The UK and EU have agreed to extend current trade rules on electric vehicles until the end of 2026, the UK Government has confirmed.
The rules are designed to ensure that EU-produced electric cars are largely made from locally sourced parts. However, vehicle makers in the UK and the EU have said they are not ready. As EV sales ramp-up, the supply of sufficient batteries from European plants will be a huge industrial challenge for the region.
The new rules of origin applying from January 2024 apply to shipments of cars across the English Channel under the terms of the Brexit deal negotiated between London and Brussels – the UK-EU Trade and Cooperation Agreement. A higher local content – UK or EU – is stipulated from 2024 (up from 40% to 45% of an EV by value and 60% of the battery pack) which makes it difficult for EVs to qualify as tariff free. A final increase would apply from 1 January 2027.
However, in recognition of the disruption to the global supply chain caused by the COVID-19 pandemic and Russia’s illegal invasion of Ukraine, the UK and EU have agreed to cancel the 2024 changes, meaning the existing rules of origin will last for a further three years until the end of 2026.
The latest agreement therefore facilitates UK-EU tariff-free trade in electric vehicles and prevents 10% tariffs being levied on this trade from January, 2024.
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The rules of origin for electric vehicles mean that without the change, EVs with Chinese made batteries would have been hit by tariffs because too much of their value would have been manufactured in China which currently dominates global EV battery materials and cell supply – 70% of lithium-ion battery manufacturing – followed closely by South Korea.
The British and European car industries, which pushed for a delay, have said they want to use locally sourced batteries but European production has taken longer to become available than expected when the UK’s Brexit deal (Trade and Cooperation Agreement – TCA) was drafted.
Mike Hawes, SMMT Chief Executive, said: “Deferring the rules of origin is a win for motorists, the economy and the environment. Maintaining tariff-free trade in EVs will ensure consumers retain the widest and most affordable choice of models, at a time when we need all drivers to make the switch.
“Governments have listened to the sector and acted to safeguard the competitiveness of the EU and UK automotive industries and give the Anglo-European battery industry the critical time it needs to catch up. The measure will help cut carbon, support growth and jobs, and is the right decision for the decarbonisation of road transport.”
Europe’s vehicle makers also welcomed the move. “The long-awaited deal to extend rules of origin by three years provides much-needed certainty to Europe’s growing electric vehicle battery supply chain. Instead of penalising green industries, today’s decision is recognition that it takes time to build up emerging value chains,” noted Sigrid de Vries, ACEA Director General. “It is also a strong signal that the EU is willing to uphold the competitiveness of its critical industries – the deal has potentially avoided a hefty €4.3 billion in tariff costs and saved some 480,000 units of electric vehicle (EV) production.”
Richard Peberdy, UK Head of Automotive for KPMG, said it was a ‘sensible’ decision. “The delay also provides an extended window for battery production and related supply chain to become more established in the UK and Europe,” he said.
The UK Government also said it will look to agree to extend the equivalent rules of origin in the UK-Turkey preferential trade agreement ready for the end of the year, in a further boost for UK car companies who are major exporters to the Turkish market, such as Ford. This will ensure the existing rules of origin will last for a further three years until the end of 2026, and comes as the UK looks to start negotiations for a new free trade agreement with Turkey next year.