Should the UK join the Pan-Euro-Mediterranean convention?

If the UK were to join the Pan-Euro-Mediterranean Convention on rules of origin, it could potentially increase its chances of meeting the criteria to export tariff-free to the EU by considering “made in the UK” inputs sourced from other FTA partners.

Free Trade Agreements (FTAs) are designed to grant preferential tariffs for goods traded between member countries. This means that products can be traded with lower or no tariffs, making them more competitive in FTA member economies. However, as only signatories to an agreement are eligible for preferential treatment, exporters must comply with specific rules of origin criteria to benefit from these preferential tariffs. This ensures that goods are ‘mostly’ made by FTA members. Rules of origin determine what ‘mostly’ means in practice.

As part of its European Neighbourhood Policy, the European Union (EU) has established the Pan-Euro-Mediterranean (PEM) Convention, which allows for diagonal cumulation of rules of origin among the signatory parties. This means that, if Egypt sourced materials from Turkey, Turkish materials can be considered to be “made in Egypt” for purposes of Egypt’s exports to the EU.

The Trade and Cooperation Agreement that governs UK-EU trade relations since 2021 does not allow for diagonal cumulation. If the UK were to join the PEM convention, it could count PEM inputs towards the rules of origin criteria when exporting to the EU. This would broaden the base of what counts as ‘local content’ in UK exports and would therefore render it easier for UK exporters to meet EU rules of origin. As a result, UK exports could access the EU market tariff-free more easily.

To see whether this would matter in practice, we calculate the share of value-added (VA) originating in PEM countries embedded in UK exports to the EU. The two main caveats of this analysis are that, firstly, the data used is aggregated, meaning that the impact could vary for specific products; and secondly that the underlying TiVA data is in part based on proportionality assumptions and as such may not reflect real-world complexities perfectly. Hence, the policy implications drawn from this analysis are as good as the underpinning TiVA data.

The contribution of PEM countries to the VA of UK exports is rather small (Figure 1). Excluding Coke and petroleum products, which exhibit by far the largest PEM VA content but already face a 0% Most Favoured Nation tariff in the EU, the PEM countries’ VA share ranges between 1.1% and 2.8%. The low shares suggest that joining PEM would not be a game-changer for UK exports to the EU.

Beyond counting inputs from PEM countries as local content, joining the PEM convention might also establish a precedent for diagonal cumulation with other FTA partners such as Japan, Korea and Canada. However, the numbers for these countries are small. The maximum VA share in UK exports to the EU across sectors is 1.3% for Japan, 0.5% for South Korea, and 1.3% for Canada.

Conversely, the cumulation of EU inputs in UK exports to FTA countries could be important. The EU’s VA share in UK exports is around 10%, with small differences across partners. That said, many UK FTAs already allow for the cumulation of EU inputs in assessing the originating status.

It is possible that, for some narrowly defined products, the cumulation of rules of origin will be important. However, as far as we believe in the TiVA data, the data suggests that advantages may be minimal and, most likely, joining PEM will not matter much when exporting to the EU.

Methodology note

Our calculations are based on the OECD Trade in Value Added (TiVA) database. TiVA is derived from OECD Inter-Country Input-Output tables, which are constructed using statistics from national, regional, and international sources. We used the TiVA indicators on gross exports by final destination and origin of value added. For Figure 1, we divide the value-added embedded in UK exports to the EU sourced from a given country by the total value-added embedded in UK exports to the EU, for each sector.

With regard to coverage of PEM countries, the TiVA dataset includes Iceland, Switzerland, Norway, Egypt, Israel, Jordan, Morocco, Tunisia, Turkey and Ukraine, which between them cover 89% of PEM countries’ GDP in 2019 (based on World Bank GDP data in current USD). The excluded countries (Liechtenstein, Algeria, Lebanon, the Occupied Palestinian Territory, Syria, Albania, Bosnia & Herzegovina, North Macedonia, Montenegro, Serbia, Kosovo and Georgia) are subsumed into the rest of the world residual country group.