Report for the Hearing delivered in Case 12/88

I — Facts and provisions at issue

A — Facts

Schäfer Shop BV, a private limited liability company whose registered office is at Arnhem and which is a subsidiary of a company incorporated under German law and established in the Federal Republic of Germany, applied to the competent authorities in the Kingdom of the Netherlands for authorization to import from the Federal Republic of Germany ballpoint pens, leather folders and various office items, of a total value of DM 40000, originating in the German Democratic Republic.

That application was refused by a decision of the Centrale Dienst In- en Uitvoer (Central Import and Export Office) of the Ministry of Economic Affairs.

The company appealed against that decision in an application lodged on 6 May 1986 with the College van Beroep voor het Bedrijfsleven, asking that court to annul the contested decision and to order the competent authorities to issue the requested authorization.

After considering the case in open court on 6 November 1987, the College van Beroep decided that the contested decision was based on rules adopted in the Netherlands pursuant to a policy laid down by the three Benelux States from 1975 onwards under which authorizations for the importation from the Federal Republic of Germany of goods originating in the German Democratic Republic are refused ‘unless such refusal is incompatible with the interests of good administration’, which in fact means that only goods of modest value and of a noncommercial kind are admitted.

The College van Beroep, doubtful as to whether such rules were compatible with Paragraph 3 of the Protocol on German internal trade, referred the matter to the Court under Article 177 of the EEC Treaty.

B — Legal background to the dispute

(a) The Protocol on German internal trade and connected problems

Paragraph 1 of the Protocol provides that trade between the German territories subject to the Basic Law of the Federal Republic of Germany and the German territories in which the Basic Law does not apply is ‘a part of German internal trade’. In view of the disadvantages which that provision may involve for the other Member States, Paragraph 2 provides that each Member State is to inform the other Member States and the Commission of any agreements relating to trade with the territories in question and to ensure that the implementation of such agreements ‘does not conflict with the principles of the common market’. In this regard, the State in question must ‘in particular take appropriate measures to avoid harming the economies of the other Member States’.

Finally, Paragraph 3 of the Protocol contains a safeguard clause worded as follows: ‘Each Member State may take appropriate measures to prevent any difficulties arising for it from trade between another Member State and the German territories in which the Basic Law of the Federal Republic of Germany does not apply’.

(b) The policy adopted by the Benelux States and the regulations applicable in the Netherlands

1. From 1975, the Benelux countries adopted a policy under which, in principle, no authorizations are granted for the importation from the Federal Republic of Germany of goods originating in the German Democratic Republic unless the goods are of limited value and of a noncommercial kind. That policy is embodied in a ‘supplementary instruction’ of 30 June 1975 sent to the authorities in the Benelux countries responsible for issuing authorizations. That instruction was approved on 3 July 1975 by the Permanente Subcommissie voor de Handelspolitiek van de Benelux (Permanent Subcommission for the Trade Policy of the Benelux Countries). The rules were adopted on the basis of Paragraph 3 of the Protocol on German internal trade.

2. In the Netherlands, the importation of industrial products originating in the German Democratic Republic is subject to authorization under the Invoerbesluit landen 1981 (a 1981 regulation relating to imports from certain countries). It is true that the Vrijstellingsbeschikking niet-landbouwgoederen EG 1981 (a 1981 order exempting nonagricultural EEC goods from duty) provides for general exemptions from the requirement that an authorization must be obtained in the case of goods brought into free circulation in Community States. However, under Article 1(2) of that order those exemptions do not apply to goods originating in the German Democratic Republic, which are subject to the rules made under the policy adopted by the Benelux countries in 1975.

The College van Beroep, doubtful as to whether those rules were compatible with the Protocol on German internal trade, referred the following preliminary question to the Court of Justice by a decision of 8 January 1988, lodged at the Court Registry on 14 January 1988:

‘Is Paragraph 3 of the Protocol on German internal trade and connected problems annexed to the EEC Treaty to be interpreted as meaning that it is compatible therewith for a Member State or a group of Member States to adopt a policy under which, through a ban on the importation without authorization into the Member State or group of Member States of goods originating in the German Democratic Republic which have been brought into free circulation in the Community in the Federal Republic of Germany, all applications for authorizations are, in practice, refused, with the exception of those relating to goods of limited value and of a noncommercial kind?’

In accordance with Article 20 of the Protocol on the Statute of the Court, written observation have been submitted by:

i) the Belgian Government, represented by A. Reyn, Director of European Affairs at the Ministry of Foreign Affairs, Foreign Trade and Cooperation with Developing Countries, acting as Agent;

ii) the Government of the Netherlands, represented by H. J. Heinemann, Deputy General Secretary at the Ministry of Foreign Affairs, acting as Agent;

iii) the Government of the Federal Republic of Germany, represented by Martin Seidel, Ministerial Adviser at the Federal Ministry of Trade, assisted by J. Sedemund, acting as Agents;

iv) the Commission of the European Communities, represented by René Barents, a member of its Legal Department, acting as Agent.

