Brexit uncertainty looms over the auto industry once again

author: FutureCar Staff    

David Bailey examines the potential impact of new ‘rules of origin' requirements for Battery Electric Vehicles (BEV) under the Brexit trade deal. He argues that tariffs on UK-EU BEV trade would be self-defeating when both the UK and the EU are trying to encourage a switch to electric vehicles in order to reach net zero.

Many in the UK and EU auto industry fear that Brexit will disrupt the auto industry once again. 10% tariffs on Battery Electric Vehicles (BEVs) traded between the UK and EU are set to take effect next year, just as governments are pushing for the industry to transition to electric vehicles.

Starting next year, new ‘rules of origin' requirements will be implemented. These requirements state that car manufacturers on both sides of the Channel will only avoid tariffs if at least 45% of the value of a BEV's components and 60% of its battery come from the UK or EU.

While there was some flexibility built into the Brexit Trade and Cooperation Agreement (TCA) to allow automakers to qualify for zero tariffs with a lower value of parts in a BEV, the problem lies in the high proportion of BEVs' non-EU content. Many BEV components, particularly batteries, come from Asia, specifically China.

As a result, the trade of BEVs between the EU and UK could face 10% tariffs, driving up prices while Internal Combustion Engine (ICE) cars remain tariff-free. This contradicts the goal of both the UK and EU to encourage a switch to BEVs and reduce greenhouse gas emissions.

The UK has been pushing for a delay in the tightening of rules of origin, but the European Commission is not in favor of this. The Commission is concerned about the role of Biden's Inflation Reduction Act in attracting battery investment away from the EU, as well as the need to build up the EU's own battery-making capacity to reduce reliance on China.

EU Commissioner Maroš Šefčovič has stated that the EU will not change its stance on this issue, as it wants auto makers and battery firms to invest in battery-making capacity. However, Acea (the European Auto Employers' Federation) has been asked to provide evidence of potential damage to the industry, which could lead to a change of heart at the Commission.

Stellantis, the company that manufactures Vauxhall vehicles in the UK, has warned that it cannot meet the new rules and risks being at a competitive disadvantage. They have stated that if EV manufacturing in the UK becomes uncompetitive and unsustainable, operations will close. Ford and JLR have also called for a delay, stating that the current timing is unrealistic and counterproductive.

Acea has argued for an extension of the TCA rules, stating that customs duties on EU BEV exports to the UK could reach up to €4.3bn by 2026, resulting in a significant reduction in EU auto makers' BEV sales in the UK.

Ironically, while the EU wants to build a battery supply chain within the EU, imposing tariffs may actually benefit the Chinese auto industry by allowing cheaper Chinese-made BEVs to undercut those made in the UK and EU.

Discussions between the UK and EU on this issue are ongoing, but a resolution would require agreement from both sides through the joint UK-EU Partnership Council. The clock is ticking, as the deadline for increasing locally sourced battery components is hard-wired into the Brexit trade deal.

The Society of Motor Manufacturers and Traders (SMMT) has emphasized that the real deadline is now, as auto makers are already planning for production and export next year. A last-minute fix would not be beneficial, and the industry fears facing another trade rules cliff-edge.

The EU believes that auto makers have had knowledge of this issue since the start of 2021 for production planning purposes. However, external factors such as the significant support for battery making in the US, increased prices for materials used in batteries, and the slower than expected development of an EU supply chain have changed the landscape since the Brexit trade deal was finalized.

This situation means that the EU's desire to prevent the offshoring of BEV supply chains to other parts of the world now poses a risk to the very auto industry it wants to support. Both sides of the Channel are expressing concerns, and there is hope that the Commission will eventually shift its position. However, it is crucial that a resolution is reached sooner rather than later.

By David Bailey, Senior Fellow, UK in a Changing Europe, and Professor of Business Economics, Birmingham Business School.

FutureCar Staff