Rules of origin: EU and UK sign off deal for electric vehicle manufacturing

Automotive sector welcomes plan and proposals to build up battery production in Europe

The UK and European Commission have signed off a three-year delay to laws that would have imposed tariffs on certain UK-exported and imported vehicles.

The EU-UK Partnership Council adopted a decision to extend the current rules of origin for electric vehicles and batteries for three years until 31 December 2026. This follows a proposal by the Commission on 6 December and its adoption by the council earlier today.

Due to be rolled out on 1 January 2024, the ‘rules of origin’ legislation will now not come into force until 1 January 2027. These rules, created as part of the Brexit negotiations, require 45% of the value of an electric vehicle, and 60% of the battery pack, to have originated in the UK or EU.

To access zero tariffs under the Trade and Cooperation Agreement (TCA), businesses must prove their products include a minimum level of EU or UK manufactured content. These rules of origin help determine where products originate rather than where they’re shipped from to ensure lower tariffs are correctly applied to eligible products and support market competition.

Under the existing Trade and Cooperation Agreement, a staged approach was introduced for electric vehicles and batteries which required phased increases in these rules of origin requirements – with the first increase due to take effect on 1 January 2024, before a final increase from 1 January 2027.

This phased approach would have increased the content requirements for electric vehicles to be eligible for tariff-free trade over the next three years. These were initially designed to reflect industry capability at the time and incentivise investment in domestic battery production. 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.

A one-off agreement

The new agreement facilitates UK-EU tariff-free trade in electric vehicles and prevents 10% tariffs being levied on this trade from January. It is a one-off extension that cannot be prolonged, as the Partnership Council is no longer empowered to modify these rules until 2032. This means that UK and EU industry must now intensify investments to increase and deepen battery manufacturing capacities. The automotive industry also needs to evaluate its supply chains to ensure that vehicles destined for export to the United Kingdom are assembled with EU-originating (or UK-originating) batteries, in order to comply with the rules of origin applicable from 1 January 2027.

Ursula von der Leyen, president of the European Commission, said: “Today’s Decision of the Partnership Council reinforces our commitment to a competitive EU industry. Cooperation between like-minded partners is critical also to guarantee mutual market access that benefits consumers and address unfair trading practices.”

UK prime minister Rishi Sunak said: “We have been listening to concerns of the sector throughout this process, and I know this breakthrough will come as a huge relief to the industry. The UK government is delivering a pragmatic solution to keep costs down for businesses and for people at home who want to make the switch to electric vehicles.”

Business and trade secretary Kemi Badenoch added: ”This government is determined to ensure the UK remains one of the best places in the world for automotive manufacturing. We listened to the concerns of the sector and worked hard with counterparts in Brussels and across Europe to deliver a solution that works for both sides.”
The UK will also 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. 

Building battery capacity

The agreement comes as both the UK and EU committed to working together to bolster domestic battery supply chain in Europe. In his Autumn Statement the chancellor Jeremy Hunt announced that the UK making available £4.5bn over five years through the Advanced Manufacturing Plan to unlock private investment in strategic manufacturing sectors across the UK. This includes over £2bn in R&D and capital funding for the automotive sector to support the manufacturing and development of zero emission vehicles, their batteries and supply chain.

In parallel, the EU is stepping up its efforts to support the production and development of more batteries in the EU. This includes the recently announced funding mechanisms of up to €3bn to boost the EU's battery manufacturing industry. This will create significant spillover effects for the entire European battery value chain, notably its upstream segment, as well as support the assembly of electric vehicles in Europe.

Maroš Šefcovic, executive vice-president for European Green Deal, Interinstitutional Relations and Foresight, said: “Today’s decision of the Partnership Council will give legal certainty to European operators. In parallel, the EU will provide significant financial support to European producers of sustainable batteries with a view to strengthening production capacity of batteries in the EU. This is a balanced solution that protects the EU’s interests.”

Relief in the automotove sector

The automotive industry welcomed the European Commission’s proposal to extend the current rules of origin for electric vehicle batteries under the Trade and Cooperation Agreement (TCA) until 2027.

Lisa Brankin, chair, of Ford Britain said: “On behalf of Ford in the UK, I want to thank policymakers in London and Brussels for listening to and engaging with a united automotive industry. Today’s decision to avoid unnecessary tariff costs is a major moment that will protect jobs, support countless investments, and most-importantly help to keep costs down for consumers and businesses on their journey to an all-electric future.”

The government’s focus on updating the UK-Turkey battery trade rules to reflect today’s agreement with the EU is also very welcome. Our dedicated Ford Pro organisation is committed to helping businesses go electric and this swift action will help us to continue do that.”

Maria-Grazia Davino, group Managing director, Stellantis UK said: “We welcome the agreement between the EU-UK to maintain the current Rules of Origin for batteries requirements until January 2027.  We can now focus on our planned acceleration towards electrification, keeping costs down for our customers. The agreement demonstrates the importance of the trading relationship between the EU and UK and keeping the UK competitive.

BMW Group said: “We welcome the agreement which has been reached between the European Union and the United Kingdom on their Trade and Cooperation Agreement. This planning certainty will allow the BMW Group to enhance its manufacturing and sales footprint in this highly competitive market.”

The Society of Motor Manufacturers and Traders (SMMT) said extending the rules for three years would avoid a tariff cliff-edge, allowing the UK and EU automotive industries to continue to sell EVs into each other’s markets without penalty. The SMMT, alongside its EU counterparts, has warned consistently of the threat tougher locally sourced content requirements would pose to the industry on both sides of the Channel, if applied from 2024.

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.”

The SMMT said that while the industry has invested billions in EV production both in the UK and EU, local battery supply needs more time to expand to meet demand. If the rules go ahead as originally planned, EVs traded both ways would be subject to a 10% tariff – adding billions of pounds in costs, pushing up prices for consumers, and rendering both UK and EU manufacturers uncompetitive in each other’s markets. The SMMT has worried that tariffs would severely undermine the transition to zero-emission mobility, sending the wrong message to consumers about governments’ commitment.

European manufacturers welcomed today’s solution, which will help support the competitiveness of Europe’s burgeoning electric vehicle manufacturing industry. 

“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 €4.3bn in tariff costs and saved some 480,000 units of electric vehicle (EV) production.” 

Future challenges

A report published last week indicates the massive challenges for Europe’s EV manufacturing sector. Backed up by comprehensive strategies to boost domestic supply chains and homegrown EV industries, the report notes that the EU is at risk of losing ground to Chinese and US competitors.

Download: Comparison of the Chinese, European, and American regulatory frameworks for the transition to a decarbonised road mobility

De Vries said: “Unlike China and the US, the EU lacks a robust industrial strategy to boost electric vehicle manufacturing,” added de Vries. While we applaud today’s hard-fought decision, we must build on this positive collaboration to solve the immense challenge of building a mature EV battery supply chain in Europe.

“Vehicle manufacturers want to lead Europe’s green transition and build the future of EV manufacturing in Europe – for the benefit of all Europeans. Building on today’s constructive decision from law makers, the focus should turn to framing a holistic EU industrial strategy for the entire green value chain, from R&D, mining, refining and manufacturing; to charging networks, energy supply, purchase incentives, and recycling.”