<figure><img src="image_13.png" /></figure>

Concerning who is exerting this pressure to set up new production sites in low cost countries, Stellantis appears clearly as the main OEM exerting such a pressure (52%), together with other OEMs (BMW, Volkswagen, “all of them”, 22%), while Renault (19%) and first tier suppliers (7%) appear to be less involved.

The consequences of all these pressures to relocate European production to China or India and to set up new production sites in Morocco and India to supply the European market appear to be particularly threatening for the existing production of these companies in France and Europe.

What percentage of your production in France and Europe is threatened by these pressures from OEMs over the next 5 years?

<figure><img src="image_14.png" /></figure>

On the 108 companies, 98 have replied to the question concerning the threats to production in France, and 85 to the question concerning the threats in Europe over the next five years. Overall, about 70% of the companies polled estimate to more than 15% the production volume threatened in their production sites in France and Europe by the
pressures of OEMs and first-tier suppliers to either relocate this production to low-cost countries outside the EU or to shift their sourcing to low-cost based competitors.

In the case of France, 72% of the companies estimate to more than 15% their production threatened over the next five years, 48% to more than 30%, one third to more than 50%, and 11% to more than 80%. In Europe the share of production sites threatened (which include low-cost sites in Eastern European countries) appears to be less important: still about 47% of the companies estimate at more than 30% the production volume threatened, and 13% at more than 50%.

On average it is between 30 and 50% of the French production and between 15 and 30% of the European production of the enterprises polled that appear to be threatened over the next five years by the pressures exerted by OEMs and first-tier suppliers towards increasing extra-EU low-cost sourcing.

When we detail these results by sub-sectors we can see that there are some important differences in terms of the magnitude of these threats.

What percentage of your production in **France** is threatened by these pressures from OEMs over the next 5 years?

<figure><img src="image_15.png" /></figure>

What percentage of your production in **Europe** is threatened by these pressures from OEMs over the next 5 years?

<figure><img src="image_16.png" /></figure>
The rubber sector (ELANOVA) appears to be the most threatened: on average about 50% of the French production appears to be threatened (30% in Europe), and one third of the companies polled declare that more than 80% of their French production is threatened.

The automotive suppliers (FIEV) is the second most threatened sub-sector: on average about 40% of the French production is threatened (30% in Europe), and one quarter of the companies polled declare that more than 65% of their French production is threatened.

The forges and foundries also appear under strong pressure, with on average about 37% of their production threatened in France and between 15 and 30% in Europe. This is also a sub-sector that is more polarised than others: half of the companies declare that between 15% and 30% of their French production is threatened while another quarter declare that more than 50% of their production is threatened. Plasturgists (GPA) and the mechanical sector (FIM) are more or less in a similar situation with, respectively, 28% and 26% of companies declaring that more than 50% of their French production is threatened, versus 21% and 27% that declare that less than 15% of their production is threatened.

The bodywork sector is the less concerned by these pressures, with 70% of the companies polled declaring that less than 15% of their production is threatened in France, and 63% of the companies polled declaring the same for their European production.

<figure><img src="image_17.png" /></figure>

Finally, we have asked these companies whether the strong protectionist turn taken by the second Trump administration is pushing them to relocate production to the US (or Mexico and Canada). The large majority of the company (72%) is not considering yet this option, 7% is considering the option, and 21% has not come to a conclusion yet on this matter.
## 1.4 Conclusion: a comprehensive local content policy for the automotive sector is needed

The trends identified in the trade data suggesting an emerging de-Europeanization of the automotive supply chain, are confirmed by the survey of 108 French based suppliers. On average between 30 and 50% of the French production and between 15 and 30% of the European production of these suppliers is threatened by the increasing pressure exerted by OEMs to shift their sourcing towards low-cost extra EU countries.

The main danger is a short-term shift of new contracts either to production sites located in China or to competitors exporting from China, but the risk also exists of shifts towards India, and to less extent Morocco. The increasing pressure to set up new production sites in Morocco, in particular for those companies that do not have yet subsidiaries there, appears also as a very strong trend but is somehow less worrying, as it seems to reflect the recent growth of local European car production, notably by French OEMs, with the strong development of the Tangier and Somaca factories of Renault and of the Kenitra factory of Stellantis.

The automotive rubber sector (ELANOVA) and the traditional automotive suppliers (FIEV) appear to be the most exposed to these risks with respectively one company out of three claiming that more than 80% of their French production is threatened and one company out of four claiming that more than 50% of their French production is threatened. However, with perhaps the only exception of the bodywork sector, all the other sectors are also very much concerned.

To summarize, the situation seems sensitive enough for a decision to be taken very quickly to halt this dramatic development by introducing stringent local content requirements which, without prohibiting it, would put the brakes on these deadly practices.

Given the current high ratio of automotive parts manufacturing in Europe relative to extra-EU imports, local content targets should be set at least at 75%, and rather to 80% to preserve the current configuration from further disruption.

What our work shows is that:

i) it is of the utmost importance that this requirement be imposed for batteries, cells and the entire battery value chain, so that the abysmal deficit that emerges when we extend the curves will not be seen tomorrow (of course the requirement for batteries should not prevent European OEMs to produce EVs and should be therefore progressive – see for example the analysis of the Rules of Origins for batteries in the EU-UK FTA in section 2);

ii) as with cell production, locating the production of Chinese or other electric vehicles in Europe would remain of little interest if nothing was done to ensure strong local European content;

iii) the above two requirements will not be enough to enable the transition to a low-carbon automotive economy to take place under acceptable conditions; existing assembly plants must also be subject to these requirements for all the components they use, whether they produce electric cars or combustion-powered vehicles.
## 2. Local content policies: international comparison and the European exception

Once confirmed the necessity of protecting the European auto-parts sector, the purpose of this section is twofold.

First, we review the different types of local content policies that have been implemented internationally and whose number has been constantly raising since the 2008 financial crisis. The focus is in particular on automotive related local content policies to identify the types of policies implemented in other countries and to assess their record in promoting domestic production and reducing imports. We do also analyse the implementation of WTO compatible "Rules of Origins" in the most important Free Trade Agreements negotiated since 2016 and their implications for automotive trade. It is important to understand in this section why Europe has become the main exception in this new geo-political landscape characterised by widespread implementation of de-risking and re-shoring policies and why this represents a threat to the competitiveness and sovereignty of Europe in key strategic sectors, such as the automotive industry.

Second, we make a proposal to address the current lack of local content policies for the European automotive sector based on both the best international practices and the local content requirements already implemented in Europe via the Rules of Origin negotiated in Free Trade Agreements with third countries.

### 2.1 Before 1995: when local content policies were the norm

Local content policies (LCP) are non tariff-barrier that were relative common for most of the XXth century in combination with high tariff-barrier in both developed economies, where they supported the promotion of "national champions" in strategic sectors, and in emerging countries, where they were part of import substitution strategies of industrialisation. In both cases the automotive industry was one of the key sectors supported.

Following the Uruguay round of the General Agreement on Tariffs and Trade (GATT), conducted between 1987 and 1994 and culminated with the creation of the World Trade Organization (WTO), LCP faded in a context of increasing trade liberalization. From 1995 onward, local content requirements and incentives would typically violate article 2.1 of the TRIMs agreement (Agreement on Trade-Related Investment Measures) and article III of the GATT that forbade discriminating against foreign goods by making "mandatory or enforceable" or "necessary to obtain an advantage" "the purchase or use by an enterprise of products of domestic origin" <fnref n="39" />.

However, even after 1995, LCP continued to be implemented on ad-hoc bases. One of these exceptions concerned the automotive sector in Europe, where the European Commission established a transitional quota in 1991 on the imports of Japanese cars until 1999 and imposed local content requirements on Japanese car production in Europe (60% of local content at the start of production and 80% two years later based on ex-works prices).

<footnote n="39">³⁹ Mitchell, 'Hometown Heroes', 487.</footnote>
The European approach contrasted with the US one where no local content requirements were applied to the Japanese "transplants" and was eventually much more successful in dealing with the "Japanese challenge".

## The "Japanese challenge" and the "European fortress"

In the US, the Japanese "transplants" initially assembled SKD and functioned on average below 40% of local content for most of the 1980s. Even in the 1990s, when most of the transplants were fully operational, their local content level was still below 60% on average <fnref n="40" />. Between 1985 and 1989, imports of Japanese auto-parts almost tripled and represented 33% (in value) of total automotive imports ($11 billion on $33,4 billion). The fast increasing production of transplants had absorbed 77% of the growth in auto-parts imports from Japan <fnref n="41" />. Also the local content manufactured in the US only marginally benefited local suppliers: in 1989 12% of this local content was produced by US suppliers, while 85% was produced by subsidiaries established by Japanese companies <fnref n="42" />. During this period the market penetration of Japanese OEMs kept increasing, from 23% in 1985 to 31% in 1990. By the end of the 1990s Japanese market share of the US market reached 34% and is currently of 39% (2024). According to the American Automobile Labeling Act Reports the average local content of Japanese production in the US is still today around 60%: for instance the best sold Toyota light-truck in the US, the Tacoma, has a local (USMCA) content of 65% (35% in the US and 30% in Mexico) and the whole Honda line-up is at 60% (mostly made in the US)<fnref n="43" />.

In Europe, Japanese transplants had to reach 80% of local content two years after the start of mass production in order to have this production recognized as "made in Europe", and not in Japan. Imports of cars made in Japan were frozen since the late 1970s, first via Voluntary Export Restraints negotiated bilaterally at national level, and then between 1991 and 1999 by the European Union quota. Import of auto-parts from Japan increased between 1990 and 1995 from $1,3 billion to $2,4 billion, when transplants were still ramping up their production, but then they stabilised and declined to $2 billion by 1999, representing only 12% (in value) of total Japanese automotive imports to Europe <fnref n="44" />. Transplants were expected to increase the market share of Japanese brands beyond the quota fixed by the EU at 16% of the Single Market in 1999, but forced to compete with the same conditions as European car factories they turned out to be much less competitive than expected <fnref n="45" />. The market share of Japanese brands stagnated at around 12% even when the transplants became fully operational at the end of the 1990s and is still currently at 13%.

## To summarise:

In Europe, the "Japanese challenge" of the 1980s (which can be compared on several terms with the current "Chinese challenge") has been met by integrating Japanese OEMs

<footnote n="40">⁴⁰ Flynn, McAlinden, and Andrea, 'The U.S.-Japan Bilateral 1993 Automotive Trade Deficit'.</footnote>

<footnote n="41">⁴¹ Flynn et al., 'The U.S.-Japan Automotive Bilateral 1990 Trade Deficit'.</footnote>

<footnote n="42">⁴² Flynn et al., 'The 1996 U.S.-Japan Bilateral Automotive Trade Deficit'.</footnote>

<footnote n="43">⁴³ Source: https://www.nhtsa.gov/document/2025-aala-listed-alphabetically</footnote>

<footnote n="44">⁴⁴ Pardi, 'La Révolution Qui n'a Pas Eu Lieu : Les Constructeurs Japonais En Europe (1970-2010)'.</footnote>

<footnote n="45">⁴⁵ Pardi, 'Lean Production in the Automotive Industry. Origin, Diffusion, Paradoxes, and Contradictions of a New Managerial Paradigm'.</footnote>
as European based OEMs via market quota restrictions with no major disruption to
European OEMs that have caught up with their Japanese competitors; temporary but
strict local content measures played a key role in this successful outcome.

In the US, in the absence of local content measures, the combining pressure of
unregulated Japanese local production and massive imports of automotive parts and
components from Japan have permanently disrupted the traditional US OEMs whose
market share has fallen from 71% in 1985 to 39% in 2024, while Japanese OEMs'
market share increased from 22% to 34% during the same period.

## 2.2 From Local Content Policies to Rules of Origins: the globalisation of the 1990s and early 2000s

The late 1990s and early 2000s saw a sharp reduction in the number of LCP implemented at national level. But this downward trend was compensated by the parallel multiplication of Free Trade Agreements (FTA) between countries where local content requirements (LCR) were reintroduced via the Rules Of Origins (ROO). ROO are the conditions under which a product is recognised as made in a certain country so that it can benefit from a FTA. In the case of NAFTA for instance, negotiated in 1996 between the US, Canada and Mexico, cars had to comply with a 62,5% LCR to avoid custom duties.

The scope of LCR in ROO is however more limited than in national LCP. ROO only apply to products that are exported within a given FTA. In the case of Europe for instance, a car made in any EU country and exported to Japan must currently meet a 55% LCR (either made in the EU or Japan) to be exempted from duties (within the EU-Japan Economic Partnership Agreement in force since February 2019). But the same car made in the EU for the Single Market does not have to meet any LCR. The same is true for a car made in the US for the US market: the 75% LCR introduced by the USMCA agreement since 2023 does not apply in this case.

After the 2008 financial crisis, the number of LCP implemented worldwide has started to increase again with several of these policies focusing on the automotive sector.

In the section below we start first to analyse this revival of LCP, which has become more important during and after the Covid 19 pandemic, before shifting to ROO and their implication for automotive trade in the main FTAs negotiated notably by Europe since 2016.

The purpose of this review is double:

- to highlight the key role played by these LCP in structuring and developing new automotive industries, notably in the BRICs and other emerging countries, but also in protecting and restoring mature automotive industries in the US or Canada after the 2008 crisis and the Covid 19 pandemic;

- to emphasize the exception represented by the European Union which in a context of growing and widespread implementation of such policies has remained the only main economic power to strictly abide by WTO rules.

We consider here nine different types of local content policies that are detailed in the table below and which belong to two broad categories:
* The local content requirements, which define conditions under which companies must operate (share of locally produced inputs to be used, operations that need to be made locally, share of local labour required, etc.) either to access the market or to receive some benefits (fiscal and non-fiscal) from the state;

* The local content incentives, which are State aids given to companies (such as loans at preferential rates or direct grants) and attributed according to different localisation criteria.

