It is no secret that non-preferential origin can actually be more difficult to determine than preferential origin. The importance of non-preferential origin, in the age of new trade wars and border-applied sustainability policies is increasing. For that reason, the recent judgement by the Court of Justice of the European Union (CJEU) in the Harley-Davidson Europe and Neovia Logistics Services International v. Commission case (C-297/23 P) is particularly interesting.

It is no secret that non-preferential origin can actually be more difficult to determine than preferential origin. This is because the rules are less defined and can be subject to interpretation. While under preferential rules we have various ways of determining whether a product has been substantially transformed, for non-preferential rules the definitions are much more high-level.

Non-preferential origin is used for a number of purposes such as the application of trade defence measures, other trade policy tools or statistics. The importance of non-preferential origin, in the age of new trade wars, is increasing. It is also used for the application of new sustainability policies such as the EU’s Carbon Border Adjustment Mechanism (CBAM) and Deforestation Regulation. For the lack of a better way to translate sustainability concerns into trade, these policies rely on customs definitions including non-preferential origin.

For that reason, the recent judgement by the Court of Justice of the European Union (CJEU) in the Harley-Davidson Europe and Neovia Logistics Services International v. Commission case (C-297/23 P) is particularly interesting[1].

The judgement from 21 November 2024 follows an appeal and an opinion of the Advocate General (AG) of the CJEU from 30 May 30 2024 Surprisingly, the CJEU rejected both the appeal as well as disagreed with the Advocate General’s opinion.

Background

The background of the case and the Advocate General’s opinion were previously described in many articles[2]. In brief, Harley-Davidson relocated part of its production to Thailand. This coincided with an additional 25% tariffs imposed by the EU on American motorcycles. The internal company documents (Form 8-K) indicated that the relocation was motivated by these additional tariffs which led the CJEU to conclude that the processing in Thailand was not economically justified and as a result, the last substantial transformation cannot determine the origin of the products manufactured in Thailand. The products were therefore not considered to originate in Thailand.

The case revolved around the interpretation of Article 60 (2) of the Union Customs Code which states that:

Goods the production of which involves more than one country or territory shall be deemed to originate in the country or territory where they underwent their last, substantial, economically-justified processing or working, in an undertaking equipped for that purpose, resulting in the manufacture of a new product or representing an important stage of manufacture.

Article 33 of UCC Delegated Regulation states:

Any processing or working operation carried out in another country or territory shall be deemed not to be economically justified if it is established on the basis of the available facts that the purpose of that operation was to avoid the application of the measures referred to in Article 59 of the [Union Customs] Code.

Finally, Article 59 of the Union Customs Code provides:

Articles 60 and 61 shall lay down rules for the determination of the non-preferential origin of goods for the purposes of applying the following:

(a)	the Common Customs Tariff …;
(b)	measures, other than tariff measures, established by Union provisions governing specific fields relating to trade in goods; and
(c)	other Union measures relating to the origin of goods.’

Therefore, processing carried out in another country is not viewed as economically justified if it’s designed to avoid tariffs, non-tariff measures or any other measures relating to the origin of goods. In such cases, non-preferential origin is determined based on the residual rule: it’s where the largest proportion of materials originate.

The final judgement

In the most recent judgement, the CJEU rejected the company’s appeal and determined the following. Firstly, the decision on whether or not the purpose of relocation was to avoid tariffs and non-tariff measures is not subjective but should be based on facts. Here, Form 8-K provided a clear link between the EU’s new tariffs and relocation. Form 8-K served as evidence that the purpose of the move was to avoid the EU’s measures.

Secondly, according to Paragraph 62 of the judgement, it is for the economic operator to “prove that the principal or dominant purpose of that relocation was not, at the time when the decision concerning that operation was taken, to avoid the application of such measures”. In short, when based on available facts it seems that this was a decisive factor in relocation, the burden of proof falls on the operator. Companies would be advised to ensure they have appropriate paperwork prior to relocation.

Implications

The original or final judgements did not address the overall purpose of the EU’s 25% tariffs. In other words, it did not examine whether the final judgement is aligned with the wider goals of the EU’s trade policy. What was the aim of the additional tariffs? Was it to prevent American companies from selling their motorcycles on European markets, encourage relocation or something else?

These points were addressed in the Advocate General’s opinion[3]. She wrote that the “purpose of those additional duties is to place the other country at a disadvantage by worsening the competitive position of goods produced there” and not to “burden individual producers”. According to the Advocate General, “by relocating production to another country, Harley-Davidson has done exactly what the additional customs duties were intended to achieve” (72).

It is rare for the CJEU to go against the Advocate General’s opinion. It is also surprising that the likely impact of the ruling on the EU’s trade policy and the need for alignment between the two was not considered by the CJEU.

The judgement also rejected the Advocate General’s suggestion that only operations aiming to manipulate origin would be considered not economically justified. The opinion suggested that avoiding a 25% tariff was a legitimate objective under these circumstances (as opposed to, for example, antidumping duties). The final judgement introduces a much stricter interpretation according to which any processing done to bypass tariff or non-tariff measures can be viewed as not economically justified.

Companies tend to shape their supply chains to maximise profits, take advantage of cheaper factors of production as well as different facilitations and simplifications (e.g. free trade agreements) and minimise their tax bill including a range of direct and indirect taxes. This ruling restricts companies’ ability to do so if it coincides with additional tariffs or non-tariff barriers being imposed. In such cases, companies are likely to be required to provide proof that the relocation is economically justified and can be attributed to other reasons.

This judgement has implications for all types of policy that rely on non-preferential origin. This includes sustainability. CBAM relies on non-preferential origin for a number of purposes (i.e. for imported and returned goods but also rebates) and the EU Commission’s Q&A document specifically mentions Article 60 (2) of the UCC[4].

EU Deforestation is another area of policy where non-preferential origin might have an impact. We are still waiting for further guidance on how this will be implemented and the risk categorisation of countries. For both these policies, as well as any other sustainability-related policies introduced in the future, this judgment and resulting changes to the determination of non-preferential origin might have an impact. Furthermore, given the broad scope of Article 59 of the Customs Code, we may see examples where relocation to avoid or lessen the burden of any of the sustainability-related policies might also be viewed as circumvention and impact origin determination.

The importance of policy measures relying on non-preferential origin is expanding. Companies need to be aware of this new, strict interpretation of EU legislation. Particularly in light of the new Trump administration announcing new tariffs on US trading partners for the second week in a row and the likeliness of retaliatory tariffs, potentially also from the EU.

[1] Source: https://curia.europa.eu/juris/document/

[2] For example see: https://www.customsclearance.net/article
or here:
https://eulawlive.com/harley-davidson-v-commission-ag-kokott-interprets-anti-circumvention-mechanism-in-article-33-of-delegated-regulation-2015-2446-in-the-context-of-additional-tariffs-on-typical-goods/

[3] Source: https://curia.europa.eu/juris/document/

[4] Source: https://taxation-customs.ec.europa.eu/carbon-border-adjustment-mechanism_en#faq