View from Brussels - May 2023

23 May 2023

UK-EU relations appear to have been thawing recently with the Windsor Framework and only last week the agreement reached on a memorandum of understanding for financial services cooperation to help iron out any future cross-border issues which arise.

One issue looms large in the automotive sector. Under the terms of the Trade and Cooperation Agreement (TCA) which underpins the Brexit arrangements, the UK must move towards self-sufficiency in electric vehicle (EV) production to avoid EU tariffs. From 2024, this means that unless 45% of a vehicle’s value originates in the UK or the EU then UK-produced cars will attract a 10% tariff if sold in the EU and vice-versa. The intention is to prevent reliance on Asian imports.  In 2022, the US introduced subsidies for EVs assembled domestically under its Inflation Reduction Act.

EU Member States are forging ahead to build battery gigafactories. France plans four such production centres within 100km of the coastline of the English Channel. Last week, President Macron announced EV subsidies. Meanwhile, Tata – the owner of Jaguar Land Rover – is playing off the Spanish and UK authorities against one another for the best incentives to set up a gigafactory. Whilst Spain has successfully secured €2bn of EU funding towards EV vehicle production, only €350m can be invested in battery plant funding. At the same time, Chancellor Jeremy Hunt has pledged £500m to secure a UK base with further sweeteners to modernise Port Talbot’s aging infrastructure.

Whilst the UK will not meet the TCA deadline we have reached a critical juncture given that to date only one gigafactory is in the offing (in Sunderland) following the demise of BritishVolt earlier this year. In the short-term it feels like the UK’s best bet is to secure a further three-year grace period from the EU something that German car manufacturers support. In the medium-term only a change in Government philosophy will shift the dial, that is if a UK administration is prepared to countenance large-scale subsidies and/or introduce measures as a part of an industrial strategy. For now, neither seem likely.

Published 23 May 2023