<table><caption>Table 39. Local content policies by type, number and main implementing countries (2009-2024)</caption><thead><tr><td>Type of policy</td><td>N° of Policies (2009-2024)</td><td>Example</td><td>Main implementing countries</td></tr></thead><tbody><tr><td>Local Content Requirement</td><td>180</td><td>80/M-IND/PER/9/2014 LCR for motor vehicles in Indonesia: "the motor vehicle industry is required to empower the Motor Vehicle Components Industry within the country while conducting the production process". The activities to be conducted within Indonesia are specified in article 12(2) as follows:<ul><li>a. welding;</li><li>b. painting</li><li>c. assembling of the motorised vehicles and</li><li>d. quality control.</li></ul></td><td>US, Russia, India, Indonesia, Argentina, Canada</td></tr><tr><td>Localisation Policies</td><td>103</td><td>The 2023 US IRA provided a USD 7,500 income tax credit to consumers for new EVs and USD 4,000 for previously owned EVs. These tax credits are provided in return for a locally-produced input guarantee. Specifically, these tax credits can be claimed as long as a specified percentage of the value of battery components contained in EV batteries are manufactured in the US.</td><td>Canada, India, Russia, Korea, US, Turkey</td></tr><tr><td>Local Operation Requirement</td><td>97</td><td>On 22 October 2016, the Indian Ministry of New and Renewable Energy through F. No. 66/183/2016-WE imposed a local operations requirement on wind turbines to be used in onshore wind power projects. The type certificate for wind turbines has to include a hub and nacelle assembly/manufacturing facility in India. Wind turbine facilities with type certifications without this will not be allowed to be installed in India.</td><td>Indonesia, China, India, Saudi Arabia, Russia</td></tr><tr><td>Local Labour Requirement</td><td>61</td><td>On 29 October 2020, the Ministry of Human Resources and Social Development introduced a rule mandating an increase in hiring Saudi workers according to the size and scope of the company in the maintenance and operations contracting sectors. The 3% rule for Saudi workers is newly introduced and previously there was no required percentage to hire Saudi nationals in the maintenance and operations contracting sectors.</td><td>Saudi Arabia, US</td></tr><tr><td>Local Value Added Requirement</td><td>2</td><td>On 8 June 2021, the U.S. Department of Energy (DOE) introduced a new policy strengthening the domestic manufacturing requirements on funding recipients of DOE Science and Energy Programs. According to the new policy, inventions resulting from DOE-funded research and development shall be substantially manufactured in the United States.</td><td>US, Togo</td></tr><tr><td>Local Content Incentives</td><td>3065 (2804 by Brazil)</td><td>On 8 March 2019, the Ministry of Heavy Industries and Public Enterprises through S.O 1300(E) notified the second phase of the scheme titled "Faster Adoption and Manufacturing of Electric Vehicles in India (FAME India)". Under the scheme, demand incentives worth USD 1.23 billion will be provided for the purchase of electric vehicles manufactured in India. The Ministry has on 29 March 2019 published the indigenization requirements for vehicles to be eligible under the scheme. The</td><td>Brazil, US, India, Russia, Saudi Arabia</td></tr></tbody></table>
<table><tr><td></td><td></td><td>requirements provide specific dates by which parts of vehicles will have to be procured locally.</td><td></td></tr><tr><td>Local Operations Incentives</td><td>8</td><td>On 26 July 2024, Thailand's National Electric Vehicle Policy Committee (EV Board) granted local operation incentives to certain hybrid electric vehicles (HEV) manufacturers in the form of excise duty reduction. <b>To be eligible, the manufacturers should produce or assemble the key parts in Thailand by 1 January 2028.</b> The key parts include traction motors, reduction gears, inverters, AC compressors, electrical circuit breakers, DC converters, high voltage harnesses, battery cooling systems, and regenerative braking systems. <b>The excise duty will be reduced from between 25% and 35% to between 6% and 9%.</b></td><td>Indonesia, Thailand</td></tr><tr><td>Local Labour Incentives</td><td>14</td><td>On 1 January 2021, the Malaysian Investment Development Authority (MIDA) published Guidelines on Incentives for Setting Up a Global Trading Centre, providing financial incentives to foreign companies that located their global trading centre in Malaysia in the form of <b>corporate income tax rate reduction. One of the requirements for the incentive was to fill at least 50% of the high-value jobs at the global trading centres for Malaysians.</b></td><td>Indonesia, Malaysia</td></tr><tr><td>Local Value Added Incentives</td><td>1194</td><td>In July 2022, the German Export Credit Agency Euler Hermes Aktiengesellschaft provided a <b>guarantee</b> to support German company Dürr Systems AG's export of an electric vehicle assembly plant to Turkiye. <b>Export contracts which include a foreign content value lower than 49% are approved without further investigation.</b> However, if the export contract value contains more than 49% in foreign-sourced goods, an "Interministerial Committee will decide whether a transaction may be covered on the merits of the individual case."</td><td>UK, Germany, Australia, India, Saudi Arabia</td></tr><tr><td>Total</td><td>4334</td><td></td><td>57 Countries</td></tr></table>

Source: based on data extracted from the GlobalTradeAlert database - https://globaltradealert.org/ (data accessed February 2025).

We consider first and separately the local value added requirement and incentive policies as they almost exclusively concern production for exports.

## 2.3 Local value added policies for exports: where Europe leads the way

The implementation of local value added incentives has increased substantially during the period 2009-2024.
<figure><img src="image_18.png" /><figcaption>Table 40. Local value added policies by country of implementation (2009-2024)</figcaption></figure>

Source: GlobalTradeAlert database

Value Added related policies are interesting for our analysis because contrary to all the other local content policies which are mostly not implemented by European countries, the two main countries by number of value-added content policies implemented between 2009 and 2024 are European: the UK and Germany. The main reason why the other local content policies were not implemented in Europe during this period is because they run against the principle of free circulation of goods inside the Single Market: a EU country cannot discriminate against any other product or service imported from other EU countries. This rule does not apply though to products or services exported outside the EU or to FDI made in third countries outside the EU.

For instance the German Credit Agency Export (GCAE) provides guarantees and untied loan guarantees as well as financial incentives to support German exports. The GCAE only approve without further investigations export contracts with a minimum local (German) value content of 51%. If an export contract has local value content lower than 51% then the GCAE carries an investigation whose main criteria is based "on the likely effect of the transaction on German employment, whether the location of the project's management remains in Germany, the domestic availability of foreign-sourced inputs, and the German exporter's capacity utilisation rate"<fnref n="46" />.

Between 2018 and 2024, the GCAE has approved 391 export contracts (according to the TradeAlert database), which represents 51% of the total added-value content policies implemented globally during this period. The UK had a similar policy implemented by the UK Export Credit Agency which has approved 458 export contracts between 2010 and 2024, representing 38% of the total added-value content policies implemented globally during this period. Other European countries with similar policies are Belgium and Switzerland, but with a much smaller number of export contracts (16 in total).

<footnote n="46">⁴⁶ See for instance: https://globaltradealert.org/intervention/72036-germany-export-credit-agency-provides-guarantee-to-support-the-export-of-machines-for-flatting-metal-to-china</footnote>
## 2.3 Local Content Policies for domestic markets: where Europe is absent

In the figures below we use data extracted from the GlobalTradeAlert database for the period 2009-2024 which detail the implementation of the main different types of local content policies by category and by implementing country (we have retained only the top ten countries by number of local content policies implemented during the whole period representing 74% of the sample).

We have excluded from our data set local content incentives implemented in Brazil (beside the value added related policies, see above), as they would represent alone 80% of the sample of local content policies. This exceptional amount of local content incentives (2874 in total) distributed by the Brazilian state is due to the central role played in the national economy by the Brazil Development Bank (BNDES), which provides loans at preferential rate to companies whose headquarter and production are based in Brazil.

Once the Brazilian local incentives are excluded, the data set contains 724 distinct local content policies implemented by 57 states between 2009 and 2024. Local content incentives are the most frequent (36% of the sample), followed by local content requirements (25%) and localisation policies (14%). In terms of countries, the US has the highest number of local content policies implemented (150, 21% of the sample), followed by India (64, 9%), Indonesia (62, 9%) and Russia (60, 8%). **The BRICs represent 23% of the sample (4% in China), while European countries, including the European Union represent only 2%**.

<figure><img src="image_19.png" /><figcaption>Table 41. Local content policies implemented by type (2009-2024)</figcaption></figure>

Source: GlobalTradeAlert database
<figure><img src="image_20.png" /><figcaption>Table 42. Local content policies implemented by top 10 countries (2009-2024)</figcaption></figure>

Source: GlobalTradeAlert database

## 2.4 From the financial crisis to the Covid 19 crisis: a first peak and a regular growth

The 2008 financial crisis triggered a revival of local content policies with a peak in 2010 (73 policies implemented) mainly driven by local content incentives distributed by the US federal government via the Broadband Technology Opportunities Program implemented by the National Telecommunications and Information Administration, which channelled about $4 billion to build broadband internet infrastructure across the country under the “buy American” provision.

The large majority of local content requirement policies implemented during this period were located in the BRICs (plus Indonesia, Argentina and Turkey). China represented 4% of these policies. This relative low ratio is explained by the massive utilization in China of direct subsidies as the main policy tool to support the domestic industry: 75% of the total direct subsidies implemented globally since 2008 have been implemented in China (see “The NEV program in China” below).

Most of the local content policies implemented during this period concerned emerging sectors, such as solar panels, wind turbines, clean energy, software and integrated circuits, telecommunication (4G network). Key strategic mature industries were also concerned, and this was in particular the case of the automotive sector that attracted 42 policies between 2009 and 2018 – 14% of the sample.

The main examples of local content policies implemented in the automotive sector during this period – the Inovar program in Brazil (2012-2017) and the NEV program in China (2012-2024) – are analysed below.

The main purpose of most of the policies implemented after the financial crisis of 2008 was to preserve/increase the share of local content and local labour in a context of increasing globalised and regionalised value chains in both new and mature strategic sectors. The 2010 peak also reflected the localisation requirements attached to major
national programmes to stimulate the economy and create employment after the impact
of the 2008 financial crisis.

During this period the European Union completely abandoned its previous protectionist approach (see the "European fortress" above) and fully endorsed an ordo-liberal approach to trade and competition <fnref n="47" />. This had important repercussions on the regulation of the automotive sector. The French-Italian "generalist" conception of control based on a combination of protectionism, industrial policy and a strong focus on the Single Market as a strategic resource faded, and the German "premium" conception of control based on exports, trade liberalisation and regulatory driven upmarket drift for new car sales redefined the Single Market as the most open automotive market globally <fnref n="48" />.

Brazil's INOVAR AUTO 2013-2017

The Inovar Auto industrial policy was part of the Plano Brasil Major launched in 2011 to improve the competitiveness of Brazilian industry. It had three major objectives: increase stimulation of investment and innovation, protection of the industry and of the domestic market against increase importation <fnref n="49" />.

The main issue at stake was the weakening of the local auto-parts companies due to the increasing competition of imported products. The trade balance of the auto-parts industry had gone from a surplus of $2,1 billion in 2006 to a deficit of $4,6 billion in 2011 driven by the high exchange rate of the Real (indexed on the dollar since 1994), increasing production and labour costs in Brazil, and strong competition in a context of domestic market growth, mainly coming from Mexico and South Korea, and increasingly from China <fnref n="50" />.

Since 1995, the Mercosur FTA agreement had imposed a local content of 60% to benefit from reduced import taxes but such a level was too low to protect the auto parts sector from increasing imports and only applied to cars exported from Brazil to other Mercosur countries, and not to cars manufactured in Brazil for the domestic market. The Inovar policy step up this level and forced OEMs to comply even for production sold in the domestic market. From 2011 and 2012 the local content requirement was first raised to 65% based on revenue <fnref n="51" /> with a mandatory local operation requirement of 6 manufacturing steps made in Brazil out of a list of 11 <fnref n="52" /> for at least 80% of the total

<footnote n="47">⁴⁷ Warlouzet, *Governing Europe in a Globalizing World*.</footnote>

<footnote n="48">⁴⁸ Jullien, Pardi, and Ramirez, 'The EU's Government of Automobiles: From "Harmonization" to Deep Incompleteness'; Pardi, *Heavier, Faster and Less Affordable Cars. The Consequence of EU Regulations for Car Emissions*.</footnote>

<footnote n="49">⁴⁹ Pascoal et al., 'The New Brazilian Automotive Policy and Its Impact on the Competitiveness of Multinational Automobile and Auto Parts Manufacturers'.</footnote>

<footnote n="50">⁵⁰ Sturgeon, Lima Chagas, and Barnes, 'Inovar Auto: Evaluating Brazil's Automotive Industrial Policy to Meet the Challenges of Global Value Chains'.</footnote>

<footnote n="51">⁵¹ Ibusuki, Kobayashi, and Jin, 'Asian Automobile Manufacturers Strategies in Brazil: Impact of the New Automotive Policy (INOVAR-AUTO)', 10.</footnote>

<footnote n="52">⁵² Production stages include: stamping, welding, anticorrosion treatment and painting, plastic injection, motor manufacturing, gearbox and transmission manufacturing, steering and suspension systems assembly, electrical systems assembly, axle and brake systems assembly,</footnote>
number of vehicles produced. From 2013 to 2017 the number of mandatory manufacturing steps to be made in Brazil was progressively increased from 6 to 10 and local content incentives were introduced to increase the local content of cars produced in Brazil. The policy was based on a 30% increase of the tax levied on industrial goods (IPI) that applied to all motor vehicles sold in Brazil and could be reduced only by qualifying for the Inovar policy and by purchasing an increasing amount of components locally.

In order to qualify for the Inovar tax credits, beside the increasing minimum amount of manufacturing processes to be made locally, a company also needed to comply with at least two on three other requirements:

- to invest a minimum percentage of its revenue on R&D (0.15% in 2013, 0.3% in 2014, and 0.5% in 2015, 2016 and 2017);

- to invest a minimum percentage of revenues on engineering, basic industrial technology and capacity-building of suppliers (TIBI): 0.5% in 2013, 0.75% in 2014, and 1% in 2015, 2016 and 2017; or

- to join INMETRO's vehicle labeling program for energy efficiency (36% of production must be labeled in 2013, 49% in 2014, 64% in 2015, 81% in 2016 and 100% in 2017).

Once a company qualified for the Inovar auto policy, the tax credits obtained were proportional to the amount of domestically sourced auto parts (in Brazil and Mercosur). In order to obtain the maximum tax credit of 30% a level of about 50-55% of local content was eventually required by 2015. In 2015 the tax credit was increased to 45%<fnref n="53" /> to push the local content level to 65-70%. The tax credit could be also further increased by about 5% by over-reaching the R&D and engineering requirements, and the energy efficiency requirements on new car sales.

Overall, the Inovar Auto policy has been successful in driving down imports and increase local content and investments. The trade deficit on both auto-parts and finished vehicles was reabsorbed by 2017 and according to Sturgeon et al. (2017) Inovar Auto policy was responsible for half of the investments that took place in the sector since 2012. The policy also contributed to reduce the effects of the Brazilian economic recession started in 2014. Sturgeon et al. criticised however the lack of export-driven incentives to respond to the fall in domestic demand and to increase the participation of the Brazilian automotive industry in global value chains.

It is interesting to note that Brazilian policy-makers were aware of the incompatibility of the Inovar Auto policy with WTO obligations but considered that the policy had a short term implementation span and by the time it would be questioned at the WTO level, it would have already accomplished its mission and could be phased out. This was indeed what happened. The European Union and Japan questioned the policy in 2015 and the WTO eventually asked Brazil to suspend the program in 2017. Brazil initially appealed the decision and only accepted it in 2019 when Inovar had been already replaced by the "WTO compatible" Rota 2030 programme that still encouraged technological

<footnote>mono-block manufacturing or chassis assembly, final assembly, final review and testing, and
own laboratory infrastructure for product development and testing.</footnote>

<footnote n="53">⁵³ Source: https://globaltradealert.org/state-act/26838</footnote>
## The New Energy Vehicles' policies in China

The New Energy Vehicles' Chinese state policies span over more than twenty years, starting with the decision n° 40 of the 11th FYP to encourage the "development and manufacturing of new energy vehicles and key components such as compressed natural gas, hydrogen fuel, synthetic fuel, liquefied petroleum gas, alcohol ether fuel vehicles, hybrid vehicles, electric vehicles, fuel cell vehicles, etc", which was taken in 2005.

The EU (2024) investigations on "Significant distortion in the economy of People's Republic of China for the purpose of trade defence" identify no less than 15 different distinct trade distorting policies promoting NEV between 2010 and 2023.

The large majority of these policies did not technically qualify as local content policies.

One of the main exceptions was the "Government's list of 'recommended' car battery suppliers" promulgated in 2015 and applied until 2019 which excluded from the NEVs credit policies non-Chinese battery makers (notably Korean and Japanese companies that already had giga-factories established in China but were excluded from the market during 4 years) <fnref n="55" />.

However, the Chinese government did not need to implement explicit local content policies to support the development of Chinese NEV companies because most of these policies were direct subsidies (state aid and grants) to Chinese controlled companies while non-Chinese controlled companies were de facto excluded from most of the production and purchase credits made available by these policies.

