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. Bailey 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 to reach net zero emissions.

The fear in the UK and EU auto industry is that 10% tariffs could be implemented next year for BEVs traded between the two regions. This comes at a time when governments are pushing for the industry to transition to electric vehicles. The new 'rules of origin' requirements state that car makers on both sides of the Channel will only avoid tariffs if a certain percentage of a 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 means that the high proportion of non-EU content in BEVs could result in 10% tariffs on trade between the EU and UK, while Internal Combustion Engine (ICE) cars remain tariff-free. This contradicts the goal of both regions to reduce greenhouse gas emissions and reach net zero.

While the UK has been pushing for a delay in the tightening of rules of origin, the European Commission is not keen on the idea. The Commission is focused on attracting battery investment and building a domestic battery supply chain. Relaxing the rules could lead to more US- and China-made batteries being used in BEVs assembled domestically, undermining the EU's efforts.

Stellantis, Ford, and JLR have all called for a delay in the implementation of the rules. Stellantis warned that its UK operations would be at a competitive disadvantage and may have to close if the cost of EV manufacturing becomes uncompetitive. Acea, the European Auto Employers' Federation, has argued for an extension of the rules, stating that customs duties on EU BEV exports to the UK could stack up to €4.3bn.

The irony is that imposing tariffs may actually benefit the Chinese auto industry, as it could lead to BEVs made in the UK and EU being undercut by cheaper Chinese-made ones. There have been discussions between the UK and EU on the issue, but a resolution would require agreement from both sides.

The Society of Motor Manufacturers and Traders (SMMT) has highlighted that the real deadline for auto makers is now, as they are already planning for production and export next year. The industry fears another 'cliff-edge' over trade rules, similar to what was experienced before the trade deal was agreed upon.

The EU's view is that auto makers have been aware of the rules since the start of 2021 for production planning purposes. However, external factors such as US support for battery making and the slower-than-expected build-out of an EU supply chain have changed the landscape since the trade deal was finalized.

In conclusion, the EU's desire to prevent offshoring of BEV supply chains risks damaging the auto industry it wants to support. There is hope that the Commission will eventually shift its position, but a resolution needs to happen soon. A deal can be reached if common sense prevails.

FutureCar Staff