Making social science accessible

06 Dec 2023

Economy

UK-EU Relations

David Bailey explores the context to the EU’s decision to delay for three years the introduction of tariffs on electric vehicles which are required under the Brexit deal.

It seems that the European Commission is on the verge of shifting position and recommending a three-year delay to impending tariffs on battery electric vehicles (BEVs) traded with the UK. It would represent a major shift and one that would be welcomed by car makers on both sides of the Channel.

As things stand, the ‘devil in the detail’ of the post-Brexit Trade and Cooperation Agreement (TCA) dictates that new ‘rules of origin’ requirements kick in on 1 January 2024. These requirements 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.

The problem is that Lithium-ion (Li-ion) 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 decades, while the European auto industry was busy pushing diesels.

The high proportion of BEVs’ non-EU content means that trade in BEVs between the EU and UK would otherwise face 10% tariffs, thereby pushing up prices while Internal Combustion Engine (ICE) cars remain tariff-free. That’s a counter-productive policy outcome when the UK and EU are trying to encourage a switch to BEVs by 2035 in order to transition to net zero.

The auto industries in the UK and EU and the UK government had all been pressing for a tariff delay, but the European Commission was not keen, highlighting the need to build up EU Li-ion battery-making capacity to reduce reliance on China in particular. The Commission had previously hinted at only a one year delay, and was rumoured to be exploring a ‘Plan B’ to help cushion the industry in the event of tariffs coming in from January. In part its reticence to delay was related to a fear that the whole TCA might have to be reopened. This has been assuaged to some extent by the delay being firmly set up as a one-off which won’t be repeated.

While the goal of building a European supply chain underpinned the original January 2024 target, the world has changed quite a lot since the Brexit trade deal was done; notably the huge level of support in the US for battery making, which has been a game changer in attracting investment; the increase in prices for materials going into Li-ion batteries (pushing up the cost of batteries); and the slower than expected build out of an EU supply chain.

The EU’s concern remains that relaxing rules of origin requirements would see more US- and Chinese-made batteries going into BEVs being assembled domestically, thus undermining the EU’s efforts to build a domestic battery supply chain. A new €3bn package of support for the EU battery industry is likely to be announced alongside the tariff delay to address such concerns. Meanwhile the UK has recently started to get its act together with a much-anticipated battery strategy.

Concern over looming tariffs prompted Stellantis (which assembles vans at Luton and Ellesmere Port) to warn in a submission to the Commons Business Committee earlier this year 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 Li-ion battery production in either the UK or in Europe to meet the TCA rules. Ford and JLR also called for a delay, with the latter stating that the current timing is ‘unrealistic and counterproductive.’

Meanwhile, the European car maker’s association ACEA had argued for the TCA rules to be extended (to 2026), arguing that customs duties on EU BEV exports to the UK could by then total some €4.3bn, with the effect of reducing EU auto makers’ BEV sales in the UK by as much as 500,000 cars.

While the EU wants to see a Li-ion battery supply chain built in the EU, it appears to have finally realised that imposing the tariff so soon would be an own goal, with BEVs made in the UK and EU undercut by cheaper, Chinese made ones, thereby handing the Chinese auto industry a boost.

The proposal will go to the College of Commissioners, then to the European Council for agreement before going to the joint UK-EU Partnership Council that governs the implementation of the Brexit deal.

The move will be welcomed by the auto industry on both sides of the Channel. But this is just for three years and offers only a limited window for the UK and EU battery supply chain to gear up. Whether this is enough time is a key question given the huge cost and experience advantage in making batteries in China. The latter accounts for around 70% of global Li-ion battery supply. If the UK-EU industry doesn’t scale rapidly it could be back to square one in three years’ time, despite the Commission insisting this is a one-off.

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

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