Since 2009 the amount of subsidy policies implemented by China has constantly increased from less than 100 to more than 5000 annually in the 2020s to become by far the main industrial policy tool used in China representing already by 2015 more than 90% of all the trade distorting policies implemented in China, and 2/3 of all subsidies policies implemented worldwide <fnref n="56" />. The main recipients of these subsidies were the ten strategic sectors highlighted in the strategic plan Made in China 2025. The number of subsidies to the NEV and battery sectors quadrupled between 2015 and 2022 to represent together about 40% of all the subsidy policies implemented in China. As highlighted by the EU investigations on trade distorting policies <fnref n="57" /> and illegal subsidies to EVs <fnref n="58" /> these subsidies cover the whole value chain resulting in de facto local content

<footnote n="54">⁵⁴ Pelegrina, Stoeber, and Fouto, 'Will Rota 2030 Deliver Sustainable Innovation?'</footnote>

<footnote n="55">⁵⁵ European Chamber of Commerce in China, 'China Manufacturing 2025. Putting Industrial Policy Ahead of Market Forces', 40.</footnote>

<footnote n="56">⁵⁶ Rotunno and Ruta, 'Trade Implications of China's Subsidies'.</footnote>

<footnote n="57">⁵⁷ European Commission, 'On Significant Distortions in the Economy of the People's Republic of China for the Purposes of Trade Defence Investigations'.</footnote>

<footnote n="58">⁵⁸ European Commission, 'Commission Implementing Regulation (EU) 2024/1866 of 3 July 2024 Imposing a Provisional Countervailing Duty on Imports of New Battery Electric Vehicles Designed for the Transport of Persons Originating in the People's Republic of China'.</footnote>
level close to 90%. In particular the objectives of the 2017 Automobile Plan included "having (i) several Chinese companies among the top ten NEV companies in the world by 2020, (ii) several Chinese automobile parts companies having a turnover of RMB 100 billion (about €12 billion) by 2020, (iii) several Chinese companies among the top ten automobile parts companies in the world by 2025, and (iv) several Chinese companies among the top ten automobile sellers in the world by 2025"<fnref n="59" />. The MiC 2025 plan also clearly formulated the objective of structuring "a complete industrial system and innovation system from key components to complete vehicles, and promote independent brands of energy-saving and new energy vehicles to be in line with international advanced levels"<fnref n="60" />.

Concerning the exclusion/marginalisation of non-Chinese companies from these subsidies, the Dual-Credit Policy, combined with the purchase subsidies paid to the NEV producers and purchase tax exemptions, is a good example of how this was achieved. The Dual-Credit policy introduced in 2017 combines production targets for NEVs, which translate into credits when they are achieved, with fuel-economy targets for ICE vehicles that can be offset via the NEV credits. The criteria for obtaining NEV credits are regularly updated in ways that both push towards more efficiency, but also discriminate non-Chinese companies. Companies that fail to meet the targets are compelled to offset their "debits" by purchasing "credits" from performing companies further contributing to subsidizing and consolidating the most performing Chinese companies.

The purchase subsidies that play a key role in NEV sales are also distributed according to criteria that tend to discriminate non-Chinese companies<fnref n="61" />. Overall the Dual-Credit Policy has contributed to the consolidation, via a form of administrative Darwinism<fnref n="62" />, of the Chinese NEV industry and the marginalization of non-Chinese companies in the NEV market<fnref n="63" />.

The NEV program has been highly successful, as almost all the targets set in the 2015 MiC 2025 plan for NEVs and in the 2017 Automobile Plan, including the development of exports and overseas expansion, have been fulfilled. It has nevertheless triggered strong trade reactions, with strict protectionist measures recently taken in all the main automotive markets. Another problem, which is currently exacerbated by this protectionist reaction, is related to the creation of massive overcapacities in production throughout the whole value chain that cannot be realistically absorbed by the growth of the domestic market: according for instance to the Volta Foundation report Chinese

<footnote n="59">⁵⁹ European Commission, 'On Significant Distortions in the Economy of the People's Republic of China for the Purposes of Trade Defence Investigations', 678.</footnote>

<footnote n="60">⁶⁰ European Commission, 'Commission Implementing Regulation (EU) 2024/1866 of 3 July 2024 Imposing a Provisional Countervailing Duty on Imports of New Battery Electric Vehicles Designed for the Transport of Persons Originating in the People's Republic of China', 113.</footnote>

<footnote n="61">⁶¹ Alochet, 'Comparison of the Chinese, European and American Regulatory Frameworks for the Transition to a Decarbonized Road Mobility'.</footnote>

<footnote n="62">⁶² Alochet and Midler, 'A Comparison of Chinese and European Public Policies on Electric Vehicles'.</footnote>

<footnote n="63">⁶³ Pardi et al., 'European Regulations for an Affordable Sustainable (Battery) Electric Vehicle'.</footnote>
## 2.5 From the Covid 19 crisis to the “China challenge”: a second peak and accelerated growth driven by de-risking and re-shoring policies

A second (higher) peak in the implementation of local content policies occurred in 2021 (94 policies implemented) driven by both the Covid 19 crisis and the trade war started by the first Trump administration against China.

During the period 2019-2024, the annual number of local content policies implemented has more than doubled by comparison with the 2009-2018 period (from 30 to 70). The US has been the country implementing most of these policies (20%), followed by India (12%), Saudi Arabia (12%), Indonesia (9%), Russia (9%) and Canada (9%). European countries represented again only 2% of these implemented policies.

The main difference with the previous period, beside the increased rate of implementation, was that a significant amount of the policies implemented during and after the Covid crisis were oriented towards reducing economic dependencies in strategic sectors focusing on the whole value chain, including raw materials and intermediate inputs – also called “de-risking”. Before, the promotion of local production was driven by economic goals, such as nurturing new industries or reducing trade deficits. The pandemic has shifted the focus towards “public health imperatives, supply chain stability, geopolitical safety, and securing national supply chains against disruptions”<fnref n="65" />. These preoccupations underline the critical need to localise production that is now shared by many mature economies, including export-led ones such as Japan (2%) and Korea (2%).

**One typical example of this shift has been the pharmaceutical industry.** Several countries including the US, the European Union, Australia, China, Indonesia, Turkey, India and Bangladesh have implemented local content requirements and incentives to onshore pharmaceutical manufacturing. Most of these policies required a specific proportion of locally sourced materials and/or specific manufacturing operations to be made locally in order to access the market or public procurement <fnref n="66" />.

**In the case of EU, the four Advanced Purchase Agreements with AstraZeneca, Sanofi GSK, CureVac, BioNTech-Pfizer for Covid-19 vaccines included local operations requirements and incentives**<fnref n="67" />.

Another striking example of this new type of localisation policies was the Inflation Reduction Act passed in August 16, 2022 by the Biden Administration in the US, which contained 21 different trade-related policies aimed at reducing economic dependencies, in particular towards China, with a strong focus on the automotive sector and the electric vehicle value chain.

<footnote n="64">⁶⁴ Volta Foundation, ‘2024 Battery Report’, 59.</footnote>

<footnote n="65">⁶⁵ Mitchell, ‘Hometown Heroes’, 482.</footnote>

<footnote n="66">⁶⁶ Mitchell, 488.</footnote>

<footnote n="67">⁶⁷ Source: https://www.globaltradealert.org/state-act/47193</footnote>
The Inflation Reduction Act in the US<fnref n="68" />

The IRA - Public Law No 117-169 - passed on August 16, 2022 by the Biden administration include both local content requirements and local content incentive for the US automotive sector.

An important dimension concerns raw materials for battery production where is stated
that projects supported by government will be awarded in priority to an entity that:

1) Is located and operates in the USA; Ⓟ

2) Is owned by a US entity; Ⓟ

3) Deploys US-owned intellectual property and content;

4) Represents consortia or industrial partnerships;

5) Will not use and/or export battery material from/to a Foreign Entity Of Concern. Ⓟ

For the period 2023-2026 the IRA has made available $3,6 billion in loans to fund processing, manufacturing and recycling of critical minerals, which complete the $16,4 billion provided for the period 2021-2026 by the "Infrastructure Investment and Jobs Act" (IIJA) or "Bipartisan Infrastructure Law" (BIL) - Public Law No 117-58 passed on November 15, 2021.

The IRA also aims at excluding Foreign Entities of Concerns, and notably China, from the automotive supply chains in particular for EVs. The IRA forbids the allocation of tax credits (SEC 13401 Clean Credit Vehicle) for EVs that have a battery manufactured or assembled by a FEoC after December 31, 2023 or that contain any critical minerals "mined, processed, or recycled" by a FEoC after December 31, 2024. The US has also limited the share of Chinese companies in the battery supply chain, since companies must ensure that their batteries do not contain any mineral or component from a company that is at least 25% owned by a China-related entity.

The IRA also amended the Clean Vehicle Credit to add battery requirements effective January 1, 2023. To be eligible, a vehicle must be fully assembled in North America and meet local sourcing requirements for the extraction, processing, and recycling of critical minerals and the manufacturing and assembly of battery components. Vehicles that meet the critical mineral requirements are eligible for a maximum tax credit of $3,750, those that meet the battery component requirements are eligible for a maximum tax credit of $3,750, making a maximum total tax credit of up to $7,500, subject to local manufacturing thresholds for each requirement that are tightened each year to reach 80% local content (by value) for critical minerals between 2027 and 2032 and 100% local content (by value) for the battery between 2029 and 2032. The Rhodium Group estimates the total amount of subsidies made available via the Clean Vehicle Credit to €32 to 85 billion between 2022 and 2031⁶⁹.

The IRA also makes available $3,26 billion per year and per million vehicles sold via the
advanced manufacturing production credit based on the following criteria:

<footnote n="68">⁶⁸ This box is based on Alochet, 'Comparison of the Chinese, European and American Regulatory Frameworks for the Transition to a Decarbonized Road Mobility', 46–50.</footnote>

<footnote n="69">⁶⁹ Houser, et al., 'Relay Race, Not Arms Race: Clean Energy Manufacturing Implications of the IRA for the US and EU'.</footnote>
- 10% of the production cost of critical minerals,

- 10% of the cost of active materials for battery electrodes,

- $35 / kWh for battery cell production,

- $10 / kWh for the production of battery modules (or $45/kWh for the production of battery packs with a different architecture).

The Rhodium Group estimates that these productions credits will result in $73 to $177 billion of subsidies between 2022 and 2031<sup>70</sup>

To qualify for the rebates and the production credits, batteries must be produced and assembled in Canada, Mexico or the US and fulfil the local content requirements listed above.

Overall, automotive sector related local content policies represented 14% (60) of the 422 local content policies implemented during this period, and almost half of these auto-related policies (26) concerned electric vehicles. As for the previous period, most of these implemented policies are still not WTO compliant but this has not prevented them from booming during this period also due to the *de facto* paralysis of the WTO since 2019 due to the US obstructionism against the WTO Appellate Body.

## De-risking local content policies and WTO compliance

This new type of local content policies based on de-risking considerations can still be called into question under WTO obligations (see for instance the complaint of the EU against Turkey local content requirements for pharmaceutical products<sup>71</sup>). However, the general exceptions related to "public health and essential security interests" to the Trim agreement and article III of the GATT can apply here and legitimate under certain conditions this new type of local content and operation requirements<sup>72</sup>.

Also, since 2016 the US has blocked the appointment of new judges to the WTO Appellate Body (AB). The Obama administration claimed that the AB had exceeded its mandate in sanctioning anti-dumping measures taken by the US against Chinese imports and by attributing to China the status of developing country, reducing the scope of WTO obligations for China<sup>73</sup>. The first Trump administration brought the conflict further, and since 2019 the AB has been paralysed due to an insufficient number of judges appointed, preventing the WTO from applying any type of sanction: the countries concerned simply need to appeal the first degree decision to block any procedure. The Biden administration has not modified the US position towards the WTO, and there are currently no prospects of any progress towards a resolution of the conflict.

The European Union has remained the only major economic power still fully abiding by WTO obligations. The EU has notably created in 2020 a parallel new mechanism to replace the AB, called the Multi-Party Interim Appeal Arrangement (MPIA), which operates on similar principles to the AB, but is based on the arbitration provisions of WTO Dispute Settlement Understanding. Beside the EU and China, 17 other countries

<footnote n="70"><sup>70</sup> Houser, et al.</footnote>

<footnote n="71"><sup>71</sup> Source: Panel Report, Turkey - Pharmaceutical Products (n 6) para 7.210.</footnote>

<footnote n="72"><sup>72</sup> Mitchell, 'Hometown Heroes', 488.</footnote>

<footnote n="73"><sup>73</sup> Hart and Murrill, 'The World Trade Organization's (WTO's) Appellate Body: Key Disputes and Controversies'.</footnote>
(on the 164 WTO members) had initially joined the MPIA, but not several key EU economic partners such as the US, India or Turkey. So far the MPIA has judged only one appeal, and the countries concerned can, if they are not happy about a judgment, leave the MPIA at any time without having to leave the WTO.

EU countries are once again almost completely absent from the list of countries implementing this new type of local content policies for the automotive sector with the only exception of France due to the introduction of the new Eco-Bonus based on Life Cycle Analysis in 2023. The French Eco-Bonus *de facto* discriminates the sale of non-European made BEVs, and in particular those imported from China, and does therefore count as a local content incentive.

By contrast with the European reluctance in engaging with “de-risking” local content policies for the automotive sector, Turkey, with which the EU has a FTA and from which it imports about 600,000 vehicles annually and an increasing amount of auto parts, was the fourth most active country in implementing such policies for the automotive sector with 6 measures introduced between 2019 and 2024 combining local content requirements, incentives and localisation policies to support domestic production of auto vehicles and parts (see box below). The three other most active countries were India (9), Indonesia (10) and Russia (15).

## Turkey's local content polices for the automotive sector

On 26 September 2019, three major Turkish state banks namely Ziraat Bank, Halkbank, and Vakifbank jointly announced a new loan program aimed at boosting the local automotive market. Under the new program, three state banks offer credit to customers with favorable interest rates in purchasing vehicles which are produced in Türkiye. The loan will be up to 120,000 TRY (21,165 USD) per customer with a maturity of up to 36 months for non-commercial vehicles and 60 months for commercial vehicles.

Only the models which are produced in Türkiye are eligible for the loan program.<fnref n="74" />

On 24 April 2023, the Turkish government announced that Turkish state-owned banks would offer soft loans for Türkiye's locally produced electric vehicles.

Financial support targets all electric vehicles produced in Türkiye, but at the time of the announcement of this measure, TOGG was the only electric vehicle produced in Türkiye for consumers.

State-owned banks provided loans ranging from 12-month to 36-month tenure at an interest rate of 0.99%.

This financial support program was announced during the promotion of Türkiye's first fully homemade electric car TOGG. In March 2023, approximately 180 thousand orders were received for 20 thousand vehicles, and the sales for 2023 were closed. TOGG sales started at the end of April 2023.<fnref n="75" />

<footnote n="74">⁷⁴ Source: https://globaltradealert.org/state-act/38481-turkiye-special-loan-program-for-locally-produced-vehicles</footnote>

<footnote n="75">⁷⁵ Source: https://globaltradealert.org/state-act/73581-turkiye-government-supports-the-sale-of-locally-produced-electric-vehicles</footnote>
TOGG made Türkiye's first fully homemade electric car investment in 2019. The government provided investment incentives for this electric vehicle investment as well as for its battery manufacturer company.

On 26 July 2024, the Turkish Ministry of Industry and Technology announced a financial grant to support businesses investing in plug-in hybrid electric vehicles (PHEVs) and battery electric vehicles (BEVs). In addition to the financial grant, the Turkish government has announced a comprehensive package of incentives to support investment in BEVs and PHEVs, including free land allocation, import tariff exemptions, tax reliefs, and state loans (see related interventions). These combined incentives will be supported by a total budget of USD 5 billion.<fnref n="76" />

According to the announcement from the Ministry, this funding call will support new investments to produce at least 150,000 electric vehicles annually with a high level of local content (60-80%), including setting up an R&D center. The stated goal of this funding call is to reach an annual production capacity of at least 1 million electric vehicles. The financial grant for each company can be up to 15% of its investment value. On 26 July 2024, the Ministry of Industry and Technology of Turkey announced a tax relief measure to support businesses investing in plug-in hybrid electric vehicles (PHEVs) and battery electric vehicles (BEVs). The tax relief for each company can be up to 80% of its investment value.

