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Should the UK join the PEM?
Published 17 December 2025
In the UK Trade Strategy, published in June 2025, the Government indicated that it would consult further on whether the UK should join the Pan-Euro-Mediterranean Convention on preferential rules of origin. Following up on this, the Department for Business and Trade has just completed a call for evidence on this issue. This blog summarises the key issues and explains that it is unclear to what extent joining the PEM would benefit the UK.
A Free Trade Agreement (FTA) primarily removes tariffs on trade between its members, but tariff-free access applies only to goods that ‘originate’ within the participating countries.1 Hence, as a result of the Trade and Cooperation Agreement (TCA) with the EU, a UK good should pay no tariffs on exports to the EU – providing the good is made in the UK, or alternatively put, originates in the UK, and providing the UK firm can prove that this is the case.
Nowadays, supply chains are complex, and producers buy inputs from many countries. Rules of origin define how much economic activity in the UK is sufficient for a good to be deemed as originating in the UK. All FTAs have them. The idea behind the cumulation of rules of origin is, in some carefully specified cases, to allow firms to include (cumulate) economic activity from another country, that is not part of the FTA, for originating purposes.
Hence, to give an example, in the TCA, if a UK firm exports to the EU, using French inputs – the French inputs can be counted as originating. This is because France is part of the TCA, and this is known as bilateral cumulation. But if a UK firm exports to the EU using Moroccan inputs, then it cannot count those Moroccan inputs because Morocco is not part of the TCA.
The Pan-Euro-Mediterranean Convention, or PEM Convention, is a multilateral agreement that would allow for the use of those Moroccan inputs for originating purposes if a UK firm exported to the EU. This is known as diagonal cumulation. In order to do so, the PEM establishes common rules of origin between all the 25 contracting parties. These include the EU, European Free Trade Association states, Baltic states, and many countries in the Middle East and North Africa. A revised version of the PEM entered into force in January 2025, which further facilitated diagonal cumulation by simplifying the product-specific rules, through easier reporting requirements, and increasing tolerance requirements. Importantly, the PEM does not establish a customs union, with common external tariffs.
If the UK joined the PEM, this could be beneficial to the UK because it would increase its scope to use inputs from the non-EU PEM countries. However, in order to join the PEM, it is normally the case that the rules of origin have to be the same between all the contracting parties – hence the rules of origin between the UK and the EU would have to be the same as the PEM rules of origin. Currently, this is not the case. Rules of origin are complicated and vary from a rule which states the minimum amount of domestic value added that is required; to whether or not the inputs come from a different tariff line code, to whether specific production processes have been used. We have coded these into a ROO restrictiveness measure for each tariff line.
When we compare the rules of origin between the PEM and the TCA, out of the 5385 6-digit tariff lines, we find that the PEM rules of origin are more restrictive than the TCA for roughly 25% of the tariff lines; conversely, the TCA rules are more restrictive about 10% of the time. The average degree of restrictiveness across sectors for the two sets of rules of origin can be seen in the chart below. From this, it can be seen that the PEM rules are slightly less restrictive in automobiles and agrifood, but more restrictive in textiles, advanced manufacturing or chemicals.
source:own calculations based on UKTPO rules of origin restrictiveness index
Hence, joining the PEM would almost certainly benefit some firms and some sectors that could find it easier to access the EU market more competitively by using PEM country inputs. However, it could also disadvantage others, who would face more stringent origin requirements. This arises simply because of the differences in the underlying rules of origin. As stated above, there may also be other advantages from joining the PEM related to the reporting requirements and the tolerance rules. It is also worth noting that this would also make it easier for PEM country firms, including EU firms, to use PEM country inputs in order to access the UK market. Hence, it is likely to increase exports to the UK, with some impact on competing UK producers. In addition, and as we illustrated in an earlier blog, the share of non-EU PEM country inputs in UK exports is, on average, very low, and across fourteen aggregate sectors ranges from between 1.1% and 2.8%. Hence, this also suggests that it does not appear on the face of it that the gains would be large.
The key point, however, is that the net effects for the UK as a whole are ambiguous, and it is certainly not clearly the case that joining the PEM would necessarily be beneficial overall. This would require much more detailed – sectoral and firm-level analysis.
There is another possibility - which involves the UK and the EU agreeing that in their bilateral exports to each other - firms could apply either the TCA rules of origin or the PEM rules of origin. Technically, this is certainly possible and would give maximum flexibility to UK and EU firms, and thus maximum benefit. While this is technically possible it would require political will / agreement from both the UK and the EU, and the PEM countries. The key stumbling block here is likely to be the EU. To date, the EU does not appear to have shown much enthusiasm for the UK joining the PEM. In part, this reflects each party’s underlying engagement in international value chains. For the UK, the share of foreign value added in its goods exports is close to 30%, and of that, the EU accounts for a bit under 45%. In contrast, the share of foreign value added in EU exports is about 20% and the UK share is considerably lower. This implies that the gains from the UK joining PEM are higher than for the UK than for the EU, and this asymmetry will be reflected in each country’s negotiating position.
Agreeing to the application of both sets of rules of origin would be the optimal outcome, but the EU is unlikely to agree to this. Therefore, before the UK decides whether or not joining the PEM is an important objective in its reset of relations with the EU, it needs first to have a solid evidence base as to the benefits to the UK – by sector and overall. The Department for Business and Trade has just completed a consultation exercise to obtain information as to those relative benefits. While this is very welcome, it should be complemented by detailed firm level analysis available from the ONS and the HMRC. It is also important for the UK Government to understand where there may be benefits for EU firms, in order to better understand the political economy driving the EU’s position.
Footnotes
- Of course, most FTAs also have a range of chapters reducing barriers and closer cooperation in many other ways, but in this blog focuses on the issue of the tariff reductions.
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