In a landmark ruling on 21 November 2024, the European Court of Justice (“ECJ”) dismissed an appeal, upholding the General Court of the European Union’s original decision that relocation of production from the US to Thailand with the dominant purpose of avoiding EU retaliatory tariffs on US-origin goods could not be “economically justified” and as such falls foul of the EU’s “anti-circumvention” rules. This decision could have wide-ranging impacts, including a significant impact on companies’ abilities to relocate production in order to avoid the impact of EU/ UK retaliatory tariffs.
The appeal revolved around the EU non-preferential customs origin of goods produced in Thailand, following relocation of manufacturing from the US, and imported into the EU. The core issue centred on whether the relocation of production to Thailand was “economically justified”, or whether the dominant purpose of relocation was to avoid additional customs duties imposed by the EU on certain US-origin products. The ECJ upheld the General Court’s decision that the “principal or dominant purpose” of the relocation, based on objective evidence, was to avoid the application of EU commercial policy measures (i.e., the EU’s retaliatory tariffs on certain US-origin products). When a relocation is not economically justified, the normal rules of origin determination are disapplied, and the so-called residual rule applies, basing the origin on the country from which the major portion of material originates.
Importantly, the court found that avoiding commercial policy measures need not be the only purpose for an operation, nor must the operation have no other commercial reasoning; even if an operation does have other commercial reasons, if it is found that the “principal or dominant purpose” is to avoid commercial policy measures such as tariffs (through an objective test), then determining the non-preferential origin of products on this basis will be prohibited.
This decision emphasises the importance of objective evidence, and the “principal or dominant purpose” of an operation, in determining whether it is “economically justified” for the purposes of determining non-preferential origin.
Looking forward to the significance of this ruling in the light of an upcoming second Trump presidency, any new tariffs imposed under a second Trump presidency would likely trigger a swift response from the EU/ UK, including the reinstatement of retaliatory tariffs (of up to 50%) on key US products.The ruling could have a significant impact on a number of businesses – especially for US companies that may be impacted by a potential re-introduction of or new retaliatory tariffs on import into the EU and the UK in response to any future additional tariffs imposed under President-Elect Trump’s second term. In particular, this ruling may limit a company’s ability to alter its supply chain to avoid tariffs. Relocating may be seen as an attempt to circumvent these tariffs, even if there are other economically justifiable reasons for doing so. In such cases where relocation is found to have the dominant purpose of circumventing EU tariffs, the product’s EU non-preferential origin will be based on the origin of the materials / components used in their production.”
We expect that the EU ruling will be equally applied in the UK, now that the UK has left the EU.
This is a highly sensitive and political area, and we expect to see the EU/ UK authorities taking a very aggressive approach in rejecting avoidance of the retaliatory tariffs and deciding whether relocating production out of the US constitutes circumvention.
Upcoming webinar:
Baker McKenzie’s Global Customs Group will be holding a webinar titled “Trump and Tariffs: A Global Perspective of What Lies Ahead” which will take place virtually on Thursday 12 December 2024 at 3:00 PM GMT / 10:00 AM EST / 11:00 PM HKT.
To know more and register for the webinar, click the link below.
