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David Bailey examines the potential impact of new ‘rules of origin’ requirements for Battery Electric Vehicles (BEV) under the Brexit trade deal, arguing 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.

Is Brexit about to throw another spanner in the works of the auto industry? That’s the fear of many in the UK and EU auto industry as 10% tariffs effectively loom next year for Battery Electric Vehicles (BEVs) traded between the two, at a time when governments are pressing the industry to go electric.

New ‘rules of origin’ requirements kick in next year and will mean 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.

Under an Annex to the Brexit Trade and Cooperation Agreement (TCA) some flexibility was built in for automakers until next year, with a lower value of parts in a BEV being needed to qualify for zero tariffs.

The problem is that batteries remain costly, and many BEV components come from Asia – in particular China, which has been busy building a BEV industry and battery supply chain for years.

In other words, the high proportion of BEVs’ non-EU content means that trade in BEVs between the EU and UK could well face 10% tariffs, thereby pushing up prices while Internal Combustion Engine (ICE) cars remain tariff-free. That’s an odd position to be in when both the UK and EU are trying to encourage a switch to BEVs in order to get greenhouse gas emissions down and reach net zero.

While the UK has been pressing for the rules of origin tightening to be delayed, the European Commission isn’t keen, so far at least. It highlights the role of Biden’s game-changing Inflation Reduction Act in wooing much major battery investment away from the EU, through substantial subsidies, and the need to build up its own battery-making capacity to reduce reliance on China in particular.

The EU’s fear is that relaxing rules of origin requirements would see more US- and China-made batteries going into BEVs being assembled domestically, further undermining the EU’s efforts to build a domestic battery supply chain.

EU Commissioner Maroš Šefčovič has said that the EU won’t move on this as it wants auto makers and battery firms to invest in battery-making capacity. Nevertheless, he did ask Acea (the European Auto Employers’ Federation) to submit evidence of potential damage to the industry, which could open the door to a change of heart at the Commission at some point.

Concern over the looming rules of origin change prompted Stellantis (which makes Vauxhall vehicles in the UK) to warn in a submission to the Commons Business Committee that its UK operations couldn’t meet the new rules and risked being at a ‘competitive disadvantage.’ It stated that ‘if the cost of EV manufacturing in the UK becomes uncompetitive and unsustainable, operations will close,’ adding that there won’t be enough battery production in either the UK or in Europe to meet the TCA rules.

Ford and JLR have also called for a delay, with the latter stating that the current timing is ‘unrealistic and counterproductive.’

Meanwhile, Acea has argued for the TCA rules to be extended (to 2026), arguing that customs duties on EU BEV exports to the UK could by then stack up to €4.3bn, with the effect of reducing EU auto makers’ BEV sales in the UK by as much as 500,000 cars.

The irony is that while the EU wants to see a battery supply chain built in the EU, imposing the tariff may well be a huge own goal as it could see BEVs made in the UK and EU undercut by cheaper, Chinese made ones, thereby handing the Chinese auto industry a huge boost.

There appear to be tentative talks between the UK and EU on the issue, but not yet at the top-table. The deadline for increasing locally sourced battery components is hard-wired into the Brexit trade deal and extending it would need agreement by both sides, that is through a resolution of the joint UK-EU Partnership Council that governs the Brexit trade deal. That is doable but the council has met only twice since being set up, and the clock is ticking.

The Society of Motor Manufacturers and Traders (SMMT) has highlighted that the real deadline isn’t January 2024 but rather right now as auto makers are already planning for production and export for next year. A last-minute fix isn’t going to help them much, and SMMT fears that the industry faces yet another ‘cliff-edge’ over trade rules, just as it saw in the run up to the trade deal being agreed originally.

The EU’s view is that auto makers have had sight of this for ‘production planning purposes’ since the start of 2021 so this should hardly come as a surprise. That may be correct but a number of external factors have changed since then, notably the huge level of support in the US for battery making, which has been a game changer; the increase in prices for materials going into batteries (pushing up the cost of batteries); and the slower than expected build out of an EU supply chain. Put simply, the world has changed quite a lot since the Brexit trade deal was done.

What this means is that the EU’s desire to make sure that BEV supply chains aren’t offshored to other parts of the world now risks damaging the very auto industry it wants to support. The industry on both sides of the Channel is speaking with a clear voice.

There is a perception that the Commission is listening and may eventually shift position, but that needs to happen sooner rather than later. There is a deal to be done here – let’s hope common sense prevails.

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

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