What Comes Next?
What's next for EVs, accidental illegality and rules origin
Tariffs have always been a slightly odd tool to deploy if you are worried about national security.
If a product is viewed as a threat (unless set absurdly high) a tariff will increase the relative price of the imported product but it won’t prevent anyone from buying the product. Is a threatening foreign product less threatening if it is more expensive?
The tariff may of course mean fewer imports, which matters if you are worried about retaining domestic manufacturing capacity for *insert security-related reasoning*. But again, slightly crude.
In the context of Chinese electric vehicles, now that the world is full of tariffs – which, as I’ve previously written, in the context of the EU, will slow down imports rather than stop them [see chart below] – there is a question of what comes next if you view the car itself as a potential threat.
A recent USTR ‘Report on the Operation of the USMCA with Respect to Trade in Automotive Goods (2024)’ sent me down two rabbit holes, the second of which I’ll cover at the end of the newsletter.
The first was triggered by this throwaway line:
This concern about in-vehicle data being transferred to China is consistent with US plans to impose new restrictions on China-connected vehicles in the Autumn. The UK has also conducted its own investigation.
What could this mean?
In a hypothetical scenario where all cars that send data back to China were banned from the road, given the nature of modern cars, this would shut out pretty much any China-linked vehicle produced in the last 10 years.
Which would be pretty punchy.
Guilty as charged
On the subject of EV tariffs, if you haven’t already, please check out this week’s piece for FT Alphaville. I take a look at the EU’s implementing legislation which gives more detail on the rationale for its countervailing tariffs.
The most interesting aspect, IMHO, is the EU’s argument that the Chinese battery industry is state-owned, and providing car makers with a de facto subsidy when it sells them cheap batteries.
In doing so, the EU implicitly sets out the case against the Chinese battery industry … which gives a clue as to where future anti-subsidy investigations will focus.
Accidental illegality
Back in my think tank days, I wrote a piece about “accidental illegality” and the possibility that, post-Brexit, lots of companies trading between the EU and UK would break the law without necessarily meaning to:
Even if the EU and UK succeed in concluding a free trade agreement (which at the time of writing is uncertain), on January 1st 2021 hundreds, perhaps thousands, of companies selling goods or services between the UK and EU will be breaking some rule or other, if only by mistake. Packets will be mislabelled, financial products will be sold from the wrong jurisdiction and people travelling to countries to meet clients will breach the terms of their visa. This accidental illegality will be widespread, and is an inevitable consequence of asking businesses to adjust to a radically different operating environment at breakneck speed.
It is not a question of whether companies will break the law – they will – but how vigorously the EU and UK authorities choose to enforce the new rules.
Anyway, this happened to varying degrees, with the UK authorities being much more tolerant than the EU. But it sounds as if times are a changin’, or at the very least threatening to change [from June]:
In a missive to traders […], the Department for Environment, Food and Rural Affairs (Defra) wrote that many businesses and logistics firms are making “continuous and/or deliberate” errors that could lead to the avoidance of recently introduced charges.
Many medium-risk goods were falsely being marked as low-risk, while high-risk goods were being downgraded to medium-risk.
Defra also suggested that traders had been trying to include multiple Export Health Certificates (EHCs) – documents that must accompany medium- and high-risk goods – on a single Common Health Entry Document (CHED), when only one should be included. With the cost of each document reaching as much as £145, the department suspects this to be a money-saving measure.
The missive also noted that some traders were failing to include EHCs at all for imports of meat and dairy products, as well the corresponding certificate for plants.
Port Health Authorities have been told to take action if they encounter this kind of misrepresentation, which constitutes a criminal offence.
Traders, you’ve been warned!
Chart of the week: deforestation
From Bloomberg’s report about US diaper makers complaining about the EU’s anti-deforestation regulation:
Rules of origin
Returning to the aforementioned USTR ‘Report on the Operation of the USMCA with Respect to Trade in Automotive Goods (2024)’, the findings provide a nice case study on the impact of restrictive rules of origin provisions.
To re-cap, rules of origin are the provisions which determine whether an export qualifies for the preferential treatment of a free trade agreement. When Trump renegotiated NAFTA and turned it into USMCA, he made the rules of origin criteria stricter, making it harder for Mexican and Canadian car exporters to avoid tariffs:
The USMCA ROOs for motor vehicles require a specific amount of North American content in the final vehicle in order to qualify for duty-free treatment under the USMCA. The USMCA raised regional value content (RVC) requirements to 75 percent for passenger vehicles and light trucks, compared to 62.5 percent under the NAFTA. In addition, certain “core parts” must also meet the higher RVC thresholds for the entire vehicle to qualify. The USMCA also requires that at least 70 percent of a vehicle producer’s steel and aluminum purchases originate in North America. Finally, the USMCA introduced a new LVC rule that requires that a certain percentage of each producer’s qualifying vehicles be produced by employees making an average of $16 per hour. Collectively, these new requirements are intended to incentivize increased investment in autos and automotive parts production within the United States and North America.
And the report finds that this had an impact. Since USMCA’s entry into force (2018), the share of US imports of vehicles from Canada and Mexico rose from 7.5% to 20.5%:
So restrictive rules of origin result in fewer exports using the FTA.
However, one point I would make here is that the marginal benefit of using USMCA to export vehicles is actually pretty low. The US’s MFN tariff for vehicles is only 2.5 per cent, so while the USMCA rate of 0 per cent is better, it’s not loads better. This means that being hit with the tariffs is manageable in many instances, and might in fact be cheaper than complying with the stricter rules of origin requirements.
It will be interesting to see what happens, however, if Trump does impose his universal 10 per cent tariff …
Best,
Sam