Economic Policy and Infrastructure

Lithium-ion cells and rules of origin in the EU’s free trade agreements

Ensure application of the tariff benefits from the agreements on electric and hybrid vehicles

The European Union’s free trade agreements are of major importance to the German automotive manufacturers and their suppliers. Application of the agreements can enable import tariffs on vehicles and vehicle components to be avoided or reduced in the signatory states. At present, there are 42 free trade agreements (FTAs) in force between the European Union (EU) and 73 partner countries. The rules of origin in these agreements play the most important role for the automotive industry when it comes to classifying the goods produced in the EU for the tariff advantages resulting from the agreements. Complicated rules of origin that are associated with excessive bureaucracy and which cannot be satisfied are one of the main reasons for the low use rate of FTAs. The utilization rate could be greatly improved by anchoring simple and practicable rules of origin in FTAs in the future. This is true for passenger cars with internal combustion engines and even more so for battery electric and hybrid vehicles.

Status quo: electric and hybrid vehicles cannot satisfy the current rules of origin in the EU’s FTAs

Over 75% of the electric vehicles built in Germany are exported, and currently almost 30% are destined for countries outside the EU. In view of the increasing demand for electric vehicles in the EU’s FTA partner countries, it should be kept in mind that the rules of origin in the first-generation free trade agreements (e.g. with Switzerland, South Africa, Mexico) in particular, but also in some second-generation agreements (e.g. with South Korea, Andean countries), do not take account of the actual economic circumstances in the EU. In the first-generation agreements on lithium-ion cells, for example, the level of EU value creation required to qualify lithium-ion cells as originating in the EU was set at 70%, or a change of tariff classification rule for all non-EU materials used in combination with an EU value creation of 60%.

However, the raw materials required for manufacturing the cells and the primary materials are currently not available in sufficient quantity or quality in the EU. This means that even if cells are produced in the EU, all the required production materials have to be imported from countries outside the EU. As, on average, the value of the imported materials constitutes 80% of the value of a finished lithium-ion cell, it is impossible to satisfy the above-mentioned rules of origin at this time.

In addition, using the cells within the EU to manufacture finished high-voltage batteries cannot generate sufficient EU value creation to define a high-voltage battery as originating in the EU, because the necessary production depth cannot be achieved.

This leads to the following situation: at present a maximum EU value creation of only 20% can be achieved because of the materials that are necessary. If EU production were to begin with the manufacture of electrodes and go all the way to high-voltage batteries, with the situation as it stands the maximum possible EU value creation would be 30%.

Result: rules of origin for battery cells urgently need revision

As the maximum possible EU value creation is insufficient to qualify high-voltage batteries as originating in the EU under the EU’s existing FTAs, the non-EU share of a high-voltage battery has to be taken into account negatively when calculating the preferential origin of an electric or hybrid vehicle. Given that the high-voltage battery constitutes the largest portion of the value of a vehicle (30% to 50%), this currently results in electric and hybrid vehicles not satisfying the rules of origin in most of the EU’s free trade agreements, and therefore they cannot qualify for the tariff benefits from these agreements.

Therefore, in order to ensure that electric and hybrid vehicles, which make up an ever larger proportion of the auto makers’ product portfolios, can benefit from preferential treatment under EU FTAs and thus enhance their international competitiveness, it is absolutely essential to revise the rules of origin in the EU’s current and in future free trade agreements, such that electrodes, as part of an electric accumulator, and the resulting downstream products (battery cell, battery module and high-voltage battery) are classified as originating in the EU when they are produced in the EU.

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