First, the short version…
In my opinion, the UK should rejoin the Pan-Euro-Mediterranean Convention, which would allow British firms to use components sourced from anywhere within this zone and still qualify for tariff-free trade with other members.
This would not be a ‘betrayal of Brexit’, despite what some are claiming. Crucially, the PEM Convention is separate from the EU’s Customs Union and Single Market, and it already has many non-EU members. The UK could therefore still do independent trade deals with the rest of the world and would not have to sign up to other EU rules, such as freedom of movement.
The additional benefits would still be small, not least because most of our trade with the rest of Europe is already free from tariffs or quotas. But every little helps.
Now the longer version…
The Pan-Euro-Mediterranean Convention is a intra-regional agreement which sets out common ‘rules of origin’ for trade within the zone.
The participants include the EU and hence all the member states of the EU, including the UK until Brexit. But it also includes a large number of non-EU states, namely:
- the EFTA countries: Switzerland, Norway, Iceland and Liechtenstein
- the Faroe Islands
- many countries around the Med: Algeria, Egypt, Israel, Jordan, Lebanon, Morocco, Palestine, Syria, Tunisia and Türkiye
- many countries in Eastern Europe: Albania, Bosnia and Herzegovina, North Macedonia, Montenegro, Serbia, Kosovo, Moldova, Georgia and Ukraine
What does this mean in practice? ‘Rules of origin’ are regulations that determine the country of origin of a product for the purposes of deciding whether it qualifies for preferential treatment, such as tariff-free and quota-free trade.
For example, a trader in Algeria who is making clothing for export to the EU could use fabric from Egypt, or zips from Türkiye. and their goods would still be considered as originating from Algeria. This would then give them preferential access to the EU market. (In the jargon, this is known as ‘diagonal cumulation’.)
Similarly, if the UK were to rejoin the PEM Convention, a British car or food manufacturer could use more components from, say, Morocco or Ukraine, and still qualify for tariff-free access to the EU. Equally, an EU firm exporting to the UK may be able to use more inputs sourced from other countries within the PEM zone.
So, what’s not to like?
Some people instinctively oppose having anything more to do with the EU, including the PEM Convention, regardless of the actual costs or benefits to the UK. To be fair, this is a highly technical area. But dismissing an offer out of hand just because it comes from the EU is, to say the least, unhelpful.
A slightly more sophisticated argument is that rejoining the PEM Convention would be a slippery slope towards reversing Brexit ‘by the back door’, although precisely how is not obvious.
Ironically, some supporters of rejoining the PEM Convention (including LibDem MPs) have done themselves no favours here by describing it as a ‘customs union’, or even as ‘the EU’s Customs Union’. This is just plain wrong.
A ‘customs union’ is an economic zone where members remove all tariffs and quotas for trade among themselves and, crucially, where all members impose common external tariffs to all goods coming from third countries. This is not the case with the PEM Convention.
The PEM Convention is also separate from the EU’s Single Market. The UK would not have to sign up to a whole raft of other EU rules, such as product regulations and freedom of movement, and could still do independent trade deals with the rest of the world.
Rejoining the PEM Convention would not therefore complicate accession to the CPTPP or any future deal with the US. In fact, the more flexible rules of origin within the PEM Convention might provide a helpful template for other deals.
Of course, the EU may well try to package UK membership of the PEM Convention with other potentially more controversial steps, such as a new veterinary agreement or a youth mobility scheme. But each of these proposals should be considered on their own merits. If PEM is the only offer on the table, we should take it.
A final objection is that rejoining the PEM Convention might benefit the EU more than the UK. This appears to assume that it would boost UK imports more than it would boost UK exports, which is debatable, or that UK firms might choose to source more components from abroad rather than from home production.
But, in my view, this makes the fundamental error of looking at trade from the perspective of producers rather than consumers. Indeed, the main benefits of free trade – in terms of lower prices, more choice, stronger competition and efficiency gains – come at least as much from an increase in imports as from an increase in exports.
Nonetheless, rejoining the PEM Convention would not be a gamechanger for UK trade, either way.
For a start, the existing UK-EU deal (the TCA) already eliminates tariffs and quotas on all UK goods exports to the EU which comply with the appropriate rules of origin. The UK also already has free trade agreements with most of the non-EU PEM members.
Many of these agreements already allow components which are sourced from a wide range of other countries to be counted as ‘local content’. The UK also has similar arrangements with countries further afield, such as South Korea, which are better than anything we had as members of the EU.
Indeed, even when the UK was part of the EU, the share of value-added from components sourced from non-EU PEM members was very low. The potential gains from closer integration with European supply chains are therefore exaggerated, especially once any additional costs and complexities are taken in account.
Moreover, despite what some supporters claim, rejoining the PEM Convention would not do away with the need for paperwork to confirm that goods meet the new rules of origin and other requirements, such as health and safety standards. In fact, even if the UK rejoined the EU Customs Union, there would still need to be some border checks, unless the UK signed up for the Single Market and Schengen too.
Finally, even where rules of origin are a big issue, membership of the PEM Convention would not help with the most pressing problems. One good example is the treatment of batteries for electric vehicles which mostly come from China, or elsewhere in Asia, rather than anywhere in Europe. As a result, even the UK automotive industry is lukewarm about the benefits of the PEM Convention.
The upshot is that the PEM Convention is largely a sideshow, and supporters and opponents have both misrepresented its importance. But that does not mean that it is not worth looking seriously at rejoining.
ps. I’ve been asked about who has jurisdiction in the event of a dispute. My understanding (and I may be wrong on the legal technicalities) is that disputes under the PEM Convention are sorted out at the national level between the importer and the customs authority of the importing country, subject to the law of that country. If not they get bumped up to a ‘Joint Committee’ of all Contracting Parties. So this would not cross any ‘ECJ red lines’.
Plain-speaking Economics 