Rules of Origin

Rules of origin. China currently produces 75% of all electric vehicle batteries and could result in a 10% tariff.

Following Alpha Bites ‘Made in China,’ another challenge appears to be facing the European car manufacturing industry. The problem stems from the ‘rules of origin’, which come into force in January 2024, following Brexit.

Rules of origin determine the ‘economic nationality’ of a good and were a key part of the UK/EU trade agreement. Rules of Origin ensure that only goods produced in a designated country can benefit from a free trade agreement (the UK or the EU), or zero tariffs. From January 2024, electric vehicle batteries and other components with less than 45% produced in the UK or Europe, will face a 10% tariff.

It is estimated that China currently produces 75% of all electric vehicle battery cells. Unfortunately, because battery production has not ramped up as quickly as expected, European car manufacturers are struggling to meet the new criteria. The European Automobile Manufacturers Association (ACEA) has warned that the measures could reduce output from EU factories by 480.000 vehicles and cost the industry €4.3bn. This comes as European car makers have warned about the competitive challenge from Chinese manufacturers of electric cars. The ACEA said ‘Driving up consumer prices of European electric vehicles, at the very time when we need to fight for market share in the face of fierce international competition, is not the right move.’

The ACEA wants the new rules to be delayed by three years and is appealing to the European Commission. However, the ACEA is concerned that the European Commission does not want to change anything, it seems, as when it comes to Brexit-related topics it is politically very sensitive. However, UK Business Secretary, Kemi Badenoch is ‘optimistic.’  The UK’s Society of Motor Manufacturers believes that like Brexit, a very last-minute deal will be agreed.

Last week, the UK government pushed back the deadline for the sale of new diesel and petrol cars. About 80% of new cars and 70% of new vans sold in Great Britain are to be zero emission by 2030, increasing to 100% by 2035. The 2035 end of sale date puts the UK in line with other major global economies, including France and Germany.

Meanwhile, the EU is already preparing a case against China over unfair subsidies for its electric vehicles. China has already countered by warning of ‘consequences’ if its electric vehicle manufacturers are denied access to the EU market. Expect more sabre rattling and soft lobbying by China, together with possibly more restrictions on critical raw materials until the EU allows full access.

 

What have we been watching   

 

Global bond yields moved higher as investors fretted over ‘higher for longer’ interest rates. The yield on 10-year US Treasury stock almost touched 4.7% – the highest level since 2007, German bonds rose to a 12-year high of almost 3%, while in the UK the 10-year gilt yield touched 4.5%, albeit, below the 15-year high of over 4.7% last month. Rising government bond yields fed into equities with the US recording the biggest monthly drop of the year in September since last year. Higher interest rates may well slow the US economy and the US standard 30-year fixed rate mortgage is now around 7.8%.

The market mood was not helped by concerns about a possible US federal shutdown, although this appears to have been averted for now by a temporary solution. Despite the latest inflation data in the US and Europe being in line with expectations, the recent spike in the price of oil has raised concerns about inflation. As one UK fixed interest veteran fund manager said last week ‘What if inflation is not dead?’   

US President Joe Biden sought to re-assure the leadership in Kiev and its nervous NATO allies after a last-minute US funding deal to avoid a federal shutdown saw Congress axe $6bn of military funding for Ukraine. Meanwhile, the higher oil price is helping Putin with the European Central Bank for Reconstruction and Development now forecasting that the Russian economy will grow by 1.5% in 2023, compared with its earlier projection that the economy would contract by 1.5%. 

Meanwhile, tension between the US and China was again to the fore with a US State Department report suggesting China is spending billions of dollars globally to spread disinformation and threatening to cause a sharp contraction in freedom of speech around the world.

 

In the UK, second quarter GDP was left unrevised at 0.2% but as previously flagged by the ONS, extensive back revisions to the pandemic years have taken the overall level of GDP up by 2.1%. As such the UK economy is now running above its pre-pandemic level and is ‘only’ 2.5% below a continuation of its pre-pandemic trend. This encouraging news is however countered by the PMIs which have indicated that business activity ground to a halt in the third quarter and risks of recession have risen.  Meanwhile, the Bank of England’s latest money and credit data shows weakness in housing activity but resilience in lending.

 

Except for Italy, European inflation data for September came in below expectation with Germany at 4.3%, down from 6.4% the previous month, while the Netherlands September CPI recorded deflation!

 

In the US, Congress passed an eleventh-hour bill over the weekend to keep federal agencies running for another 45 days and avert a costly government shutdown.  The Federal Reserve’s preferred inflation gauge the PCE deflator was slightly better than expected at 3.5%.

 

There was slightly better economic data from China with the official PMI business activity indicators showing some improvement in September but the Caixin PMI which covers smaller businesses slowed the pace of pick-up. The manufacturing PMI improved from 49.7 to 50.2.

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Brent oil edged back slightly to under $93.

Finally, Lego has abandoned a bid to ditch oil-based plastics from its bricks after finding its new material, made from recycled plastic (RPET) led to higher carbon emissions. Currently, oil-based ABS is used in about 80% of the billions of pieces it makes each year. Replacing ABS that makes bricks durable and easy to put together and pull apart while eliminating fossil fuels and reducing carbon emissions is proving a challenge. Lego’s dilemma is one that many companies face in seeking to be more sustainable.

 

Read Last Week’s Alpha Bites – Ukrainian War Fatigue

 

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