When the Brexit transition period ends on 31 December 2020, the rules governing international trade will become more relevant to businesses operating in the UK than ever before. A well-publicised example of the impact that these rules can have can be found in the electric vehicle (EV) sector as a result of what are known as the "rules of origin".
The "rules of origin"
Even if a free trade deal (FTA) can be agreed between the UK and the EU, it is almost certain that any agreement would contain detailed rules that define whether goods produced in the UK are eligible for tariff-free treatment in the EU. These are known as “rules of origin”, conceived to prevent high value inputs, such as engines, which are manufactured in a country that is not party to the FTA (and so would normally have higher tariffs applied) slipping through the net and benefiting from the FTA partner's tariff-free access. FTAs generally stipulate that c.50% of a product needs to be produced locally in order for it to be considered to "originate" from that country and therefore qualify for tariff-free treatment.
The issue for the UK EV sector is that many of the key components of EVs manufactured in the UK are sourced from outside the EU (in particular batteries and motors from China and Japan). Even if a trade deal were agreed allowing for zero tariffs to be applied on exports of UK vehicles, EVs that were not made up of enough "British" components would not be able to benefit from tariff-free treatment and as a result would attract a tariff of c.10%. This would make UK exports of EVs much less price competitive in EU markets compared to EU manufactured vehicles.
This issue applies to the automotive sector more generally, but due to the particularly international character of the EV supply chain (in part a result of the lack of any large scale UK battery or motor production) it is especially concerning in relation to EVs.
UK attempts to minimise disruption rejected by the EU
According to various news reports, the UK Government had sought to avoid the impact of these rules by (i) agreeing with the EU that Japanese components should count as “British” on the grounds that both the EU and UK have trade deals with Japan, and/or (ii) seeking to minimise the percentage of locally manufactured inputs that are needed to secure tariff-free access for electric cars (hoping to agree that 70% of inputs could be from outside of the UK).
However, it is understood that such attempts have been rejected by the EU, who are insisting that the percentage of locally manufactured components be set at 45% for EVs. The basis behind this stance being that the EU does not want to see the UK become an offshore assembly hub for EVs made using predominantly Asian or American components (to which tariffs would normally apply).
What next?
The impact of the UK's departure from the EU's Single Market and Customs Union on the automotive sector will be felt from 1 January 2021 regardless of whether an FTA is agreed.
A study by the Society of Motor Manufacturers and Traders (SMMT) has estimated that for cars and vans alone (not limited to EVs), the reduction in demand caused by 10% tariffs could reduce production by three million vehicles over five years. The SMMT estimates that this would cost UK factories €52.8 billion and EU plants €57.7 billion.
Businesses therefore need to evaluate their supply chains and consider what steps can be taken to mitigate any negative impacts of the end of the transition period. Further investment in UK manufacture of key components will be critical but will no doubt require significant Government support.