are sourced from Asia, particularly China. This means that a significant portion of BEVs' non-EU content could potentially lead to 10% tariffs on trade between the UK and EU, driving up prices while Internal Combustion Engine (ICE) cars remain tariff-free.

The UK has been advocating for a delay in tightening the rules of origin, but the European Commission has been hesitant. The Commission is concerned about the impact of relaxing these requirements on the EU's efforts to build a domestic battery supply chain and reduce reliance on China. EU Commissioner Maroš Šefčovič has stated that the EU will not budge on this issue, as it wants to encourage investment in battery-making capacity.

Stellantis, the company behind Vauxhall vehicles in the UK, has warned that it may not be able to meet the new rules and could be at a competitive disadvantage. Ford and JLR have also called for a delay, citing the current timing as unrealistic and counterproductive.

The Society of Motor Manufacturers and Traders (SMMT) has emphasized that the real deadline is not in January 2024, but rather the present moment, as auto makers are already planning for production and export next year. The SMMT fears that the industry could face another trade rules "cliff-edge" situation, similar to what was experienced during the negotiations of the trade deal.

While the EU aims to establish a battery supply chain within its borders, imposing tariffs could inadvertently boost the Chinese auto industry by making UK and EU-made BEVs less competitive. Talks between the UK and EU on this issue are ongoing, but time is running out as the deadline for increasing locally sourced battery components is fixed in the trade deal.

Ultimately, the EU's desire to prevent offshoring of BEV supply chains may end up damaging the very auto industry it seeks to support. It is hoped that common sense will prevail, and a mutually beneficial agreement can be reached.

FutureCar Staff