Brexit's impact on the auto industry

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.

There are concerns in the UK and EU auto industry that Brexit might disrupt the auto industry once again. The fear is that 10% tariffs will be imposed on Battery Electric Vehicles (BEVs) traded between the UK and EU, just as 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 at least 45% of the value of a BEV's components and 60% of its battery come from the UK or EU.

However, there is some flexibility built into the Brexit Trade and Cooperation Agreement (TCA) until next year. Automakers can qualify for zero tariffs with a lower value of parts in a BEV.

A major issue is that batteries remain expensive and many BEV components come from Asia, particularly China. China has been building its own BEV industry and battery supply chain for years.

The high proportion of non-EU content in BEVs means that trade between the EU and UK could face 10% tariffs. This would increase prices while Internal Combustion Engine (ICE) cars remain tariff-free. This situation is contradictory to the efforts of both the UK and EU to promote the switch to BEVs and reduce greenhouse gas emissions.

The UK has been advocating for a delay in tightening the rules of origin, but the European Commission is not in favor. The Commission emphasizes the role of Biden's Inflation Reduction Act in attracting battery investment away from the EU through subsidies. It also highlights the need to build up the EU's own battery-making capacity to reduce reliance on China.

The EU is concerned that relaxing the rules of origin requirements would result in more US- and China-made batteries being used in domestically assembled BEVs. This would undermine 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, he has asked for evidence of potential damage to the industry, which could potentially lead to a change of heart at the Commission.

Stellantis, which manufactures Vauxhall vehicles in the UK, has warned that it cannot meet the new rules and risks being at a competitive disadvantage. Ford and JLR have also called for a delay, stating that the current timing is unrealistic and counterproductive.

Acea, the European Auto Employers' Federation, has argued for an extension of the TCA rules until 2026. They claim that customs duties on EU BEV exports to the UK could reach €4.3bn by then, resulting in a significant reduction in EU auto makers' BEV sales in the UK.

The irony is that while the EU wants to establish a battery supply chain within the EU, imposing tariffs may benefit the Chinese auto industry by making UK and EU-made BEVs more expensive compared to cheaper Chinese-made ones.

Discussions between the UK and EU on this issue are ongoing, but no agreement has been reached yet. 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 UK-EU Partnership Council.

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 solution would not be helpful, and SMMT fears another trade rules "cliff-edge" situation.

The EU believes that auto makers have been aware of these requirements since the beginning of 2021, so this should not come as a surprise. However, external factors such as US support for battery making and increased prices for battery materials have changed since then.

This situation means that the EU's desire to prevent the offshoring of BEV supply chains now risks damaging the auto industry it wants to support. The industry on both sides of the Channel is expressing concerns and calling for a resolution.

There is a perception that the Commission is listening and may eventually change its position, but this needs to happen sooner rather than later. A compromise can be reached, and it is hoped that common sense will prevail.

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

FutureCar Staff