December 28th, 2020 by Steve Hanley
Boris Johnson has finally got Brexit done. But as the old expression goes, “Be careful what you wish for. You just might get it.” Now that Britain is ready to wave goodbye to the 27 nations in the European Union and bravely chart its own course forward, unfettered by narrow minded minions at EU headquarters in Brussels, what can it expect to get from its new found independence?
When it comes to its auto industry, which is a major component of its economy, the answer is it must learn how to source the battery cells for electric cars from factories in the UK or Europe within 6 years or face an import tariff of 10% when EVs manufactured in the UK are exported to EU countries. At the present time, most of the battery cells for electric cars made in the UK, such as the Nissan LEAF that is assembled in Sunderland, are sourced from factories in China, South Korea, or Japan.
Here’s what makes international trade deals so mind numbingly complex. Japan and the EU already have a trade deal in place that exempts cars made in Japan from tariffs. So a LEAF manufactured in Japan that uses battery cells made in Japan is exempt from EU tarifs while a LEAF manufactured in the UK that uses battery cells made in Japan will be subject to a 10% tariff in 6 years. That makes no sense, of course, but there is no rule that says trading rules have to be rational. The result is that the new Nissan Ariya, a sort of upgraded LEAF with more SUV in its DNA, will not be manufactured at the Sunderland factory in the UK but rather in Japan. That is not good news for the British automobile industry.
According to Forbes, over the past few weeks negotiators working on Brexit sparred over local content rules, with one side suggesting cars built in the UK with up to 70% EU or UK content could avoid the imposition of tariffs and the other side advocating for 45% local content. In the end, they decided to forget about local content rules entirely and agree instead on a 6 year tariff moratorium for electric cars. The EU wants to promote batteries manufactured in the EU, even if the factories are owned by Asian companies.
That 6 year period of time has a special significance in an industry in which the normal lifespan of a model is 7 years, It usually takes anywhere from 3 to 5 years to design the next version of an existing model and establish the supply chain needed to build it. The moratorium caries an implied risk that no new electric vehicles models will be forthcoming from UK factories as global manufacturers decide to simply avoid the whole tariff issue by moving production to Europe or Asia.
The larger point is that the UK is proposing to ban the sale of cars with gasoline or diesel engines by 2035. Unless the UK ramps up local battery production soon, it risks being shut out of the EV revolution entirely as the tariffs set to kick in six years from now will simply make cars built in the UK noncompetitive anywhere except in the home market.
The Brexit deal, such as it is, is like the dog who chases cars. The question is, what will the dog do with the car if he catches it? Boris Johnson and his yapping chorus of acolytes have caught the EU car. What happens next will be interesting to watch as industries like finance and auto manufacturing decamp to greener pastures. The Brits have achieved the autonomy they so desperately desire, but at what cost?
The promise of Brexit is much like Ronald Reagan’s trickle down economics — a theory that is fascinating for academic discussions but a disaster for the people who have to live with it in practice. In two years, will the denizens of the British Isles be as delighted with Brexit as they appear to be today? “We’ll see,” said the Zen master.
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