Customers may in the future get a better chance to tell whether a car advertised as "Made in Britain" really was made in Britain or assembled abroad, after the European parliament narrowly voted to make labels specifying the country of origin mandatory for all goods sold in the EU.

The proposal opened up a new dividing line across the continent, with southern European countries such as Italy welcoming the proposals as a boost to the fashion, shoemaking and ceramics industries, and Britain and Germany in particular warning that compulsory "made in" signs could damage companies that rely on global supply chains.

Currently, companies that use "made in" labels do so on a voluntary basis, and there is no central body in charge of handing out the label. Companies in countries renowned for their manufacturing sectors, such as Germany or Italy, frequently use the label.

The slogan "Made in Germany" became an unlikely marketing device after Britain issued the Merchandise Marks Act in 1887 for fear of cheap continental imitations of Sheffield cutlery flooding the market. But as the quality of German manufacturing improved, a slogan designed to scare away customers turned into a seal of quality.

According to a recent study by PricewaterhouseCoopers, nine out of 10 Germans would consider buying a product on the basis of a "Made in Germany" label. In August last year, Telekom and other German internet providers launched an initiative called "Email made in Germany" in response to revelations of NSA surveillance.

A Made in Britain campaign launched last December with a union jack-based logo aims to have around 2,000 small manufacturers signed up by the end of the year. The Labour leader, Ed Miliband, has called for Made in Britain labels to be more prominent on British products.

Under the European proposals, however, some supposedly British trains, German coffee machines or Italian shirts might have to be relabelled "Made in Japan", "Made in Morocco" or "Made in Vietnam". According to the new guidelines, the country of origin will be the one where the product underwent its "last, substantial, economically justified processing". For example, if the cells of a hi-tech battery are produced in Germany but assembled in Tunisia, the label may have to say "Made in Tunisia".

Labelling the country of origin on the product or the packaging will no longer be optional but mandatory. Companies can opt for a "Made in the EU" label if they produce across several European countries.

A group of 16 member states from northern and eastern Europe, including Britain and Germany, have already said they will block the European parliament's proposal from being adopted in the European Council.

Ashley Fox, a British Conservative MEP, said the proposed directives had "nothing do with consumer protection" and failed on practicality and costs. He said: "Calls for 'made in' markings are only used to demonstrate a perceived higher quality associated with a given country. This is against the principles of the single market."

Andreas Schwab, a German MEP for Angela Merkel's CDU party, said the guidelines were driven "not so much by a desire to advertise Italian products as to punish German companies". He added: "I am all for helping to make Italy more competitive again, but pseudo-measures like these won't help us get there."

Schwab said the cost of labelling would particularly hit smaller enterprises that produced parts of their goods abroad, such as the shoemaker Ricosta in his Baden-Württemberg constituency – a claim that was met with some surprise at the company. "We are proud to produce our shoes in safe companies in Germany, Hungary, Poland and Romania, so a 'Made in the EU' label would actually work to our advantage", a Ricosta spokesperson told the Guardian.

Markus Wiesner, president of the European Furniture Industries Federation, said the drive against "made in" labels was driven mainly by large retailers, and he rejected accusations of protectionism. "We don't want to roll back the free market, but we just want to make sure that customers can make an informed choice."

Some reports have suggested that redefining the country of origin based on the materials could theoretically affect the marketing of famous British brands that use foreign components, such as Rolls-Royce.

Rolls-Royce uses engines from Germany and materials from around the world, but a spokesman said the company would be unconcerned by a legal redefinition. "We get our leather from Alpine cows, and source our veneers from South America because that wood has a particular appeal. But it's designed by a Brit, and built by British craftsman in the Sussex Downs, so it's an inherently British brand."