Preparing for a trade war

The European Court of Justice confirmed in its recent judgment on customs taxation, C-297/23 P, that relocating a company's production to another country cannot be considered acceptable solely for the purpose of avoiding tariffs, unless the transfer is also economically justified.

In the case, Harley-Davidson transferred the production of motorcycles from the United States to Thailand, among other things, to avoid additional tariffs imposed by the European Union on US products. Although Harley-Davidson presented other economic justifications for relocating production to Thailand, according to the European Court of Justice, the transfer was not economically justified because its primary purpose was to avoid additional tariffs imposed by the European Union on US products. Accordingly, motorcycles manufactured in Thailand and imported from there to the European Union did not avoid additional tariffs.

The case applied the general rules on origin of the European Union's customs legislation. It is apparent that US authorities interpret their own rules of origin in the same way in reverse situations.

Donald Trump has announced his intention to impose tariffs of at least 10% on most foreign products and up to 60% on products from China. This could lead to retaliation from the European Union, which would mean higher tariffs on products of US origin when they are imported into the EU. This will increase the pressure on European Union companies that import US products or export products manufactured in the European Union or elsewhere to the US.

1. Companies cannot avoid tariffs simply by relocating their production from one country to another. The relocation must also be economically justified on other grounds.
2. Companies must carry out thorough economic analyses and ensure that the relocation of production makes economic sense and is not simply aimed at avoiding tariffs.
3. Companies must prepare for changes in trade policy and possible new tariffs, especially in the trade relations between the United States and the European Union.
4. Companies must develop scenario plans and contingency plans to ensure business continuity in the event of potential trade policy changes.

The judgment of the European Court of Justice C-297/23 P is significant and surprising, given that the European Union customs authorities had previously ruled in preliminary rulings on the status of origin that Harley-Davidson motorcycles manufactured in Thailand were of non-US origin. The judgment heralds a tightening of the application of trade policy measures in a world threatened by trade wars.

The decision of the European Court of Justice and Donald Trump’s plans together create a complex and challenging operating environment for EU companies. Companies will need to carry out in-depth economic analyses, develop strategic plans and prepare for possible changes in trade policy to ensure business continuity and competitiveness.

Please note; KPMG is organizing an event together with Nordea titled Navigating Change: The Trump Administration’s Influence on Finnish Businesses. This event will offer critical insights into the evolving public policy landscape during Trump’s second presidential term. Please sign in from the link above.

Later in the spring KPMG will be hosting a US Tax Day in March, when tax legislation plans by Trump’s administration are formed. More information coming soon.