At a glance
The Court of Justice of the European Union (CJEU) has issued its long-awaited judgment in appeal of the Harley-Davidson Europe and Neovia Logistics Services International v. Commission case (C-297/23 P). This ruling carries significant implications for manufacturers and importers determining the non-preferential origin of goods for imports into the EU, particularly with respect to whether the relocation of processing or working operations to another country following the imposition of additional customs duties, trade defense measures or other trade measures is economically justified. The CJEU confirms that if the primary or dominant purpose of the relocation is to avoid paying the duties or avoiding trade measures, it is not economically justified, and the origin of the imported goods must be determined on the basis of the origin of the major portion of its parts.
Background Information
In response to the 2018 U.S. tariffs on steel and aluminum imports, the EU imposed retaliatory duties on certain products with U.S. origin, including Harley-Davidson motorcycles. Consequently, Harley-Davidson relocated production of some motorcycles for the EU market from the U.S. to Thailand.
The determination of the non-preferential origin is an essential step in the assessment of whether a given product is subject to measures targeting one or more specific countries. This includes trade defense measures, such as anti-dumping, countervailing duties or safeguards, retaliatory (“rebalancing”) duties such as those imposed against the United States in 2018, or for the application of other trade measures such as economic sanctions.
Under Article 60(2) of the Union Customs Code (UCC), a product originates in the country where it underwent its last substantial, economically justified processing. This provision has been in the books ever since the EU adopted its first customs code in 1968. What is new is the introduction of an anti-abuse provision in 2016, Article 33 of the UCC’s Delegated Act (UCC-DA), according to which the last substantial transformation is not economically justified, and therefore cannot confer origin, if it aimed at avoiding tariff or other trade measures. The validity of that provision was reviewed for the first time by the Court of Justice in the Harley-Davidson case.
When the rebalancing duties were imposed against motorcycles originating in the United States, Harley-Davidson obtained five Binding Origin Information (BOIs – the EU’s term for rulings on customs origin) from the Belgian authorities confirming that motorcycles it assembled in Thailand were of Thai non-preferential origin. Belgium was asked by the European Commission to withdraw those BOIs through a formal Decision that concluded that the supply of motorcycles from Thailand was not economically justified. Harley-Davidson and Neovia Logistics brought an action for the annulment of that Commission Decision before the EU Courts.
Diverging Perspectives: The General Court’s Strict Interpretation vs. the Advocate
General’s More Flexible Approach to Economic Justification Under Article 33(1) UCC DA
The lower EU Court, the General Court, ruled (case T-324/21) that an economic operator must prove that the principal or dominant purpose of a relocation operation was not, at the time when the decision concerning that operation was taken, to avoid the application of EU commercial policy measures. According to the Court, providing evidence that there was any justification for the relocation (as opposed to a principal or dominant one) is not sufficient. The General Court therefore refused to annul the Commission Decision and dismissed the action.
On appeal, the Advocate-General (A.G.), who issues non-binding opinions after all written and oral pleadings have been made by the parties, disagreed with the European Commission’s and General Court’s interpretation of Article 33(1) UCC DA (Opinion). The A.G. considered that this provision must be interpreted as meaning that the economic justification is absent only if the purpose of the operation is to circumvent the application of customs duties by manipulating origin, which presupposes that failure to apply the duty is contrary to that duty’s objective. Avoiding a new tariff burden of 25%, as was the case here, is a legitimate economic objective, according to the A.G., and therefore the relocation of production to Thailand was consistent with the objectives of the duty.
The CJEU in appeal confirmed the General Court’s interpretation, and ruled against the A.G., which happens only in a small minority of cases.
According to the CJEU, the scope of Article 33(1) UCC DA is not limited to operations carried out with the purpose of circumventing commercial policy measures or to the manipulation of origin, but rather applies to all operations of which the principal or dominant purpose is to avoid commercial policy measures.
Furthermore, in cases where no factual information exists to establish that another purpose is the principal or dominant purpose, or if the competent authorities do not have this information, it falls on the economic operator to provide this information. In addition, the principal or dominant purpose of that operation must be assessed at the latest, at the time when the operation was decided.
Conclusion
If the economic operators cannot demonstrate that the primary or dominant purpose of the relocation is not paying the additional customs duties or the trade defense measures, it will not be economically justified based under Article 33(1) UCC DA. In that case, the subsidiary rule of Article 33 (3) UCC DA (“the major portion rule”) must be applied instead. Goods for which there is not specific residual rule (found in Annex 22-01 of the UCC DA) shall then be considered to have undergone their last substantial, economically justified processing or working, resulting in the manufacture of a new product or representing an important stage of manufacture, in the country or territory where the major portion of the materials originated.
This interpretation applies also to the determination of the origin of goods for the purpose of the EU’s economic sanctions, which are governed by the same provisions of the UCC and UCC DA.
This judgment of the Court of Justice is a welcome clarification of the rules applicable to the relocation of operation following the adoption of tariff, trade defense measure or other trade measures such as sanctions. If there is no evidence that the principal or dominant of the relocation is something else than avoiding those EU measures, the origin will not be determined by the country of the last substantial transformation, but by a subsidiary rule (often, the origin of the major portion of the parts). This ruling will discourage relocation strategies that primarily aim to circumvent duties and trade measures, compelling businesses to adopt more transparent and economically justified relocation practices.
Any questions? Please do not hesitate to get in touch with Cassidy Levy Kent’s customs and international trade team in Brussels, or your usual contact at Cassidy Levy Kent.