UK automotive supply chains face new tariff risks as SMMT warns over EU trade barriers

The UK's automotive industry has warned that proposed EU industrial policies, stricter Rules of Origin requirements and uncertainty over the UK's ZEV Mandate threaten to undermine one of Europe's most integrated automotive supply chains, with industry leaders urging government to act quickly on trade alignment and competitiveness before investment decisions are made elsewhere, according to the Society of Motor Manufacturers and Traders (SMMT).

At the SMMT International Automotive Summit held yesterday (30 June) in London, the association’s chief executive Mike Hawes warned that the UK automotive sector faces a convergence of regulatory, trade and competitiveness challenges that threaten investment in the UK’s automotive industry. Alongside calls for an earlier review of the UK's Zero Emission Vehicle (ZEV) Mandate, industry leaders highlighted two emerging risks from Brussels in the European Commission's proposed Made in Europe industrial measures under the Industrial Accelerator Act (IAA) and stricter Rules of Origin requirements due to take effect from January 2027.

For manufacturers and suppliers, the wider concern was how a series of overlapping policy changes could reshape cross-border automotive supply chains.

UK-EU alignment becomes the defining supply chain challenge

“Industry strategy must align all government policies to deliver growth and to attract investment,” said Mike Hawes, chief executive of SMMT. His call to action echoed what industry executives have repeatedly warned, that unless the UK secures alignment with the EU on both the Made in Europe and Rules of Origin initiatives, new trade barriers could increase costs across tightly interconnected supply chains spanning assembly plants, battery production and tier suppliers on both sides of the Channel.

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The Made in Europe requirements are not yet set in stone, with the proposal published in March this year still to be negotiated by the European Parliament and Council before becoming law as part of the Industrial Accelerator Act (IAA). It is intended to rebuild European manufacturing, reduce dependence on China and other non-EU suppliers, encourage low-carbon products and strengthen European competitiveness. Instead of banning imports, the proposal would give preference to products made in the EU through incentives such as public fleet purchases and subsidies. Going by the current draft of the proposal, UK-built vehicles and parts could lose out on access to these schemes, putting the UK’s competitiveness at risk.

It means that a vehicle made in, for example, Nissan’s Sunderland plant could satisfy Rules of Origin and enter the EU tariff-free, but still fail to qualify as a Made in EU vehicle under the IAA. It could become ineligible for any public procurement schemes or excluded from subsidy programmes, reducing its competitiveness in comparison to an EU-built model.

Automotive parts suppliers in the UK are also at risk under the proposed IAA Made in EU scheme. If procurement rules increasingly favour EU-produced batteries, motors and components, OEMs could shift sourcing inside the EU rather than the UK, influencing future investment decisions.

Despite the UK being the EU’s biggest export vehicle and parts market, Hawes said that the UK was effectively “shut out” of the Made in Europe initiative. “Four in five business leaders said their UK operations would be hit if the proposals go ahead unchanged,” Hawes said. “Britain was written out of Made in Europe. It's not just a UK problem, however, it's also a threat to European competitiveness because we're part of the European industry.”

Rules of Origin deadline raises tariff risk

The industry’s concern is only heightened by the approaching implementation of tougher Rules of Origin under the EU-UK Trade and Cooperation Agreement.

From January 2027, many battery electric and plug-in hybrid vehicles traded between the UK and EU could face a 10% tariff if they fail to meet revised local content requirements. According to SMMT estimates, that would put around £16.4 billion ($21.7 bn) worth of annual UK-EU electrified vehicle trade at risk while generating approximately £1.4 billion in tariffs across the industry. The organisation is calling for a joint UK-EU solution before the new rules take effect.

Trade specialist Sam Lowe, partner at advisory firm Flint, told delegates that UK manufacturers face what could become a "perpetual state of negotiation" with Brussels as the EU increasingly links industrial policy with trade policy. As the bloc seeks to localise production in strategic sectors, including automotive batteries and clean technologies, the UK will need to negotiate continued participation across a growing number of initiatives rather than resolving the issue through a single agreement.

That uncertainty comes at a time when manufacturers are making long-term sourcing and investment decisions, with suppliers seeking clarity well before the 2027 implementation date.

ZEV review linked to manufacturing investment

Alongside trade, the industry renewed calls for an urgent review of the UK's ZEV Mandate.

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Hawes argued that manufacturers remain fully committed to electrification but said current sales targets are moving ahead of underlying market demand, forcing OEMs to spend billions of pounds subsidising electric vehicle sales rather than investing in products, jobs and manufacturing capability. He stressed that the industry was seeking "not dilution but a reality check" that would maintain the direction of travel while reflecting current market conditions.

JLR's external affairs director Murray Paul echoed that position during a later panel discussion, arguing that manufacturers remain committed to electrification but that "targets themselves don't create markets". He said the objective should be to sustain the transition without asking a single industry to effectively finance it alone, while continuing investment in the next generation of electric vehicles.

Government also indicated that changes may be forthcoming. Business secretary Peter Kyle told delegates that the review of the ZEV Mandate would be completed soon, while maintaining that the government remains committed to electrification and domestic EV manufacturing. He said the transition must protect both Britain's environmental ambitions and its industrial capability.

However, uncertainty surrounding the expected change in Prime Minister has raised questions over whether decisions on the ZEV review and wider UK-EU negotiations could be delayed at a time when manufacturers require policy certainty for future investment.