Changes to Rules of Origin could put a squeeze on electric vehicles

The EU and the UK currently trade under an agreement with important rules of origin (ROO). The EU-UK Trade and Cooperation Agreement (TCA) governs the trade relationship between the European Union (EU) and the United Kingdom (UK) post-Brexit. Rules of origin are used to determine whether goods qualify for preferential tariffs under a free trade agreement, but they’re due to end, and the automotive industry is worried about what’s to come and its effect on trade - especially on electric vehicles. 

The current rules of origin for electric vehicles are due to expire on 31 December 2023, whereupon tighter restrictions will come into force, which could have a negative impact on the EU's electric vehicle industry. The European Automobile Manufacturers’ Association (ACEA) is making an urgent plea to the European Commission to act to prevent taxes from being imposed on electric vehicles traded between the EU and the UK from January 2024.

The UK is the EU's largest export market, and the EU is the UK's largest import market for vehicles. In 2022, the EU exported over 2 million vehicles to the UK, and the UK exported over 1.1 million vehicles to the EU.

To qualify for preferential tariffs under the TCA, a vehicle must be produced in the EU or the UK and meet certain requirements. For example, a vehicle must be assembled in the EU or the UK, and the value of the non-originating materials used in the vehicle must not exceed 40% of the total value of the vehicle. Still, rule changes could see that drop as low as 10%.

Rules of origin for electric vehicles

By way of an example, an electric vehicle is assembled in the UK using a battery pack imported from China. The battery pack accounts for 20% of the vehicle’s total value. The vehicle qualifies for preferential tariffs under the TCA because the value of the non-originating materials used in the vehicle (the battery pack) does not exceed 40% of the vehicle’s total value. Other advantages to the Rules of Origin are: 

• Tariff-Free Trade: The TCA usually allows trade between the EU and UK tariff-free. This means vehicles can move between these two regions without customs duties.
• Rules of Origin: To benefit from tariff-free trade, vehicles must meet certain "rules of origin." These rules determine whether a product is considered as originating from one of the parties (EU or UK) or from a third country.
• Electric Vehicles: Electric vehicles (EVs) are subject to specific rules of origin within the TCA. To qualify as originating from the EU or UK, a certain percentage of the EV’s value, parts, and labour used in manufacturing must come from the EU or the UK. This ensures that the benefits of tariff-free trade apply only to EVs produced within the EU or the UK.
• Regional Value Content: The TCA specifies the minimum percentage of regional value content required for electric vehicles. This means that a certain portion of the EV's value must be derived from materials and labour within the EU or UK to be considered originating from one of these regions.
• Cumulation: Cumulation allows manufacturers to use materials and components from the EU and the UK when calculating the regional value content. This helps ensure EVs can easily meet the rules of origin requirements.
• Documentation: To claim tariff-free status, manufacturers must provide proper documentation and evidence that their electric vehicles meet the rules of origin criteria. This can include invoices, production records, and certificates of origin.

“Driving up consumer prices of European electric vehicles, at the very time when we need to fight for market share in the face of fierce international competition, is not the right move – neither from a business nor an environmental perspective,” stated Luca de Meo, ACEA President and CEO of Renault Group. “We will effectively be handing a chunk of the market to global manufacturers.”

Costly to EU vehicle makers

If the Commission fails to act, urges ACEA, a 10% tariff will be placed on EU electric vehicle exports to the UK – its largest trading partner. This could cost EU vehicle makers €4.3 billion over the next three years, potentially reducing electric vehicle production by 480,000 units, equivalent to two average-size auto factories.

Under these more restrictive rules due to apply from January, the only way to avoid duties will be to source all battery parts and some critical battery material in the EU/UK, which is practically impossible today.

“Europe should be supporting its industry in the net-zero transition as other regions do – not hindering it,” added de Meo. “There is a very simple and straightforward solution: extend the current phase-in period for battery rules by three years. We urge the Commission to do the right thing.”

Massive investments are being made in European battery supply chains, but more time is needed to build up the scale needed to meet the rules of origin.

Image: Shutterstock-2196120217 - Bartolomiej Pietrzyk