Upon hearing the report of the Judge-Rapporteur and the views of the Advocate General the Court decided to open the oral procedure without any preparatory inquiry.

II — Summary of the written observations submitted to the Court

The Kingdom of the Netherlands and the Kingdom of Belgium consider that the rules at issue are compatible with Paragraph 3 of the Protocol on German internal trade.

a) The Kingdom of Belgium points out that, under the case-law of the Court, Community law does not apply to trade between the German Democratic Republic and the Federal Republic of Germany. The Protocol on German internal trade constitutes an exception to the Community trading system. It observes, as does the Kingdom of the Netherlands, that such a situation has given rise to difficulties which became particularly apparent once the customs union had been set up. The goods in question are exempt from Common Customs Tariff duties and other levies and benefit from a flat-rate VAT deduction granted by the Federal Republic of Germany. Although it is true that the flat-rate VAT deduction does not apply to re-exported goods, such an arrangement has proved to be very difficult to control in practice. In the long term, that situation has important consequences regarding not only the impact that such re-exports may have in general but also, and more seriously, the deflection of trade and the circumvention of quantitative restrictions to which they may give rise. As the flow of the goods in question is liable to sudden and erratic variation, the Benelux countries were forced to choose the policy which they adopted as from 1975. That policy does not, in fact, mean refusing all applications for authorizations. Of all the applications made during the last three years, for example, the Belgian Central Office for Quotas and Licences refused two in 1985, one in 1986 and two in 1987. The Kingdom of Belgium also observes that the goods in question cannot be regarded as being in free circulation in the Federal Republic of Germany since they do not comply with the conditions laid down in that regard by Article 10 of the EEC Treaty.

b) The Kingdom of the Netherlands considers that the measures whose validity is questioned by the national court are proportionate to the intended aim.

In this regard, it puts forward three considerations. First, it points out that the Tarifbesluit of 1960 (now repealed) provided for the application of Common Customs Tariff duties to goods imported from the German Democratic Republic via the Federal Republic of Germany, those duties being applied category by category in accordance with the difficulties prevailing in the relevant sectors of the economy.

That measure proved impossible to implement as a result of both the diversity of the products involved and the complete freedom of trade between the Netherlands, Belgium and Luxembourg. Secondly, it is pointed out that Paragraph 3 of the Protocol on German internal trade is a highly specific provision aimed at alleviating the consequences of the special relationship between the Federal Republic of Germany and the German Democratic Republic. That provision cannot, therefore, be compared to other derogating or safeguard clauses, such as Article 115 of the EEC Treaty; it rather enables States to take action to prevent any difficulties from arising as a result of trade between the Federal Republic of Germany and the German Democratic Republic, subject merely to the requirement that the measures taken are not to exceed whatever is necessary to achieve the aim in question.

It so happens that the system adopted whereby importation is, in principle, forbidden is the only measure suitable inasmuch as another selectively applied system has proved unable to protect the Benelux market adequately.

The Federal Republic of Germany and the Commission take a different view.

a) The Federal Republic of Germany, which asks the Court to rule in plenary session, acknowledges that the special arrangements for German internal trade may give rise to a certain number of difficulties involving inter alia deflection of trade. However, the German Government, aware of its duties under Paragraph 2 of the Protocol, has taken steps which ensure that only very few goods are re-exported to other Member States. It also points out that, contrary to what is stated in the judgment making the reference for a preliminary ruling, it is clear from the case-law of the Court, in particular its judgment of 1 October 1974 in Case 14/74 Norddeutsches Vieh- und Fleischkontor GmbH v Hauptzollamt Hamburg-Jonas [1974] ECR 899, that while the German Democratic Republic is not a member of the European Community, it is not a nonmember State.