On 27 December 2024, the Turkish government issued Presidential Decree No. 9321 raising the local content threshold for vehicles eligible for SCT exemption from 20% to 40%. According to the Turkish Revenue Administration, 166,000 vehicles were sold under this program in the first 10 months of 2024.<fnref n="77" />

<footnote n="76">⁷⁶ Source: https://globaltradealert.org/state-act/88332-turkiye-ministry-of-industry-and-technology-announces-a-funding-call-worth-usd-5-billion-to-support-ev-and-phev-production</footnote>

<footnote n="77">⁷⁷ Source: https://globaltradealert.org/state-act/89817-turkiye-turkish-authorities-increases-local-content-threshold-for-tax-exempt-vehicles</footnote>
## 2.6 Conclusion on local content policies

In a recent study comparing EU de-risking policies towards China with those implemented in the US and Japan, the Rhodium group found that Europe had not de-risked at all, in particular concerning the automotive sector 78. Between 2017 and 2023, the US has reduced the share of Chinese imports in its overall imports by 8,4 percentage points (from 23,5% to 14,1%), Japan by 2,3 percentage points (from 29,6% to 27,3%), while Europe has increased this share by 3 percentage points (from 22% to 25%). Batteries, electric vehicles and auto-parts represented half of this growth. In explaining this striking difference, the report insisted on the key role of the presence or absence of neo-protectionist policies:

> "More broadly, this reflects Europe's greater openness to Chinese clean tech imports over the period. By contrast, tariffs and provisions in the Inflation Reduction Act (IRA) made it harder and/or costlier for Chinese clean tech manufacturers to export to the US." 79

If since at least 2023, the European Commission has made of “de-risking” a political objective, in particular towards China80, after the traumatic impact of both the Covid 19 pandemic and the 2022 Russia’s invasion of Ukraine, there is still no evidence of a concrete implementation of “de-risking” local content policies by the European Union. If after the 2008 financial crisis and up to the Covid 19 crisis, the ordo-liberal faith in the WTO global order that characterised the European approach to trade and competition could be still justified by a substantial trade surplus in key high-value added industrial sectors including the automotive sector, this is less and less true since 2019. In particular, the trade deficit with China has been constantly growing reaching €280 billion in 2023 from €150 billion in 2019. More generally, the lack of active industrial policies articulated with new types of protectionist measures to defend vital EU economic interests has been highlighted by Mario Draghi’s report as one of the main weaknesses of the EU.

It seems more and more evident, in particular for the automotive sector, that the question is not whether or not Europe will implement this new type of local content policies, but when and how.

<footnote n="78">78 Kratz, Boullenois, and Smith, 'Why Isn't Europe Diversifying from China?'</footnote>

<footnote n="79">79 Kratz, Piper, and Bouchaud, 'China and the Future of Global Supply Chains', 5.</footnote>

<footnote n="80">80 See Ursula Von der Leyen' speech to Mercator Institute for China Studies and the European Policy Centre : https://ec.europa.eu/commission/presscorner/detail/en/speech_23_2063</footnote>
## 2.7 Rules Of Origin: what they are and why they matter in international trade

To explore how Europe could rapidly introduce LCP for the automotive sector, we analyse the current implementation of Rules of Origins in Free Trade Agreements.

### 2.7.1 Definition and a brief history of the creation of ROO

According to the World Trade Organization (WTO)<fnref n="81" />, "*Rules of origin (ROO) are the criteria needed to determine the national source of a product. Their importance is derived from the fact that duties and restrictions in several cases depend upon the source of imports.*"

In customs matters, a distinction is made between two types of origin, namely Non-Preferential Origin and Preferential origin:

*   **Non-Preferential Origin:** Non-Preferential rules of origin are used to determine the country of origin of goods for the application of the most-favored nation treatment (MFN) but also for the implementation of a number of commercial policy measures such as anti-dumping and countervailing duties, trade embargoes, safeguard measures and quantitative restrictions or tariff quotas.

*   **Preferential Origin:** Preferential rules of origin determine whether goods qualify as originating from certain countries, for which special arrangements and agreements apply. Where all the requirements are met, goods with preferential origin are eligible to be imported with lower duty rates or at zero rate depending on the preferential tariff treatment provided for.

**BOX 1: Most-favored-nation definition**

**Most-favored-nation (MFN):** treating other people equally. Under the WTO agreements, countries cannot normally discriminate between their trading partners. Grant someone a special favor (such as a lower customs duty rate for one of their products) and you have to do the same for all other WTO members.

Source: https://www.wto.org/english/thewto_e/whatis_e/tif_e/fact2_e.htm

Originally, the General Agreement on Tariffs and Trade (GATT), which aimed to minimize barriers to international trade by eliminating or reducing quotas, tariffs and subsidies, had no specific rules for determining the country of origin of goods in international trade. However, the proliferation of preferential trade arrangements, the number and importance of rules of origin and disputes over their application, and the use of anti-dumping laws (and subsequent allegations of circumvention of anti-dumping

<footnote n="81">⁸¹ The information on the ROO has been taken from two sources: (i) the WTO website, https://www.wto.org/english/tratop_e/roi_e/roi_info_e.htm and (ii) the European Commission Taxation and Customs Union website, https://taxation-customs.ec.europa.eu/customs-4/international-affairs/origin-goods_fr</footnote>
duties through the use of facilities in third countries) prompted negotiators in the
Uruguay Round, which began in 1986 and ended in 1994, to address the issue.
The negotiators' objective was that the agreement on rules of origin should harmonize
non-preferential rules of origin and ensure that these rules do not in themselves create
unnecessary barriers to trade.

Nowadays, ROO are the laws, regulations and administrative provisions of general
application used to determine the country of origin of goods - where they have been
produced or manufactured, with the exception of those relating to the granting of tariff
preferences. Consequently, ROOs are used in non-preferential trade policy situations to:

1. Implement trade policy measures and instruments, such as anti-dumping duties and safeguard measures;

2. Determine whether imported products should receive most-favored-nation (MFN) treatment or preferential treatment.

They are also used for: (i) the application of labelling and marking requirements; (ii) government procurement; and (iii) for the purpose of trade statistics.

In addition, the use of preferential trade agreements has advantages and disadvantages, which are summarized in the table below<fnref n="82" />:

<table><caption>Table 43. Advantages and disadvantages of Preferential trade agreements</caption><thead><tr><td>Advantages</td><td>Disadvantages</td></tr></thead><tbody><tr><td>1. Increased trade: Preferential trade agreements remove trade barriers such as customs duties, quotas and other restrictions, thus facilitating trade between countries.</td><td>1. Unequal benefits: Developed countries often have greater bargaining power and can negotiate agreements that are disproportionately favorable to them.</td></tr><tr><td>2. Improved market access: Preferential trade agreements give member countries better access to markets, enabling them to sell more goods and services in other countries.</td><td>2. Trade diversion: Preferential trade agreements can lead to trade diversion, with countries turning to other member countries of the agreement to take advantage of the preferential conditions.</td></tr><tr><td>3. Lower prices: Preferential trade agreements help to lower prices for consumers by reducing the costs associated with importing goods.</td><td>3. Dependence: Preferential trade agreements can create dependence on member countries for certain goods and services.</td></tr><tr><td>4. Improved standards: Preferential trade agreements encourage member countries to adopt higher standards in terms of labor, environmental protection and intellectual property.</td><td>4. Complexity: Preferential trade agreements are often complex and difficult to negotiate. This can lead to protracted negotiations and disputes and slow down the process of creating a trade agreement.</td></tr></tbody></table>

<footnote n="82">⁸² Information retrieved from https://www.kasteelwijenburg.nl/advantages-and-disadvantages-of-preferential-trading-agreement/ and amended by the authors</footnote>
### 2.7.2 How to determine the country of origin of goods?

As mentioned above, determining the origin of goods can be complex and difficult and is one of the reasons why protracted negotiations and disputes can occur during the negotiation of a trade agreement.

There are two basic criteria to determine the country of origin of goods<fnref n="83" />:

* Wholly obtained criterion,

* Substantial/sufficient transformation criterion.

Wholly obtained goods are: goods naturally occurring; or live animals born and raised in a given country; or plants harvested in a given country; or minerals extracted or taken in a single country. The definition of wholly obtained also covers goods produced from wholly obtained goods alone or scrap and waste derived from manufacturing or processing operations or from consumption.

If only one country is involved in producing a good the wholly obtained concept will be applied. An example of a wholly obtained good is a graphite anode for an EV battery: the raw material is mined and processed in China, and the anode is manufactured in China.

If two or more countries are involved in the production of the product, the substantial transformation principle applies and can be expressed through three main criteria:

1. A criterion of a change in tariff classification. A good is considered substantially transformed when the good is classified in a heading or subheading (depending on the exact rule) different from all non-originating materials used. This rule is not self-explanatory and the box below explains how it works and an example is provided in the figure below.

**BOX 2: Tariff classification**

Customs tariffs are based on the (Custom) Harmonized System (HS) managed by the World Custom Organization (WCO).

There are 3 HS levels used:

* HS2 (HS chapter level represented by 2-digit codes)

* HS4 (tariff heading level represented by 4-digit codes)

* HS6 (tariff sub-heading level represented by 6-digit codes)

**Change of tariff classification means that a final good cannot have the same**

<footnote n="83">⁸³ Definitions have been simplified for the sake of clarity. The reader can access the web pages from which they were taken for more detailed information.</footnote>

<footnote>https://www.wcoomd.org/~/media/wco/public/global/pdf/topics/origin/overview/origin-handbook/rules-of-origin-handbook.pdf</footnote>

<footnote>https://taxation-customs.ec.europa.eu/customs-4/international-affairs/origin-goods/non-preferential-origin_en, https://trade.ec.europa.eu/access-to-markets/fr/roo-trade-agreement/GB</footnote>
classification as any of the non-originating materials used to make them.

Source: https://www.gov.uk/guidance/understanding-rules-of-origin-under-the-developing-countries-trading-scheme

<table><caption>Table 44. Example of application of change of tariff classification</caption><thead><tr><th>Category</th><th>Raw material source 1</th><th>Raw material source 2</th><th>Production</th><th>Export</th></tr></thead><tbody><tr><td>Materials</td><td>Rubber</td><td>Fabric</td><td>Rubberised fabric</td><td></td></tr><tr><td>Country</td><td>South Korea</td><td>India</td><td>Laos</td><td>United Kingdom</td></tr><tr><td>HS Chapter</td><td>40</td><td>53</td><td>59</td><td></td></tr></tbody></table>

Source: https://www.gov.uk/guidance/understanding-rules-of-origin-under-the-developing-countries-trading-scheme

2. A criterion of value added (ad valorem percentages). Regardless a change in its (tariff) classification, a good is considered substantially transformed when its value-added increases up to a specified level expressed by ad valorem percentage. Value added rules can be calculated in different manners:

I. "customs value" means the value as determined in accordance with the Agreement on Implementation of Article VII of GATT 1994;

II. "EXW price" or "ex-works price" means the price of the product paid or payable to the company where the last processing took place and which must include the value of all materials used and all previous processing operations, less any taxes already paid;

III. "MaxNOM" means the Maximum value of Non-Originating Materials expressed as a percentage of the value of the good;

IV. "VNM" or "Value Non-originating Materials" means the value of the non-originating materials used in the production of the product;

3. A criterion of manufacturing or processing operations (technical requirement). Regardless a change in its (tariff) classification, a good is considered to be substantially transformed if it has undergone certain manufacturing or processing operations. In concrete terms, this means that certain operations defined in the rule must have taken place in a country in order to obtain originating status (from that country).
We summarize below what are the advantages and disadvantages of each type of criterion used to establish that a good can benefit from the substantial transformation principle to define its origin<fnref n="84" />. Whatever the criterion used and its advantages /disadvantages, we must bear in mind that the application of each of them requires a deep and extensive knowledge of the product's value chain.

<table><caption>Table 45. Advantages and disadvantages of criteria used in the determination of a substantial transformation</caption><thead><tr><td>Criterion</td><td>Advantages</td><td>Disadvantages</td></tr></thead><tbody><tr><td>Change in Tariff Classification (CTC)</td><td>Simplicity and predictability.<br/>The Harmonized System (HS) is designed to be a multi-purpose nomenclature and has been established as a common customs language that is well understood by custom officers.</td><td>Although being a multi-purpose nomenclature, the HS is not always suitable for origin determination purposes.<br/>Difficult to understand for people not aware of the HS.</td></tr><tr><td>Value added (VA)</td><td>Suitable for addressing certain goods which have been further refined or value-added, despite the unchanged classification.<br/>The value provides a simpler threshold than manufacturing or processing operations.</td><td>Lack of predictability and consistency due to currency fluctuation and possible exposure to transfer pricing.<br/>Difficulty to calculate the real value of the good in the case of deep value chains spread over many different countries.<br/>The calculated value may not accurately reflect the strategic value of the product.</td></tr><tr><td>Manufacturing operation (MO)</td><td>A technical and objective criterion.</td><td>Need for frequent modifications to catch up with technological developments.<br/>To be relevant, longer and more detailed texts are often needed to clearly set the production process and define the rule.</td></tr></tbody></table>

<footnote n="84">⁸⁴ Original information amended by the authors – source: https://www.wcoomd.org/~/media/wco/public/global/pdf/topics/origin/overview/origin-handbook/rules-of-origin-handbook.pdf</footnote>
### 2.7.3 The French eco-bonus as a smart local content policy

The French eco-bonus is a purchase subsidy that favors new electric vehicles with a low carbon footprint. The granting of this subsidy depends on a number of criteria including the ecological score of the vehicle. The latter is calculated using a simplified LCA approach based only on the CO2 emissions (expressed in kg-eq CO2) of the various production stages of some materials used in the assembly of the vehicle (excluding the battery), the vehicle (excluding the battery), the battery and the transport of the vehicle.

Article 1 of the Decree of 23 January 2025⁸⁵ amends the original decree of 7 October 2023 on "the methodology for calculating the environmental score and the minimum score value to be achieved for eligibility for the ecological bonus for new electric passenger cars" by replacing "'Assembly site': site where the electric motor and battery are installed on the chassis of the vehicle version' by the words: 'Manufacturing site': site where the stamping, assembly of the body in white of the vehicle version, protection and painting of the said body and final assembly of the reference vehicle are carried out.<fnref n="86" />"

Although this regulation cannot be considered as a pure rule of origin, the modification of a manufacturing criterion (one of the solutions for defining the origin of a good when two or more countries contribute to its production), namely the replacement of "assembly site" by "manufacturing site", imposes a stricter condition on the local production conditions of the good (in this case a battery electric vehicle) and successfully exclude from the bonus Chinese CKD and SKD assembled in Europe.

### 2.7.4 The situation of Europe regarding trade of goods

In a customs union, such as the EU-27, goods (produced in the countries that are members of the union) are not traded on the basis of their origin, but on the basis of whether they comply with the rules on free movement (and the relevant union regulations that apply to the goods in question). Goods that do not fall under the customs union (produced in countries that are not members of the union) may or may not benefit from preferential treatment due to their status of origin and the nature of the trade agreements concluded or not between the EU-27 and the country(ies) from which they originate.

A list of the concluded agreements and ongoing negotiations can be found on the EU Trade and Economic Security - "Negotiations and Agreements" website<fnref n="87" />.

Since 2016, a series of free trade agreements have gained significant attention, largely due to the creation, renegotiation, or separation of some of the world's largest trade blocs. These include the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), the United States-Mexico-Canada Agreement (USMCA), and the EU-UK Trade and Cooperation Agreement (TCA). Unlike earlier trade deals, tariff and non-tariff barriers have already been largely removed between the member countries of these agreements, so only minimal tariff reductions are anticipated. Governments are now focused on determining how to assess whether a product qualifies for preferential

<footnote n="85">⁸⁵ JORF n° 0020 du 24 janvier 2025 - Texte 31 - https://www.legifrance.gouv.fr/jorf/jo/2025/01/24/0020</footnote>

<footnote n="86">⁸⁶ Texts in italics have been translated from the French text using Deep-L®</footnote>

<footnote n="87">⁸⁷ https://policy-trade.ec.europa.eu/eu-trade-relationships-country-and-region/negotiations-and-agreements_en</footnote>
treatment within these agreements, especially in sensitive sectors like the automobile industry.

For instance, the CPTPP established a relatively generous regional value content (RVC) rule for duty-free vehicles at 45%, meaning that cars must be made with at least 45% of content sourced within the FTA region. This has faced strong opposition in certain member countries, such as Canada, which argues that this rule contradicts the stricter requirements set by the US in the USMCA, where the standard has risen from 62.5% to 75%. In Asia, RCEP harmonizes the rules across five existing "ASEAN+1" agreements, meaning businesses no longer have to adjust their production to meet different criteria. Instead, they only need to meet a single set of RCEP requirements, which is relatively low at 40%.

