Behind the Scenes: Original sin

Behind the Scenes: Original sin
An electric car at the 100th edition of the Brussels Motor Show. Credit: Belga/ Eric Lalmand


Weekly analysis with Sam Morgan

Britain and the EU are on a collision course over post-Brexit trade rules that risks blowing up both their ambitions to sell lots of electric vehicles. But an unlikely hero, long-prophesied and who has gradually faded into myth might yet ride to their aid: German carmakers.

Brussels-London relations are currently quite friendly, buoyed as they are by the recent agreement on Northern Ireland and chugging along slowly but surely thanks to Rishi Sunak’s Conservative government not doing anything stupid lately.

But trouble is waiting around the corner. Post-Brexit tariffs are meant to activate in 2024, meaning certain imports will have to respect rules governing where they are made and where the manufacturing materials have come from.

That poses a problem for the UK, particularly in the e-mobility industry, because it simply does not have the domestic resources or facilities to get its numbers up above the level at which tariffs will kick in.

Hopes are high that Brussels will agree to an extension of the 2024 deadline in order to give the UK more time to ramp up battery factories. However, the European Commission is still insisting that changes to the deal are not on the table.

A hero of legend, frequently promised by the leave-championing side of the Brexit debate has now made a rare appearance. German carmakers want the agreement changed too.

BRUSSELS BEHIND THE SCENES includes weekly analysis not found anywhere else, as Sam Morgan helps you make sense of what is happening in Brussels. If you want to receive Brussels Behind the Scenes straight to your inbox every week, subscribe to the newsletter here.

First, a quick explainer of the ‘rules of origin’ that are at the heart of this story. ROOs dictate what percentage of an import must be locally produced. They are a staple of trade deals and are used to govern tariff-free access to markets.

In this case, after 2024, 45% of an electric vehicle will have to originate in the UK or EU and, most importantly, 60% of the battery. The exemption granted to allow supply chains to grow will elapse and carmakers will have to comply or pay extra.

A further tightening is on the cards for 2027.

Some UK-based manufacturers have managed to ink deals with Europe-based battery-mongers but many still rely on Southeast Asian power packs. This is a big problem for the likes of Stellantis, the mega-firm made up of what was Fiat-Chrysler and Peugeot.

Factory closures are a possibility if domestic sales are not enough to make a profit and exports are hit by unmanageable tariffs.

It is a miracle in some regard that so many marques have ditched long-entrenched positions against e-mobility. There are still holdouts but some of the biggest names are already planning for a life after the internal combustion engine.

Mucking up how these firms can sell their wares and creating smaller markets for what is still a young e-industry is bad policymaking.

The agreement can be changed if both sides want to make a tweak; it will not have to be re-ratified or have to be exposed to the political whims of either the European Parliament or Westminster.

For now, the Commission says no. But at the end of the week, Germany’s powerful auto industry argued in favour of an extension to the 2024 date, insisting that it would hurt efforts to transform the sector.

China and other Asian competitors are going to be huge rivals for the traditionally powerful European brands, so maintaining a “significant competitive disadvantage” is not the way to go, according to the trade group.

Das Auto riding to the rescue of the UK is somewhat ironic given that pro-Brexit supporters insisted during the negotiation period that Germany's mighty car lobby would not allow the EU to cut Britain and its market off from European suppliers. They also said that French cheesemakers and Italian prosecco merchants would champion their cause.

It did not pan out that way.

In this case though, it is hard to see this broad support going unnoticed or unheeded at Brussels HQ. The president, Ursula von der Leyen, is German and hails from a very industry-minded party, and neither of those factors can be discounted.

The EU is also still trying to prove itself to be a geopolitical superpower and to ‘de-risk’ its ties with China. With all due respect, the decision that needs to be made seems very obvious to Behind the Scenes.

This, after all, is the rub: this is not a UK-problem. The EU has a lot of battery factories in the pipeline but much of the capacity is yet to come online. Its carmakers are also still relying on outside help to power their e-machines.

Billions of euros of investment are going to come good eventually but absolutely not by 2024, so it is in Brussels’ interests to compromise on this issue. Elon Musk can promise Emmanuel Macron his business but until it is up and running, nothing is guaranteed.

‘Rules of origin’ are nowhere near politically-charged enough for the Commission or EU governments to take a stand against alleged UK cherrypicking, which Westminster has of course been guilty of in the past.

The only political impact denying an extension would cause would be negative for both sides.

EU climate policies are being attacked on several fronts and the last thing the transport sector needs right now is something else gumming up the works. 

There is also the small matter of future EU-UK relations that still needs to be worked out. Talks about finally joining the Horizon Europe research scheme still have to happen, a new agreement on financial services looks promising and a reform of the customs union might be of interest to both parties.

It would be a shame to ruin a rare period of bilateral adultness with a pointless spat over electric cars. 

BRUSSELS BEHIND THE SCENES includes weekly analysis not found anywhere else, as Sam Morgan helps you make sense of what is happening in Brussels. If you want to receive Brussels Behind the Scenes straight to your inbox every week, subscribe to the newsletter here.

Copyright © 2024 The Brussels Times. All Rights Reserved.