The government has been repeatedly told in private that British assembled cars will not qualify as British-made for the purposes of the much-vaunted free trade deals it hopes to sign upon leaving the European Union and its customs union.
The government, in speeches and through its “Automotive Council”, has repeatedly said that 44% of the value of UK cars is “local content”.
This would suggest that post-Brexit, the UK is not so far away from the thresholds of 55%-60% required to qualify for tariff-free trade in a typical trade deal.
But, since the beginning of the year, the car industry has explicitly told the government, including at roundtables in Downing Street in the presence of the PM, that these numbers hugely overstate the position that is relevant for trade deals under so-called “rules of origin” regulations.
This means that in the absence of special content deals, the bulk of UK assembled cars would not qualify for tariff-free treatment under a typical free trade deal.
The discrepancy arises because the 44% figure includes foreign parts bought from UK suppliers.
The automotive industry boss Mike Hawes confirmed the calculations to Sky News, saying: “To be able to take advantage of a free trade deal generally you need to say that the majority of the components that go into your products come from that country.
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“So if you look at automotive you’d have to say that at least 55% of a UK car comes from UK products but we’re totally integrated into a European industry.
“That real figure in the UK is really more like 25% because whilst we buy just under half our components from a UK supplier they in turn buy it from a range of suppliers in the UK and beyond so the actual figure is more like 25%.
“If the target is 55-60% it shows you the distance we would have to go.”
Asked why the government is saying it is more like 44%, Mr Hawes, the chief of the Society of Motor Manufacturers, replied: “The UK automotive industry on average buys about 44% of its parts from a UK supplier but that’s not what rules of origin is.
“You have to look at something called ‘originating content’. What proportion of the content comes from the UK in our instance. That is more like 20-25%”.
Sky News asked International Trade Secretary Liam Fox about this specific issue on the anniversary of Article 50 three months ago – whether cars might not qualify for his trade deal.
Dr Fox replied: “In any trade agreement rules of origin is always an important element, you can’t prejudge any one trade agreement.
“But we would want to make sure that anything we signed up to was able to maximise the UK sale of goods – why would we sign up to something that wasn’t actually going to give you a trading advantage?”
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This news shows that not only, as Sky News revealed yesterday, are European governments advising European export manufacturers to shun British parts, but that some of the marquee products from Britain would not qualify as “made in Britain” for free trade purposes.
The government hopes to increase the proportion of locally-sourced content in the UK’s automotive industry, and that approach could work with individual plants already using a high proportion of UK parts.
But at a time when there is an electric and autonomous revolution in car use and tens of billions of pounds in investment being allocated, the industry is very worried about the impact of this on the chances of attracting revolutionary new battery plants to the UK.
Such batteries would make up a very large part of the value of an electric car, and any difficulty on their import into continental Europe would likely scupper such a plan.
The government may also seek to recognise EU content in the UK and vice versa, a process known as “cumulation”, but that would require an agreed trade deal, and creates some issues, even if a transition deal is agreed, with important third countries such as South Korea, South Africa and Canada.
A former Department for International Trade insider and British trade negotiator David Henig told Sky News that the government had been told about these rules of origin problems within a month of the referendum.
Sky News also revealed an extraordinary Japanese government warning, including on these specific rules of origin issues in September 2016.
Image: Liam Fox says the government will make sure deals ‘maximise the UK sale of goods’
Mr Henig told Sky News: “It was raised by trade experts including myself in July 2016, that’s the earliest article I can find about the impact of rules of origin on the UK leaving the EU.
“It was of course only one of the issues and businesses themselves weren’t aware of it right away.
“But given that the UK government still doesn’t have a position on it according to a parliamentary question that was asked last week, it is something that should have been asked more quickly.”
He said the blame for not addressing this issue early on goes right to the top, where the government “just wanted to talk about Brexit opportunities”.
“We knew there would be a steep learning curve for ministers, the prime minister, over issues of trade.
“I think I’ve been more surprised by the lack of engagement with business that meant that these messages didn’t come through clearly and quickly enough that essentially they wanted from business just talk about the opportunities, they didn’t want hear about the possible threats that would come with Brexit, they didn’t want to hear about the whole picture.”
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Asked if he meant Downing St, Number 10 and the PM, he replied: “I think so, yes”.
The PM did mention “rules of origin” once in her Mansion House speech in March.