It should be also noted that in the current context of raising tariffs triggered by the second Trump administration, ROO could become increasingly important as a way to avoid these tariffs via compliance with the FTAs.

**In the annex 1 we analyze in detail the ROOs of the main FTAs currently implemented or in negotiation between the EU and other countries, and in the most important non-EU economic areas.**

These FTAs are listed in the table below where the main features of the ROO implemented for motor vehicles and parts are compared. Currently the highest locally value added requirements in EU FTAs is the 30% MaxNOM that will applied from 2027 onward to Battery accumulators traded between EU and the UK, which is equivalent to a 70% local content requirement. Otherwise the norm generally applied is a MaxNom of 45% for vehicles and of 50% for parts and components (55-50% local content). These levels are notably much lower than those applied by the USMCA trade agreement which has a local content level of 75% for passenger vehicles, light trucks and core auto parts.

<table><caption>Table 46. Main Free Trade Agreements and related Rules of origin</caption><thead><tr><th>FTA – implementation date</th><th>Countries</th><th>Rules of origin</th><th>Cumulation</th></tr></thead><tbody><tr><td>Trade and Cooperation Agreement - 2020</td><td>EU, UK</td><td><strong>Locally added value:</strong><br>ROO for vehicles and parts 2023-2026:<br>MaxNOM 60%<br>2027:<br>MaxNom 45%<br><strong>MaxNOM</strong><br>30% Accumulators<br>35% Cells<br>45% Packs</td><td></td></tr><tr><td>USMCA - 2020</td><td>United States, Mexico, Canada</td><td><strong>Locally added value:</strong><br><strong>For passenger vehicles, light trucks, core auto parts</strong><br>75% RVC<br><strong>For other vehicles and auto parts</strong><br>65%-70% RVC<br><strong>For EV batteries</strong><br>75%<br><strong>Labor value content:</strong><br>LVC rule stating that 40-45% of a vehicle's production by</td><td></td></tr></tbody></table>
<table><tr><td></td><td></td><td>value be made by workers earning at least $16 per hour<br><b>Raw materials</b><br>70% of a vehicle manufacturer's steel and aluminum purchases by value must originate in North America</td><td></td></tr><tr><td>EU-India<br>Agreement<br>Negotiations<br>- ongoing</td><td>EU, India</td><td>(ACEA Requests)<br><b>Locally added value:</b><br>'Standard' EU rule of origin of 45% NOM for motor vehicles and 50% NOM or CTH for automobile parts and components, including engines<br>Flexibility on rules of origin for low- and zero-emission vehicles and/or their batteries and battery components to reflect the reality of battery manufacturing capacity</td><td>(ACEA Requests)<br>Full<br>bilateral<br>cumulation</td></tr><tr><td>CPTPP<br>- 2018</td><td>Australia,<br>Brunei, Canada,<br>Chile, Japan,<br>Malaysia,<br>Mexico, New<br>Zealand, Peru,<br>Singapore, the<br>United Kingdom<br>and Vietnam.</td><td><b>Locally added value</b><br><b>ROO for electric and ICE vehicles:</b><br>45% of the ex-works price<br><b>EV batteries</b><br>A substantial part of the battery and its components (e.g., lithium, cobalt, nickel) must originate in a CPTPP country or undergo sufficient processing in the region<br><b>Parts and components:</b><br>Key components like motors (for EVs), batteries, inverters, chassis, and powertrains. These components must be produced or undergo substantial processing within the CPTPP region.</td><td>Allows for<br>cumulation<br>Among all<br>members</td></tr><tr><td>EU-Japan<br>Economic<br>Partnership<br>- 2019</td><td>European<br>Union,<br>Japan</td><td><b>Locally added value For ICE vehicles:</b><br>MaxNOM 50% or RVC 55%<br><b>For ICE engines and diesel engines:</b><br>MaxNOM 50% or RVC 55%<br><b>For chassis and body:</b><br>MaxNOM 45% or RVC 60%<br><b>For parts and accessories:</b><br>CTH: MaxNOM 50% or RVC 55%<br><b>Hydraulic brake fluids:</b><br>CTSH, MaxNOM 5% (EXW), RVC 55%<br><b>Nuts of iron or steel:</b><br>CTH<br><b>Solid profiles of aluminum alloys:</b><br>CTH, MaxNOM 50% (EXW), CTH and RVC 55% (Free-on-board)<br><b>Parts of seats</b><br>Change chapter (CC)</td><td></td></tr><tr><td>EU-Korea<br>Agreement<br>- 2011</td><td>European<br>Union, Korea</td><td><b>Locally added value:</b><br><b>For all vehicles:</b><br>MaxNOM 45% (EXW)<br><b>For parts and components:</b><br>MaxNOM 50% (EXW)</td><td></td></tr><tr><td>Pan-Euro-Mediterranean-<br>Convention<br>- 2012</td><td>The EU, the<br>EFTA States, the<br>Faroe Islands,<br>the participants<br>in the<br>Barcelona<br>Process, the<br>participants in</td><td><b>Locally added value:</b><br><b>For vehicles and vehicle parts and components:</b><br>Around MaxNOM 45-55% (EXW) depending on countries and context</td><td></td></tr></table>
<table><tr><td></td><td>the EU's Stabilization and Association Process (Albania, Bosnia and Herzegovina, the Republic of North Macedonia, Montenegro, Serbia and Kosovo, the Republic of Moldova, Georgia, Ukraine)</td><td></td><td></td></tr><tr><td>EU-Mercosur Agreement - 2024</td><td>EU, Argentina, Brazil, Paraguay, and Uruguay</td><td>Locally added value<br>For vehicles and vehicle components:<br>RVC 60%<br>EV batteries and components:<br>MaxNOM 40%</td><td>De minimis<br>10% (EXW)</td></tr><tr><td>EU-Mexico - 2025</td><td>EU, Mexico</td><td>Locally added value:<br>For vehicles and vehicle components (ICE and EV):<br>MaxNOM 55%</td><td>De minimis<br>10% (EXW)</td></tr><tr><td>CETA - 2017</td><td>EU, Canada</td><td>Locally added value:<br>For vehicles (ICE and EVs)<br>MaxNOM 55%</td><td>De minimis<br>10% (EXW)</td></tr></table>
2.7.5 Conclusions on rules of origins

The EU does not have yet local content policies to protect its automotive sector. It does
however have already multiple ROO with local content requirements via its FTAs with
several countries that export and import vehicles and auto-parts to and from Europe,
such as Japan, Korea, Mexico, Turkey, Morocco, etc.

These ROO are set however at relative low levels, with the only exception of the FTA
with the UK for the batteries. If these ROO do prevent third countries from using FTAs to
ship, for instance, assembled vehicles from CKD to Europe via our trade partners, they
cannot slow down the trend highlighted in section 1 towards higher extra EU low-cost
sourcing, in particular from China.

Based on the results of our work in section 1, we believe that these ROO should be set at
higher level, following the example of the USMCA agreement, to fulfill at least partially
this role.

We are aware that high level of ROO for batteries could be problematic and should be set carefully given the current lack of local production in Europe and the generalized dependence of EU battery makers on raw materials but also cathode and anodes imported mainly from China. Currently the target announced by the EU is of at least 50% value added along the battery value chain made in Europe by 2030 (European Commission 2025, p. 11). **Such a problem however does not exist for auto-parts and the evidences provided in section 1 suggest that ROO set at 75%-80% would be perfectly viable for the European automotive industry and should not have any negative impact on production costs and prices.**

Finally, the current multiple ROOs that the EU apply within all these FTAs for the trade of vehicles and auto-parts means that local content requirements based on the different methods used to establish and check ROO could be implemented effectively with almost no delay to protect the European auto-parts from unfair competition, in particular from China by setting up an European ROO to define for the Single Market what is a “Made in Europe” car and auto-part.
## 3. Recommendations

### 3.1 Pleading for a comprehensive and ambitious EU local content policy for the automotive sector

The purpose of this report was three-fold:

1) to assess whether there is a need for a comprehensive local content policy to protect the European automotive sector, including the European automotive suppliers, from unfair competition, notably from China, but also from other extra-EU low-cost countries;

2) to review and characterize the increasing implementation of different types of local content policies in non-European countries since at least the financial crisis of 2008, in particular in the automotive sector, and why the European Union has become the main exception in this new neo-protectionist geopolitical order;

3) to propose an EU local content policy for the automotive sector based on these insights.

We have found in the first section that while the European automotive auto-parts sector is still in 2024 exporting outside the EU more than it is importing from extra EU countries, this is less and less true, and for some parts such as road wheels, fasteners, tires it is already not true anymore and this is due mainly to decreasing exports to China, and increasing imports from China. Furthermore, when we integrate lithium-ion accumulators with auto-parts, the €2 billion trade surplus that the EU still has with China on auto-parts in 2024, becomes already a €17 billion trade deficit.

The results of the questionnaire distributed to French automotive suppliers (108 returned) to better characterise the "Chinese threat", but also, to better understand the concrete implications of the increasing pressure exerted by OEMs towards higher level of extra-EU low-cost sourcing, show that extra-EU import penetration should increase substantially during the next 5 years. On average, it is between 30-50% of the French production and 15-30% of the European production of these suppliers that could disappear by 2030, and in several cases is more than 50% or even 80% of this production that is at risk.

**On the basis of these results, we concluded that there is an urgent need to implement a comprehensive local content policy to prevent this massive announced disruption of the EU automotive supply chain before it is too late.**

In the second section we have found that the implementation of local content policies since the 2008 financial crisis has increased exponentially outside the EU. We have also found that this growth has changed of nature during and after the pandemic, shifting towards de-risking and re-shoring, leaving the EU particularly vulnerable to both the direct consequences of this new type of strategic policies such as the NEV policy in China or the IRA policy in the US, and the absence of equivalent policies implemented in the EU. We have also found that the implementation of such policies is widespread, and goes well beyond these well known cases.
In such a context, the EU position is increasingly at odds with the new geopolitical order that has been emerging after the pandemic, the Russia's invasion of Ukraine, and, last but not least, the ultra-neo protectionist agenda pushed forward by the second Trump administration.

If the multiple FTAs negotiated by the EU during the last fifteen years do provide some degree of protection via the application of Rules of Origin on the basis of different local content requirements, the degree of this protection appears in most of the cases too low to represent a viable alternative to the much more comprehensive local content policy advocated by this report and only concerns production for export. Furthermore, taking into account the threat represented by Chinese competition and the multiple ways through which "on sale" components and parts from China could find a way into Europe via imports, but also via SKD assembled with some level of local content in third countries with which Europe has FDAs, it is crucial to rethink the current levels of ROO's local content requirements and raise them to anticipate this type of risk.

We have estimated that in order to prevent the announced disruption of the European automotive supply chain during the next five years, what is needed is a local content level of 80%, which corresponds to the average local content achieved by European made cars during the last ten years. Such a level would preserve the EU based automotive supply chain with no major impacts on production costs or prices.

While it is possible to argue that letting European based OEMs increasingly source from China could contribute to a short-term reduction of production costs and prices, in particular for EVs, the longer-term consequences would inevitably be an even higher dependence on Chinese products and technologies that would eventually undermine the competitiveness of the European automotive industry.

Furthermore, given the current fragility of several segments of the European supply chain, which are already confronted with the consequences of high energy costs and low production volumes, such a scenario would also have immediate and catastrophic consequences for the workers and territories of the automotive industry <fnref n="88" />.

In the current configuration of depressed production and strong pressure on margins, even the relative modest increase (by comparison with what is expected for the next five years) in the penetration of Chinese imports during the last two years has already resulted in several factory closures, and this is even more evident in the sub-sectors where these imports have increased the most, as for example in tire and road wheels production.

The report also provides clear evidences that the EU is well equipped to implement such a comprehensive local content policy in a short period of time by making use of the instruments already in place for the application of the ROO.

<footnote n="88">⁸⁸ Goodman, 'Charged with Consequences. How Europe Navigates the Risks of Chinese Electric Vehicles'.</footnote>
## 3.2 A "Rule of Origin" for Made in Europe cars and auto-parts

We have found that ROO provide a solid framework to implement local content requirements by using three different criteria: change in tariff classification; value added percentage; and localization of specific manufacturing or process operations. These criteria are already applied in many FTAs and can be combined together to address the risk of circumventing strategies from third countries' exporters.

We propose to create a "ROO" for the Single Market (as a local content requirement) set at 20% MaxNOM (maximum value of Non-Originating Materials) for passenger cars and light vehicles which corresponds to a local content requirement of 80%. We propose to set at 25% the MaxNOM for auto-parts. A distinction between core-parts, principal parts and complementary parts as used in the USMCA FTA could be introduced to adjust the MaxNOM at different levels to reflect the reality of current international trade flows and avoid negative impacts on the competitiveness of OEMs. We propose to combine these MaxNOM with a manufacturing operation requirement for at least core-parts.

We propose to exclude batteries from the EU vehicles-auto-parts ROO and to have a separate ROO for batteries that will be set according to the EU "Battery Booster package" and the announced target of at least 50% value added along the battery value chain made in Europe by 2030⁸⁹.

The new European ROO for passenger cars, light-vehicles and auto-parts will define for Europe what is a "made in Europe" car or auto-part, and could be then used in different key EU and national policies:

- **In trade policies** to exclude non "made in Europe" cars and auto-parts from the free-circulation of goods within the Single Market<fnref n="90" />;

- **In public procurement** to effectively implement a 'buy European' procurement plan

- **In policies for boosting demand for zero-emission vehicles** such as social leasing schemes and corporate fleet's decarbonising schemes;

- **In incentive schemes for consumers' purchase;**

- In the **up-coming Clean Industrial State Aid framework** to define the eligibility criteria for overseas players;

- In the **FDI screening regulation** to regulate foreign automotive production in Europe.

This new comprehensive local content policy could be also complemented with other innovative policies, such as a European eco-score, that could simultaneously act as localization and decarbonisation policies for the European automotive industry. It should be not forgotten that letting inside Europe an increasing amount of parts and components made in China (or in other highly carbonised economies) results in much

<footnote n="89">⁸⁹ European Commission, 'Industrial Action Plan for the European Automotive Sector', 11.</footnote>

<footnote n="90">⁹⁰ Similarly at what is currently applied to cars or auto-parts manufactured in Europe that do not meet specific ROO criteria when exported to third-countries with which Europe has an FTA, these cars and auto-parts would therefore considered as most-favored-nation imported goods and would be taxed accordingly.</footnote>
bigger carbon footprints for the European made vehicles, and the implementation of regulations that would limit the carbon footprint of cars, and in particular of EVs, could indeed serve multiple purposes combing decarbonisation with trade protection.

Such a comprehensive local content policy is fully coherent with the Mario Draghi's call for "protecting jobs (in the automotive sector) from unfair competition"<fnref n="91" /> and Ursula von der Leyen's will to "ensure that the future of cars remains firmly rooted in Europe"<fnref n="92" />. It will align European trade and industrial policies and regulations with those of our main competitors. It will boost the resilience and sustainability of the European automotive sector and avoid the imminent disruption of its supply chain.

<footnote n="91">⁹¹ Draghi, 'The Future of European Competitiveness', 41.</footnote>

<footnote n="92">⁹² European Commission, 'Strategic Dialogue on the Future of the European Automotive Industry to Start in January'.</footnote>
Alochet, Marc. 'Comparison of the Chinese, European and American Regulatory Frameworks for the Transition to a Decarbonized Road Mobility'. Ecole Polytechnique, 2023.
https://portail.polytechnique.edu/i3_crg/en/publication-report-comparison-chinese-european-and-american-regulatory-frameworks-transition.

Alochet, Marc, and Christophe Midler. 'A Comparison of Chinese and European Public Policies on Electric Vehicles'. *Le Journal de l'école de Paris Du Management* 152, no. 6 (2021): 16–23.

