Brexit and Trade: The Automotive Sector

According to the SMMT (Society of Motor Manufacturers and Traders), the UK automotive industry generates more than £78.9 billion in turnover and adds £15.3 billion value to the UK economy. Of the c 1.3 million cars manufactured in the UK in 2019 80% were made for export, with more than half of the exports heading for the EU and the USA second at around 19% of export volumes.

It is no surprise then that the automotive industry lobbied hard for a trade agreement to be signed with the EU prior to end of the Brexit Transition Period. The Trade and Cooperation Agreement (TCA) achieves some, but not all of industry's demands.

What are the Positives?

The TCA ensures, as its headline achievement, tariff and quota free trade in goods between the UK and EU. This means that tariffs of 10% of more (depending on vehicle type) on vehicles and vehicle parts have been avoided and, in principle, the UK automotive sector can continue to compete in the EU (and vice versa). However, this is subject to the provisions relating to rules of origin.

Rules of Origin

Free trade agreements such as the TCA always contain provisions relating to the origin of goods in order to ensure only goods from the parties to the agreement benefit from preferential tariffs and the countries are not simply used as distribution hubs for goods sourced from around the world.

The TCA does allow the UK to "cumulate" materials from the EU with UK materials in calculating the percentage of non-originating materials (and vice versa). This may mean UK manufacturers seeking more parts supply from the EU than from e.g. Asia.

The TCA requires that internal combustion engine cars are limited to a maximum or 45 % non-originating content.

All UK manufacturers must urgently assess their supply chains in order to ensure they will satisfy the rules and thereby qualify for tariff free exports.

These figures are a challenge for electronic vehicles (EVs) where the most expensive single component (the battery) is necessarily sourced from overseas – usually China, South Korea or Japan.  The TCA provides for a special temporary regime for batteries, hybrids and EVs:

These concessions will help the UK automotive industry to compete – but not indefinitely. 

Regulatory issues

The UK and EU did not formally agree in the TCA to harmonise their regulatory regimes or to recognise each other's regulatory bodies. Accordingly, vehicles and parts sold in the UK must comply with UK type approval and vice versa. However, to avoid divergence and barriers to trade, the EU and UK have agreed:

• to base regulatory convergence on the use of the international technical standards set at UNECE (United Nations Economic Commission for Europe) level. Both Parties will cooperate and, where appropriate, plan initiatives to promote greater international harmonisation of technical requirements;
• to accept, in their respective markets, products that are covered by a valid UN type-approval certificate; and
• to cooperate in the field of research and exchange of information linked to the development of new vehicle safety regulations or related standards, advanced emission reduction, and emerging vehicle technologies.

Customs compliance

As well as regulatory compliance, and notwithstanding tariff free trade, the need to comply with all customs formalities is a necessary consequence of the UK becoming a "third country".

All customs controls and formalities required under EU law (and in particular the Union Customs Code), including entry and exit summary declarations, will apply to all goods entering the customs territory of the EU from the UK, or leaving that customs territory to the UK. This does not apply to trade in goods between the EU and Northern Ireland, where the Protocol on Ireland and Northern Ireland included in the Withdrawal Agreement will apply. To avoid a hard border with the South, Northern Ireland is essentially regarded as remaining part of the single market. Special rules apply for both exports and imports between Great Britain and Northern Ireland.

To minimise disruption and costs, the UK and EU have agreed to recognise each other's ‘Authorised Economic Operators' programmes, enabling trusted traders that benefit from this status to enjoy certain simplifications relating to security and safety in their dealings with the customs authorities of the other party.

The TCA also allows for further developing customs cooperation in the future, including for instance with regard to innovative solutions, in full respect of both parties' domestic rules, concerning the handling of customs procedures for roll-on/roll-off (“ro-ro”) traffic, i.e. ships carrying loaded trucks, or exchange of customs-related information.

The TCA also includes a Protocol on mutual assistance to combat customs fraud as well as an ambitious Protocol allowing Parties to cooperate on VAT matters and the recovery of claims relating to indirect taxes and duties.

It will inevitably take some time for industry (especially smaller operators without dedicated staff) to adjust to this new environment but over time business will adapt and closer cooperation seems likely as discussions continue to minimise administrative burdens.

On-going collaboration

The TCA establishes a Working Group on Motor Vehicles and Parts which will assist the Trade Specialised Committee on Technical Barriers to Trade in monitoring and reviewing the implementation and ensuring the proper functioning of the terms of the TCA as it impacts on the motor industry.

Other trade agreements

Given the global nature of the automotive sector it is important to review what other free trade agreements are in place.  Notably the EU and UK have both recently signed trade agreements with Japan – which may have the effect of encouraging Japanese manufacturers to invest more in domestic production now their exports are potentially tariff free.

Meanwhile both the UK and EU are separately discussing trade agreements with the USA, and the EU recently signed an investment agreement with China.  These deals will impact on the automotive sector.

Conclusions

Traders in the UK and EU have to adapt fast to the new trade rules in place following Brexit.   However, given the value of these markets and the level of trade in vehicles and vehicle parts, business will adapt but some price rises may result given additional bureaucracy involved.