Two industries will survive the wrath of net zero – carmaking isn’t one of them

China-built electric vehicles of the company BYD, are seen parked in the port of Zeebrugge, Belgium
Carmakers face fierce competition from Chinese vehicles, many of which are cheaper and, according to commentators, of far superior quality - Yves Herman/Reuters

Was it worth the brickbats? Rachel Reeves, the Chancellor, found herself in all kinds of trouble last week for ploughing ahead with a “bridge-building” visit to China while seemingly in the midst of a fully blown crisis of confidence in her economic management back home.

Had she returned from Beijing with some great prize that made an appreciable difference to UK growth, it might have been possible to justify the trip.

But she did not. The Treasury was forced to throw virtually everything into the mix, including the kitchen sink, to come up with its big number of £1bn of benefits over the next five years. In the context of a £2.5 trillion economy, this is no more than a rounding error and scarcely supports Reeves’s contention in a newspaper article to coincide with the visit that the “UK needs China”.

“China is not going to open up anything like enough to make a meaningful difference [to growth] here”, says George Magnus, the veteran China watcher. Reeves cannot be faulted for at least trying, but as with so many of her predecessors she’s set to learn the hard way an enduring truism about trade with China; they take, you give. It’s a one-way street.

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The way things are going, the only industries the UK will have left by the time its pursuit of net zero has killed off everything else are financial services and law, so I suppose it made sense for Reeves to focus on winning concessions in China for bankers and insurers. These were the people who she took with her on the mission.

All the same, you might have expected a somewhat broader approach. The UK auto industry, which is fighting for its very survival against mounting Chinese competition, barely got a look in.

As on so much else, the Government has got itself into the most ghastly mess attempting to reconcile its net zero goals with some kind of a future for automobile manufacturing in the UK.

And it’s not just cars. Britain’s multibillion-pound chemicals industry is facing “extinction” because of soaring energy costs and the shift to net zero, Sir Jim Ratcliffe, chairman of Ineos, said this week.

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Car manufacturing similarly faces the double whammy of increasingly punishing fines for failure to transition quickly enough to electric vehicles (EVs) and a destructive onslaught of heavily subsided Chinese competition.

Like rabbits frozen in the headlights of an oncoming car, ministers seem unable to decide how to deal with this potent cocktail of threats to an industry which still supports tens of thousands of relatively highly paid jobs in Britain and is one of the country’s biggest exporters.

There are two interconnected decisions which need urgently to be addressed. One is whether to offer some protection for the industry by following the US and Europe into imposing heavy tariffs on Chinese EVs. The other is whether to axe or adjust the legally binding mandate requiring the phasing out of petrol and diesel car sales and their replacement with all electric vehicles.

On neither issue is there anything approaching clarity. Having originally agreed to the mandate, the industry no doubt has plenty to answer for in failing to meet it.

Yet it was also reasonable for carmakers to expect more in the way of government support and incentives to back an intended transition that is running way ahead of any natural market demand for it. As it is, sales of EVs are falling far short of mandated quotas, theoretically leaving carmakers liable for punishing fines of £15,000 for every non-compliant vehicle sold.

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In the event, less than 20pc of all vehicles sold in the UK last year were all-electric plug-ins, against the mandated quota of 22pc.

Buying credits from manufacturers that manage to exceed the quota, or extending the shortfall into this year in the hope of making it up, should ensure that in practice no fines are imposed for last year. Yet for offenders, it only postpones the pain. According to industry estimates, Ford would alone be facing total fines for last year of around £500m without these dispensations.

As it is, manufacturers are having to go to extreme lengths in attempting to meet the mandate. Dealers complain of having to force-feed consumers with EVs by offering them no alternative and of having to resort to deep discounts to shift the stock.

At the same time, carmakers face increasingly fierce competition from Chinese upstarts, many of which are both much cheaper and, according to commentators, of far superior quality.

Ministers are being hoisted on their own petard, with policy reduced to a mass of contradictions. Consumers are being frog-marched in pursuit of net zero into buying EVs; to then deprive them of the cheaper option by imposing swingeing tariffs on Chinese competition would look perverse. Yet without such protections, domestic producers are facing oblivion, at a cost of thousands of jobs and further catastrophic damage to the balance of payments.

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To impose such tariffs would on the other hand deal a body blow to relations with China just at the moment when the Chancellor is trying to re-engage by holding out the hand of friendship. It’s an odd kind of a reset that begins with a giant “no entry” sign for cutting edge Chinese produce.

One possibility would be to persuade BYD and other Chinese carmakers to set up shop here in Britain, much in the way the UK did with Japanese car manufacturers in the 1980s. Under the EU-UK Trade and Cooperation Agreement, Britain continues to trade tariff-free with Europe on cars, subject to rules of origin requirements. It therefore makes some sense for Chinese manufacturers to establish a presence here as a backdoor into European markets.

BYD is already investing heavily in Hungary as a way of bypassing EU tariffs, and in Turkey, which similarly enjoys tariff-free auto trade as part of the EU’s customs union. But it would take years for any such factory to be up and running in Britain and doesn’t help the Government much in the meantime with the threat to UK jobs.

It also risks upsetting Trump, who in attempting to curb Chinese influence asks the likes of Britain to pick a side. For the UK, trade with the US is far more important than with China.

Ministers face a clear choice. Either they must abandon the charade of the zero emission mandate and let the market decide the pace of the transition away from petrol and diesel vehicles.

Or they can let UK manufacturing fall on the sword of rigid net zero commitments, knowing that it won’t make a blind bit of difference to global emissions – and, by the by, would destroy whatever chance Labour may still have of eventual re-election. One imagines that common sense will prevail.