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The long-term future of the United Kingdom’s electric car industry, which has benefited from considerable Japanese investment, is facing uncertainty under new trading arrangements being proposed by the European Union, according to a body representing auto manufacturers.

Even if a trade deal is agreed to by January, Japanese companies based in Britain may face 10% tariffs on exports of electric cars into the economic bloc, according to authoritative reports of the negotiations.

Industry representatives and analysts have warned this could make the country a less attractive investment destination for Japanese firms and ensure the EU becomes the main home to the electric car industry.

Britain is in a transition phase with the EU until January, so exports from U.K.-based Japanese firms into the bloc are still tariff-free. It is hoped a new deal will be in place by the start of the year.

That new agreement will see rules of origin to ensure goods that come from either the U.K. or the EU have sufficient “local” content to benefit from zero tariffs in the free trade area.

Brussels is reportedly proposing that from January 2021 until 2027 at least 55% of the value of electric cars exported from the U.K. into the EU must have been locally sourced. If not, then a tariff of 10% would be placed on the vehicle.

Besides, the European Union is also planning on insisting that by 2027 all battery packs in cars must originate from the U.K. or the EU, reports say.

When assessing the local content level in a car, the battery often constitutes between 35% and 45% of its overall value.

According to trade experts, it would be tough for any manufacturer to meet the local content requirements under these rules. It has long been argued that both Britain and Europe lack a homegrown supply of components and materials for electric vehicles.

For example, Toyota, which makes the hybrid Corolla, and Nissan, which makes the all-electric Leaf, use technology from Japan and other parts of Asia.

AutoTechInsight, a business intelligence platform from IHS Markit Ltd., noted the Nissan Leaf had a “significant dependency” on parts sourced from Japan and other Asian countries. And the Toyota Corolla has battery components imported from Japan.

The Society of Motor Manufacturers and Traders in the United Kingdom recently estimated a 10% tariff would add £2,000 ($2,590) to the average cost of a British-built electric car.

The trade body warned that such a move would make the U.K. “less attractive” to investors and “hamper the country’s ambition to be a leader in zero-emission vehicle development and production.”

David Leggett, an automotive analyst at GlobalData, a data and analytics firm, said that a 10% tariff would make life “difficult” for Japanese firms whose margins are already slim.

“The carmaker would be forced to either pass on the tariff penalty to the final customer or absorb it,” he said. “In practice, it may not be quite as bleak. For example, the United Kingdom government could look at ways to compensate the manufacturers and therefore protect their competitive position.

“However, tariffs on EU trade would be a blow and would force manufacturers to review sourcing strategies — perhaps making more within the European Union customs union area.”

On the EU’s proposals, Sam Lowe, a trade expert at the Centre for European Reform, wrote, “the proposed rules of origin suggest the (European) Commission spies an opportunity to use the trade agreement to further its ambitions of ‘strategic autonomy,’ and cajole European industry into hastily developing an on-shore domestic battery industry.”

According to reports, London is pushing to initially lower the “local” content for the U.K. and EU to 30% for electric cars and 25% for batteries. The U.K. also tried to get Japanese inputs classed as “British” — to get around the rules of origin requirements — but this appears to have been rejected.

Anna Jerzewska, a trade and customs expert, said she thinks the proposals from both sides are effectively “lines in the sand” before further negotiations. “Both sides will have to make some compromises, but it’s difficult to tell at this point.”

She said it is possible the EU may be more flexible on a limited number of car parts but will be keen to protect its own electric vehicle supply chain.

Toyota declined to comment, and Nissan failed to respond to an inquiry. Auto manufacturers have long argued that tariffs will seriously challenge their business model. There are reports the two companies may seek compensation from the government if tariffs are imposed.

Britain formally left the European Union in January, and negotiators are currently trying to hammer out the details of a new trading arrangement that needs to be in place by the start of 2021.

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