The warning by Stellantis that Britain’s trade rules with the EU threaten the viability of its electric van plant at Ellesmere Port has reopened one of the car industry’s most complicated headaches: rules of origin.
The UK’s failure to attract international battery investments means British plants will be reliant on imported batteries for years.
The wider car industry, which includes JLR, Nissan, BMW and Toyota, is reliant on exports to Europe, even after Brexit. These companies are concerned that anything that penalises their vehicle sales will make their factories less competitive, and more at risk in the future.
How do rules of origin work for vehicles?
Rules of origin, sometimes abbreviated to “ROOs”, are a common condition of trade deals to ensure that goods have sufficient locally made content to qualify for tariff-free access to a market.
Under the UK’s post-Brexit Trade and Cooperation Agreement with the EU, cars sold from one side to the other must have 55 per cent of their “content” — whether engines or other costs such as materials or components — from within the EU or UK in order to gain tariff free access to the other’s market.
Electric vehicles initially received a concession because the battery is such a significant portion of the vehicle’s value and many still come from China, South Korea or Japan.
However, from January 2024 some 45 per cent of an electric vehicle must come from the UK or EU to avoid tariffs when sold across the Channel, but 60 per cent of a battery pack must originate from Europe or the UK for the whole battery to qualify as “local”. These levels increase to 55 per cent for vehicles and 65 per cent for batteries in 2027.
The concession was put in place to allow fledgling battery industries to develop on both sides of the Channel.
How do the rules affect UK carmakers?
Many of the UK’s car plants, from Nissan’s in Sunderland to Toyota’s site in Derbyshire, were opened in order to export vehicles to continental Europe. Around four in five UK-built cars are sold abroad, with more than half going to the EU.
Stellantis, which owns the Vauxhall plants in Luton and Ellesmere Port, argues that price rises outside Europe, particularly in battery materials, mean it will not now comply with the upcoming rule changes, something that puts the site at risk.
The company, stitched together by combining Opel, Peugeot and Fiat Chrysler, has a large network of plants across Europe, and currently makes the same electric vans as Ellesmere Port in Spain and Portugal. It is also planning a similar factory in South Africa.
This means it will be able to meet some EU demand without exporting from the UK, and may be able to sustain its UK plant on domestic sales alone if it can secure the batteries, trade experts suggest.
The business currently imports batteries from China’s CATL, something that makes it harder for the company to comply with the higher threshold requirements.
Other carmakers are less exposed to the rules. Nissan builds batteries in the UK with Envision, while BMW’s electric Mini uses imported batteries from Germany.
JLR, whose parent Tata Motors is close to deciding whether to put a battery factory in Spain or the UK, is less reliant on European sales as it exports more of its cars to the US or China, neither of which have trade deals with the EU or UK.
Toyota, the UK’s other large carmaker, does not make battery electric models in Europe yet, and does not plan to do so until the middle of the decade.
Yet the risk is still substantial. In its submission to MPs on the business select committee, Nissan warned: “There is a vital need to fulfil rules of origin requirements for UK battery content required to export EVs, not just to Europe but also to the rest of the world, and to create the supply-side demand that is necessary to justify the establishment of an EV battery supply chain and battery manufacturing presence in the UK.”
Will the EU agree to a delay?
The European Commission is being lobbied by both EU and UK car manufacturers to delay the imposition of the tougher thresholds for originating content, but has so far not yielded to industry pressure.
The commission also sees the rules of origin as a lever to encourage EU carmakers to invest in EU battery plants, partly at the expense of the UK industry, which has struggled to attract investment in the sector.
However, the UK accounts for almost a quarter of EU-built EV exports, but since 2019 has seen a growing number of imports from China. EU carmakers fear that if a 10 per cent tariff is added to their vehicles they will lose further UK market share.
Despite industry concerns, insiders on both sides say the commission is in principle reluctant to set a precedent by renegotiating the UK-EU Trade and Cooperation Agreement, although the deal does allow for the rules of origin to be changed by a joint EU-UK decision, without the need for a further ratification process.
One commission official said Brussels was “not open to changes to the rules of origin”.
Still, leading industry experts believe Brussels may, at the eleventh hour, give manufacturers more time to adapt. This would also avoid a political confrontation with London just as post-Brexit relations have improved under prime minister Rishi Sunak.
UK business minister Nusrat Ghani told MPs on Wednesday that ministers “have had productive conversations with our counterparts in the European Union” and said they will “continue to make strong representation” on the issue.
Sam Lowe, trade expert at consultancy Flint Global, said it was clear that neither EU or UK manufacturers had the domestic manufacturing capacity to meet the 2024 rules of origin requirements.
“Ultimately, I think the EU will agree to some form of extension — a scenario in which combustion engine cars can trade tariff-free, but EVs cannot is absurd — but the decision could be made quite late in the day so as not to weaken the desired onshoring impact,” he said.
How will this affect the UK car market?
While the UK imports far more electric vehicles from Europe than it sells into the market, the overall impact of tariffs on UK carmakers will be more significant than on EU carmakers.
The UK is one of the leading markets for electric vehicles in Europe, with many battery-driven Volkswagen, Peugeot and Fiat models imported from the mainland.
If the rules are not relaxed then models that do not use European batteries will face 10 per cent tariffs.
Electric vehicles are already more expensive than petrol rivals to buy outright, and further price rises will stem demand significantly, industry leaders fear.
In addition, the UK will introduce an electric vehicle sales mandate from next year, penalising companies that do not meet their quotas.
If electric vehicles become more expensive, it will be harder for carmakers to hit the targets, which start at 22 per cent from 2024 and rise every year, and may see them scale back offerings of petrol or hybrid models to compensate, industry executives say privately.
There are already concerns about the coming wave of Chinese EVs from brands such as BYD, Great Wall, and Geely. These are likely to be cheaper than European models, a gap that will widen if EU-made cars face additional tariffs.