British car manufacturers could face higher export tariffs with or without a Brexit deal after the EU rejected an argument that components from Japan used on UK assembly lines should be considered British.
The car industry has maintained that parts for cars, vans and trucks, that have been sourced in non-EU countries should be deemed British under the rules of origin system that will apply to all exports from 1 January when the transition period is over.
But according to a letter by the UK Brexit negotiator David Frost, this idea, known as “cumulation” has been formally rejected in trade talks.
“The commission has made clear that it will not agree third-country cumulation in any circumstances, which we regret, but obviously cannot insist upon.
“I am sorry to say that so far they [EU negotiators] have neither been willing to discuss these nor share any proposed text with us,” Lord Frost said in a letter seen by the BBC.
Rules of origin go to the heart of the question as to whether the British car industry is manufacturing or assembly.
Typically to qualify as British after Brexit, products must have around 60% local parts or ingredients by value.
Even if a deal is struck between the EU and the UK allowing zero tariffs on exports from Britain, vehicles that do not have enough British components will typically attract a tariff of around 10%, making them less competitive than EU-sourced cars and lorries.
The British industry, which includes Jaguar Landrover, Ford, Vauxhall and Nissan, relies heavily on an EU supply chain but also on parts sourced in Japan and Turkey.
Frost has reportedly told the industry that the EU has also rejected the UK’s request for electric cars, batteries and bicycles to be treated leniently under the rules of origin system if the majority of components come from elsewhere.
The letter says: “I am sorry to say that so far they [EU negotiators] have neither been willing to discuss these nor share any proposed text with us.”
While the letter is a blow to the British car industry, which two weeks ago warned of “catastrophic” £100bn losses if a trade deal is not struck, it has been alert to the issues since the referendum in 2016.
It was one of the most vocal campaigners for a soft Brexit aligning Britain to EU rules and had some success with Theresa May’s version of the withdrawal agreement.
Two years ago it disclosed that the average content of cars built in the UK that was British was around 44%, which would automatically mean it would fall foul of the rules of origin system.
Over the past two years, the auto industry has consistently warned of the deep cost of no deal on the sector, which employs 14.6 million people across the EU and UK directly and indirectly in factories, component supplies, engineering, design and marketing and sales.
They hope this latest warning from the combined forces of leaders in the EU and the UK will help both sides see past their political differences and strike a trade deal.