Electric vehicles traded between the EU and the UK have been given a grace period to prevent trade being slammed with tariffs, but battery producers need to start preparing now to meet the deadline, industry sources say.
Under the new EU-UK trade agreement, a maximum of 45% of car parts are allowed to originate from outside the EU in order to benefit from zero-tariff trade between the two sides. Above that threshold, they will face tariffs.
However, because most batteries for electric vehicles come from outside Europe, an annex to the deal grants a grace period for the industry to bring production within its borders.
Until 2023, electric vehicles require at least 40% of content originating from the EU or the UK while batteries require 30% to avoid tariffs. After that, until 2026, electric vehicles require 45% and batteries 50-60%.
“The phase-in addresses a big concern for the industry because to create a battery industry you really need to have scale and demand. The phase-in helps ensure trade can continue, but may not be long enough,” said Nils Poel from CLEPA, the European association of automotive suppliers.
While the industry expects production of electric vehicles, including batteries, to increase in Europe, it can take up to five years to plan and develop a battery plant.
Even EU-produced battery cells contain, at best, around 20-30% of EU originating content, so the 45% requirement would be challenging for electric vehicle producers.
“That’s extremely restrictive. I’m not aware of any other rule in any agreement that goes quite as deep in the supply chain as that,” said Jonathan O’Riordon, international trade director at the European Automobile Manufacturers Association (ACEA).
Batteries for electric vehicles are 30-40% of their value and are not currently produced in sufficient quantities in Europe to meet demand. The European Commission expects a 14-fold increase in battery demand by 2030, mostly due to the 30 million electric vehicles it says will be on Europe’s roads by then.
Once the transition period ends, manufacturers will be requested to deliver battery packs made in the EU with chemicals also sourced in Europe. A worry for the industry is that both battery manufacturing and chemical producers are far behind other parts of the world.
“There’s an inherent risk there. If they can’t meet it in terms of cost or quality competitiveness, then that’s a concern for us because ultimately if we’re paying more for the battery, it makes this future of driving in Europe harder to access for consumers,” said O’Riordon.
If electric vehicles cannot meet the rules of origin, they will face 10% tariffs entering the UK and 10-22% tariffs entering the EU.
It’s one of several problems the car industry is faced with after the EU-UK trade deal came into force.
The supply chain for vehicles is complex and includes many small and medium enterprises, who may have never traded outside of the EU single market before. Additional costs are foreseen for manufacturers, as they cope with more paperwork and dual certification.
Divergence is also a concern for the industry, which relies on a high level of interconnectivity between the EU and the UK. While the UK is currently almost completely aligned with the EU, there are fears it will diverge.
While extending lead times and providing storage facilities can help overcome customs issues, distance can create problems if customs capacity becomes overwhelmed and ports clog up. As a result, goods might end up being blocked for unpredictable lengths of time, O’Riordon warned.
While ACEA says the UK is not likely to be at a disadvantage from the new trade agreement, the situation may be different for suppliers of car parts.
Preliminary evidence suggests that investments and sourcing are changing in favour of businesses operating in the single market, according to Poel.
“If you have to do more paperwork, you would ideally do it with suppliers that are in the same regulatory orbit or face less complex customs procedures. That means that, for certain suppliers, there will be competitive disadvantages of no longer being part of the single market,” Poel said.
There is a review clause in the deal to extend this grace period that either party can initiate.
[Edited by Frédéric Simon]