A closer look at the recent ECJ decision on tariffs

Closing a loophole that could remove US motorcycle manufacturers from the European market

In the last article, I mentioned a decision by the European Court of Justice (ECJ) that dealt with the issue of Harley-Davidson sourcing motorcycles from its Thailand factory for the European market. This was at a time of trade tension between the US and the EU, bought on by the implementation of former- and now current- President Trump’s tariffs on the import of foreign steel and aluminium into the US.

The case came about because Harley-Davidson, facing a retaliatory tariff by the EU on its US-origin motorcycles that meant it was losing money and market share, decided to alter its global supply chain. It would import motorcycles bound for the EU from its factory in Thailand, rather than from Harley’s US factories. This Thai factory had been established to build motorcycles for selected Asian markets, which had long imposed steep tariffs on the import of motorcycles, partly to protect domestic manufacture.

Once the European Commission (EC) became aware of Harley’s ex-Thailand supply process, it determined that these motorcycles were being imported from Thailand solely to avoid the duties (a 25% retaliatory tariff) now in force. The EC revoked the pre-existing classification of the motorcycles as Thai-origin, which allowed them in without tariffs, classifiying them instead as US-origin and therefore liable for the 25% tariff.

This was naturally a significant set back for Harley-Davidson. As Europe is its second biggest market and one where it competes with European manufacturers such as Triumph, Ducati and BMW (all of whom have their own Thai factories) in the high-end motorcycle segment, Harley could not afford to pass on to customers an additional 25% and remain competitive. Harley therefore appealed the EC decision, eventually to the ECJ.

Harley’s main argument centred around Article 33 of Regulation 2015/2446. This Regulation deals with the EU’s customs code. Article 33 provides that

“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 [relevant duties].”

The EC took the position that Harley’s relocation of EU-bound production was not economically justified but done to avoid duties. Harley on the other hand argued that the clause needed to be read in a more literal sense; in other words, it could only apply if the whole relocation was uneconomically justifiable. That is, only the building of a factory somewhere that made no economic sense other that to avoid duties was covered. Harley’s move of production was a legitimate decision driven by global efficiency considerations.

The ECJ disagreed with Harley’s position. It held that the term ‘purpose’ referred to the intent of the relocation of production, to be inferred from available facts. There was a presumption created by the evidence of an intent to avoid EU measures.

Unfortunately for Harley-Davidson, it had earlier filed a ‘Form 8-K’ to the US stock exchange where it is listed as part of its reporting obligations. In that form, Harley-Davidson explicitly stated that the move of production from the US to Thailand for EU-bound motorcycles was to avoid EU tariffs on US-origin motorcycles.

The Court therefore had no difficulty siding with the EC, holding in particular that if evidence indicates that avoiding EU measures was a decisive factor in relocation, the burden shifts to the business to prove otherwise. This Harley-Davidson had failed to do. The result of this ruling is that while businesses are free to make decisions about how they operate, changes in operations that coincide with EU measures will face additional scrutiny.

We do not know yet what tariffs President Trump proposed to apply to imports from the EU but we can be sure that retaliatory measures are ready to be implemented. The last time this happened, the EU targeted specific US companies and industries, such as Harley-Davidson, that either had political impact (because of the state or district in which the company operated) or which were uniquely ‘American’ (such as Kentucky bourbon, which can only be made in Kentucky).

Harley-Davidson (and presumably Indian motorcycles) are likely to be targetted in any new trade war between the US and EU. Given that it will now be impossible for Harley to import motorcycles from Thailand to Europe, a prolonged trans-Atlantic trade spat could spell the end for many European Harley-Davidson franchise holders and dealers, not to mention have a serious negative effect on the bottom line at the Motor Company.