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'Big loss' for Britain as EU trade deal exposes some UK cars to tariffs

THURLEIGH, BEDFORDSHIRE - JUNE 09: Thousands of unwanted new and used cars line up on June 09, 2020, at Thurleigh Airfield in Bedfordshire. Britain's economy slumped by 20.4% in April in the biggest monthly decline since records began as the coronavirus lockdown paralyzed the country. (Permission from Aerodrome for flight). (Photo by Chris Gorman/Getty Images)
The Brexit deal's terms over non-EU materials used in car exports are a 'big loss' for the UK, according to an expert. Photo Chris Gorman/Getty Images.

Some UK carmakers and drivers face higher costs under the Brexit trade agreement, with an expert warning little-noticed parts of the deal are a “big loss” for Britain.

Prime minister Boris Johnson has said the deal struck in late December would enable UK-EU trade without tariffs or quotas. But it has since emerged that tariffs, a tax on imports, remain a threat to trade as they can be imposed by either side in a wide range of scenarios.

Dr Michael Gasiorek, a Sussex University economics professor and director of the UK Trade Policy Observatory (UKTPO), said some makers of certain goods using parts from outside Europe risked UK or EU tariffs.

Gasiorek and other UKTPO members wrote in a recent paper that such taxes risked “less investment in the UK as more production switches to the EU.”

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The deal means firms only enjoy the tariff-free trade they had until last month if they can prove a certain amount of their product ‘originates’ in Britain or the EU, with the rules varying by sector.

Such strict rules-of-origin requirements pose a major headache for many firms using parts from outside the EU, with carmakers among the most affected as many source large numbers of parts from around the world.

Gasiorek said Britain had pushed Brussels for a more generous settlement, allowing carmakers to source parts from certain other countries without increasing the risk of tariffs. Such effective exemptions exist in some other global trade agreements, with Britain granting EU parts such special status in its trade deal with Japan.

But in the final UK-EU deal, no such ‘third country accumulation,’ as it is formally known, was agreed.

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“That’s a big loss for the UK,” he said in a call with British Chambers of Commerce (BCC) members on Tuesday. “That’s going to impact on trade flows in future, and the way supply chains are organised.”

It makes trade “more difficult for carmakers,” he told Yahoo Finance UK after the call, though the impact will vary according to their supply chains.

Such rules and potential tariffs affect both UK consumers buying from EU car or other goods manufacturers, and UK carmakers exporting to the EU.

A Ford spokesman told Autocar last week that hikes in the cost of several of its Fiesta and Puma models were “all to do with Brexit pricing.”

The cost of a Fiesta ST-3 rose by £1,695 between December and January, according to the industry publication.

The spokesman said it was because some engine parts were from the US. Both models were therefore reported to be hit by UK tariffs, as they exceeded the allowed proportion of non-European components.

Some UK carmakers’ ranges are also at risk of EU tariffs, according to the Society of Motor Manufacturers & Traders (SMMT). It said last month the deal did not deliver on “key asks,” including allowing carmakers to use common supply countries, such as Japan, Korea and Turkey, without raising their exposure to tariffs.

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“Some members were disappointed,” chief executive Mike Hawes told Autocar on Tuesday. He said securing better deals with such common supply countries had been a “big ask” by Britain, however.

Another trade expert on the industry call, Dr Anna Jerzewska, of consultancy Trade and Borders, agreed. "It was always unlikely for the EU to agree to such type of cumulation with the UK," she told Yahoo Finance UK.

Under the UK-EU deal, 55% of the average car’s parts will have to come from the UK or the EU to avoid tariffs, according to Gasiorek.

He gave the example of a carmaker which sourced around a third of their parts from Britain, and a third from Korea. It would face tariffs of 10% under the agreement.

If Britain had secured a deal allowing Korean parts to count as effectively ‘domestic’ parts, “the car could be exported duty-free.”

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Such a carmaker would then face a choice between paying tariffs, buying inputs within the UK or EU where possible, ceasing EU exports and going out of business, he added.

The proportion of cars and carmakers exposed to such rules remains to be seen. One car expert told Autocar “most” carmakers would not be affected.

Companies from carmakers to retailers are now examining their potential exposure to EU and UK tariffs from the rules, which appear to have caught some by surprise.

But the car industry faces a particular challenge with such calculations, as the average car contains some 30,000 parts, according to Toyota.

UK and EU carmakers are also facing broader headwinds, with demand subdued even before COVID-19 hammered demand. New figures show they suffered their worst year on record in 2020.

READ MORE: Carmakers suffer worst year on record amid pandemic