Brexit's Impact on the Auto Industry

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. The looming 10% tariffs on Battery Electric Vehicles (BEVs) traded between the UK and EU are a cause for concern, especially when governments are pushing for the industry to go electric.

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

Although there is some flexibility for automakers until next year, with a lower value of parts needed to qualify for zero tariffs, the problem lies in the costly batteries and the fact that many BEV components come from Asia, particularly China.

Due to the high proportion of non-EU content in BEVs, there is a possibility of facing 10% tariffs on trade between the EU and UK. This would increase prices while Internal Combustion Engine (ICE) cars remain tariff-free, which is counterproductive to the efforts of both the UK and EU to encourage a switch to BEVs for reducing greenhouse gas emissions and achieving net zero.

While the UK has been advocating for a delay in the tightening of rules of origin, the European Commission is not in favor of it. The Commission emphasizes the role of Biden's Inflation Reduction Act in attracting battery investment away from the EU and the need to reduce reliance on China by building its own battery-making capacity.

The EU is concerned that relaxing rules of origin requirements would result in more US- and China-made batteries being used in domestically assembled BEVs, undermining the EU's efforts to establish a domestic battery supply chain.

EU Commissioner Maroš Šefčovič has stated that the EU will not change its stance as it wants auto makers and battery firms to invest in battery-making capacity. However, there is a possibility of a change of heart at the Commission if evidence of potential damage to the industry is presented.

Stellantis, Ford, and JLR have expressed concerns over the looming rules of origin change and have called for a delay. Stellantis warns that its UK operations may not meet the new rules and could be at a competitive disadvantage. Ford and JLR believe that the current timing is unrealistic and counterproductive.

Acea argues for the extension of the TCA rules, stating that customs duties on EU BEV exports to the UK could accumulate to €4.3bn by 2026, potentially reducing EU auto makers' BEV sales in the UK by 500,000 cars.

Ironically, while the EU aims to build a battery supply chain within its borders, imposing tariffs may give a boost to the Chinese auto industry by making UK and EU BEVs less competitive compared to cheaper Chinese-made ones.

Talks between the UK and EU on the issue are ongoing, but there has been no significant progress. The deadline for increasing locally sourced battery components is set in the Brexit trade deal, and extending it would require agreement from both sides through the joint UK-EU Partnership Council.

The Society of Motor Manufacturers and Traders (SMMT) emphasizes 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 helpful, and SMMT fears another cliff-edge situation over trade rules.

The EU argues that auto makers have been aware of the requirements since the start of 2021 for production planning purposes. However, external factors such as US support for battery making, increased prices for materials going into batteries, and slower than expected development of an EU supply chain have changed the landscape since the trade deal was agreed upon.

The EU's desire to prevent offshoring of BEV supply chains now risks damaging the auto industry it wants to support. The industry on both sides of the Channel is united in its concerns, and there is hope that the Commission will eventually shift its position. A deal needs to be reached soon, and common sense should prevail.

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