Carbone 4. 'Buy European and Sustainable Act : Accelerating the Low-Carbon Transition in the European Union'. Carbone 4, 2024. https://carbone4.com/en/publication-buy-european-and-sustainable-act.

Deringer, Hanna, Fredrik Erixon, Philipp Lamprecht, and Erik Van der Marel. 'The Economic Impact of Local Content Requirements: A Case Study of Heavy Vehicles'. ECIPE Occasional Paper, 2018.
https://www.econstor.eu/bitstream/10419/202458/1/1013259750.pdf.

Draghi, Mario. 'The Future of European Competitiveness'. European Commission, 2024.

European Chamber of Commerce in China. 'China Manufacturing 2025. Putting Industrial Policy Ahead of Market Forces', 2017. www.europeanchamber.com.cn.

European Commission. 'Commission Implementing Regulation (EU) 2024/1866 of 3 July 2024 Imposing a Provisional Countervailing Duty on Imports of New Battery Electric Vehicles Designed for the Transport of Persons Originating in the People's Republic of China'. Official Journal of the European Union L4.7.2024. European Union, 2024.

—. 'GEAR 2030. High Level Group on the Competitiveness and Growth of the Automobile Industry in the European Union'. Text, 2017.

—. 'Industrial Action Plan for the European Automotive Sector'. COM(2025) 95 Final. European Commission, 2025.

—. 'On Significant Distortions in the Economy of the People's Republic of China for the Purposes of Trade Defence Investigations'. Commission Staff Working Document. Brussels: European Union, 2024.

—. 'Strategic Dialogue on the Future of the European Automotive Industry to Start in January'. EU, 19 December 2024.
https://ec.europa.eu/commission/presscorner/api/files/document/print/en/ip_24_6542/I P_24_6542_EN.pdf.

Fay, Sophie. 'Carlos Tavares' Ruthless Cost-Cutting Strategy', 19 June 2024.
https://www.lemonde.fr/en/economy/article/2024/06/19/carlos-tavares-ruthless-cost-cutting-strategy_6675189_19.html.

Fix, Liana, and Heidi Crebo-Rediker. 'China's Double Threat to Europe'. *Foreign Affairs*, 5 September 2024. https://www.foreignaffairs.com/united-states/chinas-double-threat-europe.

Flynn, Michael S., David J. Andrea, Sean P. McAlinden, and Brett C. Smith. 'The U.S.-Japan Automotive Bilateral 1990 Trade Deficit'. The Office for the Study of Automotive Transportation, University of Michigan, May 1991.

Flynn, Michael S., Sean P. McAlinden, and David J. Andrea. 'The U.S.-Japan Bilateral 1993 Automotive Trade Deficit'. Office for the Study of Automotive Transportation, University of Michigan, September 1994.

Flynn, Michael S., Sean P. McAlinden, Godfrey Cadogan, Brett C. Smith, and David J. Andrea. 'The 1996 U.S.-Japan Bilateral Automotive Trade Deficit'. The Office for the Study of Automotive Transportation, University of Michigan, July 1993.
Goodman, Sam. 'Charged with Consequences. How Europe Navigates the Risks of Chinese Electric Vehicles'. Frierich Naumann Foundation, China Strategic Risks Institute, 2025.

Goujon, Reva, and G. Sebastian. 'Car Trouble: ICTS Rule Rewires Global Auto Supply Chains'. Rhodium Group, 2024. https://rhg.com/research/car-trouble-icts-rule-rewires-global-auto-supply-chains/.

Grudler, Christophe. 'Against Unfair Competition, Time Has Come for a Buy European Act.' *The European Files* (blog), 26 April 2024.
https://www.europeanfiles.eu/digital/against-unfair-competition-time-has-come-for-a-buy-european-act.

Hart, Nina M., and Brandon J. Murrill. 'The World Trade Organization's (WTO's) Appellate Body: Key Disputes and Controversies'. Congressional Research Service, 2021.
https://crsreports.congress.gov/product/pdf/R/R46852.

Houser, Trevor, John Larsen, Kate Larsen, Ben King, and Marie Tamba. 'Relay Race, Not Arms Race: Clean Energy Manufacturing Implications of the IRA for the US and EU'. Rhodium Group, 28 February 2023. https://rhg.com/research/clean-energy-manufacturing-ira-us-eu/.

Ibusuki, Ugo, Hideo Kobayashi, and Yingsham Jin. 'Asian Automobile Manufacturers Strategies in Brazil: Impact of the New Automotive Policy (INOVAR-AUTO)'. Paris, 2013. https://gerpisa.org/node/2108.

Jullien, Bernard, Tommaso Pardi, and Sigfrido Ramirez. 'The EU's Government of Automobiles: From "Harmonization" to Deep Incompleteness'. In *The EU's Government of Industries: Omnipresent, Incomplete and Depoliticized*, edited by Bernard Jullien and Andy Smith, Routledge. Routledge, 2014.

Kratz, Agatha, Camille Boullenois, and Jeremy Smith. 'Why Isn't Europe Diversifying from China?' Rhodium Group, 2 December 2024. https://rhg.com/research/why-isnt-europe-diversifying-from-china/.

Kratz, Agatha, Lauren Piper, and Juliana Bouchaud. 'China and the Future of Global Supply Chains'. Rhodium Group, 2025. https://rhg.com/research/china-and-the-future-of-global-supply-chains/.

Mitchell, Andrew D. 'Hometown Heroes: Onshoring, Promoting Local Content & WTO Law'. *The Journal of World Investment & Trade* 25, no. 4 (2024): 481-96.

Pardi, Tommaso. *Heavier, Faster and Less Affordable Cars. The Consequence of EU Regulations for Car Emissions*. Bruxelles: ETUI, 2022.

—. 'La Révolution Qui n'a Pas Eu Lieu : Les Constructeurs Japonais En Europe (1970-2010)'. EHESS, 2011.

—. 'Lean Production in the Automotive Industry. Origin, Diffusion, Paradoxes, and Contradictions of a New Managerial Paradigm'. In *The Cambridge International Handbook of Lean Production Diverging Theories and New Industries around the World*, 204-26, 2021. https://doi.org/10.1017/9781108333870.009.

Pardi, Tommaso, Marc Alochet, Samuel Klebaner, and Bernard Jullien. 'European Regulations for an Affordable Sustainable (Battery) Electric Vehicle'. *Actes Du GERPISA* 43 (2024). https://hal.science/hal-04878220/.

Pascoal, Erik Telles, Maurício César Delamaro, Ugo Ibusuki, Osamu Tsukada, and Henrique Martins Rocha. 'The New Brazilian Automotive Policy and Its Impact on the Competitiveness of Multinational Automobile and Auto Parts Manufacturers'. *International Journal of Automotive Technology and Management* 17, no. 3 (2017): 225. https://doi.org/10.1504/IJATM.2017.086405.

Pelegrina, Juliano, Timo Stoeber, and Nuno Manoel Martins Dias Fouto. 'Will Rota 2030 Deliver Sustainable Innovation? Comparing the Ends and Means of Brazilian and
German Auto Industry Innovation Policies'. *Innovation & Management Review* 20, no. 3 (2023): 227–43.

Prado, V. do, E. Fabry, A. Gonzalez Laya, N. Köhler-Suzuki, P. Lamy, and S. Praetorious. 'The Road to a New European Automotive Strategy: Trade and Industrial Policy Options'. Jacques Delors Institue, 2025.

Ragonnaud, Guillaume. 'The Crisis Facing the EU's Automotive Industry'. *EPRS, European Parliamentary Research Service*, 2024.
https://www.europarl.europa.eu/RegData/etudes/ATAG/2024/762419/EPRS_ATA(2024)762419_EN.pdf.

Rotunno, Lorenzo, and Michele Ruta. 'Trade Implications of China's Subsidies'. *IMF Working Papers*, no. WP/24/180 (2024). https://www.imf.org/-/media/Files/Publications/WP/2024/English/wpiea2024180-print-pdf.ashx.

Sebastian, G., N. Barkin, and A. Kratz. 'Ain't No Duty High Enough'. Rhodium Group, 2024.
https://rhg.com/wp-content/uploads/2024/04/Aint-No-Duty-High-Enough.pdf.

Sebastian, G., and François Chimits. ""Made in China" Electric Vehicles Could Turn Sino-EU Trade on Its Head | Merics'. *Mercator Institute for China Studies*, 30 May 2022.
https://merics.org/en/comment/made-china-electric-vehicles-could-turn-sino-eu-trade-its-head.

Stone, Susan, James Messent, and Dorothee Flaig. 'Emerging Policy Issues: Localisation Barriers to Trade', 2015. https://www.oecd-ilibrary.org/trade/emerging-policy-issues_5js1m6v5qd5j-en.

Strategy&. 'Electric Vehicle Transition Impact Assessment Report 2020 - 2040. A Quantitative Forecast of Employment Trends at Automotive Suppliers in Europe'. PwC network / CLEPA, 2021.

Sturgeon, Timothy, Leonardo Lima Chagas, and Justin Barnes. 'Inovar Auto: Evaluating Brazil's Automotive Industrial Policy to Meet the Challenges of Global Value Chains'. World Bank, 2017. https://www sidalc.net/search/Record/dig-okr-1098628947/Description.

Van Wieringen, Kjeld. 'The Future of European Electric Vehicles'. EPRS Policy Foresight Unit, 2024.
https://www.europarl.europa.eu/thinktank/en/document/EPRS_IDA(2024)762873.

Volta Foundation. '2024 Battery Report'. Volta Foundation, 2024.

Warlouzet, Laurent. *Governing Europe in a Globalizing World: Neoliberalism and Its Alternatives Following the 1973 Oil Crisis*. Routledge, 2017.
# Annex 1. Comparison of rules of origin requirements in different FTAs for the automotive sector

## A.-The EU-UK Agreement case

One of the most recent and widely known case of rules of origin in an EU FTA is the case of the EU-UK Agreement, for the automotive sector. The agreement was signed at the end of 2020 and resulted from several months of intense negotiations between the two parties, among which the automotive sector was a key subject.

The EU-UK TCA (Trade and Cooperation Agreement) is a perfect example of how rules of origin in a trade agreement can be used to boost the industry of a specific territory. This is why it is the agreement presented with the most details in this document. Indeed, specific rules of origin were decided in order to encourage the development of the EV battery in Europe (and in the UK) and discourage long-term dependence on Asian batteries. For that reason, a three-phase period was decided with gradually increased severity on the local content requirements for batteries for the period 2021 to 2027.

It is important to understand that the issue of rules of origin only applies to EVs as 40% of the value of an EV comes from the battery and batteries of EVs made in Europe are mainly supplied by Asian players. The issue is not present for ICE despite the value chain also being strongly internationalized. In Europe, the value added to ICE cars by European manufacturers and suppliers is still enough for these vehicles to be considered "European enough" by authorities. The real question lies in the competitiveness of suppliers of the ICE value chain, and whether European authorities should implement local content requirements similar to those of EVs, in the EU-UK case, which would boost the competitiveness of European suppliers.

Before Brexit, the UK and the EU were part of the EU customs union, meaning that no duties were imposed on the trade of hybrid, plug-in hybrid, and electric vehicles between these regions, regardless of where the products originated.

Since the implementation of the TCA after Brexit vehicles can only be traded without tariffs between the UK and the EU if they meet the criteria for preferential origin from either the EU or the UK, and if a claim for preferential origin is made. The TCA allows products containing non-originating materials to be granted originating status as long as they comply with the rules of Origin (ROO). Specifically, for motor vehicles designed for passenger and freight transport, classified under HS codes 87.02-87.04⁹³, including electric, plug-in hybrid, and hybrid vehicles, the products will only be considered of EU or UK origin if the value of non-originating materials does not exceed a certain threshold.

In particular, as of 1st January 2027, vehicles will be granted originating status if the non-originating materials comprise no more than 45% of the vehicle's total value. This means that over half of the vehicle's value must be made up of materials originating from the EU or the UK to avoid import duties. There is an additional stipulation for plug-in hybrid and electric vehicles: the battery packs (classified under HS code 85.07) used

<footnote n="93">⁹³ 87.02: Motor vehicles for the transport of >= 10 persons; 87.03 Motor cars and other motor vehicles principally designed for the transport of <10 persons; 87.04: Motor vehicles for the transport of goods</footnote>
to power the vehicle must also originate in the EU or UK. This applies if any non-originating materials used in the battery pack are classified under a different HS code than 85.07, with exceptions for non-originating active cathode materials, or if the non-originating materials in the battery pack do not exceed 30% of its total value.

To help EU and UK vehicle manufacturers transition to the stricter rules, Annex 5 of the TCA includes transitional product-specific rules for hybrid, plug-in hybrid, and electric vehicles. These rules provide lower maximum thresholds for non-originating materials, making it easier for manufacturers to qualify for preferential origin:

* From the entry into force of the TCA until 31st December 2023, the value of non-originating materials must not exceed 60% of the product's total value for electric and electrified vehicles.

* From 1st January 2024 to 31st December 2026, the value of non-originating materials must not exceed 55% of the product's total value for electric and electrified vehicles.

At the end of 2023, the rules of origin which were supposed to change on 1st January were maintained as they were from the 2021 to 2023 period, meaning that the long-term rule will be directly applied as of 1st January 2027. The table below highlights the differences between the rules for accumulators of batteries, battery packs and vehicles.

<table><caption>Table 47. The initial TCA rules of origin for batteries, battery cells and electric and electrified vehicles before the extension of the first-phase rules in December 2023</caption><thead><tr><th>HS code and goods description</th><th>Product-specific rule of origin applicable until 31 December 2023</th><th>Product-specific rule of origin applicable from 1 January 2024 until 31 December 2026</th><th>Product-specific rule of origin applicable from 1 January 2027</th></tr></thead><tbody><tr><td>85.07<br>• Accumulators containing one or more battery cells or battery modules and the circuitry to interconnect them amongst themselves, often referred to as battery packs, of a kind used as the primary source of electrical power for propulsion of vehicles of headings 87.02, 87.03 and 87.04<br>• Battery cells, battery modules, and parts thereof intended to be incorporated into an electric accumulator of a kind used as the primary source of electrical power for propulsion of vehicles<br>• of headings 87.02, 87.03 and 87.04</td><td>CTSH;<br>or<br>assembly of battery packs from non-originating battery cells or battery modules;<br>or<br>max 70%<br><br>CTH;<br>or<br>MaxNOM<sup>94</sup> 70%</td><td>CTH except for non-originating active cathode materials;<br>or<br>MaxNOM 40%<br><br>CTH except for non-originating active cathode materials<br>or<br>MaxNOM 50%</td><td>CTH except for non-originating active cathode materials;<br>or<br>MaxNOM 30%<br><br>CTH except for non-originating active cathode materials<br>or<br>MaxNOM 35%</td></tr></tbody></table>

<footnote n="94">⁹⁴ Maximum of non-origination material: meaning that the non-originating material cannot exceed that specific percentage.</footnote>
* Vehicles with both internal combustion engines and electric motors as motors for propulsion other than those capable of being charged by plugging into an external source of electric power ('hybrid') MaxNOM 60%

* Vehicles with both internal combustion piston engines and electric motors as motors for propulsion capable of being charged by plugging into an external source of electric power ('plug-in hybrid') MaxNOM 55%

* Vehicles with only electric motors for propulsion MaxNOM 45% and battery packs of heading 85.07 of a kind used as the primary source of electrical power for propulsion of the vehicle must be originating.

