How to save the UK car industry from Brexit (kinda)

I was at a loose end, so I thought I’d give it a go.

The car industry is worried that even if the UK does have a zero-tariff free trade agreement with the EU they won’t be able to take advantage of it because not enough of the components in UK cars are actually from the UK.

Mike Hawes, the CEO of The Society of Motor Manufacturers and Traders said:

“The danger is that UK-built cars may not qualify under most normal free-trade agreements,” he said. “Generally rules of origin require around 50 to 55% local content. Currently in the UK, the average car has about 41% local content.”

But worry not, I’ve thought up a solution.

(It still leaves them worse off than the status quo — costs associated with complying with rules of origin and other annoyances are estimated to be between 2 and 6% of the final price, or $14 to $1,500 fixed, depending on who you ask — and with considerably more paper work, but what can you do?)

Option one:

Have more relaxed rules of origin requirements.

There is no hard and fast rule saying that 50% of the car has to originate in the UK so as to be eligible for preference. It can be whatever the EU27 and UK agree it is. It could be 40%. 30%. Hell, why not 0%.

The EU27 is probably not going to let this happen, due to a fear it would allow third-country manufacturers to use the UK as a tariff-free backdoor into its market.

Option two:

Agree to treat inputs imported from the EU27 as being from the UK (and vice versa) for originating purposes.

This is called bilateral cumulation and is fairly common in trade agreements.

As a large proportion of the inputs for UK cars are sourced from EU27 countries (if you have the exact number, @ me) this would quite comfortably take the local content % over the presumed 50–55% qualifying threshold.

An extra problem:

While the above solves the problem for UK car makers exporting to the EU27, it doesn’t resolve the issue of what happens to exports to third-countries.

As the EU27 and UK are now distinct, EU27 or UK car exporters may have trouble taking advantage of trade agreements the EU27 already has/ones the UK is yet to have because the cars they are selling don’t meet the agreed originating requirements.

This too is resolvable, but it is slightly more complicated.

Let’s say that as well as an FTA with the UK, the EU27 has another one with Japan (currently being negotiated), and the UK also has one with Japan (maybe one day).

If the rules of origin requirements in the UK-Japan FTA allow for diagonal cumulation explicitly with the EU27, a UK car manufacturer could import EU originating inputs, put it all together in the UK and then sell it to a customer in Japan and it would be treated as if it was of UK origin no matter how much value was added, or not, in the UK.

This is far from unheard of. Such provisions already exist in the EU-Canada deal specifically for automobiles allowing for diagonal cumulation between Canada and the US, if and when the EU signs a trade agreement with the US.

All the UK and EU27 has to do is get everyone else to agree to it.