b) With regard to the regulation of German internal trade, the Federal Republic points out that imports from the German Democratic Republic are subject to authorization on the conditions laid down in the Berlin Agreement of 1951. There are strict controls and supervision to ensure that the relevant conditions are observed. The regulation system has three main elements: first, goods may only be bought and sold under an offset arrangement and payment in freely convertible currency is thus precluded. Secondly, purchases only involve products originating in the German Democratic Republic meeting the needs of the Federal Republic. From this point of view, supplies for West Berlin play a major part. This means, according to the Federal Republic, that 99% of the goods from the Democratic Republic remain on the market of the Federal Republic and are not subsequently re-exported. Explaining the actual situation as regards German internal trade, the Federal Republic of Germany points out that it is not true to say that products originating in the Democratic Republic are less expensive than those delivered directly from the Democratic Republic to the other Member States, inasmuch as the inapplicability of the Common Customs Tariff combined with the system of compensating transactions encourages the Democratic Republic to sell at cheaper rates to the other Member States than to the Federal Republic. It also points out that the Federal Republic ensures that the prices applied by the Democratic Republic are equivalent to those prevailing in the Federal Republic, and the enforcement of that condition is subject to strict supervision. Quotas have, indeed, already been imposed in sensitive areas. With particular regard to the Benelux countries, restrictions have been in place since 1976 on goods coming from the Democratic Republic and intended for re-exportation to those three countries. Six-month export bans have been introduced on goods subject to quotas in direct trade between the Benelux countries and the German Democratic Republic and on goods in sensitive areas. The Commission also lays emphasis on the actual situation as regards German internal trade in order to show that its impact on other Member States is necessarily limited. Strict checks are carried out to ensure that the prices charged are equivalent to those charged in the Federal Republic of Germany and the quantities imported correspond strictly to the needs of the Federal Republic. This means, according to the figures supplied by the Commission, that only 0.8% of imports from the German Democratic Republic into the Federal Republic are re-exported, representing 0.3% of the Federal Republic's exports to the other Member States. The Commission further stresses the cooperation which has been established between it and the Federal Republic, resulting in a reduction in the volume of goods supplied by the German Democratic Republic to the Federal Republic. According to figures provided by the Federal Republic, that country's exports to the Member States amount to DM 267000 million and, of that total, goods from the Democratic Republic account for only DM 45 million, or 0.017% (figures for 1986). With regard, finally, to the tax arrangements, the Federal Republic of Germany points out that, whilst goods originating in the Democratic Republic imported into the Federal Republic of Germany do benefit from an abatement, that advantage does not apply when the goods in question are exported or used for exponation. Compliance with that rule is subject to strict supervision, and the tax regulations involved cannot give rise to any particular difficulty for other Member States.

c) With regard to the scope of Paragraph 3 of the Protocol on German internal trade, the Commission considers that recourse to that provision is only justified in exceptional cases and that any State intending to take action in reliance on it must consult the Commission. In the Commission's view, the essential question is whether the measures taken by the Benelux countries are ‘appropriate’ within the meaning of the Protocol, which forms part of the Treaty by virtue of Article 239, the Commission being charged with ensuring that it is applied.

The word ‘appropriate’ is to be interpreted in the light of the measures already taken by the Federal Republic, of which the Commission is kept informed. As the exception provided for in Paragraph 3 of the Protocol is to be interpreted strictly, the Commission considers that, given the actual situation as regards German internal trade, as described above, the measures adopted by the Benelux countries are disproportionate, a complete ban on importations being too severe.

Those measures are therefore incompatible with the Protocol.

In that regard, the Federal Republic of Germany emphasizes that Paragraph 3 of the Protocol differs from other safeguard clauses such as Article 115 of the Treaty. First of all, the difficulties referred to may be merely contingent, which means that preventive measures may be taken ; secondly, the paragraph does not provide for any Community control, which implies that States have a considerable degree of discretion. Therefore, any measures they adopt can only be challenged if they patently exceed that margin of discretion.

The Federal Republic is nevertheless of the opinion that such is the case with a complete ban on importation. It considers that, while States are not obliged to examine every single case of importation because the resulting administrative burden would be too great, it is enough if the general rules adopted cover groups of products or branches of the economy where there are difficulties, provided that the measures in question are temporary and are regularly reviewed.

In that connection, the Federal Republic points out that the judgment making the reference for a preliminary ruling does not provide sufficient information to answer the question whether difficulties of that sort exist as regards the categories of products concerned. That question must be determined by the national court alone.

III — Answers to questions put by the Court

1. In compliance with the Court's request, the Netherlands Government submitted the text of the policy adopted by the Benelux States in 1975 and the full text of the Invoerbesluit Landen 1981 and the Vrijstellingsbeschikking niet-landbouwgoederen EG 1981.

2. The Court asked the Commission to state: (i) whether Belgium and Luxembourg in fact apply the policy adopted by the Benelux States in 1975 and, if so, what the detailed rules of application are; (ii) secondly, what is the practice of Member States other than the Benelux countries regarding recourse to Paragraph 3 of the Protocol on German internal trade and connected problems; (iii) finally, whether Member States consult the Commission before taking measures under that provision. The Commission answered as follows: (i) The Kingdom of Belgium applies a system of import licences for products originating in the German Democratic Republic, but this system does not always lead in practice to the refusal of a licence. The Luxembourg Government follows the same practice. The Commission concludes that the three Benelux countries do in fact apply the 1975 policy, but that its practical effects differ from one country to another. In answer to the second question, the Commission states, on the basis of information supplied to it by the Member States, that France applies a system of licences for products originating in the German Democratic Republic and brought into free circulation in the Federal Republic of Germany. There are no particular measures affecting such products in the other Member States. In reply to the third question, the Commission states that the Member States do not generally consult it before taking measures under Paragraph 3 of the Protocol.

F. Grévisse

Judge-Rapporteur

1 Language of the case: Dutch.