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Brussels Urges UK to Join Trade Pact to Ease Risk of Post-Brexit Car Tariffs

The UK should join a pan-European agreement on goods trade to limit the damage to its car industry from looming post-Brexit tariffs instead of seeking a delay to their introduction, according to senior officials in Brussels.

From next January, electric vehicles shipped between the UK and the EU will need to have at least 45 per cent of their parts sourced from within the two regions or face 10 per cent tariffs, under “rules of origin” terms set out in their post-Brexit trading agreement.

The limit rises to 60 per cent for batteries, which make up a significant part of the value of an EV, and is particularly problematic as the UK and EU still import many from China, South Korea or Japan.

London wants the EU to delay the introduction of the levy until 2027. The move is backed by carmakers in the UK and EU, which have warned they will not be able to comply with “rules of origin” from next January due to the lack of battery manufacturing capacity in Europe.

But two senior officials in Brussels said they would instead encourage the UK to sign up to an existing pact among more than 20 other European, Middle Eastern and North African countries that treats goods assembled in one country from parts made in another signatory state as originating in the exporting country, thereby avoiding tariffs and quotas.

“The simple way to solve this is for the UK to join the Pan-Euro-Mediterranean convention,” said one, citing its “harmonised rules on trade”. After leaving the EU, the UK decided not to join PEM.

The European Commission has dismissed the idea of an extension of the current EU-UK tariff exemption. “If you go down that route [of an extension] we will never be able to build our own battery supply chain in Europe because [companies] will lock in long-term supply from China,” Maroš Šefčovič, vice-president responsible for UK relations, told the Financial Times.

The concession for EVs was originally agreed as part of the UK’s post-Brexit Trade and Cooperation Agreement with the EU to allow fledgling battery industries to develop on both sides of the Channel.

The commission sees the impending change to the rules of origin requirements as a lever to encourage EU carmakers to invest in battery plants in the region, partly at the expense of the UK industry, which has struggled to attract investment in the sector.

UK membership of PEM might help European carmakers eventually as signatory states such as Norway and Turkey develop a domestic EV battery-making sector, but trade experts warned it would do little in the short-term to solve the UK-EU tariff issue given the need to import batteries from Asia.

“PEM might help in some areas, but it’s not necessarily an immediate fix,” said Sam Lowe, trade expert at consultancy Flint Global. “PEM membership doesn’t address the main problem at the moment for EU and UK carmakers, which is that they need to import batteries from Asia which is not part of PEM,” he added.

But David Henig, at the European Centre for International Political Economy think-tank, said the move would help avoid future post-Brexit tariffs in other sectors such as food. “It would go some way to removing barriers to UK manufacturers staying part of supply chains.”

He added that commission officials had told him the EU and other PEM signatories would approve UK membership but he warned of a possible delay. “PEM rules are in the process of being updated, and the UK probably couldn’t accede until that process is complete.”

Government insiders said ministers believed that a solution that avoided tariffs on electric vehicles from 2024 could be achieved within the framework of the TCA. The government declined to comment.

Source : FinancialTimes