Why the UK should probably join the Regional Convention on pan-Euro-Mediterranean preferential rules of origin
Yeah, another one … sorry.
My most popular blog post ever was on the topic of rules of origin. Which is strange. Anyway, since then I have written follow up posts explaining cumulation (bilateral, diagonal and full, I’ll have you know) and another providing a practical example of how the government might go about saving the UK car industry (government, you are welcome).
In this post, because I’m feeling generous, I’m going to suggest another solution to the UK’s rules of origin based headache: The Regional Convention on pan-Euro-Mediterranean preferential rules of origin (PEM Convention).
But first, a recap (you can skip this if you already know about rules of origin and cumulation):
Rules of origin
In order to benefit from the advantages of a trade agreement the UK has with another country, a UK exporter must prove that the product it is selling is actually from, or has had sufficient work done on it in (subject to myriad terms and conditions laid out in the specific agreement), the UK.
In practice, this means that even if the UK and EU agree a comprehensive post-Brexit free-trade agreement, due to dispersed regional and global supply chains and the UK’s place in said chains, UK companies exporting into the EU may struggle to qualify for it. For example, Mike Hawes, the CEO of The Society of Motor Manufacturers and Traders said:
“The danger is that UK-built cars may not qualify under most normal free-trade agreements,” he said. “Generally rules of origin require around 50 to 55% local content. Currently in the UK, the average car has about 41% local content.”
It is, however, possible to mitigate some of these issues. That’s where cumulative rules of origin comes into play.
If, written into a trade agreement between two countries, there are provisions allowing for Country A to treat inputs imported from Country B as being from Country A (and vice versa) for originating purposes it is known as bilateral cumulation. This is fairly common.
But let’s say that as well as an FTA with the Country B, Country A has another one with Country C, and Country B also has one with Country C.
If the rules of origin requirements in the trade agreement between Country A and B allow for diagonal cumulation explicitly with Country C, a producer based in Country A could import a good from Country C (that originates in Country C), incorporate it into something else, alter it, do nothing with it, whatever, and then sell it to a customer in Country B and it would be treated as if it was of Country A origin no matter how much value was added, or not, in Country A.
I know, that all sounds terribly complicated. If you’re still confused do go back and read the original post which will hopefully clear things up.
Anyway, onto the subject of this post.
The PEM Convention
Originating *ahem* in 1997, the pan-Euro-Mediterranean cumulation system of origin fully materialised in 2005.
There are currently 23 Contracting Parties to the PEM Convention:
- the EU,
- the EFTA States (Switzerland, Norway, Iceland and Liechtenstein),
- the Faroe Islands,
- the participants in the Barcelona Process (Algeria, Egypt, Israel, Jordan, Lebanon, Morocco, Palestine, Syria, Tunisia and Turkey),
- the participants in the EU’s Stabilisation and Association Process (Albania, Bosnia and Herzegovina, the former Yugoslav Republic of Macedonia, Montenegro, Serbia and Kosovo),
- the Republic of Moldova.
All of the signatories to the PEM convention have agreed to replace protocols of rules of origin in the FTAs between each other with the rules of origin laid down in the PEM Convention, streamlining procedures across the zone.
As to benefits: the PEM Convention allows for diagonal cumulation between all signatories to the agreement (so long as there are free trade agreement in place between all the Contracting Parties concerned). This facilitates the dispersion of supply chains across the zone, making it easier for exported goods to qualify for preferential free trade agreements between the various parties. (It also allows for full cumulation between some countries.)
The Brexit angle
We still have no real idea what the the future EU-UK relationship looks like. But, assuming that there’s a possibility we are no longer in a customs union with the EU, joining the PEM Convention would certainly help mitigate many of the issues associated, and cause less disruption to regional supply chains (so long as we also manage to replicate all of the EU’s agreements with the PEM countries … which might take a while).
Of course, this doesn’t entirely solve the rules of origin problem — costs associated with complying with rules of origin and other annoyances have been estimated to be between 2 and 6% of the final price — but what can you do?
And fear not, the PEM Convention is certainly on the radar of the Department for International Trade. About a year ago a senior civil servant told me they were looking into it, but hadn’t yet worked out how a country actually applies to join. Well, a year is a long time, so here’s to hoping an answer has since decided to make itself known.
Further Reading: https://ec.europa.eu/taxation_customs/business/calculation-customs-duties/rules-origin/general-aspects-preferential-origin/arrangements-list/paneuromediterranean-cumulation-pem-convention_en
This is exciting. With thanks to the mysterious Thee Rex on Twitter, here’s how you go about joining the PEM Convention: