FT Schools - 'catastrophic’ tariffs for European carmakers

A global supply chain is a network of suppliers, producers, distributors, and other organizations located in different countries that are involved in producing and delivering a good or service.

Award [1] for a definition that shows limited knowledge of a global supply chain.

Award [2] for a definition that shows clear and accurate knowledge of a global supply chain, similar to the example above.

Possible answers include:

• Access to specialist suppliers – European EV manufacturers rely on overseas businesses that have expertise and established production capacity for batteries, components, and raw materials.
• Lower costs – Sourcing batteries and components internationally may enable carmakers to purchase inputs from suppliers that benefit from economies of scale and lower production costs.
• Availability of raw materials – Some of the raw materials required for EV batteries are not sufficiently available from European sources, making international sourcing necessary.
• Production capacity – European battery supply has not developed as quickly as expected, meaning carmakers need overseas suppliers to meet their production requirements.
• Flexibility – A wider international supplier network can provide manufacturers with alternative sources of components when domestic or regional capacity is insufficient.

Mark as a 2 + 2.

Award [1] for identifying each relevant reason and [1] for explaining this in the context of European car manufacturers, up to the maximum of [4].

Possible advantages include an explanation of any one of the following:

• Avoidance of tariffs – Using EU- or UK-produced batteries could help EVs satisfy the rules of origin and therefore avoid the proposed 10% tariff.
• Reduced supply chain risk – Greater regional production could reduce dependence on overseas suppliers and make manufacturers less vulnerable to geopolitical tensions and disruptions to international transportation.
• Shorter supply chains – Sourcing batteries closer to vehicle assembly plants could reduce transportation times and potentially improve responsiveness.
• Greater control – Closer relationships with regional suppliers could give car manufacturers greater oversight of quality, delivery times, and production standards.

Possible disadvantages include an explanation of any one of the following:

• Higher costs – European battery manufacturers may have higher production costs than established overseas suppliers, increasing the cost of producing EVs.
• Insufficient capacity – European battery production is not yet large enough to satisfy the industry's requirements, as illustrated by the collapse of Northvolt and difficulties experienced by other producers.
• Investment costs – Establishing new European battery factories and supply networks requires substantial capital investment and could take several years.
• Loss of economies of scale – Switching away from large, established global suppliers could mean manufacturers lose some of the cost advantages available from businesses producing batteries on a very large scale.

Mark as a 2 + 2.

Award [1] for identifying a relevant advantage/disadvantage and [1] for explaining this in the context of European car manufacturers, up to the maximum of [4].

Tariffs are a type of tax imposed by a government on imported goods, usually increasing their price in the importing country.

Award [1] for a definition that shows limited knowledge of a tariff.

Award [2] for a definition that shows clear and accurate knowledge of a tariff, similar to the example above.

The proposed 10% tariff would increase the cost of selling EVs in the UK if they do not meet the new rules of origin. With ACEA estimating that the tariffs could cost the European automotive industry around €1.5 billion annually, manufacturers may face higher costs and lower profit margins.

Award [1] for identifying a relevant impact on costs and [1] for explaining this in the context of European car manufacturers.

Possible answers include an analysis of any two of the following:

• Political/legal factors – Post-Brexit rules of origin could result in a 10% tariff on EVs that do not contain sufficient EU- or UK-originating components. This could increase the prices of European EVs in the UK, making them less price competitive and potentially reducing their market share.
• Economic factors – Slower-than-expected growth in EV demand can make it more difficult for European battery manufacturers to achieve economies of scale. Higher unit costs could therefore reduce the competitiveness of European EV manufacturers.
• Competitive factors – Increasing competition from Chinese EV manufacturers could put pressure on European manufacturers to reduce prices, improve quality, or increase expenditure on innovation. Additional tariffs could make it more difficult for European manufacturers to compete effectively.
• Technological factors – Difficulties in developing European battery production capacity mean carmakers remain dependent on overseas suppliers. This could increase costs and supply chain risks, thereby reducing their competitiveness.
• Supply chain factors – The collapse of Northvolt and difficulties experienced by other European battery manufacturers in scaling up production have slowed the development of European battery supply chains. This makes it more difficult for EV manufacturers to satisfy the new rules of origin and avoid tariffs.

Mark as a 3 + 3.

Award [1] for identifying a relevant external factor, [1] for analysing its impact, and [1] for appropriate application to European EV manufacturers, up to the overall maximum of [6].