How could new rules of origin affect Europe's automotive sector?

Industry News | | MIC Customs Solutions |

Why have some of Europe's biggest carmakers been calling on the EU and UK to renegotiate rules of origin for trade?

The UK's automotive sector is warning of a major threat to future manufacturing in the country unless the government can renegotiate a key part of its post-Brexit trading arrangement with the EU.

A deadline is looming that will see tougher rules of origin requirements imposed on the import of cars across the English Channel. Unless a deal is done, this could see significant additional tariffs levied on vehicles, with some commentators even stating that if unresolved, it poses an existential threat to the UK's car manufacturing sector.

So what is the issue, what's at stake and how could governments in Westminster and Brussels come to an agreement?

What is causing the concern among automakers?

The concern relates to rules of origin requirements for vehicle imports into the EU from the UK and vice versa. Under the regulations set out in the post-Brexit Trade and Cooperation Agreement (TCA), cars entering the bloc must contain a minimum of 40 percent of their parts by value that originate in either the UK or the EU. Those that fail to meet this threshold are subject to tariffs of ten percent.

However, from next year, this threshold will increase to 45 percent, before rising again in 2027, at which point battery packs for electric vehicles (EVs) must come from the UK or EU - and the sector is not yet prepared for this.

At present, many UK-manufactured vehicles will fail to meet the higher threshold to comply with zero-tariff rules of origin, which will mean extra costs for every vehicle shipped from the UK to the EU. This is largely because EV batteries are still largely sourced from Asia, with China in particular the biggest source of these components.

While a lack of EV battery facilities is an issue in both the UK and EU, investment in new manufacturing is more advanced on the continent, with the UK lagging behind. As such, it is likely to be several more years before the country's automotive sector has enough domestic capacity to meet demand. 

What have major brands said about the issue?

Among the first companies to raise the issue publicly was Stellantis, whose brands include Vauxhall, Fiat, Peugeot and Chrysler. It stated that if the changes go ahead as planned, this would greatly increase its costs and could threaten the future viability of its manufacturing operations. It said: "If the cost of EV manufacturing in the UK becomes uncompetitive and unsustainable, operations will close."

Shortly after this, other major manufacturers with UK operations, including Ford and Jaguar Land Rover, added their voices to calls for a renegotiation.

In a statement, Ford also urged the new requirements to be pushed back, saying: "Tariffs will hit both UK and EU-based manufacturers, so it is vital that the UK and EU come to the table to agree a solution ... Tightening the trade rules at this point risks undermining the switch to EVs with tariffs."

How could the issue be resolved?

Carmakers have called for a renegotiation of the TCA that will push back the change in rules of origin until 2027. They say this delay will give them enough time to prepare their supply chains and ensure the necessary battery manufacturing capacity is in place in the EU and UK. However, this will require political effort on both sides in order to secure a deal.

While in recent years, cool relations between Westminster and Brussels may have made this unlikely, the atmosphere has begun to warm in recent months. For instance, the Windsor Framework governing trade between Great Britain and Northern Ireland demonstrates that there is now more goodwill between the parties.

Pressure from the automotive sector on the continent has also made clear that this is an issue that affects both sides, not only UK imports to the EU, which may make Brussels more likely to agree to a deal. 

Germany's main industry lobbying group, the VDA - which represents brands including BMW, Mercedes-Benz and VW, is among those urging lawmakers to postpone the changes. It noted prospective new tariffs would create "a significant competitive disadvantage for the European car industry in relation to its Asian competitors in the so important UK market".

UK prime minister Rishi Sunak has stated discussions are underway between the UK and EU to forge a new agreement, telling Bloomberg: "We are engaged in a dialogue with the EU about how we might address those concerns when it comes to auto manufacturing more generally."

While there have so far been few updates on progress since Stellantis' first public warnings, there remains optimism that a deal can be done.