19 May 2023

UK TPO's Gasiorek/Tamberti: Rules of origin do matter after all!

The issue is the following: The Trade and Cooperation Agreement with the EU allows for tariff-free trade between the EU and the UK, providing that the goods being exported originate (i.e. are sufficiently produced) in each country. There are different rules regarding batteries and cars

Michael Gasiorek is Director of the UK Trade Policy Observatory and Co-Director of the Centre for Inclusive Trade Policy. He is Professor of Economics at the University of Sussex Business School. Nicolo Tamberi is Research Officer in Economics at the University of Sussex and Fellow of UKTPO.

Earlier this week Vauxhall announced it may withdraw from producing electric vehicles in the UK owing to difficulties from meeting ‘rules of origin’ on EU exports. The car manufacturer called for a revision to the Trade and Cooperation Agreement (TCA) between the EU and then UK, notably regarding rules of origin (ROOs). Ford and Jaguar Land-Rover have also warned of the difficulties and called for a revision to the TCA and German producers have also expressed concerns about the meeting these ROOs. 

The issue is the following: The Trade and Cooperation Agreement with the EU allows for tariff-free trade between the EU and the UK, providing that the goods being exported originate (i.e. are sufficiently produced) in each country. There are different rules regarding batteries and cars. Some of the key elements are in relation to the maximum value of non-originating materials:

• For battery packs and battery cells:
  • Up to the end of 2023 these should not exceed 70% of the value of the battery pack/cell.
  • Up to the end of 2026 they should not exceed 40% for battery packs and 50% for battery cell.
  • From 2027 they should not exceed 30% for battery packs and 35% for battery cells.

• For electric/hybrid cars:
  • Up to the end of 2023 these should not exceed 60% of the value of the vehicle.
  • Up to the end of 2026 these should not exceed 55% of the value of the vehicle.
  • From 2027 onwards these should not exceed 45% of the value of the vehicle.

The current struggle to meet the ROOS for electrical vehicles is in part due to the need to import the batteries for those vehicles, which typically constitute 30-40% of the cost of an electric car, and because of the rise in raw materials costs. If the ROOs cannot be met, then a tariff of 10% would be levied on the exports of those cars from the UK and the EU, and vice versa. Note that, paradoxically, tariffs would be levied on electric vehicles, while less environmentally friendly petrol/diesel vehicles would remain exempt.

In the short term there is an obvious remedy to this problem: extend the deadlines for the current, and more generous, ROOs regime. Importantly, this would not require any renegotiation of the TCA. Article 68 of Chapter 2 (Rules of Origin) states that “The Partnership Council may amend this Chapter and its Annexes”. Similarly, Article 519 states that “The Partnership Council may: (a) adopt decisions to amend: (i) Chapter 2 of Title I of Heading one of Part two and its Annexes, in accordance with Article 68”.

Unlike so many Brexit-related issues, this problem can be relatively easily overcome if there is political goodwill from both the UK and the EU. As Kemi Badenoch, the Trade and Business Secretary acknowledged in Parliament yesterday, the difficulties in meeting the ROOs apply to both sides. One might hope the economic concerns and political incentives may be strong enough for this to be resolved. There is of course the possibility that the EU perceives the issue to be more important for the UK and may ask for other concessions in return.  

If a resolution is not found, there will be material consequences for the UK car industry. It is worth also considering how important this is for the UK. Overall, cars (technically, HS8703 in the trade classification) accounted for over 8% of UK exports in 2022, and over 6% of imports. Out of over 1,200 products defined at this (four-digit) level, cars are the UK’s 5^th most significant export and its 2^nd most important import. From the total UK car exports and imports in 2021, the share of electric / hybrid cars was 36% and 38% respectively.[1]...

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