Source: CELEX 22021A0430(01) EN TXT accessible at https://eur-lex.europa.eu/legal content/EN/TXT/?uri=CELEX%3A22021A0430%2801%29

<table><caption>Table 48. The TCA rules of origin for batteries, battery cells and electric and electrified vehicles after the extension of the first-phase rules in December 2023</caption><thead><tr><th>HS code and goods description</th><th>Product-specific rule of origin applicable until 31 December 2023</th><th>Product-specific rule of origin applicable from 1 January 2024 until 31 December 2026</th><th>Product-specific rule of origin applicable from 1 January 2027</th></tr></thead><tbody><tr><td><strong>85.07<sup>95</sup></strong></td><td></td><td></td><td></td></tr><tr><td><ul><li>Accumulators containing one or more battery cells or battery modules and the circuitry to interconnect them amongst themselves, often referred to as battery packs, of a kind used as the primary source of electrical power for propulsion of vehicles</li><li>of headings 87.02, 87.03 and 87.04</li><li>Battery cells, battery modules, and parts thereof intended to be incorporated into an electric accumulator of a kind used as the primary source of electrical power for propulsion of vehicles</li></ul>of headings 87.02, 87.03 and 87.04</td><td>CTSH;<br>or<br>assembly of battery packs from non-originating battery cells or battery modules;<br>or<br>max 70%</td><td>*Extension of the first-phase rules</td><td>CTH except for non-originating active cathode materials;<br>or<br>MaxNOM 30%</td></tr><tr><td><strong>87.02-87.04</strong></td><td></td><td></td><td></td></tr><tr><td><ul><li>vehicles with both internal combustion engines and electric motors as motors for propulsion other than those capable of being charged by plugging into an external source of electric power ('hybrid')</li><li>vehicles with both internal combustion piston engines and electric motors as motors for propulsion capable of being charged by plugging into an external source of electric power ('plug-in hybrid')</li><li>vehicles with only electric motors for propulsion</li></ul></td><td>CTH;<br>or<br>MaxNOM 70%</td><td>*Extension of the first-phase rules</td><td>CTH except for non-originating active cathode materials<br>or<br>MaxNOM 35%</td></tr><tr><td></td><td>MaxNOM 60%</td><td>*Extension of the first-phase rules</td><td>MaxNOM 45% and battery packs of heading 85.07 of a kind used as the primary source of electrical power for propulsion of the vehicle must be originating.</td></tr></tbody></table>

Source: Gerpisa (2025).

For ICE vehicles, the rules of origin are set at a maximum of 45% of non-originating material for all FTAs.

<footnote n="95">⁹⁵ Items are classified under numerical chapters in the HS (Harmonized System) Code, which is the internationally harmonized tariff nomenclature harmonized.</footnote>
For components, the requirement is either a change in tariff heading or a maximum of 50% of non-originating material.

For vehicles or components that do not comply with the rule of origin, a 10% tariff applies.

## B. - The USMCA (United States – Mexico and Canada Agreement) case

The USMCA was implemented to replace the NAFTA (North American Free Trade Agreement) of 1994. It came into force on 1st July 2020 and was signed by the United States, Mexico and Canada.

The main objective of the agreement was to provide stricter rules of origin for automotive vehicles traded between the signatories. Tariff elimination is therefore maintained but under stricter rules. A three-transition period was provided in the USMCA to allow vehicle producers to request an alternative staging regime that would permit a longer transition period to implement the new rules of origin.

A report published by the U.S. International Trade Commission (USITC) estimated that at the end of 2022, there were no significant impacts of the USMCA legislation for the automotive industry of its parties. However, the report stated that full impacts would be witnessed after 2027, the year of the full implementation of the rules of origin.

It is important to note that in 2022, USMCA ROO had led to a 487,048 decrease of imports of core auto parts from non-USMCA countries and 1,464 more vehicles produced in the United States in 2022. Over time, these ROOs are expected nevertheless to lead to increased production costs and higher vehicle prices. CRS analysis of data from the U.S. International Trade Administration also found that the value of U.S. vehicle and auto parts imports from Canada and Mexico that paid the 2.5% MFN tariff increased from about 4% in 2019 to 16% in 2023. Which is why the trade unions have asked to increase the MNF tariff in order to make the USMCA requirements more constraining, in particular for Mexican imports.

The table below shows a comparison of the ROO for NAFTA and for the USMCA

<table><caption>**Table 3: NAFTA and USMCA Automotive Rules of Origin**</caption><thead><tr><td>NAFTA</td><td>USMCA</td></tr></thead><tbody><tr><td>62.5% RVC for passenger vehicles, light trucks, engines and transmissions</td><td>75% RVC for passenger vehicles, light trucks, core auto parts</td></tr><tr><td>60% RVC for other vehicles and auto parts</td><td>65%-70% RVC for other vehicles and auto parts</td></tr><tr><td>No labor value content rule (LVC) (no wage requirement)</td><td>LVC rule stating that 40-45% of a vehicle's production by value be made by workers earning at least $16 pe hour</td></tr><tr><td>No steel and aluminum requirement</td><td>70% of a vehicle manufacturer's steel and aluminum purchases by value must</td></tr></tbody></table>
Source: CRS based on USMCA and NAFTA text

As shown by the table above, the rules have indeed become stricter under USMCA rules, with other criteria such as the production regarding labor remuneration as well as raw material requirements.

Regarding the automotive trade between USMCA countries, although not as significant as would be expected in 2027, there has been an increase from 2020 to 2023 as showed by the table below.

<figure><img src="image_21.png" /><figcaption>**Figure 1. U.S. Automotive Trade with Canada and Mexico, 2017-2023**</figcaption></figure>

Source: CRS analysis of data from U.S. International Trade Administration, accessed November 26, 2024.

Note: *USMCA entered into force.

The increase can mainly be seen in the imports of the US from Mexico, with an almost $50 billion increase in value, which is probably due to the increase amount of value imported outside the UMSCA agreement.

## C. - The EU-India Agreement negotiations

The EU-India negotiations were suspended between 2013 and 2022 after seven years of unsuccessful discussions and are still ongoing since their relaunch in 2022.

In March 2023, ACEA issued a position paper highlighting the importance of removing trade barriers for the complete value chain of the EU automotive industry, including that of EVs:

* "ACEA requests a threshold of 45% non-originating materials (NOM) for all motor vehicles and 50% NOM or CTH3 for automobile parts and components, including engines.
* Full bilateral cumulation – allowing for all inputs or operations carried out in either the EU or India to be taken into account in origin calculation – should be part of the agreement.

* The rules of origin for the batteries of electrically-chargeable vehicles should reflect the state of development of both parties' integrated battery supply chain and their ability to meet the required targets.

The negotiations are also in favor of the protection of EU investors in India.

India's automotive industry benefits from the trade agreements the country has with other neighbor countries like Japan, Korea and the ASEAN bloc for automotive parts which can therefore be imported tariff-free.

The EU-India negotiations are a perfect example of how a country is willing to impose strict rules on another territory in order to boost and protect its local industry. The Indian automotive industry currently positions as fourth in terms of world vehicle production, behind China, Germany and Japan, producing 2,843 million units in 2024.<fnref n="96" />

India currently imposes very high import duties on vehicles and components as shown on the ACEA table below:

<table><caption>Table 49. Vehicle import duty in India</caption><thead><tr><td>Vehicle type</td><td>Import duty²</td></tr></thead><tbody><tr><td>Car CBUs* whose CIF* value is more than $40,000 or petrol engine >3,000 CC or diesel engine >2,500 CC</td><td>100%</td></tr><tr><td>Full battery-electric car CBUs whose CIF value is more than $40,000</td><td>100%</td></tr><tr><td>Car CBUs whose CIF value is less than $40,000 or petrol engine <3,000 CC or diesel engine <2,500 CC</td><td>70%</td></tr><tr><td>Full battery-electric car CBUs whose CIF value is less than $40,000</td><td>70%</td></tr><tr><td>Commercial vehicle CBUs (trucks and buses)</td><td>40%</td></tr><tr><td>CKD* passenger cars (kits with engine, gearbox or transmission pre-assembled but not mounted on a chassis or body assembly)</td><td>35%</td></tr><tr><td>CKD passenger cars (kits with engine, gearbox or transmission not pre-assembled)</td><td>15%</td></tr><tr><td>CKD commercial vehicles and buses</td><td>25%</td></tr></tbody></table>

Source: ACEA (March 2023)<fnref n="97" />

Europe could perhaps follow India's example by the imposition of tariffs for the importation of competitive ICE components for the ICE vehicles. The question which remains however is how much this would eventually penalize the local European

<footnote>*CBU = completely built units</footnote>

<footnote>*CIF = cost, insurance and freight</footnote>

<footnote>*CKD = completely knocked down</footnote>

<footnote n="96">⁹⁶ https://www.statista.com/statistics/607818/vehicle-production-volume-by-segment-india/</footnote>

<footnote n="97">⁹⁷ https://www.acea.auto/files/ACEA_position_paper_EU_IndiaKG TradeNegotiations.pdf</footnote>
component makers. The question of the raw materials used in the making of these
components and whether local sourcing should also be imposed also remains.

In the case of an FTA, the possibility of fiscal advantage could be considered for foreign suppliers who source their materials or products in countries with whom Europe already has agreements. This would push aside the currently very high reality of sourcing from China.

For example, India does not impose a duty on components from neighbor countries with
whom it already shares an FTA.

D. - The CPTPP<fnref n="98" /> case

The CPTPP came into force in December 2018 and currently has twelve members
Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore,
the United Kingdom and Vietnam.

The objective of the agreement is to reduce the impact of unfair practices and promote
sustainable development in the region. For that reason, the agreement provides a
gradual elimination of border tariffs for the following products:

* agglomerated and reduced iron;

- alumina, scrap metal, ammonia, crude steel, aluminium;

* solar PV modules, solar cells, solar wafers, polysilicon;

- battery packs, battery cells;

- anodes, cathodes and electrolysers;

- heat pumps;

- electric vehicles and ICE cars<fnref n="99" />.

The CPTPP is seen as an opportunity to diversify supply chains by its signatories. For the specific case of automotive, a manufacturer can sell car engines to a car-maker in the region, who could then sell the final cars on preferential tariff terms to any member country subject to meeting the rules of origin.

The CPTPP typically requires that a significant percentage of a vehicle's value comes
from materials or components originating in the CPTPP region. This ensures that a
substantial portion of the vehicle's content is sourced from the member countries.

The required percentage of originating content can differ based on the type of vehicle (ICE or EV) and the components involved. For example, a typical rule for passenger vehicles might set the required value-added percentage at 45% of the ex-works price¹⁰⁰.

<footnote n="98">⁹⁸ Comprehensive and Progressive Agreement for Trans-Pacific Partnership</footnote>

<footnote n="99">⁹⁹ https://www.international.gc.ca/trade-commerce/trade-agreements-accords-commerciaux/agr-acc/cptpp-ptpgp/sectors-secteurs/auto.aspx?lang=eng</footnote>
For ICE vehicles, the key components such as engines and transmissions are particularly important for determining origin. They generally need to be produced within the CPTPP zone or undergo sufficient transformation to qualify. If non-originating materials are used (e.g., from outside the CPTPP region), the vehicle must undergo sufficient processing within the region, such as final assembly, engine installation, or other major manufacturing processes. Simple operations such as basic assembly are typically not enough to meet the origin criteria. The processing must go beyond minimal steps, ensuring that the vehicle is truly produced within the CPTPP region.

For electric vehicles, the rules require that a substantial part of the battery and its components (e.g., lithium, cobalt, nickel) must originate in a CPTPP country or undergo sufficient processing in the region. There is an emphasis on the importance of localizing the production of batteries within the region, or at least ensuring the battery undergoes substantial transformation in a CPTPP country to meet origin requirements. The rules may also require battery cells to meet specific content requirements (e.g., a certain percentage of battery materials sourced from CPTPP countries) to be counted as originating.

Both ICE vehicles and EVs must adhere to specific origin rules for key components like motors (for EVs), batteries, inverters, chassis, and powertrains. These components must be produced or undergo substantial processing within the CPTPP region. For example, the motor used in an electric vehicle must be either: produced in a CPTPP country, or meet the regional value content rule by having enough value added from the region to qualify.

The CPTPP features diagonal cumulation, which allows for the accumulation of originating materials from multiple CPTPP member countries. This is particularly important in the automotive sector, where complex supply chains often span several countries. For instance, a vehicle assembled in Japan could use parts from Mexico, Canada, or Australia, and still qualify as originating if the necessary percentage of value-added content from CPTPP countries is met.

The de minimis rule allows for a small percentage of non-originating material to be included in a vehicle while still allowing the product to qualify for preferential treatment. Typically, this is set at 10% of the vehicle's value. This means that some components or materials from outside the CPTPP region (such as certain electronics or specialized parts) may be included without affecting the vehicle's status as originating.

Some specific components or materials used in the production of vehicles may have separate rules of origin. For instance, certain electronic components might have different rules, particularly for EVs that rely heavily on advanced electronics. For batteries, the rules often require that the critical materials in the battery (e.g., lithium, cobalt) or the final assembly of the battery undergo substantial processing within the CPTPP region to count as originating.

<footnote n="100">¹⁰⁰ The ex-works price includes the value of all the materials used and all other costs related to its production, minus any internal taxes, which are, or may be, repaid when the product obtained is exported.</footnote>
Europe already forms a similar bloc to the CPTPP (or at least to what the CPTPP is trying to achieve), spread among many countries. The last point which evokes more intense rules for specific electronic components and EV batteries should be followed in Europe, similarly to how the EU-UK TCA was designed. This would guarantee protection for European suppliers. However, a gradual procession, perhaps more flexible timewise than for the TCA should be taken into account.

## E. - EU-Japan Economic Partnership Agreement

The EU-Japan Economic Partnership Agreement was negotiated between 2013 and 2017 and came into force in February 2019¹⁰¹. The EU wants Japan to remove unnecessary obstacles to European imports so that EU firms can export more. Japan's main interest is in the EU removing tariffs on imports of Japanese products, such as cars and car parts. The EU wants Japan to remove unnecessary obstacles to European imports so that EU firms can export more.

The product-specific rules only apply to Japanese imports of EU products that receive preferential treatment under the EPA. It does not apply to EU products for which Japan had already granted duty-free access at the MFN level before the EPA came into effect.

All vehicles produced in Europe can be exported to Japan duty-free.

* For ICE vehicles the rules of origin are as follows<fnref n="102" /> (87.03):

<table><thead><tr><th>From the first year until the end of the third year</th><th>From the fourth year until the end of the sixth year</th><th>From the beginning of the seventh year</th></tr></thead><tbody><tr><td>MaxNOM 55 % (EXW)<br>or;<br>RVC 50 % (FOB)</td><td>MaxNOM 50 % (EXW)<br>or;<br>RVC 55 % (FOB)</td><td>MaxNOM 45 % (EXW)<br>or;<br>RVC 60 % (FOB)</td></tr></tbody></table>

* For internal combustion engines and diesel engines the rules are as follows <fnref n="103" />(84.03 and 84.08)

<table><thead><tr><th>From the first year until the end of the third year</th><th>From the beginning of the fourth year</th></tr></thead><tbody><tr><td>MaxNOM 60 % (EXW); or<br>RVC 45 % (FOB)</td><td>MaxNOM 50 % (EXW); or<br>RVC 55 % (FOB)</td></tr></tbody></table>

* For vehicle chassis and bodies the rules are as follows<fnref n="104" /> (87.07 and 87.08):

<footnote n="101">¹⁰¹ https://policy.trade.ec.europa.eu/eu-trade-relationships-country-and-region/countries-and-regions/japan/eu-japan-agreement/agreement-explained_en</footnote>

<footnote n="102">¹⁰² https://trade.ec.europa.eu/access-to-markets/en/country-assets/tradoc_157231.pdf#page=137</footnote>

<footnote n="103">¹⁰³ *Idem.*</footnote>

<footnote n="104">¹⁰⁴ *Idem.*</footnote>
<table><thead><tr><th>From the first year until the end of the fifth year</th><th>From the beginning of sixth year</th></tr></thead><tbody><tr><td>MaxNOM 55 % (EXW); or<br/>RVC 50 % (FOB)</td><td>MaxNOM 45 % (EXW); or<br/>RVC 60 % (FOB)</td></tr></tbody></table>

<figure><img src="image_22.png" /></figure>

* For vehicle parts and accessories, the rules are as follows <fnref n="105" /> (87.08):

<table><thead><tr><th>From the first year until the end of the third year</th><th>From the beginning of the fourth year</th></tr></thead><tbody><tr><td>CTH;<br/>MaxNOM 60 % (EXW); or<br/>RVC 45 % (FOB)</td><td>CTH;<br/>MaxNOM 50 % (EXW); or<br/>RVC 55 % (FOB)</td></tr></tbody></table>

The historical presence of Japanese car-makers on the European territory is a good example of how local investment can be advantageous for both parties.

