Brexit's Impact on the Auto Industry

author: FutureCar Staff    

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

There is concern in the UK and EU auto industry that Brexit may disrupt the industry even further. With 10% tariffs looming for BEVs traded between the two, at a time when governments are pushing for electric vehicles, the industry is at risk.

Starting next year, new 'rules of origin' requirements will be implemented, which means that car makers on both sides of the Channel will only avoid tariffs if a certain percentage of the BEV's components and battery come from the UK or EU. However, the problem lies in the fact that batteries are expensive and many BEV components come from Asia, particularly China.

This high proportion of non-EU content in BEVs could result in 10% tariffs on trade between the EU and UK, increasing prices while Internal Combustion Engine (ICE) cars remain tariff-free. This is contradictory to the goal of encouraging a switch to BEVs to reduce greenhouse gas emissions and reach net zero.

The UK has been pushing for a delay in the tightening of rules of origin, but the European Commission is not inclined to agree. The EU fears that relaxing the requirements would lead to more US- and China-made batteries being used in domestically assembled BEVs, undermining their efforts to build a domestic battery supply chain.

Stellantis, which manufactures Vauxhall vehicles in the UK, has already warned that it cannot meet the new rules and may be 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 rules until 2026, as customs duties on EU BEV exports to the UK could accumulate to €4.3bn, potentially reducing EU auto makers' BEV sales in the UK by 500,000 cars.

The irony is that while the EU wants to build a battery supply chain within the EU, imposing tariffs may actually benefit the Chinese auto industry, as BEVs made in the UK and EU could be undercut by cheaper Chinese-made ones.

Tentative talks between the UK and EU on the issue have begun, 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 for next year. The industry fears another 'cliff-edge' situation over trade rules.

The EU argues that auto makers have been aware of these requirements since the start of 2021, but external factors such as increased support for battery making in the US and slower than expected development of an EU supply chain have changed the landscape since the trade deal was agreed upon.

Ultimately, the EU's desire to prevent offshoring of BEV supply chains risks damaging the very auto industry it aims to support. It is hoped that the Commission will listen to industry concerns and shift its position sooner rather than later, as there is a deal to be done.

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

FutureCar Staff