However, EU does also targets raw material with specific rules to protect the competitiveness of its local industry, as shown below:

**Heading 3819.00 - Hydraulic brake fluids**

* CTH, meaning that non-(EU/Japan) originating materials, i.e. imported from non-contracting Parties, can be used in the production of these goods if these materials are classified under another tariff sub-heading, or

* a chemical reaction, purification, production of standard materials, isomer separation or biotechnological processing is undergone, or

* MaxNOM 50% (EXW) – meaning that the value of the non-originating materials cannot be higher than 50% of the ex-works price of the product paid or payable to the manufacturer in who's undertaking the last working or processing is carried out, or

* RVC 55% (FOB) – meaning that the minimum regional value content of the product is 55% of the free on-board price of the product paid or payable to the seller regardless of the mode of shipment.

**Heading 7318.16 - Nuts of iron or steel:**

* CTH, meaning that non-(EU/Japan) originating materials, i.e. imported from non-contracting Parties, can be used in the production of these goods if these materials are classified under another tariff heading.

**Heading 7604.29 – Solid profiles of aluminium alloys**

* CTH and

* MaxNOM 50% (EXW) or

* CTH and RVC 55% (FOB)

<footnote n="105">¹⁰⁵ Idem.</footnote>
**Heading 8302.10 – Hinges of all kinds, of base metal**

* CTH, or

* MaxNOM 50% (EXW) or

* RVC 55% (FOB)

**Heading 9401.90 – Parts of seats**

* CC<fnref n="106" />, meaning that non-(EU/Japan) originating materials, i.e. imported from non-contracting, Parties, can be used in the production of these goods if these materials are classified under another tariff chapter<fnref n="107" />.

There is no specific rule concerning EVs for the EU-Japan Agreement. The same rules are applied for both ICE and EVs as Japan does not seem to represent a threat to the EU EV industry, especially regarding the manufacturing of batteries.

## F. - EU-Korea Agreement

Since the entry into force of the FTA on 1 July 2011, bilateral trade and investment have expanded remarkably. Total bilateral trade in goods amounted to ca. €130 billion in 2023, up by 106% from 2011 (ca. €63 billion).

The rules of origin for vehicles are as follows: manufacture in which the value of all the materials used does not exceed 45 % of the ex-works price of the product<fnref n="108" />.

The rules of origin for vehicle parts are as follows: Manufacture in which the value of all the materials used does not exceed 50 % of the ex-works price of the product.

The EU-Korea FTA includes diagonal cumulation provisions, allowing both the EU and South Korea to use materials or components originating from each other or other countries in their production of electric vehicles. For example, if a car is assembled in South Korea using parts sourced from the EU (or vice versa), those parts can count toward meeting the origin requirements for the final product. This promotes regional integration and allows manufacturers to source components from multiple countries within the FTA zone to meet the origin criteria.

For electric vehicles, South Korean is the second partner for the EU in terms of imports after the UK as shown by the diagram below<fnref n="109" />:

<footnote n="106">¹⁰⁶ Change in chapter</footnote>

<footnote n="107">¹⁰⁷ https://www.eu-japan.eu/sites/default/files/vehicles_factsheet.pdf.</footnote>

<footnote n="108">¹⁰⁸ https://eur-lex.europa.eu/resource.html?uri=cellar:a2fb2aa6-c85d-4223-9880-403cc5c1daa2.0022.02/DOC_4&format=PDF#page=6</footnote>

<footnote n="109">¹⁰⁹ https://ec.europa.eu/eurostat/web/products-eurostat-news/w/ddn-20241030-2</footnote>
Extra-EU trade in electric cars, 2023

(% of value)

<figure><img src="image_23.png" /></figure>

eurostat

<figure><img src="image_24.png" /></figure>

Generally, the minimum percentage of value added required for the vehicle to be considered originating is 45% of the ex-works price of the vehicle. This percentage could vary for different components or product categories (for instance, parts like batteries or motors).

South Korea being advanced in the development of EV batteries, the local content requirements are not an issue.

G. - Pan-Euro-Mediterranean Convention

The Pan-Euro-Mediterranean Convention was established in 2012, with the objective of establishing common rules of origin and cumulation among 25 PEM parties and the EU.

The contracting parties are:

* the EU

* the EFTA States<fnref n="110" />

* the Faroe Islands

* the participants in the Barcelona Process<fnref n="111" />

* the participants in the EU's Stabilization and Association Process (Albania, Bosnia and Herzegovina, the Republic of North Macedonia, Montenegro, Serbia and Kosovo<fnref n="112" />

* the Republic of Moldova

<footnote n="110">110 Switzerland, Norway, Iceland and Liechtenstein</footnote>

<footnote n="111">111 Algeria, Egypt, Israel, Jordan, Lebanon, Morocco, Palestine (This designation shall not be construed as recognition of a State of Palestine and is without prejudice to the individual positions of the Member States on this issue.), Syria, Tunisia and Türkiye</footnote>

<footnote n="112">112 Albania, Bosnia and Herzegovina, the Republic of North Macedonia, Montenegro, Serbia and Kosovo</footnote>
* Georgia

* Ukraine

The EU's preferential rules of origin include the concept of cumulation, which allows you as an importer or exporter, under certain conditions, to consider non-originating materials imported from third countries or processing carried out in a non-partner country, as originating in the EU or a trading partner country. It is recalled that diagonal cumulation can only be applied if the Parties of final manufacture and of final destination have concluded free trade agreements with all the Parties participating in the acquisition of originating status, i.e. with all the Parties from which the materials used originate. Materials originating in a Party which has not concluded an agreement with the Parties of final manufacture and/or of final destination are treated as non-originating.

For an electric vehicle to be considered originating from the PEM region, it must meet certain value-added criteria meaning that a significant portion of the vehicle's components must be produced within the PEM zone. The EU Content Rule applies, requiring a certain percentage of the vehicle's content (including its core components) to come from PEM countries. While the exact percentage may vary depending on the type of product, it typically ranges around 45%-55% or higher, based on the specific conditions of the trade agreement.

**Batteries:** One of the most important and distinctive components for electric vehicles is the battery. To meet PEM origin requirements, the battery and its critical components (e.g., lithium, cobalt, nickel, etc.) must either:

* Originate within the PEM zone or meet specific rules for cumulation, meaning materials sourced from PEM countries can count toward the originating content, even if they are processed or assembled elsewhere in the zone.

Batteries are a focal point due to their significant value in an EV, and therefore, having PEM-sourced materials or a sufficient level of local processing in the region is crucial for meeting origin requirements.

As said for other cases, this strategy could also be considered by the EU for automotive suppliers.

The tolerances or de minimis rule is important for electric vehicles as well. This allows a small portion of non-originating content (such as certain non-PEM materials) to be included in the final product without affecting its origin status. This could apply to parts like electronic components, wiring, or specialized materials that are not yet available in sufficient quantities within the PEM zone.

## H. - The EU-Mercosur Agreement

The EU-Mercosur Agreement (Southern Common Market) includes the EU, Argentina, Brazil, Paraguay, and Uruguay as the core member countries and reached political agreement in December 2024, after almost 25 years of negotiations.

The agreement has also specific rules of origin ICE vehicles, vehicle components, and EVs and aims to facilitate intra-regional trade and encourage local manufacturing by
promoting the use of domestic parts and components. Below is an overview of the rules of origin for vehicles and components under the agreement:

* The rules specify a regional value content (RVC) of 60% or more for vehicles and vehicle components. For certain vehicle components, this percentage may vary, but 60% is a typical baseline.

* For ICE vehicles, a minimum of 60% of the vehicle's value must be sourced from EU-Mercosur countries. This includes components like the engine, transmission, and body of the vehicle. The vehicle must undergo substantial transformation in the region, meaning key processes such as assembly, engine installation, or other major production steps must take place in a EU-Mercosur country. For instance, an ICE vehicle assembled in Brazil using parts from Argentina, Uruguay, and Brazil would qualify as originating, provided the regional content meets the 60% threshold.

* Components like engines and transmissions typically need to be manufactured in EU-Mercosur countries or meet certain processing criteria to count toward the vehicle's regional content.

* The chassis and body must also originate within the EU-Mercosur region or undergo sufficient processing in one of the member countries.

* Components, such as seats, tires, windows, batteries, and electronics must be produced or processed to be considered originating from the region. For components like batteries or electronic parts, there may be additional rules focusing on regional sourcing of materials or significant transformation of parts within EU-Mercosur countries.

EU-Mercosur uses a diagonal cumulation system, which allows parts and materials from one EU-Mercosur member country to count as originating when they are used in the assembly or manufacture of a product in another member country. This helps manufacturers in the region by offering more flexibility in sourcing parts and materials.

For electric vehicles, the rules of origin are similar in structure but tailored to the unique components of EVs, such as batteries, electric motors, and inverters. Key requirements for EVs typically include a significant portion of the value (usually at least 60%) of the electric vehicle must come from EU-Mercosur member countries. The battery must meet origin criteria. This includes sourcing the materials for the battery from EU-Mercosur countries or ensuring the battery assembly occurs within the region.

For electric motors and powertrains, the same rules apply as for ICE vehicles, requiring that these components either originate within EU-Mercosur countries or undergo substantial transformation in the region. As the electric vehicle market develops, EU-Mercosur has adjusted its rules to ensure that the growing demand for EV components (like electric drivetrains, inverters, and charging equipment) is met with local sourcing and manufacturing. Charging Infrastructure: There may also be some specific provisions in the EU-Mercosur agreement related to the charging infrastructure for electric vehicles, ensuring that this infrastructure meets origin rules to help promote regional development of EV-related sectors.

EU-Mercosur typically allows for a de minimis rule, meaning that a small portion of non-originating content can be included in the vehicle or component without disqualifying it
from preferential treatment. Typically, up to 10% of the ex-works value of the vehicle or component may consist of non-originating materials.

## I. - EU-Mexico Agreement

The negotiations of the EU-Mexico agreement were concluded in January 2025. It follows similar principles to other modern free trade agreements establishing rules based on Regional Value Content (RVC) and substantial transformation.

Typically, the requirement for vehicles (ICE or EV) is 45% of the total value to come from the EU or Mexico for the product to qualify as "originating". «If non-originating materials (e.g., from a third country) are used in the production of vehicles or components, they must undergo substantial processing within the EU or Mexico to be considered originating. This might include assembly, engine installation, or significant modifications.

For an ICE vehicle to qualify as originating, at least 45% of its value must be sourced or processed in the EU or Mexico. This includes manufacturing processes such as assembly and the installation of key components (engine, transmission, body). The final vehicle assembly must take place in the EU or Mexico for it to qualify for preferential tariff treatment. This ensures that significant value is added within the regions, making the vehicle eligible for trade benefits. Simple operations (such as packaging or basic assembly) are generally insufficient for a vehicle or its components to meet the origin rules. A significant degree of manufacturing or assembly is required.

It is important to note that Mexico is the EU's second destination of EV exports after the UK and the US. The rules require that the battery pack, and potentially battery cells, must either: be produced in the EU or Mexico, or undergo substantial transformation in the EU or Mexico, meaning significant manufacturing or assembly steps must occur in these regions. In practice, this ensures that EVs benefit from preferential tariff treatment only when a significant portion of the battery's value is generated in the EU or Mexico. The 45% regional value content requirement also applies to EVs, meaning that at least 45% of the vehicle's total value (including the battery, electric motor, and other components) must come from the EU or Mexico to qualify for preferential tariffs.

Similar to ICE vehicles, electric motors and inverters must either be manufactured in the EU or Mexico or undergo substantial transformation in these regions to count as originating. The rules of origin for individual vehicle components such as seats, windows, bumpers, steering systems, and suspension components follow similar criteria to those for ICE and electric vehicles. To be considered originating, the components must be produced or undergo substantial transformation in either the EU or Mexico. 45% of the value must be added within the EU or Mexico for the component to qualify as originating.

Like many other agreements, the EU-Mexico Agreement also allows for diagonal cumulation with other countries that have trade agreements with both the EU and Mexico, such as EFTA countries (e.g., Switzerland). This means that parts or materials sourced from these countries can count as originating when used in the production of a vehicle or component. The de minimis rule (also set at 10%) is also allowed.

Similarly to the CPTPP, the EU could reinforce its regional agreements in order to create geographical zones specifically beneficial to the industry of suppliers. Zones with a lower percentage of suppliers but with an automotive industry. EU agreements with
more third-world countries, for instance, could be an example. Some third-world countries have large reserves of critical materials. Some even have an automotive industry, although its OEMs industry is not as developed as other countries the EU already has agreements with, there is potential for the future of ICE in these countries where there is currently no planned ban in many of these countries. European suppliers could target such territories for their future profitability, and even consider the African market in general, especially ICE suppliers. Agreements designed on the basis of a supply of components against tariff-free access to raw materials could be envisaged, although this is not as simple to design. The African market and other third-world countries could be considered.

The biggest issue however is that cars in those countries are mainly used cars from Europe. With the Green Deal, the question of delocalizing production to third-world countries cannot be considered. Europe therefore has two options:

* Reconsidering the question of CBAM in the Green Deal which could allow the delocalization of parts of vehicle production, which could enable the exportation of certain components to these sites, and therefore preserving employment in the EU. Cars produced on those territories could then be reimported into the target markets.

* Support OEMs and suppliers in building a strategy aimed at targeting new markets with ICE cars (which would mean producing cheaper cars) which could be accessible to more middle classes in third-world countries.

These two options however represent a complex mechanism to put in place.

## L. - The CETA Agreement

The EU-Canada Comprehensive Economic and Trade Agreement (CETA), which came into force in September 2017, includes specific rules of origin for internal combustion engine (ICE) vehicles, vehicle components, and electric vehicles (EVs). These rules help determine whether products such as vehicles and components qualify for preferential tariff treatment between the EU and Canada.

For vehicles (whether ICE or EV), the general rule of origin is the same as with many other agreements, meaning that at least 45% of the ex-works price must be of originating content from the EU, Canada, or other CETA members. This 45% value-added requirement applies to the total value of the vehicle (parts and labor).

For ICE vehicles, CETA has specific origin requirements for key components, such as: Engines and transmissions, which must either be produced in the EU or Canada, or undergo sufficient transformation within one of these regions. If parts from outside the EU-Canada area are used (e.g., from third countries), the vehicle or component must undergo significant processing within the region. This usually involves assembly, installation of the engine and transmission, or other substantial production steps to meet the origin requirements.

The vehicle must be assembled in Canada or the EU, and key processes such as engine installation, chassis assembly, and final vehicle assembly must take place within the region to qualify as originating. Certain vehicle components like chassis, braking systems, and electrical systems also need to meet specific origin rules to ensure that the parts are sourced or produced within the CETA region.
For electric vehicles, the cells and modules used in the battery should ideally be sourced or manufactured within the EU or Canada (or other CETA countries). The battery pack as a whole must also undergo a substantial transformation in either the EU or Canada. The rules may require the assembly of battery cells and modules into the full battery pack to occur in one of the CETA regions.

For electric vehicles, electric motors and inverters must meet similar origin criteria and should either be manufactured or undergo substantial transformation within the EU or Canada.

If materials or components (such as rare earth materials for batteries or certain electronics) are sourced from outside the CETA region, they must still undergo sufficient processing in the EU or Canada to be considered originating. For individual components (e.g., seats, windows, bumpers, steering systems, suspensions, airbags, and other major subassemblies), the same regional content rules apply. Components must either be produced within the EU or Canada or undergo substantial processing in the region to meet the origin criteria.

CETA also allows for diagonal cumulation of origin between the EU, Canada, and other partner countries that have agreements with the EU (such as Mexico and Switzerland

The de minimis rule is also set at 10%.
The texts presented in the Actes of GERPISA may be published
subsequently in a possibly amended version.

ISSN 0981-5597